<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934
January 23, 1996
Date of Report (date earliest reported)
-----------------------
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 0-14517 74-2294235
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
KERRIA PLAZA, SUITE 301
3700 NORTH 10TH STREET
MCALLEN, TEXAS 78501
(Address of principal executive office) (Zip Code)
210-631-5400
(Registrant's telephone number, including area code)
Not Applicable
(former name or former address, if changed since last report)
- --------------------------------------------------------------------------------
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
Effective as of January 9, 1996, Texas Regional Bancshares, Inc., and First
State Bank and Trust Company, Mission, Texas, entered into an agreement under
which Texas State Bank, the principal operating subsidiary of Texas Regional
Bancshares, Inc. will acquire through merger First State Bank and Trust Company.
Also, effective as of January 9, 1996, Texas Regional Bancshares, Inc., and
The Border Bank, Hidalgo, Texas, entered into an agreement under which Texas
State will acquire through merger The Border Bank.
Under terms of the agreements, Texas State Bank will acquire the First State
Bank and Trust Company for a total cash consideration of $79.0 million and will
acquire The Border Bank, for a total cash consideration of $20.5 million.
Both acquisitions are subject to satisfaction of a number of conditions
precedent, as set forth in the Agreements filed herewith as Exhibits.
Upon the closing of the transactions, First State Bank and Trust Company and The
Border Bank will be merged with and into Texas State Bank. First State Bank
and Trust Company and The Border Bank will cease their separate existence.
Following the closing, the bank facilities of First State Bank and Trust
Company and The Border Bank will continue to be operated as branch bank
facilities by Texas State Bank, under the name of Texas State Bank.
The purpose of this Amended Form 8-K is to file certain exhibits not
available at the time of filing of the original Form 8-K.
2
<PAGE>
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The financial statements for First State Bank and Trust Company and
The Border Bank, prepared pursuant to Regulation S-X, are filed
herewith as exhibits 99.1 and 99.2, respectively.
(b) Pro Forma Financial Information.
Pro forma financial information for the transaction required by Item
7(b) of Form 8-K is filed herewith as exhibit 99.3.
3
<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 hereunto duly authorized.
Texas Regional Bancshares, Inc.
(Registrant)
By: /s/ G. E. Roney
-------------------------------------
Glen E. Roney
Chairman of the Board, President
& Chief Executive Officer
Date: March 20, 1996
4
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2.1 Agreement and Plan of Reorganization between First State Bank and
Trust Company and Texas State Bank, with schedules attached.
2.2 Agreement and Plan of Reorganization between The Border Bank and
Texas State Bank, with schedules attached.
20 Press release announcing acquisition dated January 10, 1996
*23.1 Consent of KPMG Peat Marwick LLP.
*23.2 Consent of KPMG Peat Marwick LLP.
*99.1 First State Bank & Trust Co. 1995 Financial Statements
*99.2 The Border Bank 1995 Financial Statements
*99.3 Texas Regional Bancshares, Inc. and Subsidiary Pro Forma
Combined Condensed Financial Statements
- ---------------
*Filed with this Amended Form 8-K.
5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Texas Regional Bancshares, Inc.:
We consent to the use of our report dated January 31, 1996 on the
financial statements of First State Bank & Trust Co. included herein.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 6, 1996
6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Texas Regional Bancshares, Inc.:
We hereby consent to the use of our report dated January 31, 1996 on the
financial statements of The Border Bank included herein.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 6, 1996
7
<PAGE>
EXHIBIT 99.1
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
8
<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.
9
<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.
10
<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.
11
<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.
12
<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.
13
<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
14
<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>
15
<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.
16
<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 11,737
---------------- ----------------
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.
17
<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.
18
<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
19
<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.
20
<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.
21
<PAGE>
EXHIBIT 99.2
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
22
<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.
23
<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.
24
<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.
25
<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................................. (1,964,429) (14,371,015) (20,153,723)
Net (increase) decrease in loans.................................. (1,977,648) 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.
26
<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
27
<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.
28
<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>
29
<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>
30
<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>
31
<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>
32
<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.
33
<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
34
<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.
35
<PAGE>
EXHIBIT 99.3
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
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.
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 $21.6 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.
36
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (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 $ 42,533 A $ 51,831
(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 (30,204) 56,681
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 2,937 C 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 7,000 D 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 -- -- 7,250 F 11,891
Core Deposit..................................... 1,000 -- -- 14,351 H 15,351
Organization Cost................................ 70 -- -- -- 70
Other Assets..................................... 2,606 771 515 (137)J 3,755
------------ --------- --------- ------------ -----------
Total Assets............................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
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 12,731
7,557 E
------------ --------- --------- ------------ -----------
Total Liabilities........................ 584,049 345,083 102,429 6,311 1,037,872
------------ --------- --------- ------------ -----------
Shareholders' Equity
Preferred Stock.................................. -- -- -- -- --
Common Stock..................................... 6,196 4,000 2,000 2,180 A 8,376
(6,000)F
Paid-In Capital.................................. 29,239 21,000 9,000 40,353 A 69,592
(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) 21 F 117
------------ --------- --------- ------------ -----------
Total Shareholders' Equity............... 62,720 59,387 17,075 (33,929) 105,253
------------ --------- --------- ------------ -----------
Total Liabilities and Shareholders'
Equity.................................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
</TABLE>
37
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (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 $ (4,059)K
Interest Expense..................................... 17,041 2,817 13,103 4,415 131 L
----------- ----------- ----------- ----------- -------------
Net Interest Income.................................. 26,464 3,520 19,369 4,601 (4,190)
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 (4,190)
----------- ----------- ----------- ----------- -------------
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............................ 1,010 176 568 234 294 M
Equipment Expense................................ 1,959 217 341 148 --
Other Noninterest Expense........................ 5,631 1,281 2,531 729 2,189 N
----------- ----------- ----------- ----------- -------------
Total Noninterest Expense.................... 17,847 3,008 6,264 2,167 2,483
----------- ----------- ----------- ----------- -------------
Income Before Income Tax Expense..................... 13,270 1,083 12,082 2,265 (6,673)
Income Tax Expense................................... 4,630 367 3,436 381 (2,105)
----------- ----------- ----------- ----------- -------------
Net Income........................................... $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
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...................................... $ 87,271
Interest Expense..................................... 37,507
-----------
Net Interest Income.................................. 49,764
Provision for Loan Losses............................ 4,595
-----------
Net Interest Income After Provision for Loan
Losses.......................................... 45,169
-----------
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........................ 12,361
-----------
Total Noninterest Expense.................... 31,769
-----------
Income Before Income Tax Expense..................... 22,027
Income Tax Expense................................... 6,709
-----------
Net Income........................................... $ 15,318
-----------
-----------
Primary Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 8,398
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 8,407
-----------
-----------
</TABLE>
38
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (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 $ (3,202)K
Interest Expense..................................... 11,690 2,244 11,767 3,771 131L
----------- ----------- ----------- ----------- -------------
Net Interest Income.................................. 22,941 4,185 19,064 5,108 (3,333)
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 (3,333)
----------- ----------- ----------- ----------- -------------
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 2,189N
----------- ----------- ----------- ----------- -------------
Total Noninterest Expense.................... 16,507 4,009 6,142 2,185 2,483
----------- ----------- ----------- ----------- -------------
Income Before Income Tax Expense..................... 11,121 625 12,034 2,929 (5,816)
Income Tax Expense................................... 3,936 198 3,192 604 (1,813)
----------- ----------- ----------- ----------- -------------
Net Income........................................... $ 7,185 $ 427 $ 8,842 $ 2,325 $ (4,003)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
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...................................... $ 77,568
Interest Expense..................................... 29,603
-----------
Net Interest Income.................................. 47,965
Provision for Loan Losses............................ 3,889
-----------
Net Interest Income After Provision for Loan
Losses.......................................... 44,076
-----------
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........................ 13,155
-----------
Total Noninterest Expense.................... 31,326
-----------
Income Before Income Tax Expense..................... 20,893
Income Tax Expense................................... 6,117
-----------
Net Income........................................... $ 14,776
-----------
-----------
Primary Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 7,971
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.80
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 8,215
-----------
-----------
</TABLE>
39
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (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 $42.5 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 a price of $21.00 per
share, the closing price as of February 20, 1996 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 $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 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.
40
