<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1996.
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
6022
(Primary Standard
TEXAS Industrial 74-2294235
(State or other jurisdiction of Classification Code (I.R.S. Employer
incorporation or organization) Number) Identification Number)
TEXAS REGIONAL BANCSHARES, INC.
KERRIA PLAZA, SUITE 301
3700 NORTH 10TH STREET
MCALLEN, TEXAS 78501
(210) 631-5400
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------------
COPIES OF CORRESPONDENCE TO:
WILLIAM A. ROGERS, JR., ESQ.
MCGINNIS, LOCHRIDGE & KILGORE, RICHARD K. KNEIPPER, ESQ.
L.L.P. JONES, DAY, REAVIS & POGUE
1300 CAPITOL CENTER 2300 TRAMMELL CROW CENTER
919 CONGRESS AVENUE 2001 ROSS AVENUE
AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201
(512) 495-6033 (214) 220-3939
(Name, address, including ZIP code, and telephone number of agent for service)
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
possible after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM
SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE
Class A Voting Common Stock, par
value $1.00/share.............. 2,530,000 $21.00 $53,130,000 $18,320.69
</TABLE>
(1) Includes 330,000 shares of Common Stock issuable upon exercise of an
over-allotment option granted to the Underwriters.
(2) Estimated solely for the purpose of determining the registration fee.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NO. CAPTION LOCATION IN PROSPECTUS
- --------- ---------------------------------------------------- ----------------------------------------------------
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Forepart of Registration Statement and Outside Front
Cover Page of Prospectus Cover Page of Prospectus;
Cross-Reference Sheet
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus; Available Information;
Table of Contents
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; The Company
Earnings to Fixed Charges
4. Use of Proceeds Use of Proceeds; Proposed Mergers
5. Determination of Offering Price Not Applicable
6. Dilution Dilution
7. Selling Security Holders Selling Shareholder
8. Plan of Distribution Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered Description of Capital Stock
10. Interests of Named Experts and Counsel Underwriting; Legal Matters
11. Information with Respect to the Registrant The Company; Proposed Mergers; Price Range of Common
Stock and Dividend Policy; Capitalization; Texas
Regional Bancshares, Inc. Selected Consolidated
Financial Information; Texas Regional Bancshares,
Inc. Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Holders of Capital
Stock; Index to Financial Statements
12. Disclosure of Commission Position on Indemnification Not Applicable
for Securities Act Liabilities
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PROSPECTUS MARCH 6, 1996
2,200,000 SHARES
[TEXAS REGIONAL BANCSHARES LOGO]
TEXAS REGIONAL BANCSHARES, INC.
CLASS A VOTING COMMON STOCK
-----------
Of the shares of Class A Voting Common Stock, par value $1.00 per share (the
"Common Stock"), of Texas Regional Bancshares, Inc. ("Texas Regional" or the
"Company") being offered hereby, 2,180,000 shares are being sold by Texas
Regional and 20,000 shares are being sold by a Texas Regional shareholder (the
"Selling Shareholder"). The Company will not receive any proceeds from the sale
of shares by the Selling Shareholder. The Company is selling the Common Stock to
finance a portion of the cost of the acquisition by the Company of First State
Bank & Trust Co., Mission, Texas, and The Border Bank, Hidalgo, Texas, which
will occur contemporaneously with the closing of the offering. See "Proposed
Mergers." The Common Stock, which is the only class of common stock of the
Company, is traded in the over-the-counter market and quoted on the Nasdaq
National Market System under the symbol "TRBS." On , 1996, the last
reported sale price of the Common Stock on the Nasdaq National Market System was
$ per share.
--------------
SEE "RISK FACTORS" ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
-------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE
FUND OR ANY OTHER GOVERNMENTAL AGENCY.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
Per Share............... $ $ $ $
Total(3)................ $ $ $ $
(1) See "Underwriting" for information relating to indemnification of the
Underwriters.
(2) Before deducting expenses of the offering payable by the Company estimated
at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
330,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May ,
1996.
<TABLE>
<S> <C> <C>
ALEX. BROWN & SONS FIRST SOUTHWEST COMPANY
INCORPORATED
</TABLE>
THE DATE OF THIS PROSPECTUS IS , 1996
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
[TEXAS REGIONAL BANCSHARES LOGO]
- -----------------------------------------
MAP OF BANKING LOCATIONS:
RIO GRANDE VALLEY OF TEXAS
[INSERT MAP]
This graphic contains an enlargement of the Rio Grande Valley of
Texas and shows the locations of the Company's corporate
headquarters, its existing banking locations, banking locations to
be acquired by the Company in the Mergers described in the
Prospectus and other surrounding cities in Texas and Mexico.
<PAGE>
[INSERT MAP]
This graphic contains a map of the State of Texas and a
portion of Mexico and shows the locations of certain cities
in Texas and Mexico and highlighting the Rio Grande Valley
of Texas.
THE MARKET AREA SERVED BY TEXAS STATE BANK HAS BEEN RECOGNIZED AS AMONG THE
FASTEST GROWING AREAS IN THE NATION. THE MCALLEN-EDINBURG-MISSION AREA HAS
A PROJECTED POPULATION GROWTH RATE OF 23.8% BETWEEN 1994 AND 2000, AND THE
BROWNSVILLE-HARLINGEN AREA HAS A PROJECTED POPULATION GROWTH RATE OF 16.0%
DURING THAT SAME PERIOD.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
concerning the Company may be inspected and copied at the Public Reference
facilities maintained by the Commission at its office at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the
Commission: Seven World Trade Center, 13th Floor, New York, New York 10048 and
500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such
material can also be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company has filed with the Commission in Washington, D.C., a
registration statement on Form S-1 (herein together with all amendments thereto
called the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities covered by this
Prospectus. This Prospectus does not contain all of the information set forth in
the Registration Statement, certain items of which are contained in or
incorporated by reference as exhibits to the Registration Statement as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed or incorporated by
reference as a part thereof. The statements contained herein concerning the
provisions of documents filed with, or incorporated by reference in, the
Registration Statement as exhibits are necessarily summaries of such documents
and each such statement is qualified in its entirety by reference to the copy of
the applicable document filed with the Commission. All of these documents may be
inspected without charge at the offices of the Commission as described above,
and copies may be obtained therefrom at prescribed rates.
--------------
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: THE INFORMATION PROVIDED UNDER "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION" AND "PROSPECTUS SUMMARY -- TEXAS
REGIONAL BANCSHARES, INC. SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION" AND
OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING,
WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF CHANGING ECONOMIC CONDITIONS
AND INTEREST RATES, ACTUAL RESULTS OF OPERATIONS FOLLOWING THE MERGERS, THE
PRESENCE IN THE COMPANY'S MARKET AREA OF COMPETITORS WITH GREATER FINANCIAL
RESOURCES, AND OTHER RISKS DETAILED UNDER "RISK FACTORS" AND IN OTHER SECTIONS
HEREOF AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE COMMISSION.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING MADE BY THIS
PROSPECTUS, THE COMPANY WILL ACQUIRE BY MERGER TWO BANKS USING A PORTION OF THE
PROCEEDS OF THE OFFERING. SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES,
INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE EFFECTS
ON THE COMPANY OF THE CONSUMMATION OF SUCH MERGERS.
THE COMPANY
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a
registered bank holding company whose wholly-owned subsidiary bank, Texas State
Bank ("Texas State Bank" or the "Bank"), conducts a commercial banking business
in the Rio Grande Valley of Texas. At December 31, 1995, Texas Regional had
consolidated assets of $646.8 million, loans outstanding (net of unearned
discount) of $450.9 million, total deposits of $579.7 million, and total
shareholders' equity of $62.7 million. For the years ended December 31, 1995 and
1994, the Company earned net income of $8.7 million and $7.2 million,
respectively, for a return on average assets for these periods of 1.51% and
1.43%, respectively. At December 31, 1995, the Company had nonperforming assets
(including loans 90 days or more past due and still accruing) of $4.2 million,
representing 0.9% of period-end loans and other nonperforming assets (primarily
other real estate).
Texas State Bank operates a total of nine full service banking locations in
the Rio Grande Valley. The market area served by Texas State Bank has been
recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period. The business strategy
of Texas Regional is for the Bank to provide its customers with the financial
sophistication and breadth of products of a regional bank, while retaining the
local appeal and service level of a community bank. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment and the economy of the Rio Grande
Valley. Management's strategy is to provide a business culture in which
individual customers and small and medium sized businesses are accorded the
highest priority in all aspects of the Company's operations. Management believes
that individualized customer service will allow the Company to increase its
market share in lending volume and deposits. As part of its operating and growth
strategies, the Company is working to attract business from, and provide service
to, small to medium sized businesses, and expand its operations in McAllen,
Harlingen and other strategic areas in the Rio Grande Valley.
Consistent with this strategy, during 1995, Texas State Bank acquired
banking locations in Rio Grande City and Roma, Texas, and in January 1996 it
entered into definitive agreements to acquire two banks headquartered in Mission
and Hidalgo, Texas. See "The Company" and "Proposed Mergers."
At December 31, 1995, Texas Regional employed 332 full time equivalent
employees. The address of Texas Regional's principal executive office is Kerria
Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, and its
telephone number is (210) 631-5400.
THE MERGERS
Texas State Bank has for some time sought appropriate acquisitions to permit
the Bank to expand within the market areas served by Texas State Bank and into
adjacent market areas in the Rio Grande Valley. In January 1996, the Company
entered into definitive agreements to acquire through merger First State Bank &
Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo,
Texas ("Border Bank") (the "Mergers"). First State Bank and Border Bank had
combined total assets of approximately $524.0 million at December 31, 1995.
Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995,
Texas State Bank would have had total assets of $1.143 billion, which
3
<PAGE>
would have made Texas Regional the largest bank holding company headquartered in
the Rio Grande Valley. At December 31, 1995, First State Bank had total assets
of $404.5 million, loans outstanding (net of unearned discount) of $188.4
million and stockholders' equity of $59.4 million. At December 31, 1995, Border
Bank had total assets of $119.5 million, loans outstanding (net of unearned
discount) of $47.3 million and stockholders' equity of $17.1 million. Elliot B.
Bottom is the Chairman of the Board of both First State Bank and Border Bank,
and the banks have substantial common ownership. The purpose of the Mergers is
to further strengthen Texas State Bank's branch network and banking business in
the Rio Grande Valley by adding six new banking locations in Mission, Penitas,
McAllen and Hidalgo, Texas. The purchase price for the Mergers is estimated to
be $99.5 million, approximately $40.0 million of which will be paid from the
proceeds of the offering made hereby. The Company intends to fund the balance of
the purchase price principally from liquidation of cash equivalents and, to the
extent necessary, selected investment securities on a consolidated basis. See
"Proposed Mergers" and "Use of Proceeds."
Management of Texas State Bank believes that the Mergers will expand the
Company's community banking network into contiguous markets, substantially
increasing its market share and enabling the Bank to compete more effectively
with other financial institutions in the Rio Grande Valley. Because of the
proximity of Mission to McAllen, there is a substantial overlap in the markets
served by Texas State Bank and First State Bank. For this reason and because the
banks serve a similar customer base, First State Bank is considered by Texas
State Bank management to be a direct competitor of Texas State Bank, particular
as to loan customers. The new or expanded services to be offered to First State
Bank and Border Bank customers include enhanced data processing services,
additional automated teller facilities and other services now offered to Texas
State Bank customers. Texas State Bank management believes that First State
Bank, Border Bank and Texas State Bank customers will benefit from the expansion
of Texas State Bank's branch network from nine to 15 banking locations. Texas
State Bank expects to realize certain operating and administrative efficiencies
as a result of the Mergers; however, because of the relatively low
employee-to-asset ratio at First State Bank and Border Bank, cost savings is not
a principal motivating factor for the Mergers. The operating efficiencies which
are expected include the use by all banking locations of the existing Texas
State Bank data processing facility, operation of a single human resources
department, and economies of a combined advertising program.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby................. 2,200,000 shares(1)(2)
by the Company.......................... 2,180,000 shares(1)
by the Selling Shareholder.............. 20,000 shares
Common Stock to be outstanding after the
offering.................................. 8,376,791 shares(1)(2)
Use of proceeds............................. Approximately $40.0 million of the net
proceeds to be received by the Company from
the sale of Common Stock will be used to fund
part of the consideration payable by Texas
State Bank upon consummation of the Mergers.
The remainder of the net proceeds, if any,
will be used for general corporate purposes.
See "Proposed Mergers" and "Use of Proceeds."
Nasdaq National Market symbol............... TRBS
</TABLE>
- ------------
(1) An additional 330,000 shares may be sold pursuant to an over-allotment
option granted by the Company to the Underwriters. See "Underwriting."
(2) The shares of Common Stock offered hereby will be sold contemporaneously
with the consummation of the Mergers.
4
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information under the captions "Summary
of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the five-year period ended December 31, 1995 has been derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements of the Company at December 31, 1995 and 1994
and for each of the years in the three-year period ended December 31, 1995 are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS:
Net Interest Income........................ $ 27,540 $ 22,941 $ 19,197 $ 16,861 $ 11,773
Net Income................................. 8,725 7,185 6,011 4,519 2,824
PER SHARE DATA (ON A FULLY-DILUTED BASIS):
Net Income................................. $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79
Book Value................................. 10.12 9.00 7.73 6.42 5.22
Cash Dividends Declared on Common Stock.... 0.40 0.24 -- -- --
Average Shares Outstanding (in
thousands)............................... 6,227 6,035 5,170 4,890 3,578
PERIOD-END BALANCE SHEET DATA:
Total Assets............................... $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256
Loans...................................... 450,854 339,939 290,500 252,118 179,853
Deposits................................... 579,731 472,108 429,521 375,016 271,540
Shareholders' Equity....................... 62,720 55,731 39,983 34,318 19,366
PERFORMANCE RATIOS:
Return on Average Assets................... 1.51% 1.43% 1.34% 1.23% 1.00%
Return on Average Shareholders' Equity..... 14.69 14.11 16.15 15.23 15.85
ASSET QUALITY RATIOS:
Nonperforming Assets to Loans and Other
Nonperforming Assets..................... 0.79% 1.41% 1.69% 2.31% 4.27%
Allowance for Loan Losses as a Percentage
of:
Loans.................................. 1.01 1.03 1.18 1.16 1.42
Nonperforming Assets................... 126.62 72.96 69.39 49.43 32.44
</TABLE>
SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE PRO FORMA COMBINED
EFFECT ON THE COMPANY ASSUMING CONSUMMATION OF THE MERGERS AT DECEMBER 31, 1995.
EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
5
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited summary pro forma combined financial information has
been derived from the historical consolidated financial information of the
Company, adjusted to give effect to the proposed acquisition of assets and
assumption of liabilities in connection with the Mergers, the estimated purchase
accounting adjustments resulting from the Mergers, and the proposed issuance of
Common Stock in the offering herein described (assuming no exercise of the
Underwriters' over-allotment option), in each case as though such transactions
had occurred on December 31, 1995. The pro forma combined financial information
is not necessarily indicative of the financial position or results of operations
that would have been achieved had the transactions reflected therein occurred on
such date or that may occur in the future. The pro forma adjustments with
respect to the Mergers reflect December 31, 1995 balances and are subject to
change prior to the closing date of the Mergers. The summary pro forma combined
financial information does not purport to project the consolidated financial
information of the Company for any future period. The information should be read
in conjunction with (i) the pro forma financial information, including the notes
thereto, which appears elsewhere in this Prospectus, and (ii) the historical
consolidated financial statements of Texas Regional, First State Bank and Border
Bank, including the respective notes thereto, which appear elsewhere in this
Prospectus. See "Proposed Mergers," "Texas Regional Bancshares, Inc. Selected
Consolidated Financial Information" and "Index to Financial Statements."
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C>
SUMMARY OF OPERATIONS:
Net Interest Income.................................................................. $ 49,764
Net Income........................................................................... 15,318
PER SHARE DATA (ON A FULLY-DILUTED BASIS):
Net Income........................................................................... $ 1.82
Book Value........................................................................... 12.56
Average Shares Outstanding (in thousands)............................................ 8,407
PERIOD-END BALANCE SHEET DATA:
Total Assets......................................................................... $ 1,143,125
Loans................................................................................ 685,286
Deposits............................................................................. 1,024,227
Shareholders' Equity................................................................. 105,253
PERFORMANCE RATIOS:
Return on Average Assets............................................................. 1.39%
Return on Average Shareholders' Equity............................................... 15.03
ASSET QUALITY RATIOS:
Nonperforming Assets to Loans and Other Nonperforming Assets......................... 1.04%
Allowance for Loan Losses as a Percentage of:
Loans.............................................................................. 1.44
Nonperforming Assets............................................................... 137.11
</TABLE>
6
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES
OF COMMON STOCK OFFERED BY THIS PROSPECTUS:
RISKS OF THE MERGER -- GENERAL. Upon completion of the Mergers, Texas State
Bank's size will be substantially increased in terms of assets and deposit
liabilities. The increases in assets and deposits will be in addition to the
substantial increases in assets and deposits already experienced by Texas State
Bank over the last two years. In addition, the Company has not historically made
acquisitions on the same scale as the Mergers, and the future prospects of the
Company will depend, in significant part, on a number of factors, including
Texas State Bank's ability to compete effectively in the Mission and Hidalgo,
Texas market areas; its ability to limit the outflow of deposits in the acquired
banking locations formerly part of First State Bank and Border Bank; its success
in retaining earning assets, particularly loans, acquired in the Mergers, and
its ability to generate new earning assets; its ability to control noninterest
expense in order to maintain a favorable overall efficiency ratio; its ability
to attract and retain qualified management and other appropriate personnel to
staff the newly acquired banking locations; and its ability to earn acceptable
levels of noninterest income from the banking locations. No assurance can be
given as to any of the foregoing or that the Company's existing profitability
will not be adversely affected by the operations of First State Bank or Border
Bank, that the Company will be able to achieve results in the future similar to
those achieved in the past, or that the Company will be able to manage
effectively the growth resulting from the Mergers. In addition, the Mergers will
restrict the Company's ability to consummate other possible beneficial
transactions which require further leverage or would result in the creation of
additional intangibles. See "Proposed Mergers."
RISKS OF THE MERGER -- CREDIT QUALITY. In connection with the Mergers, the
Company or its representatives reviewed the First State Bank and Border Bank
loan portfolios. This review included all loans on the First State Bank and
Border Bank watch lists, a substantial proportion of the loans to borrowers with
other large lines of credit and selected other loans in each bank's portfolio.
The Company's examinations were made using criteria, analyses and collateral
evaluations that the Company has traditionally used in the ordinary course of
its business. Nonperforming assets (including accruing loans 90 days or more
past due) at December 31, 1995 totaled $9.6 million at First State Bank and
Border Bank compared to $4.2 million at Texas State Bank. See "First State Bank
& Trust Co. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "The Border Bank Management's Discussion and Analysis
of Financial Condition and Results of Operations." Management of Texas Regional
believes that the credit quality of the loan portfolio of First State Bank and
Border Bank is nonetheless acceptable in terms of risk and that the increased
risk is expected to be offset by increased reserves and higher interest rates on
certain classifications of loans. In addition, as a result of the Mergers, the
allowance for loan loss reserves will increase. At December 31, 1995, the
Company's allowance for loan losses was 1.01% of total loans, while on a pro
forma basis at December 31, 1995, the Company's allowance for loan losses would
have been 1.44% of total loans. However, there can be no assurance as to the
future performance of the loan portfolio acquired in the Mergers.
RISKS OF THE MERGER -- COMPLIANCE AND MANAGEMENT. On October 8, 1993,
Border Bank entered into a Memorandum of Understanding with the Texas Department
of Banking (the "Banking Department"), and on December 14, 1993, First State
Bank entered into a Memorandum of Understanding with the Banking Department. The
Memorandum of Understanding applicable to each bank requires each bank to, among
other things, (i) develop and follow policies related to loan documentation and
review, (ii) increase (and continue monitoring the adequacy of) each bank's loan
valuation reserve, and (iii) review each bank's investment and funds management
policies. Texas State Bank has reviewed deficiency letters received from
applicable regulatory authorities related to each Memorandum of Understanding,
which, among other things, indicate that in the judgment of certain regulatory
authorities First State Bank and Border Bank had not yet adequately addressed
the deficiencies identified in the Memoranda of Understanding. See "Proposed
Mergers." Prior to entering into the agreements relating to the Mergers, First
State Bank and Border Bank began to implement additional corrective efforts,
including retaining an outside consultant to assist in documentation and policy
reviews for First State Bank and Border Bank. Texas State Bank management
believes that the implementation of Texas State Bank's policies and procedures,
and the application of Texas State Bank's internal controls, make it unlikely
that
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the deficiencies identified in the Memoranda of Understanding will be repeated,
although there can be no certainty that all deficiencies will be adequately
addressed to the satisfaction of applicable regulatory authorities. If the
problems addressed in the Memoranda of Understanding persist, they could
adversely affect the future operations of the Company.
Following consummation of the Mergers, (i) all lending at the facilities
formerly operated by First State Bank and Border Bank will be conducted pursuant
to Texas State Bank's policies and under the supervision of Texas State Bank's
Chief Lending Officer, Frank A. Kavanagh, (ii) investments in securities will be
managed by the investment division of Texas State Bank in accordance with Texas
State Bank's investment policies and (iii) following conversion (which is
expected by Texas Regional management to occur in fall 1996) all data processing
will be performed by Texas State Bank's data processing center. In general, the
policies and procedures for all banking locations, including the banking
locations formerly operated as First State Bank and Border Bank facilities, will
be Texas State Bank's policies and procedures. Nonperforming assets and loans
presently past due on the books of First State Bank and Border Bank have been
reviewed by or on behalf of Texas State Bank and those loans which, in the
judgment of Texas State Bank, represent probable losses will be recorded at zero
at the time of consummation of the Mergers, although Texas State Bank will
nonetheless pursue collection in appropriate circumstances.
GEOGRAPHIC CONCENTRATION. Texas Regional's profitability is dependent on
the profitability of its subsidiary bank, Texas State Bank, which operates only
in the Rio Grande Valley of Texas. In addition to adverse changes in general
conditions in the United States, unfavorable changes in economic conditions
affecting the Rio Grande Valley, such as adverse effects of weather on
agricultural production, adverse changes in United States-Mexico relations, and
substantial Mexican peso devaluations, may have a significant adverse impact on
operations of the Company.
COMPETITION. The banking industry in the Rio Grande Valley is highly
competitive. Texas State Bank, First State Bank and Border Bank compete as
financial intermediaries with other commercial banks, savings and loan
associations, credit unions, mortgage banking companies, securities brokerage
companies, consumer and commercial finance companies, insurance companies and
money market mutual funds operating in Texas and elsewhere. Many of these
competitors have substantially greater resources and lending limits than Texas
State Bank has or will have following the Mergers, and many of these competitors
offer services that Texas State Bank does not currently provide. In addition,
non-depository institution competitors are generally not subject to the
extensive regulation applicable to Texas State Bank.
RELIANCE ON CHIEF EXECUTIVE OFFICER. Texas Regional has experienced
substantial growth in assets and deposits during the recent past, particularly
since Glen E. Roney became Chairman of the Board and Chief Executive Officer of
the Company in 1985. Although Mr. Roney is the largest individual shareholder of
the Company and is the beneficiary of a deferred compensation arrangement with
the Company that generally requires continued service for vesting, the Company
does not have an employment agreement with Mr. Roney and the loss of the
services of Mr. Roney could have a material adverse effect on the Company's
business and prospects. See "Management -- Executive Compensation."
REGULATORY RESTRICTIONS AND REQUIREMENTS. Texas Regional and Texas State
Bank are subject to extensive government regulation and supervision under
various state and federal laws, rules and regulations, including rules and
regulations promulgated by the Federal Reserve Board ("FRB") and the Banking
Department. These laws and regulations are designed primarily to protect the
Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"),
depositors and borrowers, and to further certain social policies and,
consequently, may impose limitations on the Company that may not be in the best
interests of the Company and holders of Common Stock. See "Business --
Regulation and Supervision" and "Business -- Capital Resources." The Company and
the Bank are subject to changes in federal and state laws, as well as changes in
rules and regulations, governmental policies and changes in accounting
principles. The effects of any such potential changes cannot be predicted, but
they could have an adverse effect on the business and operations of the Company
and the Bank.
DILUTION. At December 31, 1995, the net tangible book value of the Common
Stock was $9.20 per share. "Net tangible book value per share" represents the
tangible net worth of the Company (total assets less intangible assets
(including goodwill) and total liabilities), divided by the number of shares of
Common Stock outstanding. Without taking into account any changes in net
tangible book value after
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December 31, 1995, after giving effect to the sale by the Company of 2,180,000
shares of Common Stock offered hereby (assuming a public offering price of
$21.00 per share) and after deducting underwriting discounts, commissions and
estimated offering expenses, and after giving effect to the Mergers (assumed to
have been consummated effective December 31, 1995), the pro forma net tangible
book value at December 31, 1995 would have been $9.30 per share, representing an
increase of $0.10 per share to current shareholders and a dilution of $11.70 per
share to persons purchasing the shares offered hereby.
CONCENTRATION OF OWNERSHIP. After issuance of the 2,180,000 shares offered
by the Company pursuant to this Prospectus, officers and directors of the
Company, and affiliates of those persons, will beneficially own 17.83% of the
Company's outstanding Common Stock (or 17.17% assuming the Underwriters'
overallotment option is exercised in full). See "Principal Holders of Common
Stock." Accordingly, such persons have the ability to act together as a group to
direct the Company's affairs and business, which may include taking actions that
may not be in the interests of the other shareholders.
SHARES AVAILABLE FOR FUTURE SALE. The future sale of a substantial number
of shares of Common Stock by existing shareholders, or the sale of shares of
Common Stock by shareholders purchasing shares of Common Stock in this offering,
could have a material adverse effect on the market price of the Common Stock.
The Company, its directors and executive officers, and the Selling Shareholder
have agreed that for a period of 120 days after the date of this Prospectus,
they will not, directly or indirectly, sell or otherwise dispose of any shares
of Common Stock (except for shares of Common Stock offered hereby and other than
shares offered pursuant to the Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions) (the "KSOP") or other employee benefit
plans) without the prior written consent of the Underwriters. See "Underwriting"
and "Shares Eligible for Future Sale."
LIMITED MARKET FOR COMMON STOCK. The Common Stock is held by approximately
642 shareholders of record. The total trading volume for the Common Stock for
1995, as reported on the Summary of Activity for December 1995, prepared by The
Nasdaq Stock Market for the Company, indicates that total share volume was
752,910 shares during 1995, representing an aggregate of 337 trades. Alex. Brown
& Sons Incorporated and First Southwest Company have made a market in the Common
Stock since March 1994 (when the Common Stock was first qualified for trading
through the Nasdaq National Market System), and each has advised the Company
that they intend to make a market in the Common Stock as long as the volume of
trading activity in the Common Stock and certain other market-making
considerations justify doing so. However, there can be no assurance that a
liquid trading market for the Common Stock will develop, that it will continue
if it does develop, or that after the completion of this offering the Common
Stock will trade at or above the offering price set forth on the cover of this
Prospectus. Making a market involves maintaining bid and asked quotations for
the Common Stock and being available as a principal to effect transactions in
reasonable quantities at those quoted prices, subject to various securities laws
and other regulatory requirements. A public trading market having the desired
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of willing buyers and sellers of the Common Stock at any given
time, which presence is dependent upon the individual decisions of investors and
general economic and market conditions, over which neither the Company nor any
market-maker has control.
USE OF PROCEEDS
The net proceeds to Texas Regional from this offering, after deducting
estimated expenses of the offering, are estimated to be $ . The Company
intends to use $40.0 million of the proceeds from this offering to finance a
portion of the consideration to the shareholders of First State Bank and Border
Bank in the Mergers. The remainder of the net proceeds, if any, will be used for
general corporate purposes. The total consideration to be paid to both First
State Bank and Border Bank shareholders in the Mergers is estimated to be $99.5
million. The Company intends to fund the balance of the consideration
principally from liquidation of cash equivalents and, to the extent necessary,
selected investment securities on a consolidated basis. See "Texas Regional
Bancshares, Inc. Pro Forma Combined Condensed Financial Information."
Consummation of the offering herein described is subject to certain
conditions, including the contemporaneous consummation of the Mergers. See
"Proposed Mergers" and "Underwriting."
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THE COMPANY
Texas Regional is a registered bank holding company whose wholly-owned
subsidiary bank, Texas State Bank, conducts a commercial banking business in the
Rio Grande Valley of Texas. At December 31, 1995, Texas Regional had
consolidated assets of $646.8 million, loans outstanding (net of unearned
discount) of $450.9 million, total deposits of $579.7 million, and total
shareholders' equity of $62.7 million. For the years ended December 31, 1995,
and 1994, the Company earned net income of $8.7 million and $7.2 million,
respectively, for a return on average assets for these periods of 1.51% and
1.43%, respectively. At December 31, 1995, the Company had nonperforming assets
(including accruing loans 90 days or more past due) of $4.2 million,
representing 0.9% of period-end loans and other nonperforming assets (primarily
other real estate).
Assuming consummation of the Mergers, on a pro forma basis at December 31,
1995, Texas State Bank would have had consolidated assets of $1.143 billion,
loans outstanding (net of unearned discount) of $685.3 million, total deposits
of $1.024 billion, and total shareholders' equity of $105.3 million. Assuming
consummation of the Mergers, on a pro forma basis at December 31, 1995 Texas
State Bank would have had non-performing assets (including accruing loans 90
days or more past due) of $13.8 million, representing 2.0% of period-end loans
and other nonperforming assets (primarily other real estate).
All of Texas Regional's operations are located in the Rio Grande Valley, and
therefore the ability of Texas Regional to continue its rate of growth and
profitability is closely linked to the economy of the Rio Grande Valley. The Rio
Grande Valley is composed of the following Texas counties: Hidalgo, Cameron,
Willacy and Starr (the "Rio Grande Valley"). The economy of the Rio Grande
Valley is based principally on retailing (including trade with Mexico),
government, agriculture, tourism, manufacturing, health care and education. A
large number of retirees spend all or part of the year in the Rio Grande Valley.
Many twin manufacturing and assembly plants, or "maquiladoras," are located in
the Rio Grande Valley or in communities located across the border in Mexico
(such as Reynosa and Matamoros). The market area served by Texas State Bank has
been recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period.
Texas State Bank has a total of nine full service banking locations in the
Rio Grande Valley through which the Bank offers a broad range of commercial
banking services. The Bank intends to operate all of the banking locations of
First State Bank and Border Bank and, after consummation of the Mergers, will
have 15 full service banking locations. The Bank serves as a community bank,
providing for the banking needs of retailers, manufacturers, food producers and
processors, real estate developers and builders, and other businesses in the Rio
Grande Valley. For commercial customers, Texas State Bank offers checking
facilities, certificates of deposit, short-term loans for working capital
purposes, construction financing, mortgage loans, loans for fixed assets and
expansion needs and other commercial loans. The services provided for
individuals by Texas State Bank include checking accounts, savings accounts,
certificates of deposit, individual retirement accounts and consumer loan
programs, including installment loans for home repairs and for purchases of
consumer goods, including automobiles, trucks and boats, mortgage loans,
travelers checks, money orders and safe deposit facilities. Where the borrowing
needs of a customer exceed the lending limits of the Bank, the Bank may
participate with other banks in the making of such loan. The Bank also offers
trust services to commercial and individual customers. At December 31, 1995 and
1994, total trust assets under management by Texas State Bank were $237.4
million and $192.4 million, respectively. On a pro forma basis at December 31,
1995, total trust assets under management by Texas State Bank would have been
$248.9 million.
Due to its close proximity to Mexico, Texas State Bank has developed banking
relations with depositors who are Mexican residents. At December 31, 1995,
approximately 9.8% of the total demand and time deposits in Texas State Bank
were deposited by or on behalf of residents of Mexico. Many of the Company's
Mexican customers are long-term customers of Texas State Bank or have
long-standing relationships with senior management. On a pro forma basis at
December 31, 1995, approximately 14.4%
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of the combined total demand and time deposits in Texas State Bank, First State
Bank and Border Bank were deposited by or on behalf of residents of Mexico, and
approximately 1.9% of the combined total loans of Texas State Bank, First State
Bank and Border Bank were secured by non-U.S. collateral, primarily real estate
and other assets located in Mexico. Management does not believe that the Bank's
profitability is dependent on business from Mexican depositors and loan
customers.
Texas State Bank is a member of the Federal Reserve System, and acts as a
correspondent to a number of banks in its service area, providing check
clearing, wire transfer, federal fund transactions, loan participations, data
processing and other correspondent services.
Texas State Bank's business strategy is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. Management
believes that the Bank is well positioned in its market due to its responsive
customer service, the strong community involvement of Texas State Bank
management and employees, recent trends in the Texas banking environment and
recent trends in the economy of the Rio Grande Valley. Management's strategy is
to provide a business culture in which individual customers and small and medium
sized businesses are accorded the highest priority in all aspects of the Bank's
operations. Management believes that individualized customer service will allow
the Bank to increase its market share in lending volume and deposits. As part of
its operating and growth strategies, the Bank intends to attract business from,
and provide service to, small to medium sized businesses, and expand its
operations in the Rio Grande Valley.
Consistent with the Company's growth strategy, in August 1995 Texas State
Bank acquired the Rio Grande City and Roma branches of First National Bank of
South Texas (the "RGC/Roma Branch Acquisitions"). In the acquisition, Texas
State Bank assumed deposit liabilities amounting to an aggregate of $79.7
million, and acquired loans (net of unearned discount) of $43.7 million, fixed
assets (after giving effect to purchase accounting adjustments) of $1.6 million,
and other assets, including foreclosed properties, of $100,000. Texas State Bank
paid a net premium (after purchase accounting adjustments) of $4.1 million for
the business, and the difference of approximately $30.6 million was funded in
cash by First National Bank of South Texas. The RGC/Roma Branch Acquisitions
provided Texas State Bank with two banking locations in Starr County, Texas.
Texas State Bank has for some time sought appropriate acquisitions to permit
the Bank to expand within the market areas served by Texas State Bank and into
adjacent market areas. In January 1996, the Company entered into definitive
agreements to acquire through merger First State Bank and Border Bank. First
State Bank and Border Bank had combined total assets of approximately $524.0
million at December 31, 1995, which, on a pro forma basis at December 31, 1995,
would have resulted in Texas State Bank increasing its total assets to $1.143
billion, making Texas Regional the largest bank holding company headquartered in
the Rio Grande Valley. The purpose of the Mergers is to further strengthen Texas
State Bank's branch network and banking business in the Rio Grande Valley by
adding six new banking locations in Mission, Penitas, McAllen and Hidalgo,
Texas. The purchase price for the Mergers is estimated to be $99.5 million,
approximately $40.0 million of which will be paid from the proceeds of the
offering made hereby. The Company intends to fund the balance principally from
liquidation of cash equivalents and, to the extent necessary, selected
investment securities on a consolidated basis. See "Proposed Mergers" and "Use
of Proceeds."
The banking industry in the market area served by Texas State Bank is highly
competitive, with competition from other commercial banks, savings and loan
associations, credit unions, mortgage banking companies, commercial and consumer
finance companies, securities broker-dealers, mutual fund companies, insurance
agents and companies and other financial institutions, located both within and
outside of the Rio Grande Valley.
Texas Regional is subject to regulation by the FRB, and Texas State Bank is
subject to regulation by both the Banking Department and its primary federal
regulator, the FRB. Such regulations are primarily
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designed for protection of depositors and not for the benefit of the
shareholders of financial institutions. See "Business -- Regulation and
Supervision" and "Risk Factors -- Regulatory Restrictions and Requirements."
At December 31, 1995, Texas Regional employed 332 full time equivalent
employees. On a pro forma basis at December 31, 1995, after giving consideration
to the Mergers, the Company would have employed 467 full time equivalent
employees. Substantially all of the present First State Bank and Border Bank
officers and employees are expected to be employed by Texas State Bank. The
address of Texas Regional's principal executive office is Kerria Plaza, Suite
301, 3700 North 10th Street, McAllen, Texas 78501, and its telephone number is
(210) 631-5400.
PROPOSED MERGERS
GENERAL
The Company, through its subsidiary Texas State Bank, has agreed to acquire,
through the Mergers, First State Bank and Border Bank. Management of Texas State
Bank believes that the Mergers will expand the Company's community banking
network into contiguous markets, substantially increasing its market share and
enabling the Bank to compete more effectively with other financial institutions
in the Rio Grande Valley. The new or expanded services to be offered to First
State Bank and Border Bank customers include enhanced data processing services,
additional automated teller facilities and other services now offered to Texas
State Bank customers. Texas State Bank management believes that First State
Bank, Border Bank and Texas State Bank customers will benefit from the expansion
of Texas State Bank's branch network from nine to 15 banking locations. Texas
State Bank expects to realize certain operating and administrative efficiencies
as a result of the Mergers; however, because of the relatively low
employee-to-asset ratio at First State Bank and Border Bank, cost savings is not
a principal motivating factor for the Mergers. The operating efficiencies which
are expected include the use by all banking locations of the existing Texas
State Bank data processing facility, operation of a single human resources
department, and economies of a combined advertising program.
The terms of the merger of First State Bank are set forth in the Agreement
and Plan of Reorganization dated January 9, 1996, as amended on ,
1996, by and between the Company, Texas State Bank and First State Bank ("First
State Bank Agreement"), and the terms of the merger of Border Bank are set forth
in the Agreement and Plan of Reorganization dated January 9, 1996, as amended on
, 1996, between the Company, Texas State Bank and Border Bank
("Border Bank Agreement") (the First State Bank Agreement and the Border Bank
Agreement are collectively called the "Merger Agreements," copies of which are
filed as exhibits to the Registration Statement). Subject to the terms and
conditions of the Merger Agreements, certain shareholders of First State Bank
and Border Bank have joined into the Merger Agreements to evidence their consent
to the Mergers and their agreement to vote their shares in favor of the Mergers
at their respective shareholders meetings. The Merger Agreements provide that,
at the time of the closing of the Mergers (the "Closing"), the net worth of
First State Bank will not be less than $62.0 million and the net worth of Border
Bank will not be less than $17.3 million. Elliot B. Bottom is the Chairman of
the Board of both First State Bank and Border Bank, and the banks have
substantial common ownership.
First State Bank, the principal office of which is located in Mission,
Texas, was chartered in 1909, and Border Bank, located in Hidalgo, Texas, was
chartered in 1968. Because of the proximity of Mission to McAllen, there is a
substantial overlap in the markets served by Texas State Bank and First State
Bank. For this reason and because the banks serve a similar customer base, First
State Bank is considered by Texas State Bank management to be a direct
competitor of Texas State Bank, particular as to loan customers.
All of the offices of First State Bank and Border Bank are located in
Hidalgo County, Texas, and all such locations are expected to continue to be
operated by Texas State Bank, under the Texas State Bank name, following the
Mergers. Both First State Bank and Border Bank are full service community banks.
The products and services offered at these locations will be expanded to include
all products and services offered by Texas State Bank.
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Substantially all of the current officers and employees of First State Bank
and Border Bank are expected to be employed by Texas State Bank following the
Mergers. Elliott Bottom, the President and Chief Executive Officer of First
State Bank, will become President of Texas State Bank's Mission banking
locations, with principal operating responsibility for the Mission banking
locations, and Brent Bottom, the President of Border Bank, will become the Chief
Executive Officer of Texas State Bank's Hidalgo banking location. Texas State
Bank management believes that this continuity of management will provide for an
orderly transition and will minimize the loss of customer relationships.
The Mergers are subject to a number of conditions, including receipt of
approval from applicable regulatory authorities. Both the FRB and the Banking
Department have approved the Mergers, subject to certain conditions, including
the successful completion of the offering of Common Stock made hereby to
partially fund the Mergers. FRB approval was received on , 1996.
Applicable regulations require a waiting period following receipt of FRB
approval prior to consummation of the Mergers. Based on a thirty-day waiting
period, Texas State Bank will be able to consummate the Mergers on ,
1996. The Mergers have also been approved by the shareholders of First State
Bank and Border Bank, as required by law, at meetings held on ,
1996.
Members of senior management of Texas State Bank, and Texas State Bank's
representatives, reviewed certain information concerning First State Bank and
Border Bank. This review included all loans on the First State Bank and Border
Bank watch lists, a substantial proportion of the loans to borrowers with other
large lines of credit and selected other loans in each bank's portfolio. The
Company's examinations were made using criteria, analyses and collateral
evaluations that the Company has traditionally used in the ordinary course of
its business.
First State Bank and Border Bank have each entered into a Memorandum of
Understanding with the Banking Department, pursuant to which each bank among
other things, agrees to (i) develop and follow policies related to loan
documentation and review, (ii) increase (and continue monitoring the adequacy
of) each bank's loan valuation reserve, and (iii) review of each bank's
investment and funds management policies. The Banking Department reviewed
compliance with the First State Bank Memorandum of Understanding as part of an
examination of First State Bank, and the FDIC reviewed compliance with the
Border Bank Memorandum of Understanding as part of an examination of Border
Bank. The regulatory authorities in each case concluded that there were
deficiencies in compliance with the Memorandum applicable to each Bank, and
required that First State Bank and Border Bank management further address the
deficiencies identified in the Memoranda. Prior to entering into the Merger
Agreements, First State Bank and Border Bank began to implement additional
correction efforts, including retaining an outside consultant to assist in
documentation and policy reviews for First State Bank and Border Bank. Texas
State Bank management believes that the implementation of Texas State Bank's
policies and procedures, and the application of Texas State Bank's internal
controls, make it unlikely that the deficiencies identified in the Memoranda of
Understanding will be repeated, although there can be no certainty that all
deficiencies will be adequately addressed to the satisfaction of applicable
regulatory authorities. If the problems addressed in the Memoranda of
Understanding persist, they could adversely affect the future operations of the
Company. See "Risk Factors -- Risks of the Mergers -- Compliance and
Management."
Following the Mergers, (i) all lending at the facilities formerly operated
by First State Bank and Border Bank will be conducted pursuant to Texas State
Bank's policies and under the supervision of Texas State Bank's Chief Lending
Officer, Frank A. Kavanagh, (ii) investments in securities will be managed by
the investment division of Texas State Bank in accordance with Texas State
Bank's investment policies and (iii) following conversion (which is expected by
Texas Regional management to occur in fall 1996) all data processing will be
performed by Texas State Bank's data processing center. In general, the policies
and procedures for all banking locations, including the banking locations
formerly operated as First State Bank and Border Bank facilities, will be Texas
State Bank's policies and procedures. Nonperforming assets and loans presently
past due on the books of First State Bank and Border Bank have been reviewed by
or on behalf of Texas State Bank and those loans which, in the judgment of Texas
State Bank, represent probable losses will be recorded at zero at the time of
consummation of the
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Mergers, although Texas State Bank will nonetheless pursue collection in
appropriate circumstances. At December 31, 1995, the allowance for loan losses
at First State Bank was $4.2 million or 52.4% of nonperforming assets plus
accruing loans 90 days or more past due. At December 31, 1995, the allowance for
loan losses at Border Bank was $1.1 million or 72.5% of nonperforming assets
plus accruing loans 90 days or more past due.
THE MERGER AGREEMENTS
The information contained in this Prospectus with respect to the Merger
Agreements is a summary of the material provisions of the Merger Agreements,
and, as such, is qualified in its entirety by reference to the Merger
Agreements, which are exhibits to the Registration Statement.
The Merger Agreements provide for the merger of First State Bank and Border
Bank with and into Texas State Bank. Each of the Mergers is conditioned upon the
closing of the other. The total consideration payable pursuant to the First
State Bank Agreement is $79.0 million, and the total consideration payable
pursuant to the Border Bank Agreement is $20.5 million, in each case payable in
cash and in each case subject to adjustment for amounts attributable to
shareholders of First State Bank and Border Bank exercising their dissenters'
rights of appraisal. [Shareholders holding shares of First State Bank
and shares of Border Bank have properly exercised their dissenter's
rights, which entitle them to be paid the fair value of their shares by Texas
State Bank, as determined in accordance with the statutory procedure.] Each of
the Merger Agreements provides that the Mergers will terminate at the election
of either party in the event that the Mergers have not been consummated prior to
June 30, 1996.
Pending the Closing, First State Bank and Border Bank have agreed to certain
operating limitations and requirements, including an obligation to operate their
businesses in accordance with reasonably prudent banking practices and in
substantially the same manner as conducted prior to the date of the Merger
Agreements. If either of the Mergers is not consummated as a result of either a
default by Texas State Bank or the failure of certain conditions precedent to
Texas State Bank's obligation to close the Mergers, Texas State Bank has agreed
to pay a $65,000 termination fee to each of First State Bank and Border Bank.
The consummation of the Mergers is subject to a number of conditions
precedent, including that shareholders holding no more than an aggregate of 2.5%
of the issued and outstanding shares shall have exercised dissenters' rights of
appraisal, that regulatory approvals shall have been obtained and not contested
in a formal proceeding, that there shall not be litigation pending or threatened
which might result in action to restrain, enjoin, or prohibit consummation of
the Mergers, and that each party shall have received certain fairness opinions
in form and content acceptable to that party. Texas State Bank's obligations are
further conditioned on there having been no material adverse change in the
condition, financial position or business prospects of First State Bank or
Border Bank and that each will have terminated its existing data processing
services contract on terms and conditions reasonably acceptable to Texas State
Bank. Texas State Bank has reserved the right to waive any applicable condition
to Closing in circumstances deemed appropriate by Texas State Bank management.
One of the conditions to Texas State Bank's obligation to consummate the
First State Bank Agreement is that First State Bank have a net worth as of the
date of Closing of not less than $62.0 million. Similarly, one of the conditions
to Texas State Bank's obligation to consummate the Border Bank Agreement is that
Border Bank have a net worth as of the date of Closing of not less than $17.3
million. Other than a dividend of $500,000 paid by Border Bank in January 1996,
each of the Merger Agreements prohibits payment of dividends to shareholders of
First State Bank and Border Bank pending Closing.
Pursuant to each of the Merger Agreements, Elliott Bottom, the Chairman of
the Board and Chief Executive Officer of First State Bank and the Chairman of
the Board of Border Bank, has agreed not to engage (except as an employee of
Texas State Bank) in the commercial banking business in Hidalgo, Cameron, Starr
or Willacy Counties, Texas, for a period of three years following the date of
Closing, except that such obligation shall terminate in the event of a change of
control of a majority of the
14
<PAGE>
outstanding capital stock of either Texas State Bank or the Company. As of the
date of Closing, Elliott Bottom will become President of Texas State Bank's
Mission banking locations. His son, Brent Bottom, the President of Border Bank,
will become the Chief Executive Officer of Texas State Bank's Hidalgo banking
location.
The terms of the Mergers were established in arms' length negotiations
conducted by representatives of Texas State Bank, and First State Bank and
Border Bank. In approving the Mergers and the amounts of the purchase price to
be paid, the Board of Directors of Texas State Bank considered a number of
factors, including: (i) First State Bank's and Border Bank's historical
financial condition, including shareholders' equity and results of operations;
(ii) First State Bank's and Border Bank's business, prospects, management and
employees; (iii) current economic and market conditions; (iv) the likelihood of
completing a transaction with one or more other banking institutions on
comparable or more favorable terms (although no specific alternative
transactions were identified); and (v) the prospects for growth of Texas State
Bank assuming the Mergers are completed. The Board of Directors attached no
specific relative weights to these factors in reaching its determination. In
addition, the Company has received an opinion of First Southwest Company as to
the fairness of the transaction, from a financial point of view, to the
shareholders of the Company. Given the historically strong growth rate for Texas
State Bank and the increasing population in its market area, management believes
that Texas State Bank's prospects for growth in the future are strong,
notwithstanding whether or not the Mergers are consummated.
It is anticipated that the Mergers, which are effective upon filing and
acceptance of a Certificate of Merger with the Banking Department, will be
consummated contemporaneously with the closing and funding of the net proceeds
of the offering herein described.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Since the public offering of the Common Stock in March 1994, the Common
Stock has traded in the Nasdaq National Market System under the symbol "TRBS."
The following table shows (i) high and low prices of the Common Stock as
reported in the Summary of Activity provided to the Company by The Nasdaq Stock
Market for transactions occurring on the Nasdaq National Market System during
the past two years, and (ii) the total number of shares involved in such
transactions. In addition, with respect to periods prior to March 16, 1994, the
information is based upon transactions with respect to which the management of
Texas Regional had knowledge of the transaction price, since during those
periods transactions were reported on an informal basis, and no independent
verification of the transaction prices was made. Therefore, during periods prior
to March 16, 1994, the prices reported may not be indicative of the actual or
market value of the Common Stock.
<TABLE>
<CAPTION>
PRICE PER SHARE CASH
-------------------- DIVIDENDS NUMBER OF
HIGH LOW DECLARED SHARES
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
1994
First Quarter.......................................... $ 12.75 $ 11.75 $ -- 854,845
Second Quarter......................................... 14.50 11.00 0.08 1,182,385
Third Quarter.......................................... 15.50 13.25 0.08 582,094
Fourth Quarter......................................... 13.50 11.50 0.08 173,796
1995
First Quarter.......................................... 12.75 11.25 0.10 78,931
Second Quarter......................................... 14.50 11.75 0.10 335,504
Third Quarter.......................................... 16.50 13.50 0.10 248,456
Fourth Quarter......................................... 18.25 15.50 0.10 90,019
1996
First Quarter
(through February 29, 1996).......................... 23.00 17.00 0.10 347,511
</TABLE>
15
<PAGE>
During the two years ended December 31, 1995, an aggregate of 58,500 shares
purchased by the KSOP are included in the foregoing table. See "Management --
Employee Stock Ownership Plan."
On , 1996, the last trading day prior to the date of this
Prospectus, the last reported sale price of the Common Stock as reported on the
Nasdaq National Market System was $ per share. On January 9, 1996, the day
prior to the public announcement of the execution of the Merger Agreements, the
last reported sale price of the Common Stock as reported on the Nasdaq National
Market System was $17.00 per share.
The Company paid no dividends on its Common Stock prior to June 1994.
Beginning in June 1994, the Company paid a quarterly dividend of $0.08 per share
of its Common Stock. During 1995, the Company increased its quarterly dividend
to $0.10 per share, and currently intends to continue to pay such dividend in
the foreseeable future. On , 1996, the Company's Board of Directors
declared a dividend of $0.10 per share of Common Stock payable to shareholders
of record as of , 1996.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors and
will depend on conditions then existing, including Texas Regional's
profitability, liquidity, financial condition, capital requirements and other
relevant factors, including regulatory restrictions applicable to the Company.
The Company's principal source of the funds to pay dividends on the Common Stock
is dividends from Texas State Bank. The payment of dividends by Texas State Bank
is subject to certain restrictions imposed by federal and state banking laws,
regulations and authorities. At December 31, 1995, an aggregate of $8.7 million
was available for payment of dividends by the Bank to the Company under the
applicable limitations and without regulatory approval. See "Business --
Regulation and Supervision."
16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company at December 31, 1995, adjusted to give effect to the issuance and sale
of the Common Stock offered by the Company hereby and consummation of the
Mergers (in each case, assuming no exercise of the Underwriters' over-allotment
option and after deduction for estimated underwriting discounts and other
expenses of the offering).
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
ACTUAL AS ADJUSTED(1)
--------- --------------
(IN THOUSANDS)
<S> <C> <C>
LONG-TERM DEBT
Note Payable...................................................................... $ -- $ --
SHAREHOLDERS' EQUITY
Preferred Stock: $1.00 par value; 10,000,000 shares authorized.................... -- --
Common Stock: $1.00 par value; 20,000,000 shares authorized; issued and
outstanding 6,196,791 shares at December 31, 1995, and 8,376,791 shares at
December 31, 1995, on an "As Adjusted" basis.................................... 6,196 8,376
Paid-In Capital................................................................... 29,239 69,592
Retained Earnings................................................................. 27,168 27,168
Unrealized Gains on Securities
Available for Sale.............................................................. 117 117
--------- --------------
TOTAL SHAREHOLDERS' EQUITY........................................................ 62,720 105,253
--------- --------------
TOTAL CAPITALIZATION.................................................................. $ 62,720 $ 105,253
--------- --------------
--------- --------------
</TABLE>
- ---------
(1) Reflects the receipt by Texas Regional of net proceeds of this offering
of approximately $42.5 million, assuming sale by Texas Regional of
2,180,000 shares at a price of $21.00 per share, net of underwriting
discounts and commissions and other estimated offering expenses.
At December 31, 1995, Texas Regional had outstanding 6,196,791 shares of
Common Stock held by approximately 642 shareholders of record.
17
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial information under the captions "Summary
of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the five-year period ended December 31, 1995 has been derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent auditors. The
consolidated financial statements at December 31, 1995 and 1994 and for each of
the years in the three-year period ended December 31, 1995 are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income.................................. $ 45,592 $ 34,631 $ 29,691 $ 27,737 $ 24,484
Interest Expense................................. 18,052 11,690 10,494 10,876 12,711
---------- ---------- ---------- ---------- ----------
Net Interest Income.............................. 27,540 22,941 19,197 16,861 11,773
Provision for Loan Losses........................ 1,685 1,085 392 220 310
Noninterest Income............................... 6,518 5,772 5,032 3,817 2,775
Noninterest Expense.............................. 18,977 16,507 14,513 13,910 9,864
---------- ---------- ---------- ---------- ----------
Income Before Income Tax Expense................. 13,396 11,121 9,324 6,548 4,374
Income Tax Expense............................... 4,671 3,936 3,345 2,029 1,550
Cumulative Effect of Change in Accounting
Principle....................................... -- -- 32 -- --
---------- ---------- ---------- ---------- ----------
Net Income....................................... $ 8,725 $ 7,185 $ 6,011 $ 4,519 $ 2,824
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA (ON A FULLY-DILUTED BASIS)
Net Income....................................... $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79
Book Value....................................... 10.12 9.00 7.73 6.42 5.22
Cash Dividends Paid on Common Stock.............. 0.40 0.24 -- -- --
Average Shares Outstanding (in thousands)........ 6,227 6,035 5,170 4,890 3,578
PERIOD-END BALANCE SHEET DATA
Total Assets..................................... $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256
Loans............................................ 450,854 339,939 290,500 252,118 179,853
Investment Securities............................ 131,641 126,828 127,540 100,353 69,735
Interest-Earning Assets.......................... 586,095 468,067 422,965 374,671 263,958
Deposits......................................... 579,731 472,108 429,521 375,016 271,540
Shareholders' Equity............................. 62,720 55,731 39,983 34,318 19,366
PERFORMANCE RATIOS
Return on Average Assets......................... 1.51% 1.43% 1.34% 1.23% 1.00%
Return on Average Shareholders' Equity........... 14.69 14.11 16.15 15.23 15.85
Net Interest Margin.............................. 5.33 5.12 4.84 5.21 4.67
Loan to Deposit Ratio............................ 77.77 72.00 67.63 67.23 66.23
Demand Deposit to Total Deposit Ratio............ 20.77 21.11 20.81 21.61 20.86
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other
Nonperforming Assets............................ 0.79% 1.41% 1.69% 2.31% 4.27%
Net Charge-Offs to Average Loans................. 0.30 0.33 (0.04) 0.21 0.45
Allowance for Loan Losses as a Percentage of:
Loans........................................ 1.01 1.03 1.18 1.16 1.42
Nonperforming Loans.......................... 216.49 143.42 146.05 257.83 67.10
Nonperforming Assets......................... 126.62 72.96 69.39 49.43 32.44
CAPITAL RATIOS
Period-End Shareholders' Equity to Total Assets.. 9.70% 10.48% 8.45% 8.28% 6.51%
Tier I Risk-Based Capital........................ 11.70 14.71 12.05 11.85 9.81
Total Risk-Based Capital......................... 12.64 15.67 13.21 12.91 11.06
Leverage Capital Ratio........................... 8.96 10.37 7.88 8.15 6.54
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
18
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed balance sheet at
December 31, 1995, and pro forma combined condensed statement of income for the
year ended December 31, 1995, combine the historical consolidated balance sheet
of the Company and the historical balance sheets of First State Bank and Border
Bank at December 31, 1995, as if the Mergers had been effective on December 31,
1995. The Mergers are accounted for under the purchase method of accounting,
after giving effect to the pro forma adjustments and assumptions described in
the accompanying notes. Under this method of accounting, which is required by
generally accepted accounting principles, assets and liabilities of First State
Bank and Border Bank are adjusted to their fair values (as estimated by
management of the Company) and combined with the recorded values of the assets
and liabilities of the Company. This pro forma combined condensed financial
information should be read in conjunction with the financial information
appearing under "Texas Regional Bancshares, Inc. Selected Consolidated Financial
Information" and the consolidated financial statements of the Company, First
State Bank and Border Bank, including the notes thereto, included elsewhere in
this Prospectus. See "Index to Financial Statements."
The following unaudited pro forma combined condensed statement of income for
the year ended December 31, 1995 assumes the Mergers and the RGC/Roma Branch
Acquisitions occurred January 1, 1995. Intangibles arising from the Mergers and
the RGC/Roma Branch Acquisitions are approximately $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 combined condensed financial information is not intended to
present the results that would have actually occurred if the Mergers had been in
effect on the assumed dates and for the assumed periods. These results are not
necessarily indicative of the results which may be obtained in the future.
19
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST BORDER PRO FORMA PRO FORMA
TEXAS REGIONAL STATE BANK BANK ADJUSTMENTS BALANCE
--------------- ----------- ----------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks................... $ 30,933 $ 16,270 $ 3,982 $ 42,533A $ 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 (30,523) 56,362
Securities Available for Sale............. 63,150 23,478 6,779 (27,478)F 65,929
Securities Held to Maturity............... 68,491 143,283 47,457 2,937C 262,168
Loans, Net of Unearned Discount........... 450,854 188,424 47,345 (1,337)G 685,286
Less: Allowance for Loan Losses........... (4,542) (4,196) (1,100) -- (9,838)
--------------- ----------- ----------- -------------- -------------
Net Loans............................... 446,312 184,228 46,245 (1,337) 675,448
Premises and Equipment, Net............... 18,374 5,487 3,297 7,000D 34,158
Accrued Interest Receivable............... 6,319 7,172 2,242 -- 15,733
Other Real Estate......................... 1,273 431 237 -- 1,941
Goodwill.................................. 4,641 -- -- 7,250F 11,891
Core Deposit.............................. 1,000 -- -- 14,351H 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 7,557E 12,731
(137) J
--------------- ----------- ----------- -------------- -------------
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 2,180A 8,376
(6,000)F
Paid-In Capital........................... 29,239 21,000 9,000 40,353A 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) 21F 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>
- ---------
See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited)
20
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
TEXAS RGC/ROMA FIRST BORDER PRO FORMA PRO FORMA
REGIONAL BRANCHES STATE BANK BANK ADJUSTMENTS BALANCE
--------- ------------- ----------- --------- ------------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Interest Income............................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (4,059)K $ 87,271
Interest Expense.............................. 17,041 2,817 13,103 4,415 131L 37,507
--------- ------------- ----------- --------- ------------- -----------
Net Interest Income........................... 26,464 3,520 19,369 4,601 (4,190) 49,764
Provision for Loan Losses..................... 1,666 19 2,425 485 -- 4,595
Net Interest Income After Provision for Loan
Losses..................................... 24,798 3,501 16,944 4,116 (4,190) 45,169
Noninterest Income
Service Charges on Deposit Accounts......... 3,312 469 1,146 255 -- 5,182
Other Service Charges....................... 825 97 151 33 -- 1,106
Trust Service Fees.......................... 1,256 -- 24 -- -- 1,280
Other Operating Income...................... 926 24 81 28 -- 1,059
--------- ------------- ----------- --------- ------------- -----------
Total Noninterest Income.................. 6,319 590 1,402 316 -- 8,627
--------- ------------- ----------- --------- ------------- -----------
Noninterest Expense
Salaries and Employee Benefits.............. 9,247 1,334 2,824 1,056 -- 14,461
Net Occupancy Expense....................... 1,010 176 568 234 294M 2,282
Equipment Expense........................... 1,959 217 341 148 -- 2,665
Other Noninterest Expense................... 5,631 1,281 2,531 729 2,189N 12,361
--------- ------------- ----------- --------- ------------- -----------
Total Noninterest Expense................. 17,847 3,008 6,264 2,167 2,483 31,769
--------- ------------- ----------- --------- ------------- -----------
Income Before Income Tax Expense.............. 13,270 1,083 12,082 2,265 (6,673) 22,027
Income Tax Expense............................ 4,630 367 3,436 381 (2,105) 6,709
--------- ------------- ----------- --------- ------------- -----------
Net Income.................................. $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568) $ 15,318
--------- ------------- ----------- --------- ------------- -----------
--------- ------------- ----------- --------- ------------- -----------
Primary Earnings Per Common Share
Net Income.................................. $ 1.39 $ 1.82
Weighted Average Number of Common Shares
Outstanding
(In Thousands)............................. 6,218 8,398
--------- -----------
Fully Diluted Earnings Per Common Share
Net Income.................................. $ 1.39 $ 1.82
Weighted Average Number of Common Shares
Outstanding
(In Thousands)............................. 6,227 8,407
--------- -----------
--------- -----------
</TABLE>
21
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET
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 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 intercompany demand deposit accounts.
(C) To adjust securities purchased to fair value at December 31, 1995.
(D) To record estimated $7.0 million increase in fair value of fixed assets.
(E) To record estimated deferred federal income tax on the net fair value
increases.
(F) To record the payment of $99.5 million to the First State Bank and Border
Bank shareholders for 100% of their outstanding stock, elimination of all
First State Bank and Border Bank equity accounts and the recording of
goodwill.
(G) To adjust loan carrying value to estimated fair value.
(H) To record estimated fair value of core deposits.
(I) To record estimated fair value of fixed maturity deposit premium.
(J) To reclassify deferred federal income taxes.
TEXAS REGIONAL BANCSHARES, INC.
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
The unaudited pro forma combined condensed statement of income combines the
three entities for the year ended December 31, 1995. In combining the entities,
the following adjustments were made:
(K) To record a reduction in interest income on the $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 sold rate of 5.92% for the year ended December 31, 1995 and
the tax effect of these 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.
22
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for the Company for each of
the years ended December 31, 1995, 1994 and 1993. This discussion should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto appearing elsewhere in this Prospectus. See "Texas Regional
Bancshares, Inc. Pro Forma Combined Condensed Financial Information" for
additional information regarding the effects on the Company of consummation of
the Mergers.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1995 was $8.7 million, reflecting
a net increase of $1.5 million or a 21.4% increase compared to net income of
$7.2 million for the year ended December 31, 1994. The earnings per share of
$1.40 for the year ended December 31, 1995 increased $0.24 or 20.7% compared to
the earnings per share of $1.16 for the year ended December 31, 1994. Earnings
performance for the year ended December 31, 1995 reflected gains in net interest
income and an increase in noninterest income. These positive factors were
partially offset by an increase in provision for loan losses and noninterest
expenses. A more detailed description of the results of operations is included
in the material that follows.
During August 1995, Texas State Bank completed the RGC/Roma Branch
Acquisitions which included the purchase of $43.7 million in loans and the
assumption of approximately $79.7 million in deposit liabilities of these
banking locations. This transaction was accounted for as a purchase; therefore,
the results of operations of the two banking locations are included in the
consolidated financial statements of the Company from the date of acquisition.
Purchase accounting adjustments for the purchase of loans and the assumption of
deposit liabilities of these banking locations were immaterial.
On March 31, 1992, the Company acquired, through merger, Mid Valley Bank,
Weslaco, Texas. Simultaneously with the acquisition of Mid Valley Bank, both the
surviving bank in that merger transaction and Harlingen State Bank, Harlingen,
Texas, a subsidiary of the Company, merged with and into Texas State Bank and
the former Weslaco and Harlingen banks became banking locations of Texas State
Bank. The Mid Valley Bank merger was accounted for under the purchase method of
accounting. Accordingly, certain income statement and balance sheet comparisons
during calendar 1991 and 1992 and at year-end 1991 and 1992, respectively, may
not be appropriate.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest expense incurred for the funds supporting those assets. The largest
category of earning assets consists of loans. The second largest category of
earning assets is investment securities, followed by federal funds sold. For
analytical purposes, income from tax-exempt assets, primarily securities issued
by state and local governments or authorities, is adjusted by an increment which
equates tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and
short-term borrowings. In addition to these interest-bearing funds, assets also
are supported by interest-free funds, primarily demand deposits and
shareholders' equity. Variations in the volume and mix of assets and
liabilities, and their relative sensitivity to interest rate movements,
determine changes in net interest income.
Taxable-equivalent net interest income was $27.8 million for the year ended
December 31, 1995, an increase of $4.7 million or 20.3% compared to the year
ended December 31, 1994, and taxable-equivalent net interest income of $23.1
million for the year ended December 31, 1994, increased $3.7 million or 19.3%
compared to the year ended December 31, 1993. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on
23
<PAGE>
those loans had been accrued at the original contractual rates, additional
interest income would have approximated $247,000, $476,000, and $149,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The net yield on total interest-earning assets, also referred to as interest
rate margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. As the following table illustrates, the
interest rate margin of 5.33% for the year ended December 31, 1995 increased 21
basis points compared to 5.12% for the year ended December 31, 1994 while the
interest rate margin of 5.12% for the year ended December 31, 1994 increased 28
basis points compared to 4.84% for the year ended December 31, 1993.
The increase in the interest rate margin for the year ended December 31,
1995 is reflective of the shift in the mix of interest-earning assets to loans
from lower yielding investment securities, including federal funds sold, which
contributed to an increase in yield on interest-earning assets during the year.
The mix of interest-earning assets was changed by total average loans of $370.3
million increasing $61.2 million or 19.8%, total average investment securities
of $131.0 million increasing $967,000 or 0.7% and average federal funds sold of
$19.8 million increasing $8.3 million or 72.4%. The increase in loan yield
reflects the general increase in average interest rates in 1995 compared to
1994. The increase in investment securities yield resulted from lower yielding
investment securities maturing and the reinvesting of the proceeds into higher
yields. The increase in interest on deposits during the year ended December 31,
1995 resulted primarily from increased volume and the higher average rate paid
compared to the previous year.
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the average interest-bearing liabilities, expressed
both in dollars and rates. Average balances are derived from average daily
balances and the yields and costs are established by dividing income or expense
by the average balance of the asset or liability. Income and yield on
interest-earning assets include amounts to convert tax-exempt income to a
taxable-equivalent basis, assuming a 34% effective income tax rate.
24
<PAGE>
THREE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- ---------------------------- ----------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
TAXABLE-EQUIVALENT BASIS(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------- -------- -------- ------ -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial.......................... $125,321 $12,355 9.86% $107,459 $ 8,959 8.34% $100,028 $ 7,891 7.89%
Real Estate......................... 208,035 21,197 10.19 172,925 16,415 9.49 139,432 13,420 9.62
Consumer............................ 36,918 3,647 9.88 28,654 2,631 9.18 24,503 2,363 9.64
-------- -------- -------- -------- -------- --------
Total Loans....................... 370,274 37,199 10.05 309,038 28,005 9.06 263,963 23,674 8.97
-------- -------- -------- -------- -------- --------
Investment Securities
Taxable............................. 126,086 7,004 5.55 125,912 5,863 4.66 110,098 5,119 4.65
Tax-Exempt.......................... 4,907 431 8.78 4,114 368 8.95 4,579 415 9.06
-------- -------- -------- -------- -------- --------
Total Investment Securities....... 130,993 7,435 5.68 130,026 6,231 4.79 114,677 5,534 4.83
-------- -------- -------- -------- -------- --------
Federal Funds Sold...................... 19,807 1,172 5.92 11,490 519 4.52 20,655 623 3.02
-------- -------- -------- -------- -------- --------
Total Interest-Earning Assets..... 521,074 45,806 8.79 450,554 34,755 7.71 399,295 29,831 7.47
-------- -------- -------- -------- -------- --------
Cash and Due from Banks................. 31,151 30,392 26,999
Premises and Equipment, Net............. 16,365 15,358 13,430
Other Assets............................ 13,507 11,562 11,573
Less Allowance for Loan Losses........ (4,158) (3,663) (3,206)
-------- -------- --------
Total Assets...................... $577,939 $504,203 $448,091
-------- -------- --------
-------- -------- --------
LIABILITIES
Interest-Bearing Liabilities
Savings............................. $ 31,360 840 2.68 $ 29,791 763 2.56 $ 27,978 780 2.79
Money Market Checking and Savings... 129,012 3,484 2.70 133,565 3,232 2.42 115,122 2,894 2.51
Time Deposits....................... 249,167 13,666 5.48 191,885 7,624 3.97 178,808 6,647 3.72
-------- -------- -------- -------- -------- --------
Total Savings and Time
Deposits......................... 409,539 17,990 4.39 355,241 11,619 3.27 321,908 10,321 3.21
-------- -------- -------- -------- -------- --------
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements......................... 1,093 46 4.21 651 23 3.53 20 1 5.00
Short-Term Borrowings............... 232 16 6.90 436 32 7.34 804 60 7.46
Note Payable........................ -- -- -- 265 16 6.04 1,873 112 5.98
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities...................... 410,864 18,052 4.39 356,593 11,690 3.28 324,605 10,494 3.23
-------- -------- -------- -------- -------- --------
Demand Deposits......................... 103,842 93,807 83,710
Other Liabilities....................... 3,835 2,896 2,552
-------- -------- --------
Total Liabilities................. 518,541 453,296 410,867
-------- -------- --------
SHAREHOLDERS' EQUITY 59,398 50,907 37,224
-------- -------- --------
Total Liabilities and
Shareholders' Equity............. $577,939 $504,203 $448,091
-------- -------- --------
-------- -------- --------
Net Interest Income..................... $27,754 $23,065 $19,337
-------- -------- --------
-------- -------- --------
Net Yield on Total Interest-Earning
Assets................................. 5.33% 5.12% 4.84%
------ ------- -------
------ ------- -------
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
25
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category.
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 9,194 $5,548 $3,059 $ 587
Investment Securities
Taxable..................................................................... 1,141 8 1,121 12
Tax-Exempt.................................................................. 63 71 (7) (1)
Federal Funds Sold............................................................ 653 376 161 116
------- ------ ------ -----------
Total Interest Income....................................................... 11,051 6,003 4,334 714
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 6,371 1,776 3,979 616
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 23 16 4 3
Short-Term Borrowings......................................................... (16) (15) (2) 1
Note Payable.................................................................. (16) (16) -- --
------- ------ ------ -----------
Total Interest Expense...................................................... 6,362 1,761 3,981 620
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 4,689 4,242 353 94
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- 265 (171) (94)
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 4,689 $4,507 $ 182 $--
------- ------ ------ -----------
------- ------ ------ -----------
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEAR ENDED DECEMBER 31, NET ---------------------------
1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 4,331 $4,043 $ 238 $ 50
Investment Securities
Taxable..................................................................... 744 735 11 (2)
Tax-Exempt.................................................................. (47) (42) (5) --
Federal Funds Sold............................................................ (104) (277) 310 (137)
------- ------ ------ -----------
Total Interest Income....................................................... 4,924 4,459 554 (89)
------- ------ ------ -----------
Interest Expense
Deposits...................................................................... 1,298 1,070 193 35
Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 22 32 -- (10)
Short-Term Borrowings......................................................... (28) (27) (1) --
Note Payable.................................................................. (96) (96) 1 (1)
------- ------ ------ -----------
Total Interest Expense...................................................... 1,196 979 193 24
------- ------ ------ -----------
Net Interest Income Before Allocation of Rate/Volume............................ 3,728 3,480 361 (113)
------- ------ ------ -----------
Allocation of Rate/Volume....................................................... -- (38) (75) 113
------- ------ ------ -----------
Changes in Net Interest Income.................................................. $ 3,728 $3,442 $ 286 $--
------- ------ ------ -----------
------- ------ ------ -----------
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
26
<PAGE>
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 34% effective federal income tax rate.
<TABLE>
<CAPTION>
NET YIELD ON % CHANGE QUARTER
EARNING ASSETS FROM PRIOR --------------------------------------------------
TAXABLE-EQUIVALENT BASIS YEAR YEAR FOURTH THIRD SECOND FIRST
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1995
Net Interest Income................ 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489
Average Earning Assets............. 15.7 521,074 574,033 542,783 492,880 474,600
Net Yield.......................... 5.33% 5.28% 5.15% 5.36% 5.54%
1994
Net Interest Income................ 19.3% $ 23,065 $ 6,289 $ 5,891 $ 5,677 $ 5,208
Average Earning Assets............. 12.8 450,554 469,604 455,802 448,356 428,454
Net Yield.......................... 5.12% 5.31% 5.13% 5.08% 4.93%
1993
Net Interest Income................ 13.7% $ 19,337 $ 4,999 $ 4,853 $ 4,738 $ 4,747
Average Earning Assets............. 22.4 99,295 426,691 407,217 393,264 370,008
Net Yield.......................... 4.84% 4.65% 4.73% 4.83% 5.20%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1995 was $1.7
million, an increase of $600,000 or 55.3% from the $1.1 million for the year
ended December 31, 1994. The provision for loan losses for the year ended
December 31, 1994 of $1.1 million reflects an increase of $693,000 or 176.8%
from the $392,000 provision for loan losses for the year ended December 31,
1993. Provisions for loan losses are charged to earnings to bring the total
allowance for loan losses to a level deemed appropriate by management based on
such factors as historical experience, the volume and type of lending conducted
by the Company, the amount of nonperforming assets, regulatory policies,
generally accepted accounting principles, general economic conditions,
particularly as they relate to the Company's lending area, and other factors
related to the collectibility of the Company's loan portfolio. The increase in
the provision for the year ended December 31, 1995, compared to the provision
for the year ended December 31, 1994, was primarily attributable to loan growth
of $110.9 million and net charge-offs of $1.1 million. See "Allowance for Loan
Losses."
In January 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan", and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on the
Company's financial position or results of operations.
NONINTEREST INCOME
Noninterest income of $6.5 million for the year ended December 31, 1995
increased $746,000 or 12.9% compared to $5.8 million for the year ended December
31, 1994, and noninterest income of $5.8 million for the year ended December 31,
1994 increased $740,000 or 14.7% compared to $5.0 million for the year ended
December 31, 1993. All categories of noninterest income, except Other Service
Charges and Net Investment Securities Gains (Losses), for the year ended
December 31, 1995, increased when compared to the year ended December 31, 1994.
Total Service Charges of $4.3 million for the year ended December 31, 1995
increased $392,000 or 10.0% compared to the year ended December 31, 1994, and
Total Service Charges of $3.9 million for the year ended December 31, 1994,
increased $646,000 or 19.6% compared to the year ended December 31, 1993. The
increase in Total Service Charges for the years ended December 31, 1995, 1994
and 1993 is attributable to increased account transaction fees as a result
27
<PAGE>
of the deposit growth experienced by the Company. The decline in Other Service
Charges for the year ended December 31, 1995 compared to the year ended December
31, 1994 was primarily attributable to a decrease in foreign currency exchange
fees. The recent events in Mexico, primarily the peso devaluation, have resulted
in a decrease in volume and spread on peso exchange fee activity.
Trust Service Fees of $1.3 million for the year ended December 31, 1995
increased $95,000 or 8.2% compared to $1.2 million for the year ended December
31, 1994, and Trust Service Fees of $1.2 million for the year ended December 31,
1994 increased $74,000 or 6.8% compared to $1.1 million for the year ended
December 31, 1993. The increase in Trust Service Fees in each of years 1995 and
1994 is attributable to increases in both the number of trust accounts and the
book value of assets managed. The book value of assets managed at December 31,
1995 and 1994 was $237.4 million and $192.4 million, respectively. Assets held
by the trust department of the Bank in fiduciary or agency capacities are not
assets of the Company and are not included in the consolidated balance sheets.
Net Investment Securities Gains (Losses) was ($111,000) for the year ended
December 31, 1995, compared to an $8,000 gain for the year ended December 31,
1994. The decrease was primarily attributable to a $99,000 loss recorded on the
sale of two bonds.
Other operating income of $601,000 for the year ended December 31, 1995
increased $192,000 or 46.9% compared to $409,000 for the year ended December 31,
1994 and other operating income of $409,000 for the year ended December 31, 1994
increased $27,000 or 7.1% compared to year ended December 31, 1993.
A detailed summary of noninterest income during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
% CHANGE FROM % CHANGE FROM
NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------------------------ ------ -------------- ------ ------------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts......................... $3,472 14.4% $3,035 11.7% $2,718
Other Service Charges....................................... 859 (5.2) 904 57.2 575
------ --- ------ ----- ------
Total Service Charges..................................... 4,331 10.0 3,939 19.6 3,293
Trust Service Fees.......................................... 1,256 8.2 1,161 6.8 1,087
Net Investment Securities Gains
(Losses)................................................... (111) * 8 (75.8) 33
Data Processing Service Fees................................ 441 72.9 255 7.6 237
Other Operating Income...................................... 601 46.9 409 7.1 382
------ --- ------ ----- ------
Total..................................................... $6,518 12.9% $5,772 14.7% $5,032
------ --- ------ ----- ------
------ --- ------ ----- ------
</TABLE>
- ---------
*Not meaningful.
NONINTEREST EXPENSE
Noninterest expense of $19.0 million for the year ended December 31, 1995
increased $2.5 million or 15.0% compared to $16.5 million for the year ended
December 31, 1994, and noninterest expense of $16.5 million for the year ended
December 31, 1994 increased $2.0 million or 13.7% compared with $14.5 million
for the year ended December 31, 1993. These increases for the years ended
December 31, 1995 and 1994 were primarily attributable to the increased volume
of business conducted by the Company.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $9.6 million for the year ended December 31, 1995, increased
$1.5 million or 19.3% compared to year ended December 31, 1994 levels of $8.0
million. Personnel expense of $8.0 million for the year ended December 31, 1994
increased $217,000 or 2.8% compared to year ended December 31, 1993 levels of
$7.8
28
<PAGE>
million. Personnel expense increased for the year ended December 31, 1995
primarily due to staffing increases, including the additional staff acquired as
a result of the RGC/Roma Branch Acquisitions, and increases in payroll taxes,
medical insurance premiums and pension expenses for all employees.
Net occupancy expense of $1.1 million for the year ended December 31, 1995
increased $108,000 or 11.2% compared to $961,000 for the year ended December 31,
1994, and net occupancy expense of $961,000 for the year ended December 31, 1994
increased $141,000 or 17.2% when compared to a net occupancy expense of $820,000
for the year ended December 31, 1993. The increase for the year ended December
31, 1995 is primarily attributable to the occupancy expenses associated with the
RGC/Roma Branch Acquisitions.
Equipment expense of $2.0 million for the year ended December 31, 1995
increased $380,000 or 23.1% compared to $1.6 million for the year ended December
31, 1994 and equipment expense of $1.6 million for the year ended December 31,
1994 increased $282,000 or 20.6% when compared with $1.4 million for the year
ended December 31, 1993. The equipment expense increase noted during the year
ended December 31, 1995 is primarily attributable to equipment obtained in the
RGC/Roma Branch Acquisitions and equipment acquired to service the Company's
increasing customer base.
Other Real Estate (Income) Expense, Net includes rent income from foreclosed
properties, gain or loss on sale of other real estate properties and direct
expenses of foreclosed real estate including property taxes, maintenance costs
and write-downs. Write-downs of other real estate are required if the fair value
of an asset acquired in a loan foreclosure subsequently declines below its
carrying value. Other Real Estate (Income) Expense, Net of $107,000 for the year
ended December 31, 1995 increased $32,000 or 42.7% when compared to $75,000 net
expense for the year ended December 31, 1994. Other Real Estate (Income)
Expense, Net of $75,000 net expense for the year ended December 31, 1994
decreased $403,000 or 122.9% compared to $328,000 net income for the year ended
December 31, 1993. The increased expense during the year ended December 31, 1995
is primarily attributable to commissions paid on new lease agreements on rental
property included in Other Real Estate. Management is actively seeking buyers
for all Other Real Estate and is of the opinion that the carrying value of Other
Real Estate approximates its estimated fair value less estimated closing costs.
Advertising and Public Relations expense of $772,000 for the year ended
December 31, 1995 increased $79,000 or 11.4% compared to $693,000 for the year
ended December 31, 1994. The increase in advertising and public relations
expense is primarily attributable to a new marketing program and additional
advertising in the service area acquired in the RGC/Roma Branch Acquisitions.
FDIC insurance of $540,000 for the year ended December 31, 1995, decreased
$433,000 or 44.5% compared to $973,000 for the year ended December 31, 1994 due
to a rebate and a premium rate reduction. On August 8, 1995, the FDIC Board of
Directors voted to reduce the deposit insurance premiums paid by most members of
the Bank Insurance Fund, effective as of June 1, 1995. As a result, the overpaid
assessments for the period June 1 to September 30, 1995 and interest (totaling
$297,000) were refunded on September 15, 1995. The Company continues to receive
the most favorable risk classification for purposes of determining the annual
deposit insurance assessment rate, although there can be no assurance that the
Company will continue in the most favorable risk classification in the future.
The increase in Other Losses represents additional losses sustained on
overdraft accounts and the costs of settlement during the period ending December
31, 1995 of certain litigation.
29
<PAGE>
A detailed summary of noninterest expense during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
% CHANGE FROM % CHANGE FROM
NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------- --------- ----------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and Wages......................... $ 7,605 20.1% $ 6,334 4.5% $ 6,059
Employee Benefits.......................... 1,958 16.5 1,681 (3.3) 1,739
--------- ----- --------- ------ ---------
Total Salaries and Employee Benefits..... 9,563 19.3 8,015 2.8 7,798
Net Occupancy Expense...................... 1,069 11.2 961 17.2 820
Equipment Expense.......................... 2,028 23.1 1,648 20.6 1,366
Other Real Estate (Income) Expense, Net
Rent Income............................... (146) 6.6 (137) (77.6) (612)
(Gain) Loss on Sale...................... 3 50.0 2 (100.4) (507)
Expenses................................. 131 33.7 98 (78.2) 449
Write-Downs.............................. 119 6.3 112 (67.3) 342
--------- ----- --------- ------ ---------
Total Other Real Estate (Income)
Expense, Net.......................... 107 42.7 75 (122.9) (328)
Other Noninterest Expense
Advertising and Public Relations......... 772 11.4 693 75.9 394
Amortization of Intangibles.............. 323 44.2 224 (4.7) 235
Data Processing and Check Clearing....... 491 36.4 360 18.4 304
Director Fees............................ 284 6.4 267 (8.2) 291
Franchise Tax............................ 198 24.5 159 9.7 145
Insurance................................ 228 (27.3) 314 (1.9) 320
FDIC Insurance........................... 540 (44.5) 973 17.1 831
Legal and Professional................... 870 (13.5) 1,006 42.9 704
Stationery and Supplies.................. 658 22.3 538 12.8 477
Telephone................................ 250 23.8 202 3.6 195
Other Losses............................. 624 252.5 177 51.3 117
Miscellaneous Expenses................... 972 8.6 895 6.0 844
--------- ----- --------- ------ ---------
Total Other Noninterest Expense........ 6,210 6.9 5,808 19.6 4,857
--------- ----- --------- ------ ---------
Total................................ $ 18,977 15.0% $ 16,507 13.7% $ 14,513
--------- ----- --------- ------ ---------
--------- ----- --------- ------ ---------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. The Company does not presently provide
postretirement benefits other than the KSOP Plan, which is available to all
eligible employees, and a nonqualified deferred compensation plan for the
benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive
Officer.
INCOME TAX
The Company recorded income tax expense of $4.7 million for the year ended
December 31, 1995 compared to $3.9 million for the year ended December 31, 1994.
The increase in income tax expense for the year ended December 31, 1995 is due
primarily to an increased level of pretax income during the year ended December
31, 1995.
30
<PAGE>
The Texas franchise tax is based in part on capital and in part on federal
taxable income with certain modifications. A portion of the tax is accrued in
the year in which the income to which it relates is earned, even though the tax
constitutes a fee for the privilege of doing business in a succeeding period and
is payable in that period. The Company recorded Texas franchise tax expense of
$217,000, $207,000 and $149,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
NET INCOME
Net income was $8.7 million, $7.2 million and $6.0 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The Company continues to experience growth in total assets, deposits and
loans attributable in the opinion of management, in part to the vitality of the
Rio Grande Valley economy and in part to the RGC/ Roma Branch Acquisitions. The
recent devaluation of the Mexican peso relative to the U.S. dollar has reduced
retail sales to Mexican nationals. However, the effects of NAFTA and the
devaluation have also increased cross-border trade and industrial development
including activity at twin manufacturing plants located on each side of the
border (referred to as maquiladoras) which benefit the Rio Grande Valley
economy. Management does not believe that the recent Mexican financial problems
will materially adversely affect the Company's growth and earnings prospects.
Average interest-earning assets of $521.1 million increased $70.5 million or
15.7% for the year ended December 31, 1995 compared to $450.6 million for the
year ended December 31, 1994 and $51.3 million or 12.8% for the year ended
December 31, 1994 compared to $399.3 million for the year ended December 31,
1993. Management's continued focus on lending has resulted in average loans
increasing $61.2 million or 19.8% to $370.3 million for the year ended December
31, 1995 compared to December 31, 1994 levels of $309.0 million, while average
investment securities of $131.0 million increased $967,000 or 0.7% for the year
ended December 31, 1995 compared to December 31, 1994 levels of $130.0 million.
Total average assets increased $73.7 million or 14.6% to $577.9 million for the
year ended December 31, 1995 compared to December 31, 1994 levels and $56.1
million or 12.5% to $504.2 million for the year ended December 31, 1994 compared
to December 31, 1993 levels of $448.1 million.
Average interest-bearing deposits increased $54.3 million or 15.3% to $409.5
million for the year ended December 31, 1995 compared to the year ended December
31, 1994 levels of $355.2 million. Demand deposits also increased $10.0 million
or 10.7% for the year ended December 31, 1995 to $103.8 million compared to the
year ended December 31, 1994 levels of $93.8 million partially as a result of
the increase in public funds from several local municipalities and independent
school districts. The Company has a stable noninterest-bearing source of funds
as reflected in the ratio of average demand deposits to average total deposits
for years ended December 31, 1995, 1994 and 1993 of 20.2%, 20.9%, and 20.6%,
respectively.
31
<PAGE>
The following table presents the Company's average balance sheets during the
last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
AVERAGE BALANCE SHEETS 1995 1994 1993
- --------------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans...................................................................... $ 370,274 $ 309,038 $ 263,963
Investment Securities
Taxable.................................................................. 126,086 125,912 110,098
Tax-Exempt............................................................... 4,907 4,114 4,579
Federal Funds Sold......................................................... 19,807 11,490 20,655
----------- ----------- -----------
Total Interest-Earning Assets............................................ 521,074 450,554 399,295
Cash and Due From Banks.................................................... 31,151 30,392 26,999
Bank Premises and Equipment, Net........................................... 16,365 15,358 13,430
Other Assets............................................................... 13,507 11,562 11,573
Allowance for Loan Losses.................................................. (4,158) (3,663) (3,206)
----------- ----------- -----------
Total.................................................................... $ 577,939 $ 504,203 $ 448,091
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES
Demand Deposits
Commercial and Individual................................................ $ 96,773 $ 91,039 $ 81,021
Public Funds............................................................. 7,069 2,768 2,689
----------- ----------- -----------
Total Demand Deposits.................................................. 103,842 93,807 83,710
----------- ----------- -----------
Savings.................................................................... 31,360 29,791 27,978
Money Market Checking and Savings
Commercial and Individual................................................ 101,881 109,689 105,646
Public Funds............................................................. 27,131 23,876 9,476
Time Deposits
Commercial and Individual................................................ 232,966 172,175 163,896
Public Funds............................................................. 16,201 19,710 14,912
----------- ----------- -----------
Total Interest-Bearing Deposits........................................ 409,539 355,241 321,908
----------- ----------- -----------
Total Deposits............................................................. 513,381 449,048 405,618
Federal Funds Purchased and Securities Sold Under Repurchase Agreements.... 1,093 651 20
Short-Term Borrowings...................................................... 232 436 804
Note Payable............................................................... -- 265 1,873
Other Liabilities.......................................................... 3,835 2,896 2,552
SHAREHOLDERS' EQUITY....................................................... 59,398 50,907 37,224
----------- ----------- -----------
Total.................................................................. $ 577,939 $ 504,203 $ 448,091
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
Texas State Bank, through its nine banking locations, offers a broad range
of commercial banking services to individuals and businesses in its service
area. Texas State Bank also acts as a correspondent to a number of banks in its
service area, providing check clearing, wire transfer, federal funds
transactions, loan participations, data processing and other correspondent
services. The amount of cash and due from banks held on any one day is
significantly influenced by temporary changes in cash items in process of
collection. At December 31, 1995, cash and due from banks was $30.9 million,
$9.5 million less than at December 31, 1994.
INVESTMENT SECURITIES
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Statement 115 established
32
<PAGE>
standards of financial accounting and reporting for investments in equity
securities that have a readily determinable fair value and for all investments
in debt securities. At acquisition, the Bank is required to classify debt and
equity securities into one of three categories: Held to Maturity, Trading or
Available for Sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
Held to Maturity and measured at amortized cost in the consolidated balance
sheet only if management has the positive intent and ability to hold those
securities to maturity. Securities that are bought and held principally for the
purpose of selling them in the near term are classified as Trading and measured
at fair value in the consolidated balance sheet with unrealized holding gains
and losses included in earnings. Investments not classified as either Held to
Maturity or Trading are classified as Available for Sale and measured at fair
value in the consolidated balance sheet with unrealized holding gains and losses
reported in a separate component of shareholders' equity until realized.
Effective December 31, 1993, the Company adopted Statement 115, which caused
various investment securities to be reclassified from Held to Maturity to
Available for Sale. All treasury and agency bonds with a maturity of two years
or less from December 31, 1993, all floating rate bonds and two small equity
securities were reclassified to Available for Sale. During 1994, management
continued classifying bonds purchased with a final maturity of two years or less
as Available for Sale. During 1995, management has classified bonds purchased
with a final maturity of three years or less as Available for Sale. All other
bonds have been classified as Held to Maturity. Future purchases of investment
securities will be classified as Available for Sale or Held to Maturity at time
of purchase as determined by the investment committee.
On October 18, 1995, the FASB decided to grant to all entities a one-time
opportunity during the period from approximately the middle of November to
December 31, 1995, to reconsider their intent and ability to hold securities
accounted for as Held to Maturity under Statement 115. This opportunity allowed
entities to transfer securities from the Held to Maturity category to Available
for Sale or Trading without calling into question their intent to hold other
debt securities to maturity. On December 31, 1995, the Bank transferred
approximately $1.5 million in Held to Maturity securities to the Available for
Sale category resulting in no change to shareholders' equity per share. As a
result of this transfer, all Other Securities are classified as Available for
Sale.
At December 31, 1995, 1994 and 1993, no securities were classified as
Trading.
The following table presents estimated market value of Securities Available
for Sale at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES AVAILABLE FOR SALE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------- --------- ---------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities................... $ 6,012 (77.8)% $ 27,132 (55.3)% $ 60,654
U.S. Government Agency Securities.......... 55,668 104.9 27,167 11.9 24,277
Mortgage-Backed Security................... -- (100.0) 498 (2.4) 510
Other Securities........................... 1,470 * 17 54.5 11
--------- ------- --------- ----- ---------
Total.................................... $ 63,150 15.2% $ 54,814 (35.9)% $ 85,452
--------- ------- --------- ----- ---------
--------- ------- --------- ----- ---------
</TABLE>
- ------------------------------
* Not meaningful.
33
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of the Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST(1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 4,001 $ 1,999 $ -- $ -- $ 6,000 $ 6,012
U.S. Government Agency
Securities............................. 20,182 35,320 -- -- 55,502 55,668
Other Securities........................ -- -- 75 1,396 1,471 1,470
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 24,183 $ 37,319 $ 75 $ 1,396 $ 62,973 $ 63,150
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 5.13% 6.07% -- % -- % 5.45%
U.S. Government Agency Securities....... 6.32 6.15 -- -- 6.21
Other Securities........................ -- -- 6.10 5.93 5.94
Total................................. 6.13 6.15 6.10 5.93 6.13
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid or less any remaining unamortized
discount received.
The following table presents amortized cost of Securities Held to Maturity
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------- --------- ----------------- --------- ----------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities................... $ 28,787 (1.7)% $ 29,270 9.4% $ 26,757
U.S. Government Agency Securities.......... 34,230 (4.8) 35,973 299.2 9,011
States and Political Subdivisions
Securities................................ 5,474 (4.6) 5,736 10.1 5,208
Mortgage-Backed Security................... -- -- -- (100.0) 77
Other Securities........................... -- (100.0) 1,035 -- 1,035
--------- ------ --------- ------ ---------
Total.................................... $ 68,491 (4.9)% $ 72,014 71.1% $ 42,088
--------- ------ --------- ------ ---------
--------- ------ --------- ------ ---------
</TABLE>
Total investments in states and political subdivisions represent investments
in entities within the State of Texas. No single issuer accounted for as much as
10.0% of total shareholders' equity at December 31, 1995. Of the obligations of
states and political subdivisions held by the Company at December 31, 1995,
88.1% were rated A or better by Moody's Investor Services, Inc.
34
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS YEARS COST(1) VALUE
- -------------------------------------------------- -------- ----------- ----------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... $ 18,412 $10,375 $-- $-- $28,787 $28,776
U.S. Government Agency
Securities....................................... 6,995 26,016 1,219 -- 34,230 34,425
States and Political Subdivisions Securities...... 425 2,818 2,034 197 5,474 5,761
-------- ----------- ----------- --------- --------- ---------
Total........................................... $ 25,832 $39,209 $3,253 $ 197 $68,491 $68,962
-------- ----------- ----------- --------- --------- ---------
-------- ----------- ----------- --------- --------- ---------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities.......................... 4.34% 5.62% -- % -- % 4.80%
U.S. Government Agency
Securities....................................... 5.37 6.45 7.57 -- 6.27
States and Political Subdivisions Securities...... 9.57 8.63 8.32 9.98 8.63
Total........................................... 4.70 6.38 8.04 9.98 5.84
-------- ----------- ----------- --------- ---------
-------- ----------- ----------- --------- ---------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
LOANS
The Company manages its credit risk by establishing and implementing
strategies and guidelines appropriate to the characteristics of borrowers,
industries, geographic locations and products. Diversification of risk within
each of these areas is a primary objective. Policies and procedures are
developed to ensure that loan commitments conform to current strategies and
guidelines. Management continues to refine the Company's credit policies and
procedures to address the risks in the current and prospective environment and
to reflect management's current strategic focus. The credit process is
controlled with continuous credit review and analysis, and by review by internal
and external auditors and regulatory authorities. The Company's loans are widely
diversified by borrower and industry group.
The Company has collateral management policies in place so that collateral
lending of all types is approached, to the extent possible, on a basis
consistent with safe and sound standards. Valuation analysis is utilized to take
into consideration the potentially adverse economic conditions under which
liquidation could occur. Collateral accepted against the commercial loan
portfolio includes accounts receivable and inventory, marketable securities,
equipment and agricultural products. Autos, deeds of trust, life insurance and
marketable securities are accepted as collateral for the installment loan
portfolio.
Management of the Company believes that the Company has benefitted from
increased loan demand due to passage of NAFTA and the strong population growth
in the Rio Grande Valley. More recently, the devaluation of the Mexican peso
relative to the U.S. dollar has reduced retail sales to residents of Mexico.
However, the effects of NAFTA and the devaluation have also increased
cross-border trade and industrial development including activity at twin
manufacturing plants located on each side of the border (referred to as
maquiladoras) which benefit the Rio Grande Valley economy. Management believes
the current Mexican financial problems will not have a material adverse effect
on the Company's growth and earnings prospects.
Total loans of $450.9 million for the year ended December 31, 1995 increased
$110.9 million or 32.6% compared to the year ended December 31, 1994 levels of
$339.9 million and increased $49.4 million or 17.0% for the year ended December
31, 1994 compared to levels of $290.5 million at
35
<PAGE>
December 31, 1993. The increase in total loans for the year ended December 31,
1995 is primarily attributable to the RGC/Roma Branch Acquisitions, funding a
large leveraged employee stock ownership trust loan (hereafter described) and
management's efforts to improve the earnings mix of earning assets by increasing
loan volume. The increase in Commercial loans in general, and Commercial-Tax
Exempt loans in particular, for the year ended December 31, 1995 was primarily
attributable to the funding of a $34.0 million employee stock ownership trust
loan which is collateralized by stock and assets of the employer and
approximately $27.5 million of cash and cash equivalent assets. Excluding this
loan, Total Commercial Loans at December 31, 1995 represented an increase of
$10.6 million, or 10.4%, compared to levels at December 31, 1994, and Total
Loans at December 31, 1995 represented an increase of $76.9 million, or 22.6%,
compared to levels at December 31, 1994. A substantial portion of the increase
in loans classified as Real Estate-Commercial Mortgage loans consists of loans
secured by real estate and other assets to commercial customers. The increase in
total loans for the year ended December 31, 1992 is primarily due to the
acquisition of Mid Valley Bank. The following table presents the composition of
the loan portfolio at the end of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial...................................... $ 112,042 $ 101,866 $ 91,697 $ 87,240 $ 63,638
Commercial-Tax Exempt........................... 34,419 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total Commercial Loans........................ 146,461 101,866 91,697 87,240 63,638
Agricultural.................................... 25,097 17,199 13,829 14,789 10,357
Real Estate
Construction.................................. 29,967 18,809 11,846 9,534 5,886
Commercial Mortgage........................... 129,953 113,677 98,635 69,407 42,853
Agricultural Mortgage......................... 17,057 10,263 5,153 7,547 5,847
1-4 Family Mortgage........................... 59,052 47,425 42,647 40,403 32,159
Consumer........................................ 43,267 30,700 26,693 23,198 19,113
----------- ----------- ----------- ----------- -----------
Total Loans................................... $ 450,854 $ 339,939 $ 290,500 $ 252,118 $ 179,853
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
36
<PAGE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
--------------------------------------------------
AFTER
ONE ONE YEAR
YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................... $ 61,134 $ 45,748 $ 5,160 $ 112,042
Commercial Tax Exempt......................................... 4,411 18,851 11,157 34,419
Agricultural.................................................. 22,449 2,648 -- 25,097
Real Estate
Construction................................................ 21,786 8,181 -- 29,967
Commercial Mortgage......................................... 28,613 85,681 15,659 129,953
Agricultural Mortgage....................................... 3,647 10,989 2,421 17,057
1-4 Family Mortgage......................................... 14,489 42,114 2,449 59,052
Consumer...................................................... 19,928 23,070 269 43,267
----------- ----------- ----------- -----------
Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Variable-Rate Loans........................................... $ 105,864 $ 126,965 $ 34,354 $ 267,183
Fixed-Rate Loans.............................................. 70,593 110,317 2,761 183,671
----------- ----------- ----------- -----------
Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
As shown in the preceding table, loans maturing within one year totaled
$176.5 million at year-end 1995. The Company's policy on maturity extensions and
rollovers is based on management's assessment of individual loans. Approvals for
the extension or renewal of loans without reduction of principal for more than
one twelve-month period are generally avoided, unless the loans are fully
secured or are revolving lines subject to annual analysis and renewal.
NONPERFORMING ASSETS
The Bank has several procedures in place to assist in maintaining the
overall quality of its loan portfolio. The Bank has established underwriting
guidelines to be followed by its officers and monitors its delinquency levels
for any negative or adverse trends, particularly with respect to credits which
have total exposures of $10,000 or more.
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. At December 31, 1995, five loan relationships in excess of
$100,000 totaling $1.6 million accounted for 76.1% of the total nonaccrual
loans. These five nonaccrual credits are secured primarily by real estate, and
management believes that it is unlikely that any material loss will be incurred
on disposition of the collateral. The remaining nonaccrual loans represent loans
of less than $100,000 each.
The Company's policy generally is to place a loan on nonaccrual status when
payment of principal or interest is contractually past due 90 days, or earlier
when concern exists as to the ultimate collection of principal and interest. At
the time a loan is placed on nonaccrual status, interest previously accrued but
uncollected is reversed and charged against current income.
Loans which are contractually 90 days or more past due, which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such accruing loans 90 days or more past due for the years ended December 31,
1995, 1994 and 1993 totaled $642,000, $226,000 and $439,000, respectively. The
increase in accruing loans 90 days or more past due at December 31, 1995 as
compared to December 31, 1994 is partly attributable to two credits over
$100,000 included in the category, both of which are in the process of
collection.
37
<PAGE>
Nonperforming assets of $3.6 million at December 31, 1995 decreased $1.2
million or 25.5% compared to December 31, 1994 levels of $4.8 million and
decreased $138,000 or 2.9% for the year ended December 31, 1994 compared to
December 31, 1993 levels of $5.0 million. Management actively seeks buyers for
all Other Real Estate. See "Noninterest Expense" above. The ratio of
nonperforming assets plus accruing loans 90 days or more past due as a percent
of total loans and other nonperforming assets at December 31, 1995 decreased to
0.94% from 1.47% at December 31, 1994 due primarily to the reduction in other
nonperforming assets and the addition of $43.7 million of performing loans from
the RGC/Roma Branch Acquisitions.
Management is not aware of any borrower relationships that are not reported
as nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
Effective January 1, 1995, the Company adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans. See "Texas Regional Bancshares, Inc. Management's
Discussion and Analysis of Financial Position and Results of Operations--
Analysis of Results of Operations -- Provision for Loan Losses."
At December 31, 1995, the Company had a $2.0 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$172,000. At December 31, 1995, there were no impaired loans for which there was
no related allowance for loan losses. The average level of impaired loans during
the year ended December 31, 1995 was $1.9 million. The Company recorded interest
income of $91,000 on its impaired loans during the year ended December 31, 1995.
An analysis of the components of nonperforming assets for the last five
years is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
NONPERFORMING ASSETS 1995 1994 1993 1992 1991
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans.............................................. $ 2,092 $ 2,435 $ 2,305 $ 1,060 $ 3,441
Renegotiated Loans............................................ 6 13 47 76 355
--------- --------- --------- --------- ---------
Nonperforming Loans......................................... 2,098 2,448 2,352 1,136 3,796
Other Nonperforming Assets (Primarily Other Real Estate)...... 1,489 2,364 2,598 4,790 4,056
--------- --------- --------- --------- ---------
Total Nonperforming Assets.................................. 3,587 4,812 4,950 5,926 7,852
Accruing Loans 90 Days or More Past Due....................... 642 226 439 474 21
--------- --------- --------- --------- ---------
Total Nonperforming Assets and Accruing Loans 90 Days or
More Past Due.............................................. $ 4,229 $ 5,038 $ 5,389 $ 6,400 $ 7,873
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming Loans as a % of Total Loans..................... 0.47% 0.72% 0.81% 0.45% 2.11%
Nonperforming Assets as a % of Total Loans and Other
Nonperforming Assets......................................... 0.79 1.41 1.69 2.31 4.27
Nonperforming Assets as a % of Total Assets................... 0.55 0.90 1.05 1.43 2.64
Nonperforming Assets Plus Accruing Loans 90 Days or More Past
Due as a % of Total Loans And Other Nonperforming Assets..... 0.94 1.47 1.84 2.49 4.28
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
38
<PAGE>
Interest income that would have been recorded for the year ended December
31, 1995 on nonaccrual and renegotiated loans had such loans performed in
accordance with their original contractual terms and been outstanding throughout
the year ended December 31, 1995, or since origination, if held for only part of
that year, was approximately $247,000. For the year ended December 31, 1995, the
amount of interest income actually recorded on nonaccrual and restructured loans
was approximately $176,000.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 1995, all such loans had been identified and included in the
nonaccrual, restructured or 90 days past due loan totals reflected in the table
above. Management continues to emphasize maintaining a low level of
nonperforming assets and returning nonperforming assets to an earning status.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged off. In addition, the loan review committee of the Bank reviews the
assessments of management in determining the adequacy of the Bank's allowance
for loan losses. Based on total allocations, the provision is recorded to
maintain the allowance at a level deemed appropriate by management. While
management uses available information to recognize losses on loans, there can be
no assurance that future additions to the allowance will not be necessary. The
allowance for loan losses at December 31, 1995 was $4.5 million, which
represents an increase of $1.0 million or 29.3% as compared to the allowance for
loan losses at December 31, 1994. Management believes that the allowance for
loan losses at December 31, 1995 adequately reflects the risks in the loan
portfolio. Various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan losses. Such
agencies may require the Company to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
39
<PAGE>
The following table summarizes the activity in the allowance for loan losses
for the last five years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year.................................. $ 3,511 $ 3,435 $ 2,929 $ 2,547 $ 2,988
Balance from Acquisitions..................................... 450 -- -- 626 --
Provision for Loan Losses..................................... 1,685 1,085 392 220 310
Charge-Offs
Commercial.................................................. 813 169 64 229 483
Agricultural................................................ 416 781 -- 64 103
Real Estate................................................. 111 153 89 490 211
Consumer.................................................... 300 132 93 84 124
--------- --------- --------- --------- ---------
Total Charge-Offs......................................... 1,640 1,235 246 867 921
--------- --------- --------- --------- ---------
Recoveries
Commercial.................................................. 401 163 113 233 67
Agricultural................................................ 66 4 13 41 --
Real Estate................................................. 4 10 128 51 29
Consumer.................................................... 65 49 106 78 74
--------- --------- --------- --------- ---------
Total Recoveries.......................................... 536 226 360 403 170
--------- --------- --------- --------- ---------
Net Charge-Offs (Recoveries).................................. 1,104 1,009 (114) 464 751
--------- --------- --------- --------- ---------
Balance at End of Year........................................ $ 4,542 $ 3,511 $ 3,435 $ 2,929 $ 2,547
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of Allowance for Loan Losses to Loans Outstanding, Net
of Unearned Discount......................................... 1.01% 1.03% 1.18% 1.16% 1.42%
Ratio of Allowance for Loan Losses to Nonperforming
Assets....................................................... 126.62 72.96 69.39 49.43 32.44
Ratio of Net Charge-Offs to Average Total Loans Outstanding,
Net of Unearned Discount..................................... 0.30 0.33 (0.04) 0.21 0.45
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
--------------------------- --------------------------- --------------------------- ---------------------------
% OF LOANS % OF LOANS % OF LOANS % OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
ON TOTAL ON TOTAL ON TOTAL ON TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- -------------- ----------- -------------- ----------- -------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.... $ 965 32.5% $ 1,057 30.0% $ 1,348 31.6% $ 1,096 34.6%
Agricultural... 304 5.6 478 5.1 138 4.7 148 5.9
Real Estate... 2,401 52.3 1,644 55.9 1,705 54.5 1,380 50.3
Consumer...... 296 9.6 257 9.0 215 9.2 254 9.2
Unallocated... 576 -- 75 -- 29 -- 51 --
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total....... $ 4,542 100.0% $ 3,511 100.0% $ 3,435 100.0% $ 2,929 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1991
---------------------------
% OF LOANS
IN EACH
CATEGORY
ON TOTAL
AMOUNT LOANS
----------- --------------
<S> <C> <C>
Commercial.... $ 787 35.4%
Agricultural.. 104 5.7
Real Estate... 1,346 48.3
Consumer...... 209 10.6
Unallocated... 101 --
----------- -----
Total....... $ 2,547 100.0%
----------- -----
----------- -----
</TABLE>
PREMISES AND EQUIPMENT
Premises and equipment of $18.4 million at December 31, 1995 increased $3.1
million or 20.3% compared to $15.3 million at December 31, 1994 in addition to a
net increase of $480,000 or 3.2% for December 31, 1994 compared to $14.8 million
at December 31, 1993. The net increase for the year
40
<PAGE>
ended December 31, 1995 is primarily attributable to the $1.8 million in fixed
assets acquired in the RGC/ Roma Branch Acquisitions and $1.0 million for new
equipment and software for the data processing center.
INTANGIBLES
Intangibles of $5.7 million at December 31, 1995 increased $3.7 million or
188.1% compared to $2.0 million at December 31, 1994 and decreased $224,000 or
10.1% for December 31, 1994 compared to $2.2 million at December 31, 1993. The
net increase for the year ended December 31, 1995 is attributable to the
goodwill recorded as a result of the RGC/Roma Branch Acquisitions.
DEPOSITS
Total deposits of $579.7 million at December 31, 1995 increased $107.6
million or 22.8% compared to December 31, 1994 levels of $472.1 million and
total deposits of $472.1 million for the year ended December 31, 1994 increased
$42.6 million or 9.9% compared to December 31, 1993 levels of $429.5 million.
The increase in total deposits at December 31, 1995 compared to December 31,
1994 is primarily attributable to the RGC/Roma Branch Acquisitions. Total
noninterest-bearing deposits of $120.4 million for the year ended December 31,
1995 represented an increase of $20.8 million or 20.8% compared to the year
ended December 31, 1994 and $10.2 million or 11.5% for the year ended December
31, 1994 compared to the year ended December 31, 1993. Total public funds
deposits (consisting of Public Funds Demand Deposits, Public Funds Money Market
Checking and Savings and Public Funds Time Deposits) of $39.3 million for the
year ended December 31, 1995 decreased $16.3 million or 29.3% compared to
December 31, 1994 levels of $55.6 million. The decline in public funds is
primarily due to the loss of a large public fund to a competitor as a result of
a competitive bid in September 1995. The Bank actively seeks consumer and
commercial deposits, including deposits from correspondent banks and public
funds deposits. The following table presents the composition of total deposits
at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------
% CHANGE FROM % CHANGE FROM
TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ------------------------------------------------------------ -------- ------------- -------- ------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual................................. $113,345 16.1% $ 97,597 11.5% $ 87,533
Public Funds.............................................. 7,069 245.5 2,046 9.4 1,871
-------- ----- -------- --- --------
Total Demand Deposits................................... 120,414 20.8 99,643 11.5 89,404
-------- ----- -------- --- --------
-------- ----- -------- --- --------
Interest-Bearing Deposits
Savings................................................... 36,133 26.0 28,689 (4.6) 30,061
Money Market Checking and Savings
Commercial and Individual............................... 105,409 (0.6) 106,062 6.3 99,785
Public Funds............................................ 22,278 (35.8) 34,688 7.6 32,232
Time Deposits
Commercial and Individual............................... 285,545 55.0 184,177 14.1 161,464
Public Funds............................................ 9,952 (47.2) 18,849 13.7 16,575
-------- ----- -------- --- --------
Total Interest-Bearing Deposits........................... 459,317 23.3 372,465 9.5 340,117
-------- ----- -------- --- --------
Total Deposits.......................................... $579,731 22.8% $472,108 9.9% $429,521
-------- ----- -------- --- --------
-------- ----- -------- --- --------
Weighted Average Rate on
Interest-Bearing Deposits................................. 4.39% 3.27% 3.21%
-------- -------- --------
-------- -------- --------
</TABLE>
41
<PAGE>
Time deposits of $100,000 or more are solicited from markets served by the
Bank and are not sought through brokered sources. Time deposits continue to be a
significant source of funds. Texas State Bank does not solicit brokered
deposits. The following table presents the maturities of time deposits of
$100,000 or more at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994
- -------------------------------------------------------------------------------- ----------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three Months or Less............................................................ $ 47,925 $ 35,964
After Three through Six Months.................................................. 20,184 25,338
After Six through Twelve Months................................................. 21,152 14,422
After Twelve Months............................................................. 37,129 15,357
----------------- -------------
Total......................................................................... $ 126,390 $ 91,081
----------------- -------------
----------------- -------------
Weighted Average Rate on Time Deposits of $100,000 or More...................... 5.54% 4.06%
----------------- -------------
----------------- -------------
</TABLE>
Mexico is a part of the trade territory of the Company and foreign deposits
from Mexican sources have traditionally been a source of funding. In December
1994, the Mexican government announced a 15% devaluation of the Mexican peso
relative to the United States dollar, and the Mexican peso has since continued
to decline relative to the dollar. The Company does not anticipate any negative
impact on foreign deposits due to these recent devaluations of the peso. The
increase in foreign deposits is primarily attributable to Mexican deposits
obtained with the RGC/Roma Branch Acquisitions. The following table presents
foreign deposits, primarily from Mexican sources, at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
FOREIGN DEPOSITS 1995 1994
- --------------------------------------------------------------------------------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Demand Deposits........................................................................ $ 2,287 $ 1,589
----------- ------------
Interest-Bearing Deposits
Savings.............................................................................. 2,174 1,336
Money Market Checking and Savings.................................................... 9,178 6,577
Time Deposits Under $100,000......................................................... 19,376 11,544
Time Deposits of $100,000 or more.................................................... 26,471 14,778
----------- ------------
Total Interest-Bearing Deposits.................................................... 57,199 34,235
----------- ------------
Total Foreign Deposits............................................................. $ 59,486 $ 35,824
----------- ------------
Percentage of Total Deposits........................................................... 10.3% 7.6%
----------- ------------
Weighted Average Rate on Foreign Deposits.............................................. 4.78% 3.55%
----------- ------------
----------- ------------
</TABLE>
LIQUIDITY
Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew and acquire additional deposit
liabilities is a major source of liquidity. The Company's principal sources of
funds are primarily within the local markets of the Bank and consist of
deposits, interest and principal payments on loans and investment securities,
sales of loans and investment securities and borrowings. See previous discussion
regarding the maturity dates for "Loans," "Investment Securities" and
"Deposits."
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At December 31,
1995, the Company's liquidity ratio, defined as cash, U.S. Government-backed
securities and federal funds sold as a percentage of deposits, was 27.5%
compared to 34.2%
42
<PAGE>
at December 31, 1994 and compared to 36.0% at December 31, 1993. The Company's
liquidity ratio has declined as a result of management's efforts to improve the
Company's earnings mix by increasing loan volume.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the Company's trade area. The Company does not have or nor does it
solicit brokered deposits. Federal funds purchased and short-term borrowings are
additional sources of liquidity. These sources of liquidity are short-term in
nature and are used, as necessary, to fund asset growth and meet short-term
liquidity needs.
During 1995, funds for $79.4 million of investment purchases and $69.5
million of net loan growth came from various sources, including a net increase
in deposits of $27.9 million, $12.6 million in proceeds from sale of investment
securities, $62.5 million in proceeds from maturing investment securities and
$8.7 million of net income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet specified
minimum capital requirements. The applicable regulations establish five capital
levels which require or permit the FRB and other regulatory authorities to take
supervisory action. The relevant classifications range from "well capitalized"
to "critically undercapitalized." The classifications are generally determined
by applicable ratios of the institution, including Tier I capital to
risk-weighted assets, total capital to risk-weighted assets and leverage ratios.
Based on Texas State Bank's capital ratios at December 31, 1995, Texas State
Bank was classified as "well capitalized" under the applicable regulations. As a
result, the Company does not believe that the prompt corrective action
regulations have any material effect on the activities or operations of the
Company or Texas State Bank.
The principal sources of liquidity for the Company during 1995 were the
proceeds from the 1994 sale of 1.0 million shares of Common Stock and interest
income of $338,000 from the Bank. The funds received were used primarily to pay
common stock dividends and other expenses.
The Company is dependent on dividend and interest income from the Bank and
the sale of stock for its liquidity. Applicable FRB regulations provide that
bank holding companies are permitted by regulatory authorities to pay cash
dividends on their common or preferred stock if consolidated earnings and
consolidated capital are within regulatory guidelines and the Bank is classified
as "well capitalized" for purposes of FDICIA. See "Business -- Regulation and
Supervision" and "Business -- Capital Resources."
The funds management policy of the Company and the Bank is to maintain a
reasonably balanced position of rate sensitive assets and liabilities to avoid
adverse changes in net interest income. Changes in net interest income occur
when interest rates on loans and investments change in a different time period
from that of changes in interest rates on liabilities, or when the mix and
volume of interest-earning assets and interest-bearing liabilities change. The
interest rate sensitivity gap represents the dollar amount of difference between
rate sensitive assets and rate sensitive liabilities within a given time period
("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate
sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in
which case the effect on net interest income due to interest rate movements
would be zero.
Rate sensitive assets maturing within one year exceeded rate sensitive
liabilities with comparable maturities at December 31, 1995 by $22.3 million.
Management monitors the rate sensitivity GAP on a regular basis and takes steps
when appropriate to improve the sensitivity. The ratio of cumulative rate
sensitivity GAP to Total Assets at a period of twelve months or less was 3.45%
of interest-earning assets at December 31, 1995.
43
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------
7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS YEARS 5 YEARS TOTAL
- ------------------------------------- ----------- ---------- --------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans................................ $ 295,292 $ 16,196 $ 26,288 $ 110,317 $ 2,761 $ 450,854
Investment Securities
Available for Sale................. 9,456 1,001 17,721 33,502 1,470 63,150
Held to Maturity................... 4,445 16,248 5,139 39,209 3,450 68,491
Federal Funds Sold................... 3,600 -- -- -- -- 3,600
----------- ---------- --------- ----------- ----------- -----------
Total Interest-Earning Assets.... 312,793 33,445 49,148 183,028 7,681 586,095
----------- ---------- --------- ----------- ----------- -----------
Savings.............................. 36,133 -- -- -- -- 36,133
Money Market Checking and Savings
Accounts............................ 127,687 -- -- -- -- 127,687
Time Deposits........................ 108,738 48,270 51,501 84,945 2,043 295,497
Federal Funds Purchased and
Securities Sold Under Repurchase
Agreements.......................... 757 -- -- -- -- 757
----------- ---------- --------- ----------- ----------- -----------
Total Interest-Bearing
Liabilities..................... 273,315 48,270 51,501 84,945 2,043 460,074
----------- ---------- --------- ----------- ----------- -----------
Rate Sensitivity GAP (1)............. $ 39,478 $ (14,825) $ (2,353) $ 98,083 $ 5,638 $ 126,021
----------- ---------- --------- ----------- ----------- -----------
----------- ---------- --------- ----------- ----------- -----------
Cumulative Rate Sensitivity
GAP................................. $ 39,478 $ 24,653 $ 22,300 $ 120,383 $ 126,021
----------- ---------- --------- ----------- -----------
----------- ---------- --------- ----------- -----------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................. 6.10% 3.81% 3.45%
----------- ---------- ---------
----------- ---------- ---------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities........ 1.14:1 1.08:1 1.06:1
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
EFFECTS OF INFLATION
Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring the spread between interest costs
and interest income yields through adjustments of maturities and interest rates
of assets and liabilities. In addition, inflation tends to increase demand for
loans from financial institutions as industrial companies attempt to maintain a
constant level of goods in inventory and assets. As consumers of goods and
services, financial institutions are affected by inflation as prices increase,
causing an increase in costs of salaries, employee benefits, occupancy expense
and similar items.
CAPITAL RESOURCES
Shareholders' equity of $62.7 million for the year ended December 31, 1995
reflects a net increase of approximately $7.0 million or 12.5% compared to
shareholders' equity of $55.7 million for the year
44
<PAGE>
ended December 31, 1994. This net increase was primarily attributable to
earnings for 1995. The net increase in shareholders' equity reflects dividends
paid on Common Stock of $2.5 million which included $620,000 declared December
12, 1995 and paid on January 16, 1996.
On March 21, 1994, the Board of Directors of the Company adopted a
resolution calling for redemption on April 22, 1994 of all issued and
outstanding preferred stock, including the Company's First Series Convertible
Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991
Convertible Preferred Stock (herein collectively called the "Preferred Stock")
at a redemption price of $104 per share plus all accrued and unpaid dividends
through the date fixed for redemption. The Preferred Stock was convertible into
13.2 shares of Common Stock for each share of Preferred Stock held.
Effective April 22, 1994, 356 shares of Preferred Stock were redeemed and
74,172 shares of Preferred Stock were converted into 979,009 shares of Common
Stock.
The risk-based capital standards as established by the FRB apply to Texas
Regional and Texas State Bank. The numerator of the risk-based capital ratio for
bank holding companies includes Tier I capital, consisting of common
shareholders' equity and qualifying cumulative and noncumulative perpetual
preferred stock; and Tier II capital, consisting of other preferred stock,
reserve for possible loan losses and certain subordinated and term-debt
securities. Beginning on December 31, 1993, goodwill is deducted from Tier I
capital. At no time is Tier II capital allowed to exceed Tier I capital in the
calculation of total capital. The denominator or asset portion of the risk-based
capital ratio aggregates generic classes of balance sheet and off-balance sheet
exposures, each weighted by one of four factors, ranging from 0% to 100%, based
on the relative risk of the exposure class.
Ratio targets are set for both Tier I and total capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum total capital ratio is 8.0%. The FRB has guidelines for a leverage ratio
that is designed as an additional evaluation of capital adequacy of banks and
bank holding companies. The leverage ratio is defined to be the company's Tier I
capital divided by its risk-adjusted total assets. An insured depository
institution is "well capitalized" for purposes of the FDICIA if its Total
Risk-Based Capital Ratio is equal to or greater than 10.0%, and Tier I
Risk-Based Capital Ratio is equal to or greater than 6.0%, and Tier I Leverage
Capital Ratio is equal to or greater than 5.0%. The Company's Tier I Risk-Based
Capital Ratio was approximately 11.70% and 14.71% at December 31, 1995 and 1994,
respectively. The Company's Total Risk-Based Capital Ratio was approximately
12.64% and 15.67% at December 31, 1995 and 1994, respectively. The Company's
Tier I Leverage Capital Ratio was 8.96% and 10.37%, at December 31, 1995 and
1994, respectively. Based on capital ratios, the Company is within the
definition of "well capitalized" for FRB purposes at December 31, 1995.
The following table presents the Company's risk-based capital calculation:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
RISK-BASED CAPITAL 1995 1994
- ---------------------------------------------------------------------------------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total Shareholders' Equity, before unrealized gains or losses on Securities Available
for Sale............................................................................... $ 62,603 $ 56,318
Less -- Goodwill and Other Deductions................................................... 5,711 1,982
----------- -----------
Total Tier I Capital.................................................................... 56,892 54,336
Total Tier II Capital................................................................... 4,542 3,511
----------- -----------
Total Qualifying Capital................................................................ $ 61,434 $ 57,847
----------- -----------
----------- -----------
Risk Adjusted Assets (Including Off-Balance Sheet Exposure)............................. $ 486,111 $ 369,273
----------- -----------
----------- -----------
Tier I Risk-Based Capital Ratio......................................................... 11.70% 14.71%
Total Risk-Based Capital Ratio.......................................................... 12.64 15.67
Leverage Capital Ratio.................................................................. 8.96 10.37
----------- -----------
----------- -----------
</TABLE>
45
<PAGE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, the Company adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
For loans covered by Statement 114, the Company makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by the
Company using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such case, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectability of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 did
not have a material effect on the Company's results of operations.
In October 1995, FASB issued Statement of Financial Accounting Standards No.
123 ("Statement 123"), "Accounting for Stock-Based Compensation". Statement 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans. Statement 123 encourages entities to adopt a "fair
value" based method of accounting for stock-based compensation plans which
requires an estimate of the fair value of stock options or other equity
instruments to which employees become entitled when they have rendered requisite
service or satisfied other conditions necessary to earn the right to benefit
from the instruments. Compensation cost is then determined based on the fair
value estimate and is recognized over the service period, which is usually the
vesting period. Statement 123 also requires that an employer's financial
statements include certain disclosures about stock-based employee compensation
arrangements regardless of the method used to account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, implementation of Statement 123 should have no material effect on the
Company's consolidated financial statements.
FOURTH QUARTER RESULTS
The fourth quarter net income for 1995 of $2.4 million or $0.39 per share
reflected an increase of $139,000 or 6.1% compared to $2.3 million or $0.37 per
share for the fourth quarter of 1994. Earnings
46
<PAGE>
performance for the fourth quarter of 1995 as compared to the fourth quarter of
1994 reflects increases in net interest income, noninterest income and
noninterest expense. The following table presents a summary of operations for
the last five quarters:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------ ---------
CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER
- --------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income.......................................... $ 12,804 $ 11,904 $ 10,880 $ 10,218 $ 9,629
Interest Expense......................................... 5,171 4,857 4,295 3,729 3,340
--------- --------- --------- --------- ---------
Net Interest Income...................................... 7,633 7,047 6,585 6,489 6,289
Provision for Loan Losses................................ 625 372 322 366 455
Noninterest Income....................................... 1,729 1,623 1,576 1,590 1,514
Noninterest Expense...................................... 5,035 4,694 4,654 4,594 3,787
--------- --------- --------- --------- ---------
Income Before Taxable-Equivalent Adjustment and Income
Tax..................................................... 3,702 3,604 3,185 3,119 3,561
Taxable-Equivalent Adjustment............................ 105 35 35 39 34
Applicable Income Tax Expense............................ 1,177 1,292 1,109 1,093 1,246
--------- --------- --------- --------- ---------
Net Income $ 2,420 $ 2,277 $ 2,041 $ 1,987 $ 2,281
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Common Share
Primary................................................ $ 0.39 $ 0.37 $ 0.33 $ 0.32 $ 0.37
Fully Diluted.......................................... 0.39 0.36 0.33 0.32 0.37
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Net interest income of $7.6 million for the fourth quarter of 1995 increased
$1.3 million or 21.4% compared to $6.3 million for the fourth quarter of 1994,
reflecting the increased volume of earning assets and net increase in yield for
the year ended December 31, 1995. Average earning assets of $574.0 million for
the fourth quarter of 1995 increased $104.4 million or 22.2% compared to $469.6
million for the fourth quarter of 1994. The fourth quarter of 1995 interest
margin was 5.28% compared to 5.31% for the fourth quarter of 1994 and 5.15% in
the third quarter of 1995.
The provision for loan losses charged against earnings in the fourth quarter
of 1995 was $625,000 compared to $455,000 for the fourth quarter of 1994,
reflecting an increase of $170,000 or 37.4%. The provision for loan losses in
the fourth quarter of 1995 was primarily attributable to loan growth.
Noninterest income of $1.7 million for the fourth quarter of 1995 increased
$215,000 or 14.2% compared to $1.5 million for the fourth quarter of 1994,
primarily due to an increased volume of business and as a result of the RGC/Roma
Branch Acquisitions. All components of noninterest income reflect increases for
fourth quarter of 1995 compared to fourth quarter of 1994 except Other Service
Charges and Investment Securities Gains (Losses). The decline in Other Service
Charges is primarily attributable to a decline in foreign currency exchange
fees. Investment Securities Gains (Losses) of ($98,000) for the fourth quarter
of 1995 compared to Investment Securities Gains (Losses) of $8,000 for the
fourth quarter of 1994.
Noninterest expense of $5.0 million for the fourth quarter of 1995 increased
$1.2 million or 33.0% compared to $3.8 million for the fourth quarter of 1994.
The increase in noninterest expense is primarily attributable to Other Losses of
$239,000 for the fourth quarter of 1995 reflecting a net increase of $738,000
compared to a net gain of $499,000 for the fourth quarter of 1994. The net gain
for the fourth quarter of 1994 was primarily attributable to a benefit of
$553,000 from the reversal of a second quarter 1994 accrual. The reversal of the
accrual resulted from the settlement of a lawsuit in the last quarter of 1994.
47
<PAGE>
BUSINESS
GENERAL
Texas Regional, a Texas business corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, was incorporated in 1983.
Texas Regional commenced operations as a bank holding company with the
acquisition of Texas State Bank, McAllen, Texas, and Harlingen State Bank,
Harlingen, Texas ("Harlingen State Bank") in May 1984. In March 1992, the
Company acquired Mid Valley Bank, Weslaco, Texas ("Mid Valley Bank") and merged
Harlingen State Bank and Mid Valley Bank into Texas State Bank. In 1995, Texas
State Bank acquired the Rio Grande City and Roma branches of First National Bank
of South Texas (the "RGC/Roma Branch Acquisitions"). Texas State Bank, which is
the Company's sole subsidiary, operates nine banking locations in the Rio Grande
Valley: four banking locations in McAllen (including its main office), two
banking locations in Weslaco, and one banking location each in Harlingen, Rio
Grande City and Roma. At December 31, 1995, Texas Regional had consolidated
total assets of $646.8 million, loans outstanding (net of unearned discount) of
$450.9 million, total deposits of $579.7 million, and shareholders' equity of
$62.7 million.
Upon consummation of the Mergers, Texas State Bank will have 15 full service
banking locations. In addition to the banking locations listed in the preceding
paragraph, Texas State Bank will add one banking location in McAllen, three in
Mission and one each in Penitas and Hidalgo. Assuming the Mergers and this
offering had been consummated at December 31, 1995, the Bank would have had pro
forma consolidated assets of $1.143 billion, loans outstanding (net of unearned
discounts) of $685.3 million, total deposits of $1.024 billion, and total
shareholders' equity of $105.3 million.
The business strategy of Texas Regional is for the Bank to provide its
customers with the financial sophistication and breadth of products of a
regional bank, while retaining the local appeal and level of service of a
community bank. The Board of Directors and senior management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment in general and the economy of the
Rio Grande Valley in particular. Management's strategy is to provide a business
culture in which individual customers and small and medium sized businesses are
accorded the highest priority in all aspects of the Company's operations.
Management believes that individualized customer service will allow the Company
to increase its market share in lending volume and deposits. As part of its
operating and growth strategies, the Company is working to continue to attract
business from, and provide service to, small and medium sized businesses, and
expand operations in the Rio Grande Valley. Management believes that the Mergers
are consistent with this strategy.
By maximizing personal knowledge of and contact with customers and
endeavoring to understand the needs and preferences of its customers, the
Company is working to maintain and further enhance its reputation of providing
excellent customer service, allowing it to achieve its growth and earnings
goals. The Company has developed an organizational structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to competing financial institutions, enables the
Company to provide a higher degree of service and increased flexibility to
creditworthy customers.
The Bank continues to focus on small and medium sized businesses and
individual customers as its principal market, and seeks to provide services to
its customers across all product lines. Many financial institutions in the Rio
Grande Valley have become part of much larger state-wide or national
organizations. Management believes that the acquiring institutions in many cases
have shifted decision making and operations out of the Rio Grande Valley, and
therefore have decreased the level of personal service that the Company seeks to
provide to small and medium sized businesses that are the core of the Company's
existing business and marketing efforts. The Company intends to continue to
target its marketing efforts to those businesses and individuals who prefer the
personalized customer service emphasized by the Company.
48
<PAGE>
Bank management and other employees participate actively in a wide variety
of civic and community activities and organizations, including local chambers of
commerce, industrial foundations and charitable and civic activities such as
educational institutions, health care organizations and the McAllen Affordable
Housing Corporation. Management has also been actively involved in organizations
to promote border trade and economic development. The Company believes that
these activities assist the Bank through increased visibility and through
development and maintenance of customer relationships.
For its business customers, Texas State Bank offers checking facilities,
certificates of deposit, short term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs, and other commercial loans. The services provided for individuals by
Texas State Bank include checking accounts, savings accounts, certificates of
deposit, individual retirement accounts and consumer loan programs, including
installment loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. Texas State Bank also
provides travelers checks, money orders and safe deposit facilities, and offers
trust services. While First State Bank and Border Bank provide similar services
and products for their customers, the products and services offered at these
locations will be expanded to include all products and services offered by Texas
State Bank.
Texas State Bank has also expanded the services which it provides to third
party correspondent banks. The Texas State Bank data processing center, for
example, presently serves three banks in addition to providing data processing
services for all Texas State Bank banking locations. It is expected that,
following consummation of the Mergers and a conversion in fall 1996, data
processing for the bank facilities formerly operated as First State Bank and
Border Bank facilities will be performed by the Texas State Bank data processing
facility.
The Company has expanded its market area and increased its market share
through both internal growth and through acquisitions. In August 1995, the
Company completed the RGC/Roma Branch Acquisitions. In that transaction, which
was accounted for as a purchase, Texas State Bank acquired substantially all of
the fixed assets associated with the banking locations, certain loans coded to
the banking locations, and certain other assets, in consideration of the
assumption of certain deposit accounts coded to the banking locations. The
RGC/Roma Branch Acquisitions increased loans and deposits of the Company by
$43.7 million and $79.7 million, respectively, at the time of the acquisition.
In addition to the pending Mergers, management believes there may be additional
opportunities to expand by acquiring financial institutions or by acquiring
assets and deposits that will allow the Company to enter adjacent markets or
further increase market share in existing markets. Management intends to pursue
acquisition opportunities in strategic markets in circumstances in which
management believes that its managerial, operational and capital resources will
enhance the performance of acquired institutions. Except for the Merger
Agreements, there are currently no agreements or understandings related to any
acquisition.
MARKET REGIONS
Texas Regional's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. Texas State Bank's
banking locations are located in Hidalgo County (McAllen and Weslaco), Cameron
County (Harlingen), and Starr County (Rio Grande City and Roma). The offices of
First State Bank and Border Bank are all located in Hidalgo County.
The ability of Texas Regional to continue its rate of growth and
profitability is closely linked to the economy of the Rio Grande Valley. The
economy of the Rio Grande Valley is based principally on retailing (including
trade with Mexico), government, agriculture, tourism, manufacturing, health care
and education. A large number of retirees spend all or part of the year in the
Rio Grande Valley. Many twin manufacturing plants, or "maquiladoras", are
located in the Rio Grande Valley or in cities located across the border in
Mexico, such as Reynosa and Matamoros.
49
<PAGE>
The City of McAllen, which is the location of the Company's headquarters,
serves as the center of a 150 mile retail market area. A large part of this
trade area is composed of the Mexican states of Nuevo Leon and Tamaulipas, which
had estimated populations of 3.1 million and 2.2 million, respectively, in 1990.
The major industrial and commercial center of northern Mexico, the City of
Monterrey in the Mexican state of Nuevo Leon, is located approximately 150 miles
southwest of McAllen. Among the largest cities in the Mexican state of
Tamaulipas are Reynosa, located ten miles south of McAllen and estimated to have
a population in excess of 700,000 persons, and Ciudad Victoria, which is located
200 miles south of McAllen. The Rio Grande Valley market includes a U.S.
population of approximately 800,000, a population which increased 128.0% (or
3.5% annually) between 1970 and 1994. The market area served by Texas State Bank
has been recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period.
The Rio Grande Valley has also experienced significant recent growth in the
retail and construction industries. Retail sales in the Rio Grande Valley
totaled approximately $5.9 billion in 1994, representing an annual compound
growth rate of 7.9% since 1984. With respect to new construction activity,
building permits in the Rio Grande Valley have grown 89.8% between 1989 and
1994, representing an annual compound growth rate of 13.7%.
LENDING ACTIVITIES
The primary source of income generated by Texas State Bank is the interest
earned from its loan and investment portfolios. Texas State Bank maintains
diversification when considering investments and the granting of loan requests.
Emphasis is placed on the borrower's ability to generate cash flow to support
its debt obligations and other cash related expenses. Lending activities include
commercial loans, agricultural loans, consumer loans and real estate loans.
Commercial loans and agricultural loans are originated primarily for working
capital funding. Consumer loans include those for the purchase of automobiles,
mobile homes, home improvements and investments. Real estate loans include the
origination of loans for commercial property acquisition or remodeling, and also
include conventional mortgages for the purchase of single-family houses or lots.
A substantial proportion of the properties collateralizing Texas State Bank's
mortgage portfolio is located in the Company's primary market area.
During 1995, Frank A. Kavanagh, President of Texas State Bank's Weslaco
banking location, was appointed the Chief Lending Officer of Texas State Bank.
During 1995, Texas State Bank also further standardized documentation
requirements and centralized loan controls and supervision. Texas State Bank
management continues to seek to preserve and enhance the quality of the Bank's
loan portfolio.
At December 31, 1995, Texas Regional's total loan portfolio (net of unearned
discount) was $450.9 million, representing 77.8% and 69.7% of its total deposits
and total assets, respectively, at that date. Total loans increased $110.9
million, or 32.6%, during 1995 from December 31, 1994 levels of $339.9 million.
A significant portion of this increase was attributable to the RGC/Roma Branch
Acquisitions. The Company's legal lending limit to any one borrower was $11.5
million at December 31, 1995. However, the legal lending limit does not include
the portion of a loan collateralized by cash or cash equivalents and government
guaranties. All current loans fall well below applicable legal lending limits.
Texas Regional's lending policy generally limits loans to one borrower to $8.0
million, with exceptions allowed for selected customers. An example of an
exception is a $34.0 million loan made during 1995 to fund a leveraged employee
stock ownership trust, which was secured by, among other assets, cash and cash
equivalents of $27.5 million. See "Texas Regional Bancshares, Inc. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Analysis of Financial Condition--Loans."
Assuming consummation of the Mergers, on a pro forma basis at December 31,
1995, Texas Regional's total loan portfolio (net of unearned discount) would
have been $685.3 million and its legal lending limit would have been $21.5
million.
50
<PAGE>
At December 31, 1995, First State Bank and Border Bank had $13.0 million of
loans secured by non-U.S. collateral, primarily real estate and other assets in
Mexico. Management currently intends to maintain the portfolio of such loans but
does not intend to significantly expand the volume of such loans.
The following table summarizes the loan portfolio of the Company by loan
category and amount at December 31, 1995 and on a pro forma basis at December
31, 1995, assuming that the Mergers had been consummated at December 31, 1995:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------- -----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................................................ $ 146,461 32.5% $ 215,279 31.4%
----------- ----- ----------- -----
Agricultural...................................................... 25,097 5.6 33,991 5.0
----------- ----- ----------- -----
Real Estate
Construction.................................................... 29,967 6.6 54,667 7.9
Commerical Mortgage............................................. 129,953 28.8 190,293 27.8
Agricultural Mortgage........................................... 17,057 3.8 27,861 4.1
1-4 Family Mortgage............................................. 59,052 13.1 98,480 14.4
----------- ----- ----------- -----
Total Real Estate............................................. 236,029 52.3 371,301 54.2
----------- ----- ----------- -----
Consumer.......................................................... 43,267 9.6 64,715 9.4
----------- ----- ----------- -----
Total......................................................... $ 450,854 100.0% $ 685,286 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
COMMERCIAL LENDING
At December 31, 1995, the Company had $146.5 million of commercial loans
outstanding, representing 32.5% of its total loans. Commercial loan balances
increased $44.6 million, or 43.8%, during 1995 from December 31, 1994 levels of
$101.9 million. The increase in commercial loans for the year ended December 31,
1995 was primarily attributable to the funding of a $34.0 million leveraged
employee stock ownership trust loan which is collateralized by stock and assets
of the employer and approximately $27.5 million of cash and cash equivalent
assets. Excluding this loan, commercial loans at December 31, 1995 represented
an increase of $10.6 million, or 10.4%, compared to levels at December 31, 1994.
On a pro forma basis at December 31, 1995, the Company would have had $215.3
million of commercial loans outstanding, representing 31.4% of total loans at
December 31, 1995.
Texas State Bank offers a variety of commercial loan services including term
loans, lines of credit, and equipment financing. A broad range of
short-to-medium term commercial loans, both collateralized and uncollateralized,
is made available to businesses for working capital (including inventory and
receivables), business expansion (including acquisitions of real estate and
improvements), and the purchase of equipment and machinery. The purpose of a
particular loan generally determines its structure.
Generally, Texas State Bank's commercial loans are underwritten in the
Bank's primary market area on the basis of the borrower's ability to service
such debt from income. As a general practice, Texas State Bank takes as
collateral a lien on any available real estate, equipment, or other assets.
Working capital loans are primarily collateralized by short-term assets whereas
term loans are primarily collateralized by long-term assets.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his employment and other income
and which are collateralized by real property whose value tends to be more
readily ascertainable, commercial loans typically are underwritten on the basis
of the borrower's ability to make repayment from the cash flow of its business
and generally are collateralized by business assets, such as accounts
receivable, equipment and inventory. As a result, the availability of funds or
collateral value available to support the repayment of commercial loans may
deteriorate over time, cannot be appraised with precision, and may fluctuate
based on the success of the business.
51
<PAGE>
AGRICULTURAL LOANS
At December 31, 1995, the Company had $25.1 million of agricultural loans
outstanding, representing 5.6% of its total loans. Agricultural loan balances
increased $7.9 million, or 45.9%, during 1995 from December 31, 1994 levels of
$17.2 million. On a pro forma basis at December 31, 1995, the Company would have
had $34.0 million of agricultural loans outstanding, representing 5.0% of total
loans.
REAL ESTATE LOANS
At December 31, 1995, the Company had $236.0 million of real estate loans
outstanding. Real estate loan balances increased $45.9 million, or 24.1% during
1995 from December 31, 1994 levels of $190.2 million. Real estate loans
represented 52.3% and 55.9% of total loans outstanding at December 31, 1995 and
1994, respectively. On a pro forma basis at December 31, 1995, the Company would
have had $371.3 million of real estate loans outstanding, or 54.2% of total
loans.
A substantial portion of the Bank's real estate mortgage loans are secured
by non-farm, non-residential properties, which are loans to commercial customers
for purposes of providing working capital. In addition, some of the Bank's real
estate mortgage loans have been made to finance or refinance the acquisition and
holding of commercial real estate. The Bank offers a variety of mortgage loan
products which generally are (i) amortized over five to 15 years, (ii) payable
in monthly installments of principal and interest, and (iii) due and payable in
full within three to five years.
Finally, a small portion of the Bank's lending activity has consisted of the
origination of single-family residential mortgage loans collateralized by
owner-occupied property located in the Bank's primary market area. The Bank
intends to pursue increased originations of single-family residential mortgage
loans with respect to its existing customer base. Loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 85% of appraised value. The Bank requires mortgage title insurance and
hazard insurance in the amount of the loan. Although the contractual loan
payment periods for single family residential real estate loans are generally
amortized over five to 20 years, they are payable in monthly installments of
principal and interest and are typically due and payable in full within three to
five years. At December 31, 1995, approximately $13.0 million of the single
family residential mortgage loans at First State Bank and Border Bank consisted
of loans to low and moderate income borrowers. The characteristics of these
loans may contribute to a higher level of delinquencies. Management believes
that this component of the pro forma portfolio will not have an adverse impact
on the financial performance of the Company.
CONSUMER LOANS
At December 31, 1995, the Company had $43.3 million of consumer loans
outstanding, representing 9.6% of its total loans. Aggregate consumer loan
balances increased $12.6 million, or 40.9%, during 1995 from December 31, 1994
levels of $30.7 million. On a pro forma basis at December 31, 1995, the Company
would have had $64.7 million of consumer loans outstanding, or 9.4% of its total
loans.
Consumer loans made by the Bank have included automobile loans, recreational
vehicle loans, boat loans, second mortgage loans, home improvement loans,
personal loans (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans typically range from 12 to 60
months and vary based upon the nature of collateral and size of loan.
Consumer loans are attractive to the Bank because they typically have a
short term and carry higher interest rates than those charged on other types of
loans. Installment loans, however, do pose additional risks of collectability
when compared to traditional types of loans granted by commercial banks, such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.
52
<PAGE>
INVESTMENTS
At December 31, 1995 the Company had federal funds sold of $3.6 million and
investment securities of $131.6 million, including $63.1 million classified as
Available for Sale and $68.5 million classified as Held to Maturity. Investments
are managed to maintain adequate sources of liquidity and diversification and to
generate acceptable levels of tax-equivalent yield.
On a pro forma basis at December 31, 1995, after giving effect to the
Mergers and this offering at December 31, 1995, the Company would have had
federal funds sold of $4.9 million and investment securities of $328.1 million,
including $65.9 million classified as Available for Sale and $262.2 million
classified as Held to Maturity. The pro forma adjustments include assumptions
regarding the use of sources of liquidity including federal funds sold and sales
of certain investment securities to fund a portion of the purchase price. See
"Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial
Information." Management believes that sources of liquidity will be adequate to
fund the required portion of consideration in the Mergers but will decide on
specific securities to be sold based on market conditions at the time of
Closing.
The following table summarizes the investment portfolio of the Company by
investment category and amount at December 31, 1995 and on a pro forma basis at
December 31, 1995, assuming that the Mergers had been consummated at December
31, 1995:
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
----------------------------- -----------------------------
AVAILABLE HELD TO AVAILABLE HELD TO
INVESTMENTS FOR SALE MATURITY TOTAL FOR SALE MATURITY TOTAL
- ------------------------------------------------------------ --------- -------- ------ --------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal Funds Sold.......................................... $-- $-- $ 3.6 $-- $-- $ 4.9
Investment Securities.......................................
U.S. Treasury............................................. 6.0 28.8 34.8 8.0 35.9 43.9
U.S. Government Agency.................................... 55.6 34.2 89.8 56.4 156.8 213.2
Mortgage-Backed Securities................................ -- -- -- -- 0.1 0.1
State and Political Subdivision Securities................ -- 5.5 5.5 -- 66.8 66.8
Other..................................................... 1.5 -- 1.5 1.5 2.6 4.1
--------- -------- ------ --------- -------- ------
Total....................................................... $63.1 $68.5 $135.2 $65.9 $262.2 $333.0
--------- -------- ------ --------- -------- ------
--------- -------- ------ --------- -------- ------
</TABLE>
As a part of the Company's purchase accounting adjustments, the Company will
review investment securities acquired in the Mergers for reclassification as
Available for Sale or Held to Maturity.
DEPOSITS
The Company has a stable noninterest-bearing source of funds as reflected in
the ratio of average demand deposits to average total deposits for years ended
December 31, 1995 and 1994 of 20.2% and 20.9%, respectively. Deposits provide
funding for the Company's investments in loans and securities, and the interest
paid for deposits must be managed carefully to control the level of interest
expense.
Texas State Bank's deposits at December 31, 1995 were $579.7 million, an
increase of $107.6 million, or 22.8% during 1995 from December 31, 1994 levels
of $472.1 million. A portion of this increase was attributable to the RGC/Roma
Branch Acquisitions. Deposits currently consist primarily of core deposits from
the Rio Grande Valley and surrounding areas. Texas State Bank does not have any
"brokered deposits", defined as deposits which, to the knowledge of management
of Texas Regional, have been placed with the Bank by a person who acts as a
broker in placing such deposits on behalf of others. On a pro forma basis at
December 31, 1995, the Bank's deposits would have been $1.024 billion.
At December 31, 1995, certificates of deposit held by Texas State Bank in
excess of $100,000 were $126.4 million, or 21.8% of total deposits. On a pro
forma basis at December 31, 1995, certificates of deposit held by the Bank in
excess of $100,000 would have been $265.5 million, or 25.9% of total deposits.
53
<PAGE>
Texas State Bank acts as local depository for a number of local governmental
entities in its market area, including the City of McAllen, the South Texas
Community College District, the City of Weslaco, the Weslaco Independent School
District, the City of Rio Grande City, the City of Roma and Starr County. Local
government deposits are subject to competitive bid and in many cases must be
secured by government securities. Total deposits by or on behalf of governmental
entities at December 31, 1995, aggregated approximately $39.3 million, or 6.8%
of total deposits. On a pro forma basis at December 31, 1995, the Bank's total
deposits by or on behalf of government entities would have been $128.5 million,
or 12.6% of total deposits.
As with loan transactions, Texas State Bank has developed deposit relations
with depositors who are Mexican residents. At December 31, 1995, $56.5 million,
or 9.8% of the Bank's total demand and time deposits were deposited primarily by
or on behalf of residents of Mexico. On a pro forma basis at December 31, 1995,
$146.9 million, or 14.4% of the Bank's total demand and time deposits, would
have been deposited primarily by or on behalf of residents of Mexico. As with
loan transactions, management believes that Texas State Bank's percentage of
deposits by or on behalf of residents of Mexico, and the percentage of deposits
on a pro forma basis at December 31, 1995, on behalf of residents of Mexico, are
somewhat less than that of banks of comparable size located in the Rio Grande
Valley.
COMPETITION
The banking industry in the market area served by Texas State Bank is highly
competitive. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality and scope of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. A substantial number of the commercial banks
in the Rio Grande Valley are branches of much larger organizations affiliated
with national, regional or state-wide banking companies, and as a result of
those affiliations have greater resources than Texas Regional or Texas State
Bank. However, as an independent community bank headquartered in Texas State
Bank's primary market area, management of the Company believes that Texas State
Bank's community commitment and involvement in its primary market area, as well
as its commitment to quality and personalized banking services, are factors that
contribute to the Company's competitiveness.
PERSONNEL
At December 31, 1995, Texas Regional employed 332 full-time equivalent
employees, and on a pro forma basis at December 31, 1995, would have employed
467 full-time equivalent employees. Substantially all of the present First State
Bank and Border Bank officers and employees are expected to be employed by Texas
State Bank. The Company's employees are not unionized, and management believes
employee relations to be favorable.
54
<PAGE>
PROPERTIES
Texas State Bank targets commercial customers by offering a broad range of
commercial banking services through a total of nine full service banking
locations in the Rio Grande Valley, as follows:
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PREMISES
AND EQUIPMENT
BANKING LOCATION DATE OPENED AT DECEMBER 31, 1995
- -------------------------------------------------------------------------------- ----------- --------------------
(IN THOUSANDS)
<S> <C> <C>
3900 North Tenth Street 1981(1) $3,262
McAllen, Texas
Kerria Plaza 1985(1) 3,162
3700 North Tenth Street
Suite 301
McAllen, Texas
2250 Nolana 1985(1) 981
McAllen, Texas
521 North 77 Sunshine Strip 1974(1) 901
Harlingen, Texas
500 South Missouri 1960(1) 2,056
Weslaco, Texas
900 E. Jackson 1994(1) 3,255
McAllen, Texas
2009 West Expressway 83 1996(1) 1,292
Weslaco, Texas
100 N. Britton Avenue 1995(2) 1,655
Rio Grande City, Texas
1004 East Highway 83 1995(2) 119
Roma, Texas
</TABLE>
- ---------
(1) Represents the date the facility opened for business as a commercial
bank.
(2) Represents the date the facility was acquired by Texas State Bank from a
third party.
All of Texas Regional's banking locations are owned by Texas Regional,
except for the Company's Roma banking location. The banking locations include
extensive drive-through facilities at the main bank location in McAllen, at the
Harlingen location, and at the new south McAllen banking location. The Kerria
Plaza banking location and the main office of Texas Regional are located within
the Kerria Plaza Building. While the Texas Regional banking facilities are
considered adequate for Texas State Bank's present operations, management
believes that it will be desirable in the future to consider the establishment
of additional banking locations in Edinburg, Harlingen and Brownsville, and to
consider development or acquisition of a substantial facility in McAllen.
55
<PAGE>
Upon consummation of the Mergers, Texas State Bank will acquire the
following additional banking locations:
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PREMISES
AND EQUIPMENT
BANKING LOCATION DATE OPENED (1) AT DECEMBER 31, 1995
- -------------------------------------------------------------------------------- --------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
900 Conway 1909 $2,726
Mission, Texas
Kika de la Garza and Tom Landry 1981 307
Mission, Texas
West Highway 83 and Tom Gill Road 1993 673
Penitas, Texas
Sharyland Road and FM 495 1986 707
Mission, Texas
2101 South 10th Street 1989 1,009
McAllen, Texas
Bridge & Esperanza 1968 3,297
Hidalgo, Texas
</TABLE>
- ------------
(1) Represents the date the facility opened for business as a commercial
bank.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, the Company and Texas State Bank are further
extensively regulated by special federal and state laws applicable only to
financial institutions and their parent companies. Virtually all aspects of the
Company's operations are subject to specific requirements or restrictions and
general regulatory oversight, from laws regulating consumer finance
transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act
and the Equal Credit Opportunity Act, to laws regulating collections and
confidentiality, such as the Fair Debt Collections Practices Act, the Fair
Credit Reporting Act and the Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the federal deposit
insurance system or the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of the Company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("BHCA"), as amended, and therefore is subject to
regulation and supervision by the FRB. In addition, the Company is required to
file reports with and to furnish such other information as the FRB may require
pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB
has the authority to issue bank holding companies orders to cease and desist
from unsound practices and violations of conditions imposed by, or violation of
agreements with, the FRB. The FRB is also empowered to assess civil penalties
against companies or individuals who violate the BHCA or orders or regulations
thereunder in amounts up to $1.0 million per day, to order termination of
non-banking activities of non-banking subsidiaries of bank holding companies,
and to order termination of ownership and control of a non-banking subsidiary by
a bank holding company. Certain violations may also result in criminal
penalties. The FRB and the FDIC, as appropriate, are authorized to exercise
comparable authority, under the Federal Deposit Insurance Act (the "FDI Act")
and other statutes, with respect to subsidiary banks.
The FRB takes the position that a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it is
the FRB's position that, in serving as a source of strength to its
56
<PAGE>
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the FRB to be an unsafe and unsound banking practice
or a violation of the FRB regulations or both. This doctrine has become known as
the "source of strength" doctrine. Although the United States Court of Appeals
for the Fifth Circuit found the FRB's source of strength doctrine invalid in
1990, stating that the FRB had no authority to assert the doctrine under the
BHCA, the decision was reversed by the United States Supreme Court on procedural
grounds. Changes in the FDI Act made by the FDICIA now require an
undercapitalized institution to submit to the FRB a capital restoration plan
with a guaranty by each company having control of the bank of the bank's
compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval prior
to merging or consolidating with any other bank holding company, acquiring all
or substantially all of the assets of any bank or acquiring ownership or control
of shares of a bank or bank holding company if, after the acquisition, the
Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also prohibited from acquiring a direct or indirect interest
in or control of more than 5% of the voting shares of any company which is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary bank, except that it may engage in and may
own shares of companies engaged in certain activities found by the FRB to be so
closely related to banking or managing and controlling banks as to be a proper
incident thereto. These activities include, among others, operating a mortgage,
finance, credit card, or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB considers whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse affects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are members of the Federal Reserve
System and other banks and non-bank companies in the same holding company. Under
the BHCA and the FRB's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
57
<PAGE>
The Company, as an affiliate of the Bank, is subject to certain restrictions
regarding transactions between a bank and companies with which it is affiliated.
These provisions limit extensions of credit (including guarantees of loans) by
the Bank to affiliates, investments in the stock or other securities of the
Company by the Bank, and the nature and amount of collateral that the Bank may
accept from any affiliate to secure loans extended to the affiliate.
REGULATION OF THE BANK
Texas State Bank is a Texas state-chartered bank subject to regulation by
the Banking Department. Texas State Bank, the deposits of which are insured by
the Bank Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal
Reserve System, and therefore the FRB is the primary federal regulator for Texas
State Bank.
The requirements and restrictions applicable to Texas State Bank under laws
of the United States and the State of Texas include (i) the requirement that
reserves be maintained, (ii) restrictions on the nature and amount of loans
which can be made, (iii) restrictions on the business activities in which the
Bank may engage, (iv) restrictions on the payment of dividends to shareholders,
and (v) the maintenance of minimum capital requirements.
Texas Regional is dependent upon dividends received from Texas State Bank
for discharge of Texas Regional's obligations and for payment of dividends to
the Company's shareholders. However, the application of minimum capital
requirements and other rules and regulations applicable to Texas State Bank
restrict dividend payments by Texas State Bank. The Banking Department and the
FRB can each further limit payment of dividends if the regulatory authority
finds that the payment of dividends would constitute an unsafe or unsound
practice. In addition, Texas law requires that, before declaring a dividend, not
less than 10% of the net profits of a bank earned since the last dividend was
declared be transferred to a "certified surplus" account. Except to absorb
losses in excess of undivided profits and uncertified surplus, such certified
surplus may not be reduced without the prior written consent of the Banking
Commissioner. However, state banks are not required to transfer any amount that
would increase the certified surplus account to more than the capital of the
bank. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Interest rate limitations for Texas State Bank are primarily governed by the
laws of the State of Texas. The maximum annual interest rate that may be charged
on most loans made by Texas State Bank is based on doubling the average auction
rate, to the nearest 0.25%, for United States Treasury Bills, as computed by the
Office of Consumer Credit Commissioner of the State of Texas. However, the
maximum rate does not decline below 18% or rise above 24% (except for loans in
excess of $250,000 that are made for business, commercial, investment or other
similar purposes (excluding agricultural loans), in which case the maximum
annual rate may not rise above 28%, rather than 24%). On fixed rate closed-end
loans, the maximum non-usurious rate is to be determined at the time the rate is
contracted, while on floating rate and open-end loans (such as credit cards),
the rate varies over the term of the indebtedness. State usury laws (but not
late charge limitations) have been preempted by federal law for loans secured by
a first lien on residential real property.
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution which does not
meet specified minimum capital requirements. The applicable regulations
establish five capital levels which require or permit the FRB and other
regulatory authorities to take supervisory action. The relevant classifications
range from "well capitalized" to
58
<PAGE>
"critically undercapitalized". Under these regulations, which became effective
December 19, 1992, an institution is considered well capitalized if it has a
total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital
ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not
subject to an order, written agreement, capital directive, or prompt corrective
action directive to meet and maintain a specific capital level for any capital
measure. An institution is considered adequately capitalized if it has a total
risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio
of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the
institution is rated composite 1 in its most recent report of examination,
subject to appropriate federal banking agency guidelines), and the institution
does not meet the definition of a well capitalized institution. An institution
is considered undercapitalized if it has a total risk-based capital ratio that
is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or
a leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution is rated composite 1 in its most recent report of
examination, subject to appropriate federal banking agency guidelines). A
significantly undercapitalized institution is one which has a total risk-based
capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is
less than 3.0%, or a leverage ratio that is less than 3.0%. A critically
undercapitalized institution is one which has a ratio of tangible equity to
total assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation to take various enforcement actions
against any significantly undercapitalized institution and any undercapitalized
institution that fails to submit an acceptable capital restoration plan or fails
to implement a plan accepted by the appropriate agency. These powers include,
among other things, requiring the institution to be recapitalized, prohibiting
asset growth, restricting interest rates paid, requiring prior approval of
capital distributions by any bank holding company which controls the
institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring a new election of
directors, and requiring the dismissal of directors and officers. These
restrictions, either individually or in aggregate, could if imposed have a
significantly adverse impact on the operations of the Bank.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become undercapitalized.
Furthermore, undercapitalized institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
undercapitalized institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an undercapitalized institution to issue shares or obligations,
which could be voting stock, to recapitalize the institution or, under certain
circumstances to divest itself of any subsidiary.
Critically undercapitalized institutions may be subject to more extensive
control and supervision and the FRB may prohibit any critically undercapitalized
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or engaging
in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of an
institution becoming critically undercapitalized, the FRB must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued operation.
Based on Texas State Bank's capital ratios at December 31, 1995, Texas State
Bank was classified as "well capitalized" under the applicable regulations. On a
pro forma basis at December 31, 1995, Texas State Bank would also have been
"well capitalized" under applicable regulations. As a result, the Company does
not believe that FDICIA's prompt corrective action regulations will have any
material effect on the activities or operations of Texas State Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF
59
<PAGE>
assessments, so that the assessment rate now in effect ranges from a minimum of
zero to a maximum of $0.27 per $100 of deposits. Institutions whose assessment
rate would be zero are required to pay a statutory minimum semiannual assessment
of $1,000. Based on the risk category applicable to Texas State Bank, the
premium paid by Texas State Bank is presently $2,000 per annum.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination (beginning in 1995) of the "too big
to fail" doctrine except in special cases, regulatory standards in areas such as
asset quality, earnings and compensation, and revised regulatory standards for
the powers of state chartered banks, real estate lending, bank closures and
capital adequacy.
COMMUNITY REINVESTMENT ACT
Under the CRA, a bank's applicable regulatory authority (the FDIC or the
FRB) is required to assess the record of each financial institution which it
regulates to determine if the institution meets the credit needs of its entire
community, including low- and moderate-income neighborhoods served by the
institution, and to take that record into account in its evaluation of any
application made by such institution for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition or shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. The Bank received a "satisfactory" rating in its most recent
CRA review. Both the United States Congress and the banking regulatory
authorities have proposed substantial changes to the CRA and fair lending rules
and regulations which, if enacted, could have a material adverse effect on the
Company.
CAPITAL RESOURCES
Capital management, which is a continuous process at Texas Regional and
Texas State Bank, consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements of
various banking regulators, such as the FRB, the Banking Department and the
FDIC. At December 31, 1995, Texas Regional and its subsidiaries were in
compliance with minimum capital requirements of the respective regulatory
agencies and are expected to remain in compliance in the future.
The various federal bank regulatory agencies, including the FRB, have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure as
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items.
The risk-based capital standards as established by the FRB apply to Texas
Regional and Texas State Bank. The minimum standard for the ratio of capital to
risk-weighted assets (including certain off-balance sheet obligations, such as
standby letters of credit) is 8.0%. At least half of the risk-based capital must
consist of common equity, retained earnings, and qualifying perpetual preferred
stock, less deductions for goodwill and various other intangibles ("Tier I
capital"). The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
preferred stock, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier I capital and Tier II capital is "total risk-based
capital."
The FRB also has adopted guidelines which supplement the risk-based
regulations to include a minimum leverage ratio of Tier I capital to average
total consolidated assets ("Leverage ratio") of 3.0%. The FRB has emphasized
that the foregoing standards are supervisory minimums and that a banking
organization will be permitted to maintain such minimum levels of capital only
if it has well diversified
60
<PAGE>
risk, including no undue interest rate exposure; excellent asset quality; high
liquidity; good earnings; and is in general considered to be a strong banking
organization, rated composite 1 under applicable federal guidelines, and the
banking organization is not experiencing or anticipating significant growth. All
other banking organizations are required to maintain a Leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets. The FRB continues to consider a "tangible Tier I leverage ratio" in
evaluation proposals for expansion or new activities. The tangible Tier I
leverage ratio is the ratio of a banking organization's Tier I capital, less
deductions for intangibles otherwise includable in Tier I capital, to total
tangible assets.
Bank regulators continue to consider raising capital requirements applicable
to banking organizations beyond current levels. However, the Company is unable
to predict whether higher capital requirements will be imposed and, if so, at
what levels and on what schedules, and therefore cannot predict what effect such
higher requirements may have on the Company and the Bank.
61
<PAGE>
The following table presents an analysis of capital for Texas Regional and
Texas State Bank at the end of each of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
ANALYSIS OF CAPITAL 1995 1994 1993
- --------------------------------------------------------------------------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
TEXAS REGIONAL
Tier I Capital
Common Stock........................................................... $ 6,196 $ 6,193 $ 4,186
Capital surplus........................................................ 29,239 29,204 12,802
Retained earnings...................................................... 27,168 20,921 15,481
Preferred Stock........................................................ -- -- 7,335
Less: Goodwill......................................................... (5,711) (1,982) (2,205)
----------- ----------- -----------
Total Tier I capital............................................... 56,892 54,336 37,599
----------- ----------- -----------
Tier II Capital
Allowance for loan losses.............................................. 4,542 3,511 3,435
Unrealized gains and losses............................................ N/A N/A 179
----------- ----------- -----------
Total Tier II capital.................................................. 4,542 3,511 3,614
----------- ----------- -----------
Total risk-based capital........................................... $ 61,434 $ 57,847 $ 41,213
----------- ----------- -----------
----------- ----------- -----------
Risk-weighted assets....................................................... $ 485,645 $ 369,273 $ 311,992
----------- ----------- -----------
----------- ----------- -----------
Capital Ratios
Tier I risk-based capital ratio........................................ 11.71% 14.71% 12.05%
Total risk-based capital ratio......................................... 12.65 15.67 13.21
Leverage ratio (Tier I capital to average adjusted total assets)....... 8.96 10.37 7.88
----------- ----------- -----------
----------- ----------- -----------
TEXAS STATE BANK
Tier I Capital
Common Stock........................................................... $ 20,000 $ 16,000 $ 16,000
Capital surplus........................................................ 26,000 16,000 16,000
Retained earnings...................................................... 11,997 15,288 8,591
Less: Goodwill......................................................... (5,641) (1,909) (2,130)
----------- ----------- -----------
Total Tier I capital............................................... 52,356 45,379 38,461
----------- ----------- -----------
Tier II Capital
Allowance for loan losses.............................................. 4,542 3,511 3,435
Unrealized gains and losses............................................ N/A N/A 179
----------- ----------- -----------
Total Tier II capital.............................................. 4,542 3,511 3,614
----------- ----------- -----------
Total risk-based capital....................................... $ 56,898 $ 48,890 $ 42,075
----------- ----------- -----------
----------- ----------- -----------
Risk-weighted assets....................................................... $ 486,947 $ 370,558 $ 313,324
----------- ----------- -----------
----------- ----------- -----------
Capital Ratios
Tier I risk-based capital ratio........................................ 10.75% 12.25% 12.28%
Total risk-based capital ratio......................................... 11.68 13.19 13.43
Leverage ratio (Tier I capital to average adjusted
total assets)......................................................... 8.24 8.64 8.05
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
62
<PAGE>
The following table presents an analysis of capital for Texas Regional and
Texas State Bank on a pro forma basis at December 31, 1995.
<TABLE>
<CAPTION>
PRO FORMA ANALYSIS OF CAPITAL
- ----------------------------------------------------------------------------------- DECEMBER 31, 1995
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C>
PRO FORMA TEXAS REGIONAL(1)
Tier I Capital
Common Stock..................................................................... $ 8,376
Capital surplus.................................................................. 69,592
Retained earnings................................................................ 27,168
Preferred Stock.................................................................. --
Less: Goodwill................................................................... (27,312)
----------
Total Tier I capital......................................................... 77,824
----------
Tier II Capital
Allowance for loan losses........................................................ 9,838
Unrealized gains and losses...................................................... N/A
----------
Total Tier II capital............................................................ 9,838
----------
Total risk-based capital..................................................... $ 87,662
----------
----------
Risk-Weighted Assets............................................................... $ 793,602
----------
----------
Capital Ratios
Tier I risk-based capital ratio.................................................. 9.81%
Total risk-based capital ratio................................................... 11.05
Leverage ratio (Tier I capital to average adjusted total assets)................. 6.75
----------
----------
PRO FORMA TEXAS STATE BANK(1)
Tier I Capital
Common Stock..................................................................... $ 60,000
Capital stock.................................................................... 26,000
Retained earnings................................................................ 11,997
Less: Goodwill................................................................... (27,242)
----------
Total Tier I Capital......................................................... 70,755
----------
Tier II Capital
Allowance for loan losses........................................................ 9,838
Unrealized gains and losses...................................................... N/A
----------
Total Tier II Capital........................................................ 9,838
----------
Total risk-based capital................................................... $ 80,593
----------
----------
Risk-Weighted Assets............................................................... $ 784,694
----------
----------
Capital Ratios
Tier I risk-based capital ratio.................................................. 9.02%
Total risk-based capital ratio................................................... 10.27
Leverage ratio (Tier I capital to average adjusted total assets)................. 6.13
----------
----------
</TABLE>
- ---------
(1) On a pro forma basis at December 31, 1995, and assuming completion of
the Mergers and completion of the offering of Common Stock as described
in this Prospectus at a price of $21.00 per share, net of estimated
underwriting discounts, commissions and expenses of the offering of
$3,247,000.
63
<PAGE>
LEGAL PROCEEDINGS
Texas State Bank is involved in routine litigation in the normal course of
its business, which in the opinion of management of Texas Regional will not have
a material adverse effect on the financial condition or results of operations of
Texas Regional.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is composed of eight persons elected at
each annual meeting of Texas Regional's shareholders to hold office for one year
or until their respective successors are elected and qualified. Officers of
Texas Regional are elected annually by the Company's Board of Directors at its
first meeting after each annual meeting of shareholders, to hold office until
their respective successors are elected and qualified. Officers may be removed
by the Company's Board of Directors.
The following table is a listing of all of the directors of the Company.
Each director is also a director of Texas State Bank.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE PRINCIPAL OCCUPATION SINCE
- --------------------------------------- --- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Morris Atlas(1)........................ 69 Managing Partner, Atlas & Hall, L.L.P. (law firm in
McAllen, Texas) 1994
Frank N. Boggus(2)..................... 67 Chairman of the Board of Boggus Motor Company (retail
auto dealer in McAllen and Harlingen) 1983
Robert G. Farris(3).................... 65 President of Valley Transit Company, Inc. (regional bus
company) 1983
Joe M. Kilgore(4)...................... 77 Partner, McGinnis, Lochridge & Kilgore, L.L.P. (law
firm in Austin, Texas) 1983
C. Kenneth Landrum, M.D.(5)............ 66 Retired 1994
Glen E. Roney(6)....................... 65 Chairman of the Board and Chief Executive Officer of
the Company and Texas State Bank 1985
Julie G. Uhlhorn....................... 65 Chairman of the Board, Rio Grande Equipment Company,
Inc. (farming and real estate management company) 1983
Paul G. Veale, Sr. .................... 74 Investments 1985
Jack Whetsel(7)........................ 75 Investments 1985
</TABLE>
- ---------
(1) Serves on the Stock Option and Compensation Committee of the Company,
and serves as a Trustee of the Texas Regional Bancshares, Inc., Employee
Stock Ownership Trust (the "KSOP Trust").
(2) Serves on the Audit and Stock Option and Compensation Committees of the
Company, and serves as a Trustee of the KSOP Trust.
(3) Serves on the Stock Option and Compensation Committee of the Company.
(4) Serves on the Audit and Stock Option and Compensation Committees of the
Company, and serves as a Trustee of the KSOP Trust.
(5) Serves on the Audit Committee of the Company.
(6) Serves as a Trustee of the KSOP Trust.
(7) Serves on the Stock Option and Compensation Committee of the Company.
Each of the foregoing persons has been engaged in the principal occupation
indicated for the past five years, except that Mr. Whetsel's principal
occupation was Chairman of the Board of Broadway Hardware, Inc. (a retail
hardware, electronics and home improvements store located in McAllen) prior to
his retirement in 1993, and Dr. Landrum's principal occupation was as a medical
doctor practicing with Landrum-Chester OB-GYN Associates prior to his retirement
in 1994.
The Company has the following advisory directors: Paul S. Moxley, President
of Texas State Bank; Danny L. Buttery, President of Texas State Bank's Harlingen
banking location; and Frank A. Kavanagh, President of Texas State Bank's Weslaco
banking location and Chief Lending Officer of the Company.
64
<PAGE>
The Company pays directors and advisory directors $700 for each Texas
Regional Board of Directors meeting, and reimburses all directors for
out-of-pocket expenses incurred in attending meetings. In addition, during 1995,
the Company paid each non-management director a bonus of $2,000 for service as a
director of the Company and Texas State Bank.
Each director of the Company's subsidiary, Texas State Bank (which includes
each director of Texas Regional), receives $400 for each Texas State Bank Board
of Directors meeting. Non-management directors, during 1995 also received
bonuses aggregating $2,500 for service as a director of the Bank.
Mr. Roney has been Chairman of the Board and Chief Executive Officer of the
Company since joining the Company in 1985. In addition to his director
compensation, Mr. Roney receives compensation as an executive officer of the
Company and Texas State Bank, as indicated below. See "Executive Compensation."
Mr. Kilgore is a director of other publicly-held corporations. He serves as
a director of Reno Air, Inc. (a regional airline based in Reno, Nevada) and of
Photo Control, Inc. (a supplier of photographic equipment).
The following table is a listing of all executive officers of the Company.
<TABLE>
<CAPTION>
OFFICER
NAME AGE PRINCIPAL OCCUPATION POSITION WITH THE COMPANY SINCE
- ------------------------------- --- ------------------------------- ------------------------------- -----------
<S> <C> <C> <C> <C>
Glen E. Roney.................. 65 Chief Executive Officer of the Chairman of the Board, 1985
Company President and Chief Executive
Officer
George R. Carruthers........... 45 Chief Financial Officer of the Executive Vice President and 1985
Company Chief Financial Officer
Nancy F. Schultz............... 55 Senior Vice President of the Senior Vice President and 1985
Company Secretary-Treasurer
</TABLE>
The Texas State Bank Board of Directors consists of all voting members of
the Board of Directors of the Company and the following additional persons: Maj.
Gen. Walter H. Baxter, III, USAF (Retired), Robert F. Boggus (Boggus Motor
Sales), Douglas G. Bready (Texas State Bank), Danny L. Buttery (Texas State
Bank), Antonio Falcon, M.D. (Medical Doctor), Robert R. Farris (Valley Transit
Company), Frank A. Kavanagh (Texas State Bank), Jan M. Klinck (Klinck Drug
Stores, Inc.), Roel Martinez (Pharmacist and Rancher), Paul S. Moxley (Texas
State Bank), F. Neal Runnels (Valley Beverage, Inc.), James D. Russell (Russell
Plantation) and Tudor G. Uhlhorn (Rio Grande Equipment Company). The following
persons serve as advisory directors of Texas State Bank: Jack Abbott (Arroyo
Farms and The Harlingen Gin Company), Joseph S. Bailes, M.D. (Oncologist, Valley
Oncology Group), Maj. Gen. George S. Bowman, Jr., USMC (Ret.) (Investments),
Vidala Gonzalez (Gonzalez Mercantile, Inc.), H.P. Guerra, III (attorney), Herman
A. Henry (Agriculture), Jose A. Hinojosa (Certified Public Accountant), Archie
L. Jenkines, D.D.S. (Retired), Clarence L. Johnstone (Retired), Marion R.
Lawler, Jr., M.D. (Partner, Cardiovascular Associates), Fred S. Mattar
(Merchant), W. A. McBride (Cicero Smith Lumber Company), William D. Parish
(Retired), Fernando Pena (Pena Brothers Investments), Robert A. Peterson (Starr
Produce Company), Dorothy Schmidt (Personal Financial Consultant), Sam F. Vale
(Starr-Camargo Bridge Company), and Kenneth Weaver (Investments). Each advisory
director receives $400 for each Texas State Bank Advisory Directors meeting
attended.
65
<PAGE>
The Bank has the following senior executive officers:
<TABLE>
<CAPTION>
POSITION WITH OFFICER
NAME AGE TEXAS STATE BANK SINCE
- ----------------------------------------- --- ------------------------------------------------------- -----------
<S> <C> <C> <C>
Glen E. Roney............................ 65 Chairman of the Board, Chief Executive Officer and 1985
Trust Officer
Paul S. Moxley........................... 51 President and Secretary 1986
Danny L. Buttery......................... 48 President -- Harlingen banking location 1985
Frank A. Kavanagh........................ 49 President -- Weslaco banking location and Chief Lending 1992
Officer
George R. Carruthers..................... 45 Executive Vice President and Chief Financial Officer 1985
Douglas G. Bready........................ 40 Executive Vice President 1985
Craig K. Lewis........................... 41 Executive Vice President and Chief Operations Officer 1992
Robert C. Norman......................... 32 Executive Vice President 1992
Craig A. Swann........................... 41 Executive Vice President and Director of Management 1994
Information Systems
Larry C. Gonzalez........................ 34 Executive Vice President 1995
</TABLE>
See "Proposed Mergers" regarding additional officers of Texas State Bank as
a result of the consummation of the Mergers.
Each of the executive officers listed above has been employed as a member of
senior management of the Company or its subsidiary for the past five years,
except:
Frank Kavanagh served as president of Mid Valley Bank from August 1988 until
its merger with Texas State Bank in 1992;
Craig Lewis was a Senior Vice President with NationsBank of Texas N.A. (and
its predecessors State National Bank in Robstown and NBC-South Texas) from
1984 until joining Texas State Bank in 1992;
Robert Norman was an officer of Mid Valley Bank from 1982 until its merger
with Texas State Bank in 1992;
Craig A. Swann was Branch Sales Manager for the Financial Services Division
of Unisys Corporation from 1977 until joining Texas State Bank in 1994; and
Larry C. Gonzalez who was Executive Vice President in charge of the Rio
Grande City and Roma banking locations of First National Bank of South Texas
from June 1992 until joining Texas State Bank upon the RGC/Roma Branch
Acquisitions in 1995. Prior to June 1992, Mr. Gonzalez was a national bank
examiner with the Office of the Comptroller of the Currency.
There is no family relationship between any director, executive officer or
person nominated or chosen by the Company to become a director or executive
officer; however, Glen E. Roney, the Chief Executive Officer of the Company and
Texas State Bank and Chairman of the Board of Directors of the Company and Texas
State Bank is the father-in-law of Douglas G. Bready, a Director and Executive
Vice President of Texas State Bank; Tudor G. Uhlhorn, a Director of Texas State
Bank, is the son of Julie G. Uhlhorn, a member of the Board of Directors of the
Company and Texas State Bank; Robert R. Farris, a Director of Texas State Bank,
is the son of Robert G. Farris, a member of the Board of Directors of the
Company and Texas State Bank; and Robert F. Boggus, a Director of Texas State
Bank, is the son of Frank N. Boggus, a Director of the Company and Texas State
Bank.
66
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer and the four most highly compensated executive officers of the
Company as to whom the total annual salary and bonus for the year ended December
31, 1995 exceeded $100,000. Except for directors fees paid by Texas Regional and
included in the Salary column, all executive compensation as reflected in the
following table is paid by Texas State Bank.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
---------------
AWARDS
ANNUAL COMPENSATION ---------------
NAME AND ----------------------------------- OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS /SARS COMPENSATION (2)
- ------------------------------------------ --------- ----------- ----------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
Glen E. Roney............................. 1995 $ 406,273 $ 175,000 65,000 $ 99,430
Chairman of the Board and 1994 385,505 85,000 135,050 99,430
Chief Executive Officer of the Company 1993 357,742 100,000 -- 139,264
and the Bank
Paul S. Moxley............................ 1995 154,001 28,000 4,000 13,014
President 1994 143,403 18,000 5,270 12,790
Texas State Bank 1993 134,440 23,200 -- 16,150
Danny L. Buttery.......................... 1995 152,448 23,000 4,000 12,000
President of the Bank's 1994 143,236 18,000 5,270 12,000
Harlingen banking location 1993 134,367 23,200 -- 15,284
Frank A. Kavanagh......................... 1995 154,408 25,000 4,000 13,500
President of the Bank's 1994 146,464 18,000 5,270 9,345
Weslaco banking location 1993 139,518 23,200 -- 17,576
and Chief Lending Officer
Douglas G. Bready......................... 1995 99,170 20,000 3,500 10,429
Executive Vice President of the 1994 92,900 13,500 3,162 9,345
Bank 1993 86,546 17,200 -- 11,407
</TABLE>
- ---------
(1) The amounts indicated include wages, automobile allowances and director
fees.
(2) The amounts in this column represent the amount of the Company's
optional and matching contribution for each listed executive officer
under the KSOP. In addition, with regard to Mr. Roney, the amount
indicated includes $87,000, $87,000 and $116,000 accrued during 1995,
1994 and 1993, respectively, pursuant to the Deferred Compensation Plan
adopted by the Company for the benefit of Glen Roney, described below.
The compensation upon which the KSOP contributions were determined does
not differ substantially from that set forth under the annual
compensation table, except for the 1993 contribution on behalf of Mr.
Roney, which was limited to the maximum allowable under the KSOP, and
the 1994 and 1995 contributions for Mr. Roney, Mr. Moxley, Mr. Buttery
and Mr. Kavanagh, which were limited to the maximum allowable under the
KSOP.
The following table sets forth certain information concerning stock
options/SARs granted during 1995 to the executive officers named above:
<TABLE>
<CAPTION>
OPTIONS GRANTED IN LAST FISCAL YEAR
----------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS/ STOCK PRICE
SECURITIES SARS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ----------------------------- ------------- --------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Roney................ 65,000 72.22% $ 17.25 7/01/02 $ 422,653 $ 974,363
Paul S. Moxley............... 4,000 4.44 17.25 7/01/02 26,009 59,961
Danny L. Buttery............. 4,000 4.44 17.25 7/01/02 26,009 59,961
Frank A. Kavanagh............ 4,000 4.44 17.25 7/01/02 26,009 59,961
Douglas G. Bready............ 3,500 3.89 17.25 7/01/02 22,758 52,466
</TABLE>
67
<PAGE>
The following table sets forth certain information regarding aggregate
options outstanding and held by the persons named above.
<TABLE>
<CAPTION>
AGGREGATE OPTION EXERCISES IN
LAST FISCAL AND FISCAL YEAR-END OPTION VALUE
---------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS/ SARS
VALUE REALIZED UNEXERCISED OPTIONS/SARS
(MARKET PRICE AT AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
SHARES ACQUIRED EXERCISE LESS --------------------------- ----------------------------
NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ----------------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Glen E. Roney............ -- $ -- 135,050 65,000 $ 709,013 $ --
Paul S. Moxley........... -- -- 5,270 4,000 27,668 --
Danny L. Buttery......... -- -- 5,270 4,000 27,668 --
Frank A. Kavanagh........ -- -- 5,270 4,000 27,668 --
Douglas G. Bready........ -- -- 3,162 3,500 16,601 --
</TABLE>
- ------------
(1) Calculated on the basis of the closing sale price per share for the
Common Stock of $17.25 as reported by the Nasdaq National Market System
for December 31, 1995.
The Company has three stock option plans. A fourth plan, the Company's
employee stock bonus plan, was terminated during 1995. Texas Regional's Board of
Directors has the authority to grant options to purchase up to an aggregate of
262,988 shares of Common Stock under the terms of the present stock option
plans, in each case at the then present fair market value of the Common Stock.
One of these plans, the Texas Regional Bancshares, Inc. 1995 Nonstatutory Stock
Option Plan, was adopted in 1995 and is expected to be considered and voted upon
by the shareholders of the Company at the 1996 annual meeting of the
shareholders. As of the date of this Prospectus, options for the purchase of an
aggregate of 262,988 shares of Common Stock have been granted under the plans,
including the options included in the tables above, with the result that the
Company's Board of Directors does not have the authority to grant any additional
options to purchase Common Stock pursuant to the stock option plans, except to
the extent that any outstanding options in the future lapse or otherwise
terminate unexercised.
In December 1993, the Company adopted a Deferred Compensation Plan (the
"Deferred Compensation Plan") for the benefit of Mr. Roney, which provides for
payments to be made to Mr. Roney (or in the event of his death during the
period, to his designated beneficiary or his estate) in the amount of $100,000
per year commencing October 29, 2002, and continuing for fourteen years
thereafter. The obligation to make such payments requires Mr. Roney to continue
to be employed by the Company until October 29, 2002, unless his compensation is
reduced from that paid in 1993, his duties are materially changed, his
employment is terminated due to his disability or death, or he is discharged
without cause. If Mr. Roney dies prior to October 29, 2002, the payments would
commence immediately and be paid to his designated beneficiary, or his estate.
At December 31, 1995, the Company had funded, pursuant to the Trust under Glen
E. Roney Deferred Compensation Plan, an aggregate of $291,000. The Trust was set
up for the purpose of payment of the deferred compensation benefit. The Company
incurred expenses of approximately $87,000 during each of the years ended
December 31, 1995 and 1994, with respect to the Deferred Compensation Plan. See
"Business -- Personnel." In January 1996, the Company's Board of Directors
amended the Deferred Compensation Plan and Trust to change the identity of the
Trustee and to make other changes designed to assist in obtaining a favorable
determination letter from the Internal Revenue Service as to the status of the
Deferred Compensation Plan for federal income tax purposes.
First State Bank has three separate deferred compensation plans for the
benefit of three First State Bank employees, and Border Bank has a deferred
compensation plan for the benefit of one Border Bank employee. The plans each
provide for retirement benefits to be paid to the specified employee, a
designated beneficiary or the employee's estate. One plan commenced payments to
a retired employee of approximately $13,000 per year on January 4, 1988,
continuing annually thereafter until June 2003. A second plan provides for
payments of approximately $13,300 per year to commence in April 1990, and
continuing until June 2005; however, the employee elected to receive a lesser
amount payable over a longer period of time. The third plan, covering Elliott
Bottom, provides for retirement benefit payment of
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<PAGE>
$50,000 per year commencing in March 1999 and continuing annually thereafter for
20 years. A fourth plan commenced payments to a retired employee of
approximately $1,112.50 per month in March 1995, and provides for monthly
payments thereafter for 180 months. First State Bank and Border Bank own and are
beneficiaries of life insurance policies on the employees covered under the
deferred compensation plans, with face values in amounts approximately equal to
the total benefits paid or payable under the plans. Upon consummation of the
Mergers, Texas State Bank will become obligated to make payments under the
plans, and will own and become the beneficiary of the related life insurance
policies.
Beginning in 1991, the Bank established a discretionary incentive bonus pool
for the benefit of employees and directors of the Bank. Contributions are made
to the discretionary bonus pool based on projected year-end return on assets
earned by the Bank, calculated as follows: in the event that the year-end return
on average assets of the Bank, prior to any amount attributable to the
discretionary bonus ("ROA") for the year is in excess of 1.00%, 2% of net income
for the year is contributed; in the event that the ROA for the year exceeds
1.05%, in addition to the base contribution, 5% of net income in excess of 1.00%
ROA is contributed; if the ROA for the year exceeds 1.10%, an additional
contribution is made in the amount of 10% of net income in excess of 1.05% ROA.
For each 0.05% increase in ROA, the proportion of the excess net income
contributed is increased by 5% of net income, up to an ROA of 1.25%. A total of
25% of any amount of net income in excess of 1.25% ROA is contributed to the
pool. Amounts are paid out of the discretionary bonus pool to individual
employees and directors of the Bank as determined by the Stock Option and
Compensation Committee. An aggregate of $574,000 was awarded to employees of the
Bank out of the discretionary bonus pool during 1995, and $43,000 was awarded to
directors of the Bank that are not employees of the Bank. An aggregate of
$375,000 was awarded to employees and $43,000 to non-employee directors out of
the discretionary bonus pool during 1994.
EMPLOYEE STOCK OWNERSHIP PLAN
In 1990, Texas Regional adopted the KSOP. Since adoption of the KSOP, Texas
Regional has made contributions to the KSOP, on behalf of employees of the
Company, in the aggregate amount of $2.8 million, and employees have in addition
made salary deferral contributions to the KSOP in the aggregate amount of
$512,000 through December 31, 1995. All Texas Regional contributions are used to
purchase Common Stock, and employees have the option to direct that salary
deferral contributions (and certain applicable target benefit plan rollover
contributions) be invested either in a money market fund or in Common Stock. The
aggregate number of shares of Common Stock held pursuant to the KSOP as of
December 31, 1995, was 302,007 (about 4.9% of total outstanding shares of Common
Stock). All assets in the KSOP, including Common Stock held pursuant to the
KSOP, are held by the KSOP Trust, which holds the shares of stock on behalf of
the employee participants in the KSOP.
Trustees of the KSOP Trust, who are selected by, and all of whom are,
directors of Texas Regional, are Morris Atlas, Frank N. Boggus, Joe M. Kilgore
and Glen E. Roney. Employees are entitled to direct the voting of any shares
allocated to their employee accounts, and the trustees of the KSOP Trust direct
the voting of any unallocated shares held by the KSOP Trust. At December 31,
1995, there were no unallocated shares held by the KSOP Trust. During 1996,
management of Texas Regional anticipates recommending to the Board of Directors
of Texas Regional certain amendments to the KSOP to make available to plan
participants more diverse investment options.
CERTAIN TRANSACTIONS
Texas State Bank has had, in the ordinary course of business, banking
transactions with certain of its officers and directors and with certain
officers and directors of Texas Regional. Loans by Texas State Bank to executive
officers and directors of Texas State Bank and Texas Regional, in the aggregate,
amounted to $4.0 million at December 31, 1995, or 0.9% of total loans
outstanding and 6.3% of the shareholders' equity of the Bank. All loan
transactions with officers and directors of Texas Regional and Texas State Bank,
and their related and affiliated parties, have been on substantially the same
terms as those
69
<PAGE>
prevailing for comparable transactions with other loan customers of the Bank,
and have not included more than the normal risk of collectibility associated
with Texas State Bank's other banking transactions or other unfavorable
features.
Prior to 1993, the Company leased office facilities from Kerria Plaza, Ltd.,
a real estate limited partnership in which Mr. James W. Collins, former Director
and former Secretary-Treasurer of the Company, is general partner and certain
principals of the Company own an interest. Management of the Company believes
that the terms of the leases were comparable to terms of leases between the
partnership and third parties. Persons having a direct or indirect interest in
Kerria Plaza, Ltd., their relationship to the Company and their interest in
Kerria Plaza, Ltd., were: James W. Collins, individually and as Trustee for
Carvan, Vanco and KVTC Trusts (of which Mr. Collins is not a beneficiary, but of
which his spouse and children are beneficiaries), owned a 27% interest in Kerria
Plaza, Ltd.; Glen E. Roney, Chairman of the Board and Chief Executive Officer of
the Company, owned an 11% interest in Kerria Plaza, Ltd.; Frank N. Boggus,
former President and a present Director of the Company, owned a 4% interest in
Kerria Plaza, Ltd.; and Robert G. Farris, a Director of the Company, owned a 2%
interest in Kerria Plaza, Ltd.
Kerria Plaza, Ltd. purchased the Kerria Plaza building in 1984. In June
1992, the directors of Texas State Bank obtained an appraisal from an
independent third party appraiser indicating that the market value of Kerria
Plaza office building was $2.5 million. In January 1993, Texas State Bank
purchased the Kerria Plaza office building from Kerria Plaza, Ltd. for the
appraised value of $2.5 million.
Mr. Collins is Chairman of the Board of Rioco Corporation, a real estate
brokerage and property management company. During 1995 and 1994, Rioco
Corporation received from Texas State Bank leasing commissions totaling $1,237
and $1,260, respectively, resulting from leases of office space in Kerria Plaza.
Rioco Corporation continues to manage the Kerria Plaza building for Texas State
Bank under a property management agreement which management of the Company
believes is on terms comparable to terms available from other property
management companies operating in the area, which management agreement, among
other things, provides for payment of management and accounting fees at a
minimum of $2,900 per month and payment of leasing commissions in the event of
the lease of office space in the building to third party tenants.
Texas State Bank, along with other banks in the Rio Grande Valley, sells
credit life insurance for Texas State Life Insurance Company. Texas State Life
Insurance Company is owned 50% by Mr. Roney and 50% by Mr. Collins. Commission
fee income received by Texas State Bank from Texas State Life Insurance Company
totaled $82,475 for the year ended December 31, 1995.
Mr. Joe M. Kilgore, a Director of the Company, is a partner in the law firm
of McGinnis, Lochridge & Kilgore, L.L.P. His firm received fees for legal
services rendered to the Company and its subsidiary during 1995, but the amount
of fees received did not exceed either 5% of his firm's gross revenues for 1995
or 5% of Texas Regional's total operating expenses for the year ended 1995.
Mr. Morris Atlas, a Director of the Company, is a partner in the law firm of
Atlas & Hall, L.L.P. His firm received fees for legal services rendered to the
Company and its subsidiary during 1995, but the amount of fees received did not
exceed either 5% of his firm's gross revenues for 1995 or 5% of Texas Regional's
total operating expenses for the year ended 1995.
During 1995, Texas State Bank purchased a tract of real estate from Scott &
White Memorial Hospital and Scott, Sherwood & Brindley Foundation ("Scott &
White"), a Texas non-profit corporation, for $227,000. Texas State Bank intends
to hold the property for possible future development as a banking location. Mr.
Roney and Mr. Kilgore each serve as members of the Board of Directors of Scott &
White.
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<PAGE>
PRINCIPAL HOLDERS OF CAPITAL STOCK
The following table sets forth at December 31, 1995 the beneficial ownership
of the Common Stock by each person known by the Company to be the beneficial
owner of more than 5% of the Common Stock, each director and executive officer
of the Company, and all executive officers and directors as a group. The number
of shares beneficially owned by each person as indicated in the table is
determined under rules of the Commission and the information is not necessarily
indicative of beneficial ownership for any other purpose. Except as otherwise
noted, the indicated shareholders have sole voting and investment power over the
number of shares shown. The information is based on data furnished by the
respective persons named.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER NUMBER %
- ------------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Morris Atlas(1)............................................................................ 67,835 1.09
Frank N. Boggus(2)......................................................................... 133,082 2.15
Douglas G. Bready(3)....................................................................... 16,321 .26
Danny L. Buttery(4)........................................................................ 18,168 .29
George R. Carruthers(5).................................................................... 12,652 .20
James W. Collins(6)........................................................................ 665,239 10.74
Individually and as Trustee of Vanco, Carvan, KVTC, Cook Memorial and
Vannie Cook Trusts
P.O. Box 1239
McAllen, Texas 78502
Robert G. Farris(7)........................................................................ 4,977 .08
Frank A. Kavanagh(8)....................................................................... 10,808 .17
Joe M. Kilgore(9).......................................................................... 184,756 2.98
C. Kenneth Landrum, M.D.(10)............................................................... 73,928 1.19
Paul S. Moxley(11)......................................................................... 21,467 .35
Glen E. Roney(12).......................................................................... 758,927 11.99
3700 North 10th, #301
McAllen, Texas 78501
Julie G. Uhlhorn(13)....................................................................... 77,828 1.26
Paul G. Veale, Sr.(14)..................................................................... 60,908 .98
Wanger Asset Management, L.P., of which Wanger Asset Management, Ltd., is the general
partner, of which Ralph Wanger is the principal shareholder.............................. 411,600 6.64
227 West Monroe Street, Suite 300
Chicago, Illinois 60606
Jack Whetsel(15)........................................................................... 203,739 3.29
All Directors and Executive Officers as a group (14 persons) (16).......................... 1,541,389 24.26
</TABLE>
- ------------
(1) The total includes 2,000 shares held by Mr. Atlas' wife.
(2) The total includes 95,364 shares owned by companies controlled by Mr.
Boggus.
(3) The total includes 3,601 shares held by Mr. Bready's wife, 985 shares
held by an independent trustee for Mr. and Mrs. Bready's individual
retirement accounts, 8,573 shares allocated to Mr. Bready's account as a
participant in the KSOP and 3,162 shares Mr. Bready has the right to
acquire within 60 days through the exercise of options. Not included in
the total are 3,500 shares which represent options granted in 1995 and
not exercisable within 60 days. See "Management--Executive
Compensation."
(4) The total includes 12,898 shares allocated to Mr. Buttery's account as a
participant in the KSOP and 5,270 shares Mr. Buttery has the right to
acquire within 60 days through the exercise of options. Not included in
the total are 4,000 shares which represent options granted in 1995 and
not exercisable within 60 days. See "Management -- Executive
Compensation."
(5) The total includes 9,160 shares allocated to Mr. Carruthers' account as
a participant in the KSOP and 3,162 shares Mr. Carruthers has the right
to acquire within 60 days through the exercise of options. Not included
in the total are 3,500 shares which represent options granted in 1995
and not exercisable within 60 days.
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<PAGE>
(6) The total includes 20,204 shares owned by a company controlled by Mr.
Collins, 8,023 shares held by an independent trustee for Mr. and Mrs.
Collins' individual retirement accounts and a money purchase pension
plan, 4,854 shares owned by a company controlled 50% by Mr. Collins and
50% by Mr. Roney, 593,600 shares held by trusts for the benefit of Mr.
Collins' wife, children and others, and 6,122 shares held by various
family members who have given Mr. Collins power of attorney to act on
their behalf.
(7) The total includes 2,384 shares held by Mr. Farris' wife. Mr. Farris
disclaims beneficial ownership of his wife's shares.
(8) The total includes 5,538 shares allocated to Mr. Kavanagh's account as a
participant in the KSOP and 5,270 shares Mr. Kavanagh has the right to
acquire within 60 days through the exercise of options. Not included in
the total are 4,000 which represent options granted in 1995 and not
exercisable within 60 days. See "Management--Executive Compensation."
(9) The total includes 8,333 shares held by Mr. Kilgore's wife, 1,156 shares
held by Mr. Kilgore as custodian for his grandchildren and 34,511 shares
held by an independent trustee for Mr. Kilgore's individual retirement
account.
(10)The total includes 14,258 shares held by a trust for the benefit of Dr.
Landrum, 6,172 shares held by a trust for Dr. Landrum's pension plan and
53,498 shares held in a trust for the benefit of Dr. Landrum's wife. Dr.
Landrum disclaims beneficial ownership of his wife's shares.
(11)The total includes 406 shares held by Mr. Moxley's wife, 14,209 shares
allocated to Mr. Moxley's account as a participant in the KSOP and 5,270
shares Mr. Moxley has the right to acquire within 60 days through the
exercise of options. Not included in the total are 4,000 which represent
options granted in 1995 and not exercisable within 60 days. See
"Management--Executive Compensation."
(12)The total includes 16,166 shares held by Mr. Roney's wife, 5,202 shares
held by Mr. Roney's wife as trustee, 31,383 shares held by a trust for
the benefit of Mr. Roney's wife, 68,604 shares held by trusts at Texas
State Bank for which Mr. Roney and Mr. Whetsel serve as trustees along
with other individuals who are not directors of the Company but in which
they have no interest as beneficiaries, 4,854 shares owned by a company
controlled 50% by Mr. Roney and 50% by Mr. Collins and 42,202 shares
allocated to Mr. Roney's account as a participant in the KSOP. In
addition, included in this total are 135,050 shares Mr. Roney has the
right to acquire within 60 days through the exercise of options. Not
included in the total are 65,000 shares which represent options granted
in 1995 and not exercisable within 60 days. See "Management--Executive
Compensation."
(13)The total includes 27,016 shares which represent Mrs. Uhlhorn's
beneficial interests in a trust and 26,854 shares held by a partnership
owned 30% by Mrs. Uhlhorn.
(14)The shares indicated are owned by a limited partnership controlled by
Mr. Veale.
(15)The total includes 99,987 shares held by trusts at Texas State Bank for
which Mr. Whetsel and Mr. Roney serve as trustees along with other
individuals who are not directors of the Company but in which they have
no interest as beneficiaries and 103,752 shares held in a trust for the
benefit of Mr. Whetsel.
(16)The total includes 1,130,592 shares as to which directors and executive
officers have sole voting power; 410,797 shares as to which directors
and executive officers have shared voting power; 1,038,382 shares as to
which directors and executive officers have sole investment power; and
503,007 shares as to which directors and executive officers have shared
investment power. The total also includes 156,129 shares which officers
have the right to acquire within 60 days upon exercise of stock options.
SELLING SHAREHOLDER
Of the shares offered pursuant to this Prospectus, 2,180,000 shares are
being offered by the Company and 20,000 shares are being offered by the Selling
Shareholder. The following table includes the name of the Selling Shareholder,
the amount of Common Stock held by the Selling Shareholder prior to the
offering, the amount of Common Stock to be offered for the account of the
Selling Shareholder in this offering, and the amount and percentage of Common
Stock to be owned by the Selling Shareholder after completion of the offering.
<TABLE>
<CAPTION>
COMMON STOCK HELD
FOLLOWING THIS
COMMON STOCK OFFERING
COMMON STOCK OFFERED IN THIS ----------------------
NAME PRESENTLY HELD OFFERING AMOUNT %
- ------------------------------------------------------------ --------------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Lindberg Limited Partnership(1)............................. 60,908 20,000 40,908 0.49%
</TABLE>
- ------------
(1) The general partner of Lindberg Limited Partnership is Veale Family
Management Trust, trustees of which are Paul G. Veale and his wife,
Florence Veale. Mr. and Mrs. Veale are also individually limited
partners of the Lindberg Limited Partnership. Mr. Veale is a Director of
the Company.
72
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Texas Regional is authorized to issue 20,000,000 shares of Common Stock, and
10,000,000 shares of Preferred Stock with such preferences, limitations and
relative rights as may be determined by the Board of Directors of the Company.
Prior to April 1991, the Company had authority to issue Class B Non-Voting
Common Stock as well. The Class B Non-Voting Common class was created to provide
a mechanism for equalizing consideration to shareholders at the time of
acquisition of Texas State Bank and Harlingen State Bank in 1983. All
outstanding shares of Class B Non-Voting Common Stock were converted into Class
A Voting Common shares in April 1991, and the class of shares referred to as
Class B Non-Voting Common Stock was eliminated. As used herein, the term "Common
Stock" refers to the Company's Class A Voting Common Stock.
COMMON STOCK
As of the date hereof, Texas Regional has issued and outstanding an
aggregate of 6,196,791 shares of Common Stock and an aggregate of 262,988 shares
of Common Stock are reserved for issuance pursuant to options previously granted
by the Company. The only class of shares which Texas Regional has issued and
outstanding is the Common Stock. The shares of First Series Convertible
Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991
Convertible Preferred Stock outstanding prior to 1994 have been converted into
Common Stock or redeemed by the Company. The Common Stock has a par value of
$1.00 per share. Holders of Common Stock do not have preemptive rights for the
acquisition of additional capital stock of the Company. Each holder of Common
Stock is entitled to one vote for each share held on all matters submitted to
shareholders, including election of directors. Holders of Common Stock do not
have cumulative voting rights in the election of directors. The Texas Regional
share certificates issued to purchasers of Common Stock in the offering
described in this Prospectus will bear legends describing the fact that the
Texas Regional Articles of Incorporation (the "Articles of Incorporation") deny
preemptive rights and do not allow cumulative voting in the election of
directors.
Holders of Common Stock are entitled to dividends as and when declared by
the Board of Directors of Texas Regional out of legally available funds. See
"Price Range of Common Stock and Dividend Policy."
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock, $1.00 par value per share. The Company does not have any shares of
preferred stock outstanding as of the date of this Prospectus and does not
presently have plans to issue any shares of preferred stock. The Company's Board
of Directors is authorized by the Articles of Incorporation to provide, without
further shareholder action, for the issuance of one or more series of preferred
stock. The Company's Board of Directors has the power to fix the various terms
with respect to each such series, including voting powers, designations,
preferences, dividend rates, conversion and exchange, redemption provisions, the
amount holders are entitled to receive upon any liquidation, dissolution, or
winding up of the Company, and voting rights to which the holders of Preferred
Stock would be entitled.
TRANSFER AGENT
The transfer agent for the Common Stock is Texas Regional Bancshares, Inc.,
Kerria Plaza, Suite 301, 3700 North Tenth Street, McAllen, Texas 78501,
Attention Ann M. Sefcik, Controller.
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this offering, the Company will have outstanding
8,706,791 shares of Common Stock (assuming election by the Underwriters to
purchase shares subject to the Underwriters' over-allotment option). Of these
shares, the 2,510,000 shares of Common Stock sold in this offering (including
such over-allotment shares) will be freely tradable without restriction or
limitation under the Securities Act except to the extent such shares are subject
to the agreement with the Underwriters described below, and except for any
shares purchased by "affiliates" of the Company, as that term is defined in the
Securities Act. In addition, an aggregate of 4,811,531 shares presently
outstanding are also not restricted
73
<PAGE>
and, under certain conditions, may be freely tradable without restriction or
limitation under the Securities Act. The remaining 1,385,260 shares are
"restricted" shares within the meaning of Rule 144 adopted under the Securities
Act ("Rule 144"). Restricted shares outstanding on the date hereof owned by
"affiliates" may only be sold if they are registered under the Securities Act or
unless an exemption from registration, such as that provided by Rule 144, is
available.
The Company, its executive officers, its directors and the Selling
Shareholder have agreed not, directly or indirectly, to offer, sell, offer to
sell, contract to sell, grant any option to purchase or otherwise dispose of (or
announce any offer, sale, offer of sale, contract of sale, grant of any option
to purchase or any other disposition of), any shares of Common Stock or any
securities convertible into or exchangeable, or exercisable for, shares of
Common Stock for a period of 120 days after the date of the Underwriting
Agreement without the prior written consent of the Underwriters (the "Lockup").
Following the Lockup, these shares will be eligible for sale in the public
market, subject to the conditions and restrictions of Rules 144 and Rule 144A
also adopted under the Securities Act ("Rule 144A"), as hereinafter described.
See "Underwriting."
No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock in the public market after the lapse of the restrictions described
above could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future at a time and price which it deems
appropriate.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
Restricted Shares for at least a two-year period (as computed under Rule 144) is
entitled to sell within any three-month period a number of such shares that does
not exceed the greater of (i) 1% of the then outstanding shares of Common Stock
(approximately 87,000 shares after giving effect to this offering, assuming the
Underwriters exercise the available over-allotment option in full) and (ii) the
average weekly trading volume in the Common Stock on the Nasdaq National Market
System during the four calendar weeks immediately preceding such sale. Sales
under Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company at any time during the 90 days immediately preceding a
sale, and who has beneficially owned Restricted Shares for at least a three-year
period (as computed under Rule 144), would be entitled to sell shares under Rule
144(k) without regard to the volume limitation and other conditions described
above. Restricted Shares and options to purchase Common Stock sold by the
Company to, among others, its employees, officers and directors pursuant to
written compensation plans or contracts and in reliance on Rule 701 under the
Securities Act, may be resold in reliance on Rule 144 by such persons who are
not affiliates subject only to the provisions of Rule 144 regarding manner of
sale, and by such persons who are affiliates without complying with Rule 144's
holding period requirements. Rule 144A permits the immediate sale by the current
holders of Restricted Shares of all or a portion of their shares to certain
qualified institutional buyers as defined in Rule 144A.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated and First Southwest Company, have severally
agreed to purchase from the Company the following respective numbers of shares
of Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Alex. Brown & Sons Incorporated......................................................................
First Southwest Company..............................................................................
-----------
Total................................................................................................ 2,200,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all the shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 330,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,200,000 and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,200,000 shares are being offered.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company and its executive officers, directors and the Selling
Shareholder, holding in the aggregate 1,541,389 shares of Common Stock, have
agreed not to offer, sell or otherwise dispose of any of such Common Stock
(except for shares of Common Stock offered hereby and other than shares offered
pursuant to the KSOP or other employee benefit plans) for a period of 120 days
after the date of this Prospectus without the prior written consent of the
Representatives of the Underwriters. See "Shares Eligible for Future Sale."
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<PAGE>
Texas State Bank, both in its corporate capacity and on behalf of trust
clients, maintains a substantial portfolio of investment securities. First
Southwest Company, as a securities broker, has sold securities to Texas State
Bank, and First Southwest Company has received compensation for its services as
securities broker. First Southwest Company has also been engaged to provide an
opinion to the Board of Directors of the Company as to the fairness, from a
financial point of view, of the Mergers, for a total consideration of $125,000.
LEGAL MATTERS
McGinnis, Lochridge & Kilgore, Austin, Texas, will render an opinion to
Texas Regional with respect to the legality of the securities being registered,
and provides general legal services to Texas Regional. Joe M. Kilgore, a partner
in the firm, serves as a director of Texas Regional and Texas State Bank, and
beneficially owns 184,756 shares (2.98%) of the Common Stock.
Certain legal matters will be passed upon for the Underwriters by Jones,
Day, Reavis & Pogue, Dallas, Texas.
EXPERTS
The consolidated financial statements of Texas Regional Bancshares, Inc. at
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995, included herein and elsewhere in the Registration
Statement have been audited by KPMG Peat Marwick LLP, independent certified
public accountants, and are included herein in reliance upon such reports and
upon the authority of said firm as experts in accounting and auditing. The
financial statements of First State Bank and Border Bank at December 31, 1995
and 1994, and for each of the years in the three-year period ended December 31,
1995, included herein and elsewhere in the Registration Statement have also been
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
are included herein in reliance upon such reports and upon the authority of said
firm as experts in accounting and auditing.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL INFORMATION
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
FIRST STATE BANK & TRUST CO.
THE BORDER BANK
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
TEXAS REGIONAL BANCSHARES, INC.
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.................. F-4
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994
and 1993............................................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.............. F-6
Notes to Consolidated Financial Statements.............................................................. F-7
FIRST STATE BANK & TRUST CO.
Selected Financial Information.......................................................................... F-31
Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-32
Independent Auditors' Report............................................................................ F-52
Balance Sheets at December 31, 1995 and 1994............................................................ F-53
Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................. F-54
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993...... F-55
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993........................... F-56
Notes to Financial Statements........................................................................... F-57
THE BORDER BANK
Selected Financial Information.......................................................................... F-66
Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-67
Independent Auditors' Report............................................................................ F-87
Balance Sheets at December 31, 1995 and 1994............................................................ F-88
Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................. F-89
Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993...... F-90
Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993........................... F-91
Notes to Financial Statements........................................................................... F-92
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Texas Regional Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Texas
Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Texas
Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 26, 1996
F-2
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Assets
Cash and Due From Banks (Note 2).................................................... $ 30,933 $ 40,477
Federal Funds Sold.................................................................. 3,600 1,300
----------- -----------
Total Cash and Cash Equivalents................................................. 34,533 41,777
Securities Available for Sale (Notes 1 and 3)....................................... 63,150 54,814
Securities Held to Maturity (Estimated Market Value of $68,962 and $69,626 for 1995
and 1994, Respectively) (Notes 1 and 3)............................................ 68,491 72,014
Loans, Net of Unearned Discount of $1,272 in 1995 and $774 in 1994.................. 450,854 339,939
Less: Allowance for Loan Losses..................................................... (4,542) (3,511)
----------- -----------
Net Loans (Note 4).............................................................. 446,312 336,428
Premises and Equipment, Net (Note 5)................................................ 18,374 15,268
Accrued Interest Receivable......................................................... 6,319 4,538
Other Real Estate................................................................... 1,273 2,342
Intangibles......................................................................... 5,711 1,982
Other Assets........................................................................ 2,606 2,671
----------- -----------
Total Assets.................................................................... $ 646,769 $ 531,834
----------- -----------
----------- -----------
Liabilities
Deposits
Demand.......................................................................... $ 120,414 $ 99,643
Savings......................................................................... 36,133 28,689
Money Market Checking and Savings............................................... 127,687 140,750
Time Deposits (Note 6).......................................................... 295,497 203,026
----------- -----------
Total Deposits.............................................................. 579,731 472,108
Federal Funds Purchased and Securities Sold Under Repurchase Agreements............. 757 1,149
Short-Term Borrowings............................................................... -- 429
Accounts Payable and Accrued Liabilities............................................ 3,561 2,417
----------- -----------
Total Liabilities............................................................... 584,049 476,103
----------- -----------
Commitments and Contingencies (Notes 11 and 12)
Shareholders' Equity
Preferred Stock; Cumulative, $1.00 Par Value, $100 Liquidation Value, 10,000,000
Shares Authorized; None Issued and Outstanding (Note 9)............................ -- --
Common Stock -- Class A; $1.00 Par Value, 20,000,000 Shares Authorized; Issued and
Outstanding 6,196,791 Shares for 1995 and 6,193,629 for 1994 (Note 10)............. 6,196 6,193
Paid-In Capital..................................................................... 29,239 29,204
Retained Earnings (Notes 9 and 12).................................................. 27,168 20,921
Unrealized Gain (Loss) on Securities Available for Sale (Notes 1 and 3)............. 117 (587)
----------- -----------
Total Shareholders' Equity...................................................... 62,720 55,731
----------- -----------
Total Liabilities and Shareholders' Equity...................................... $ 646,769 $ 531,834
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest Income
Loans, Including Fees..................................................................... $ 37,131 $ 28,005 $ 23,674
Investment Securities
Taxable............................................................................... 7,004 5,863 5,119
Tax-Exempt............................................................................ 285 244 275
Federal Funds Sold........................................................................ 1,172 519 623
--------- --------- ---------
Total Interest Income............................................................. 45,592 34,631 29,691
--------- --------- ---------
Interest Expense
Deposits.................................................................................. 17,990 11,619 10,321
Federal Funds Purchased and Securities Sold Under Repurchase Agreements................... 46 23 1
Short-Term Borrowings..................................................................... 16 32 60
Note Payable.............................................................................. -- 16 112
--------- --------- ---------
Total Interest Expense............................................................ 18,052 11,690 10,494
--------- --------- ---------
Net Interest Income........................................................................... 27,540 22,941 19,197
Provision for Loan Losses (Note 4)............................................................ 1,685 1,085 392
--------- --------- ---------
Net Interest Income After Provision for Loan Losses....................................... 25,855 21,856 18,805
--------- --------- ---------
Noninterest Income
Service Charges on Deposit Accounts....................................................... 3,472 3,035 2,718
Other Service Charges..................................................................... 859 904 575
Trust Service Fees........................................................................ 1,256 1,161 1,087
Net Investment Securities Gains (Losses).................................................. (111) 8 33
Data Processing Service Fees.............................................................. 441 255 237
Other Operating Income.................................................................... 601 409 382
--------- --------- ---------
Total Noninterest Income.......................................................... 6,518 5,772 5,032
--------- --------- ---------
Noninterest Expense
Salaries and Employee Benefits (Note 11).................................................. 9,563 8,015 7,798
Net Occupancy Expense..................................................................... 1,069 961 820
Equipment Expense......................................................................... 2,028 1,648 1,366
Other Real Estate (Income) Expense, Net................................................... 107 75 (328)
Other Noninterest Expense (Note 13)....................................................... 6,210 5,808 4,857
--------- --------- ---------
Total Noninterest Expense......................................................... 18,977 16,507 14,513
--------- --------- ---------
Income Before Income Tax Expense.............................................................. 13,396 11,121 9,324
Income Tax Expense (Note 8)................................................................... 4,671 3,936 3,345
--------- --------- ---------
Income Before Cumulative Effect of Change in Accounting Principle............................. 8,725 7,185 5,979
Cumulative Effect of Change in Accounting Principle (Note 8).................................. -- -- 32
--------- --------- ---------
Net Income.................................................................................... $ 8,725 $ 7,185 $ 6,011
--------- --------- ---------
--------- --------- ---------
Primary Earnings Per Common Share
Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.19 $ 1.30
Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01
--------- --------- ---------
Net Income................................................................................ $ 1.40 $ 1.19 $ 1.31
--------- --------- ---------
--------- --------- ---------
Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,218 5,791 4,186
--------- --------- ---------
Fully Diluted Earnings Per Common Share
Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.16 $ 1.15
Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01
--------- --------- ---------
Net Income................................................................................ $ 1.40 $ 1.16 $ 1.16
--------- --------- ---------
--------- --------- ---------
Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,227 6,035 5,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
CLASS A ON
CONVERTIBLE VOTING SECURITIES TOTAL
PREFERRED COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS FOR SALE EQUITY
----------- ------- -------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992.............. $ 74 $3,489 $ 20,063 $ 10,692 $ -- $34,318
Stock Split Effected as a 20.00% Stock
Dividend............................... -- 697 -- (700) -- (3)
Preferred Stock Dividends............... -- -- -- (522) -- (522)
Change in Unrealized Gain (Loss) on
Securities Available for Sale.......... -- -- -- -- 179 179
Net Income.............................. -- -- -- 6,011 -- 6,011
----- ------- -------- ---------- ------ ------------
Balance, December 31, 1993.............. 74 4,186 20,063 15,481 179 39,983
Conversion of 74,172 shares of Preferred
Stock into 979,009 shares of Class A
Voting Common Stock (Note 9)........... (74) 979 (905) -- -- --
Redemption of 356 shares of Preferred
Stock at $104.00 per share (Note 9).... -- -- (36) (1) -- (37)
Change in Unrealized Gain (Loss) on
Securities Available for Sale.......... -- -- -- -- (766) (766)
Sale of 1,028,291 shares of Class A
Voting Common Stock.................... -- 1,028 10,082 -- -- 11,110
Preferred Stock Dividends............... -- -- -- (258) -- (258)
Class A Voting Common Stock Cash
Dividends.............................. -- -- -- (1,486) -- (1,486)
Net Income.............................. -- -- -- 7,185 -- 7,185
----- ------- -------- ---------- ------ ------------
Balance, December 31, 1994.............. -- 6,193 29,204 20,921 (587) 55,731
Exercise of stock options, 3,162 shares
of Class A Voting Common Stock......... -- 3 35 -- -- 38
Change in Unrealized Gain (Loss) on
Securities Available for Sale.......... -- -- -- -- 704 704
Class A Voting Common Stock Cash
Dividends.............................. -- -- -- (2,478) -- (2,478)
Net Income.............................. -- -- -- 8,725 -- 8,725
----- ------- -------- ---------- ------ ------------
Balance, December 31, 1995.............. $ -- $6,196 $ 29,239 $ 27,168 $ 117 $62,720
----- ------- -------- ---------- ------ ------------
----- ------- -------- ---------- ------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income................................................................................ $ 8,725 $ 7,185 $ 6,011
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net......................................... 2,013 2,089 1,381
Provision for Loan Losses............................................................. 1,685 1,085 392
Provision for Estimated Losses on Other Real Estate and Other Assets.................. 119 112 358
Gain on Sale of Securities Held for Sale.............................................. -- -- (33)
(Gain) Loss on Sale of Securities Available for Sale.................................. 111 (8) --
(Gain) Loss on Sale of Other Assets................................................... (3) 4 (10)
(Gain) Loss on Sale of Other Real Estate.............................................. 3 2 (507)
(Gain) Loss on Sale of Fixed Assets................................................... 14 8 (3)
(Increase) Decrease in Deferred Income Taxes.......................................... (336) 60 430
Increase in Accrued Interest Receivable and Other Assets.............................. (159) (1,304) (867)
Increase in Accounts Payable and Accrued Liabilities.................................. 613 135 9
--------- --------- ---------
Net Cash Provided by Operating Activities..................................................... 12,785 9,368 7,161
--------- --------- ---------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Held for Sale........................................... -- -- 5,629
Proceeds from Sales of Securities Available for Sale...................................... 12,610 12,404 --
Proceeds from Maturing Securities Available for Sale...................................... 45,000 51,600 --
Proceeds from Maturing Securities Held to Maturity........................................ 17,460 952 63,228
Purchases of Securities Available for Sale................................................ (64,961) (34,728) --
Purchases of Securities Held to Maturity.................................................. (14,390) (31,442) (96,068)
Proceeds from Sale of Loans............................................................... 5,731 1,119 105
Purchases of Loans........................................................................ (1,159) (2,151) (5,671)
Loan Originations and Advances............................................................ (74,068) (50,619) (33,178)
Recoveries of Charged-Off Loans........................................................... 536 226 360
Proceeds from Sale of Fixed Assets........................................................ 2 -- 8
Proceeds from Sale of Other Assets........................................................ 25 116 60
Proceeds from Sale of Other Real Estate................................................... 1,409 970 2,407
Purchases of Premises and Equipment....................................................... (3,597) (1,862) (6,027)
Proceeds from the Acquisition of Two Branch Bank Locations, Net of Cash Acquired.......... 30,606 -- --
--------- --------- ---------
Net Cash Used in Investing Activities......................................................... (44,796) (53,415) (69,147)
--------- --------- ---------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Money Market Checking and Savings Accounts.... (24,518) 17,600 45,621
Net Increase in Time Deposits............................................................. 52,421 24,987 8,884
Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Repurchase
Agreements............................................................................... (392) 1,149 --
Net Decrease in Short-Term Borrowings..................................................... (429) (60) (319)
Repayment of Note Payable................................................................. -- (1,150) (1,450)
Proceeds from Sale of Class A Voting Common Stock......................................... 38 11,110 --
Cash Dividends Paid on Fractional Common Shares........................................... -- -- (3)
Cash Dividends Paid on Preferred Stock.................................................... -- (258) (522)
Cash Dividends Paid on Class A Voting Common Stock........................................ (2,353) (991) --
Redemption of Preferred Stock............................................................. -- (37) --
--------- --------- ---------
Net Cash Provided by Financing Activities..................................................... 24,767 52,350 52,211
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents.............................................. (7,244) 8,303 (9,775)
Cash and Cash Equivalents at Beginning of Year................................................ 41,777 33,474 43,249
--------- --------- ---------
Cash and Cash Equivalents at End of Year...................................................... $ 34,533 $ 41,777 $ 33,474
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information
Interest Paid............................................................................. $ 17,248 $ 11,518 $ 10,562
Income Taxes Paid......................................................................... 4,752 3,799 2,986
Supplemental Schedule of Noncash Investing and Financing Activities
Cost of Securities Transferred to Available for Sale...................................... 1,455 N/A 85,181
Foreclosure and Repossession in Partial Satisfaction of Loans Receivable.................. 679 977 451
Loans Originated to Facilitate Sale of Other Real Estate.................................. N/A N/A N/A
Stock Split Effected as a Stock Dividend (Note 10)........................................ N/A N/A 697
The Company Acquired Two Branch Bank Locations, One in Rio Grande City, Texas and the
other in Roma, Texas during August 1995. Assets Acquired are as follows:
Fair Value of Assets Acquired......................................................... 75,850 N/A N/A
Cash Paid for the Two Bank Branch Locations........................................... 4,250 N/A N/A
Liabilities Assumed................................................................... 80,100 N/A N/A
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Texas Regional Bancshares, Inc.
(the "Parent" or "Corporation") and subsidiary (collectively, the "Company")
conform to generally accepted accounting principles and to prevailing practices
within the banking industry. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the more significant accounting policies follows:
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of Texas Regional
Bancshares, Inc. (the "Corporation") and its wholly owned subsidiary, Texas
State Bank (the "Bank"), collectively (the "Company"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments in the subsidiary are accounted for on the equity method in the
Parent's financial statements.
TRUST ASSETS
Assets held by the trust department of the subsidiary bank in fiduciary or
agency capacities are not assets of Texas Regional Bancshares, Inc. or its
subsidiary and are not included in the consolidated balance sheets.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: Held to Maturity,
Trading or Available for Sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as Held to Maturity and measured at amortized cost in the balance sheet only if
management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as Trading and measured at fair
value in the balance sheet with unrealized holding gains and losses included in
net income. Investments not classified as Held to Maturity nor Trading are
classified as Available for Sale and measured at fair value in the balance sheet
with unrealized holding gains and losses reported in a separate component of
shareholders' equity until realized.
Effective December 31, 1993, the Company adopted Statement 115, which caused
various investment securities to be reclassified from Held to Maturity to
Available for Sale. All treasury and agency bonds with a maturity of two years
or less from December 31, 1993, all floating rate bonds and two small equity
securities were reclassified to Available for Sale. As a result, at December 31,
1993 the Company recorded an increase in shareholders' equity of $179,000, as
unrealized holding gains. Future purchases of investment securities will be
classified as Available for Sale or Held to Maturity at time of purchase as
determined by the investment committee. At December 31, 1995 and 1994 no
securities were classified as Trading.
On October 18, 1995, the FASB decided to grant to all entities a one-time
opportunity during the period from approximately mid November to December 31,
1995, to reconsider their intent and ability to hold securities accounted for as
Held to Maturity under Statement 115. This allowed entities to transfer
F-7
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
securities from the Held to Maturity category to Available for Sale or trading
without calling into question their intent to hold other debt securities to
maturity. On December 31, 1995, the Bank transferred approximately $1.5 million
in Held to Maturity securities to the Available for Sale category resulting in
no change to stock equity per share. As a result of this transfer, all other
securities are classified as Available for Sale.
LOANS
Loans are stated at the principal amount outstanding, net of unearned
discount. Interest income on discounted loans is recognized on the
sum-of-the-months-digits method which approximates the interest method, while
interest income on other loans is calculated using applicable interest rates and
the daily amount of outstanding principal.
LOAN FEES
Loan origination fees and certain direct loan origination costs are deferred
and recognized over the lives of the related loans as an adjustment of the loan
yields.
NONPERFORMING ASSETS
Nonperforming assets are comprised of (a) loans for which the accrual of
interest has been discontinued, (b) loans for which the interest rate has been
reduced to less than originally contracted rates due to a serious weakening in
the borrower's financial condition and (c) other assets which consist of real
estate and other property which have been acquired in lieu of loan balances due
and which are awaiting disposition.
A loan is generally placed on nonaccrual status when principal or interest
is past due 90 days or more, and the loan is not both well-secured and in the
process of collection. A loan is also placed on nonaccrual status immediately
if, in the opinion of management, full collection of principal or interest is
unlikely. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectibility of principal.
Real estate and other assets acquired in lieu of loan balances due are
recorded at the lesser of cost basis or estimated fair value less estimated
closing costs. Valuation losses are charged to the allowance for loan losses on
foreclosure. Write-downs of real estate and other assets are charged to
noninterest expense if the estimated fair value subsequently declines below its
carrying value. Realized gains and losses on sales of other real estate are
included in noninterest expense.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for
Impairment of a Loan" and the amendment thereof, Statement of Financial
Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for
Impairment of a Loan-Income Recognition and Disclosures". Under Statement 114, a
loan is considered impaired when, based upon current information and events, it
is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Statement 114 requires that an
impaired loan be valued utilizing (i) the present value of expected future cash
flows discounted at the effective interest rate of the loan, (ii) the fair value
of the underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured
F-8
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
subsequent to the adoption of Statement 114 are required to be reported as
impaired in the year of restructuring. Thereafter, such loans can be removed
from the impaired loan disclosure if the loans were paying a market rate of
interest at the time of restructuring and are performing in accordance with
their renegotiated terms.
For loans covered by this statement, the Company makes an assessment for
impairment when and while such loans are on nonaccrual or when the loan has been
restructured. When a loan with unique risk characteristics has been identified
as being impaired, the amount of impairment will be measured by the Company
using discounted cash flows, except when it is determined that the sole
(remaining) source of repayment for the loan is the operation or liquidation of
the underlying collateral. In such case, the current fair value of the
collateral, reduced by costs to sell, will be used in place of discounted cash
flows. At the time a loan is placed on nonaccrual status, interest previously
recognized but uncollected is reversed and charged against current income.
Subsequent interest payments received on nonaccrual loans are either applied
against principal or reported as income, depending upon management's assessment
of the ultimate collectibility of principal.
The adoption of Statement 114 and Statement 118 did not have a material
effect on the Company's financial position or results of operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations
(provision for loan losses). Actual loan losses or recoveries are charged or
credited directly to this allowance. The provision for loan losses is based on
management's estimate of the amount required to maintain an allowance adequate
to absorb potential losses in the loan portfolio. While management uses
available information to recognize losses on loans, there can be no assurance
that future additions to the allowance will not be necessary.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, net of accumulated depreciation.
Depreciable assets are depreciated over their estimated useful lives. For
financial reporting, depreciation is computed using the straight-line method; in
computing federal income tax, both the straight-line and accelerated methods are
used. Maintenance and repairs which do not extend the life of premises and
equipment are charged to noninterest expense.
INCOME TAX
The Company files a consolidated federal income tax return. The Company
establishes a deferred tax asset or liability for the recognition of future
deductions or taxable amounts and operating loss and tax credit carry-forwards.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
EARNINGS PER SHARE COMPUTATIONS
Primary earnings per share are computed by dividing net income less
preferred stock dividends, if any, by the weighted average number of common
stock and common stock equivalents outstanding during the period, retroactively
adjusted for stock splits effected as a stock dividend. The convertible
preferred stock did not satisfy the criteria for consideration as common stock
equivalents.
Fully diluted earnings per share is computed as if all convertible preferred
stock had been converted to common stock.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
F-9
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) RESERVE REQUIREMENTS
Cash of approximately $16.2 million and $14.6 million at December 31, 1995
and 1994, respectively, was maintained to satisfy regulatory reserve
requirements.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value of investments in Securities
Available for Sale at December 31, 1995 and December 31, 1994 follows:
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 6,000 $ 19 $ 7 $ 6,012
U.S. Government Agency Securities....... 55,502 205 39 55,668
Other Securities........................ 1,471 2 3 1,470
--------- ----- --- ---------
Total............................... $62,973 $ 226 $49 $63,150
--------- ----- --- ---------
--------- ----- --- ---------
</TABLE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $27,485 $ 1 $354 $27,132
U.S. Government Agency Securities....... 27,707 1 541 27,167
Mortgage-Backed Security................ 500 -- 2 498
Other Securities........................ 17 -- -- 17
--------- ----- ----- ---------
Total............................... $55,709 $ 2 $897 $54,814
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
The amortized cost and estimated market value of investments in Securities
Held to Maturity at December 31, 1995 and December 31, 1994 follows:
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $28,787 $104 $115 $28,776
U.S. Government Agencies Securities..... 34,230 245 50 34,425
Obligations of States and Political
Subdivisions Securities................ 5,474 287 -- 5,761
--------- ----- ----- ---------
Total............................... $68,491 $636 $165 $68,962
--------- ----- ----- ---------
--------- ----- ----- ---------
</TABLE>
F-10
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
SECURITIES HELD TO MATURITY
<TABLE>
<CAPTION>
1994
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury Securities................ $29,270 $-- $ 1,244 $28,026
U.S. Government Agencies Securities..... 35,973 5 1,160 34,818
Obligations of States and Political
Subdivisions Securities................ 5,736 126 104 5,758
Other Securities........................ 1,035 -- 11 1,024
--------- ----- ---------- ---------
Total............................... $72,014 $ 131 $ 2,519 $69,626
--------- ----- ---------- ---------
--------- ----- ---------- ---------
</TABLE>
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES
--------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due in One Year or Less............................... $ 24,183 $ 24,218 $ 25,832 $ 25,751
Due After One Year Through Five Years................. 37,319 37,462 39,209 39,599
Due After Five Years Through Ten Years................ 75 74 3,253 3,394
Due After Ten Years................................... 1,396 1,396 197 218
----------- ----------- ----------- -----------
Total............................................. $ 62,973 $ 63,150 $ 68,491 $ 68,962
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
Proceeds from sales of Securities Available for Sale for the year ended
December 31, 1995 were $12.6 million. Gross losses of $111,000 and no gross
gains were realized on sales for the year ended December 31, 1995. Proceeds from
sales of Securities Available for Sale for the year ended December 31, 1994 were
$12.4 million. Cost was determined on a specific identification basis for
determining realized gain or loss.
Net unrealized holding gain of $117,000 and net unrealized holding loss of
$587,000 at December 31, 1995 and 1994, respectively, on Securities Available
for Sale are included as a separate component of shareholders' equity for each
respective year.
There were no sales from the Held to Maturity category in 1995 and 1994.
Investment securities having a carrying value of $99.6 million at December
31, 1995 and $99.8 million at December 31, 1994 are pledged to secure public
funds and trust assets on deposit and for other purposes required or permitted
by law.
F-11
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of loans at December 31, 1995 and December 31, 1994 follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Commercial.................................................................... $ 146,461 $ 101,866
Agricultural.................................................................. 25,097 17,199
Real Estate
Construction.............................................................. 29,967 18,809
Commercial Mortgage....................................................... 129,953 113,677
Agricultural Mortgage..................................................... 17,057 10,263
1-4 Family Mortgage....................................................... 59,052 47,425
Consumer...................................................................... 43,267 30,700
----------- -----------
Total................................................................. $ 450,854 $ 339,939
----------- -----------
----------- -----------
</TABLE>
In the ordinary course of business, the Company's subsidiary bank made loans
to its officers and directors, including entities related to those individuals.
These loans are made on substantially the same terms and conditions as those
prevailing at the time for comparable transactions with other persons and do not
involve more than the normal risk of collectibility or present other unfavorable
features. An analysis of these loans for the years ended December 31, 1995 and
December 31, 1994 follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Balance at Beginning of Year...................................................... $ 8,174 $ 14,644
Additions......................................................................... 1,613 4,071
Reductions
Collections................................................................... 3,083 4,702
Changes to Unrelated Status................................................... 2,730 5,839
Charge-Offs................................................................... -- --
--------- ---------
Balance at End of Year............................................................ $ 3,974 $ 8,174
--------- ---------
--------- ---------
</TABLE>
A summary of the transactions in the allowance for loan losses for years
ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at Beginning of Year............................................. $ 3,511 $ 3,435 $ 2,929
Balance of Purchased Branches............................................ 450 -- --
Provision Charged to Expense............................................. 1,685 1,085 392
Recovery of Amounts Previously Charged to Allowance...................... 536 226 360
Losses Charged to Allowance.............................................. (1,640) (1,235) (246)
--------- --------- ---------
Balance at End of Year................................................... $ 4,542 $ 3,511 $ 3,435
--------- --------- ---------
--------- --------- ---------
</TABLE>
Nonaccrual loans and renegotiated loans were $2.1 million, $2.4 million and
$2.4 million at December 31, 1995, 1994 and 1993, respectively. If interest on
these nonaccrual and renegotiated loans had been accrued at the original
contractual rates, interest income would have been increased by approximately
$247,000, $476,000 and $149,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
F-12
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
At December 31, 1995, the Company had a $2.0 million recorded investment in
impaired loans for which there was a related allowance for loan losses of
$172,000. At December 31, 1995, there were no impaired loans for which there was
no related allowance for loan losses. The average level of impaired loans during
the year ended December 31, 1995 was $1.9 million. The Company recorded interest
income of $91,000 on its impaired loans during the year ended December 31, 1995.
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation and
amortization as of December 31, 1995 and December 31, 1994 follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Land.............................................................. $ 4,526 $ 3,504
Buildings and Leasehold Improvements.............................. 2-40 years 12,440 10,663
Furniture and Equipment........................................... 3-10 years 9,581 8,007
--------- ---------
Subtotal.......................................................... 26,547 22,174
Less Accumulated Depreciation and Amortization.................... (8,173) (6,906)
--------- ---------
Total......................................................... $ 18,374 $ 15,268
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1995,
1994 and 1993 was approximately $1.6 million, $1.3 million and $1.1 million,
respectively.
(6) TIME DEPOSITS
Time deposits of $100,000 or more totaled $126.4 million and $91.1 million
at December 31, 1995 and 1994, respectively. Interest expense for the years
ended December 31, 1995, 1994 and 1993 on time deposits of $100,000 or more was
approximately $5.7 million, $3.5 million and $2.8 million, respectively.
(7) FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
The following table summarizes selected information regarding federal funds
purchased and securities sold under repurchase agreements as of and for the
years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at End of Year................................................... $ 758 $ 1,149 $ --
Rate on Balance at End of Year........................................... 3.60% 4.07% N/A
Average Daily Balance.................................................... $ 1,093 $ 652 $ 1
Average Interest Rate.................................................... 4.20% 3.57% 4.94%
Maximum Month-End Balance................................................ $ 1,349 $ 2,550 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Securities sold under agreements to repurchase are comprised of customer
deposit agreements with maturities ranging from overnight to six months. These
obligations are not federally insured but are collateralized by a security
interest in various investment securities. These pledged securities are
segregated and maintained by a third party bank.
F-13
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAX
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current Income Tax Expense
Federal.............................................................. $ 4,790 $ 3,667 $ 3,145
State................................................................ 217 207 149
--------- --------- ---------
Total Current Income Tax Expense................................. 5,007 3,874 3,294
--------- --------- ---------
Deferred Income Tax Expense (Benefit)
Federal.............................................................. (320) 57 29
State................................................................ (16) 5 22
--------- --------- ---------
Total Deferred Income Tax Expense (Benefit)...................... (336) 62 51
--------- --------- ---------
Total Income Tax Expense......................................... $ 4,671 $ 3,936 $ 3,345
--------- --------- ---------
--------- --------- ---------
</TABLE>
Following is a reconciliation between the amount of reported income tax
expense for the years ended December 31, 1995, 1994 and 1993 and the amount
computed by multiplying the income before tax by the federal statutory tax rate:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate............................. $4,689 35% $3,781 34% $3,170 34%
(Reductions) Additions
State Earned Surplus Tax, Net of Federal
Income Tax Effect............................ 130 1 140 1 113 2
Tax-Exempt Interest........................... (152 ) (1) (89 ) (1) (100 ) (1)
Other -- Net.................................. 4 -- 104 1 162 1
------ ---- ------ ---- ------ ----
Total Income Tax Expense.................. $4,671 35% $3,936 35% $3,345 36%
------ ---- ------ ---- ------ ----
------ ---- ------ ---- ------ ----
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes",
which requires establishment of deferred tax liabilities and assets, as
appropriate, for the recognition of future deductions or taxable amounts caused
when the tax basis of an asset or liability differs from that reported in the
financial statements. The cumulative effect of the accounting change on years
prior to January 1, 1993, of $32,000 is included for the year ended December 31,
1993 as an increase to income.
F-14
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAX (CONTINUED)
The net deferred tax liability included with accounts payable and accrued
expenses in the accompanying consolidated balance sheets is comprised of the
following deferred tax assets and liabilities as of December 31, 1995 and
December 31, 1994.
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Deferred Tax Liability
Premises and Equipment................................................................... $ 1,071 $ 925
Intangibles.............................................................................. 392 417
Unrealized Gain on Securities Available for Sale......................................... 60 --
Other.................................................................................... 135 135
--------- ---------
Total Deferred Tax Liability......................................................... 1,658 1,477
--------- ---------
Deferred Tax Asset
Allowance for Loan Losses................................................................ 1,034 637
Other Real Estate........................................................................ 237 227
Unrealized Loss on Securities Available for Sale......................................... -- 302
Other.................................................................................... 208 158
--------- ---------
Total Deferred Tax Assets Before Valuation Allowance......................................... 1,479 1,324
Valuation Allowance.......................................................................... (36) (36)
--------- ---------
Total Deferred Tax Assets less Valuation Allowance........................................... 1,443 1,288
--------- ---------
Net Deferred Tax Liability........................................................... $ 215 $ 189
--------- ---------
--------- ---------
</TABLE>
For the years ended December 31, 1995 and December 31, 1994, the deferred
tax liability results primarily from the use of accelerated methods of
depreciation of equipment for tax purposes and the write-off of core deposits
for book purposes. The deferred tax asset results from differences in the bad
debts written-off for financial purposes and the amount allowed under tax law,
and a difference in other real estate basis due to write-downs for financial
statement purposes for both years ended December 31, 1995 and 1994,
respectively.
The valuation allowance was established to reduce the amount that will more
likely than not be realized due to increased recoveries in allowance for loan
losses.
F-15
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) PREFERRED STOCK
The Corporation has 10,000,000 authorized shares of $1 par value Preferred
Stock. The Articles of Incorporation of the Corporation grant discretion to the
Board of Directors to establish series of Preferred Stock with such rights,
preferences and limitations as may be determined by resolution of the Board.
Series of Preferred Stock outstanding at December 31, 1995, 1994 and 1993 were
as follows:
<TABLE>
<CAPTION>
FIRST SERIES SERIES TOTAL
SERIES 1990 1991 PREFERRED
------ ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance December 31, 1992............... $ 10 $ 1 $ 63 $ 74
------ ------ ------ ---------
Balance December 31, 1993............... 10 1 63 74
Conversion of 74,172 shares of Preferred
Stock into 979,009 shares of Class A
Voting Common Stock and redemption of
356 shares of Preferred Stock for
$37,000 cash........................... (10) (1) (63) (74)
------ ------ ------ ---------
Balance December 31, 1994............... $-- $-- $-- $--
------ ------ ------ ---------
Balance December 31, 1995............... $-- $-- $-- $--
------ ------ ------ ---------
------ ------ ------ ---------
</TABLE>
The Corporation's First Series Convertible Preferred Stock and Series 1990
Convertible Preferred Stock were issued in 1989 and 1990, respectively, for cash
equal to the stated value of $100.00 per share. The Series 1991 Convertible
Preferred Stock was issued in 1991 in connection with the Company's acquisition
of Mid Valley Bank of Weslaco, Texas. The shares of First Series, Series 1990
and Series 1991 Preferred Stock ranked on a parity with each other, and superior
to the Class A Voting Common Stock of the Corporation, as to dividends and
liquidation preference. Shares of each series of Preferred Stock were
convertible into shares of Class A Voting Common Stock of the Corporation.
On March 21, 1994, the Board of Directors adopted a resolution calling for
the redemption on April 22, 1994, of all issued and outstanding Preferred Stock
at a redemption price of $104.00 per share plus all accrued and unpaid dividends
through the date fixed for redemption. At that time, the Preferred Stock was
convertible into 13.2 shares of Class A Voting Common Stock for each share of
Preferred Stock held. Effective April 22, 1994, 356 shares of Preferred Stock
were redeemed for cash and 74,172 shares of Preferred Stock were converted into
979,009 shares of Class A Voting Common Stock. As a result, as of December 31,
1994, there were no shares of Preferred Stock outstanding.
Pursuant to the Texas Business Corporation Act, the Board of Directors of
the Corporation has the authority to eliminate any series of shares which the
Board has authority to establish, if there are no shares outstanding or held as
treasury shares. Upon adoption of a resolution eliminating the series and all
references to the series, the shares resume status as authorized but unissued
shares of Preferred Stock for which the Board has the authority to determine the
designations, preferences, limitations and relative rights.
On February 14, 1995, the Board of Directors of the Corporation approved a
resolution to eliminate the series of shares known as the First Series
Convertible Preferred, the Series 1990 Convertible Preferred and the Series 1991
Convertible Preferred shares of the Corporation, and further provided for the
elimination of all references thereto from the Articles of Incorporation. As a
result of the elimination of the series of Preferred shares, the shares resume
status as authorized but unissued shares of Preferred Stock for which the Board
has the authority to determine the designations, preferences, limitations and
relative rights.
F-16
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(10) COMMON STOCK
On March 16, 1994, the Corporation completed a public offering of 1.2
million shares of the Corporation's Class A Voting Common Stock at an offering
price of $12.00 per share, and contemporaneously listed the Common Stock for
trading in the NASDAQ Stock Market's National Market System under the trading
symbol "TRBS." In the offering, the Corporation sold one million newly issued
shares and an aggregate of 200,000 shares were sold on behalf of certain selling
shareholders of the Corporation. As a part of the offering, the Corporation
granted the Underwriters an option, exercisable within 30 days following the
date of the Underwriting Agreement, to purchase up to 180,000 additional shares
of Corporation Class A Voting Common Stock solely to cover over-allotments. On
April 15, 1994, the Underwriters exercised this option and purchased 28,291
additional shares of Class A Voting Common Stock.
On May 11, 1993, the Board of Directors approved a 20% stock split effected
as a stock dividend to Class A Voting Common Stock shareholders of record on May
11, 1993, with any fractional shares resulting from such stock split to be paid
in cash based on a value of $10.00 per share.
(11) EMPLOYEE BENEFITS
In 1984, the Company adopted a target benefit pension plan covering
substantially all of their employees. In December, 1990, the Company restated
its target benefit pension plan as an Employee Stock Ownership Plan (with
section 401(k) provisions) (the "KSOP"). The Company received a favorable
determination letter on July 29, 1993, in which the Internal Revenue Service
stated that the plan, as designed, was in compliance with the applicable
requirements of the Internal Revenue Code. Employer contributions to the KSOP
are discretionary, and as such, determined at the sole discretion of the Board
of Directors. The KSOP covers employees who have completed twelve consecutive
months of credited service, as defined in the plan, and attained age 21. A
participant's account balance will be fully vested after six years of credited
service. The purpose of the restatement is to permit employees to acquire an
equity interest in the Company through the KSOP's purchase of common stock.
Pension expense, which includes Employer matching as discussed below, for the
years ended December 31, 1995, 1994 and 1993 was $526,000, $462,000, and
$570,000, respectively.
A Participant of the KSOP may authorize the Company to contribute to the
Trust on his behalf Salary Reduction Contributions. Such Salary Reduction
Contributions shall be stated as a whole percentage and shall not be less than
1% or more than 15% of the Participant's compensation. The total amount of
Salary Reduction Contributions for any Plan Year shall not exceed $7,000,
multiplied by any cost of living adjustment factor prescribed by the Secretary
of the Treasury under Section 415(d) of the Code. Such contributions are matched
at the discretion of the Board of Directors up to a maximum of 100% of the
Participant's Salary Reduction Contribution and shall be based on a
Participant's Salary Reduction Contribution of up to 4% of such Participant's
compensation. The Participant's and Employer matching contributions are vested
immediately.
In March 1986, the shareholders of the Company approved three separate stock
plans involving the Class A Voting Common Stock, providing for the issuance of
up to 253,434 shares to certain key employees for their purchase and 10,000
shares as part of a bonus plan for employees of the Company. One option plan
provides for sale of up to 126,717 shares to the chief executive officer at a
price to be determined by a committee of directors on the date of grant; another
provides for sale of up to 126,717 shares at fair market value at the date the
options are granted to key employees of the Company, excluding the chief
executive officer. The third plan provides for up to 10,000 shares to be
distributed as employee bonuses without payment of consideration by the
employees. The third plan was terminated effective January 9, 1996.
F-17
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) EMPLOYEE BENEFITS (CONTINUED)
On May 10, 1994, options to acquire up to 126,717 Class A Voting Common
shares at $12.00 per share were granted to Glen E. Roney, Chief Executive
Officer and a member of the Board of Directors of Texas Regional, pursuant to
the Texas Regional Bancshares, Inc. 1985 Non-Statutory Stock Option Plan
exercisable commencing May 10, 1995. In addition, options to acquire up to
49,433 Class A Voting Common shares at $12.00 per share were granted to certain
key employees of the Company pursuant to the Texas Regional Bancshares, Inc.
Incentive Stock Option Plan exercisable commencing May 10, 1995 including
options to acquire 8,333 shares granted to Glen E. Roney. The Incentive Stock
Option Plan expired in September 1995. Any options outstanding under this Plan,
at the time of its termination, remain in effect until the options shall have
been exercised or the expiration date of the option, whichever is earlier. The
options to acquire 49,433 Class A Voting Common Stock were awarded May 10, 1994,
and expire on May 10, 2000. During 1995, options to acquire 3,162 Class A Voting
Common Stock were exercised at a price of $12.00 per share.
Effective December 12, 1995, the Company adopted the 1995 Nonstatutory Stock
Option Plan of Texas Regional Bancshares, Inc. (the "Plan"), which provides for
granting to key employees of the Company options to acquire up to an aggregate
maximum of 90,000 shares of the Class A Voting Common Stock of the Corporation,
subject to adjustment for stock dividends, stock splits and upon the occurrence
of other events as specified in the Plan. The Board of Directors has recommended
the Plan to the shareholders of the Corporation and has authorized and directed
the officers of the Corporation to submit the Plan to the shareholders for
approval at the next regular or special meeting of the shareholders of the
Corporation. In addition, options to acquire up to 90,000 Class A Voting Common
shares at $17.25 per share were granted to certain key employees of the Company
pursuant to the Plan including options to acquire 65,000 shares granted to Glen
E. Roney. Options to purchase one-fourth of the shares as granted shall be
exercisable commencing on the later of July 1, 1996, or the date of approval of
the Plan by the shareholders of the Corporation, and (provided that the Plan has
received the approval of the shareholders of the Corporation) options to
purchase an additional one-fourth of the shares as granted pursuant to these
resolutions shall be exercisable beginning July 1 of each year thereafter, and
in each case options to purchase shares granted pursuant to these resolutions
shall thereafter be exercisable at any time prior to July 1, 2002, subject to
other provisions applicable to such options as specified in the Plan.
Effective as of December 14, 1993, the Company adopted a Deferred
Compensation Plan for the benefit of Glen E. Roney. The Deferred Compensation
Plan provides for a retirement benefit payable to Mr. Roney (or his designated
beneficiary or his estate if Mr. Roney dies prior to payment of the full amount
of deferred compensation) of $100,000 per year commencing October 29, 2002, and
continuing annually thereafter for fourteen years. If Mr. Roney dies prior to
commencement of the retirement benefit, payments would commence immediately and
be paid to his designated beneficiary or his estate. The Company also adopted
the Trust Under Glen E. Roney Deferred Compensation Plan, in the form prescribed
by applicable regulations adopted by the Internal Revenue Service for
nonqualified deferred compensation plans. Among other things, the Plan and Trust
provide for an initial deposit into the Trust by the Company and subsequent
deposits in the discretion of the Board of Directors, and further provide for
full funding of the amount necessary to discharge the retirement benefit in the
event of a change of control, as that term is defined in the Trust. The Company
has incurred Deferred Compensation expense and has funded into the Trust
$87,000, $87,000 and $116,000 respectively, for the years ended December 31,
1995, 1994 and 1993, respectively.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included on the consolidated balance
F-18
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
sheets. These transactions are referred to as "off-balance sheet commitments."
The Company enters into these transactions to meet the financing needs of its
customers. These transactions include commitments to extend credit and letters
of credit which involve elements of credit risk in excess of the amounts
recognized in the consolidated balance sheets. The Company attempts to minimize
its exposure to loss under these commitments by subjecting them to the same
credit approval and monitoring procedures as its other credit facilities.
The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent on customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for possible loan losses.
Letters of credit are written for conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.
At December 31, 1995, the Company had outstanding commitments to extend
credit of approximately $79.0 million which included standby letters of credit
of approximately $2.6 million. Management does not anticipate any losses as a
result of these commitments.
Future minimum lease payments on operating leases as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
OFFICE OFFICE
SPACE EQUIPMENT TOTAL
------ --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1996.................................... $ 22 $16 $ 38
1997.................................... 22 16 38
1998.................................... 22 17 39
1999.................................... 20 17 37
2000.................................... 15 17 32
------ --- -----
Total............................... $101 $83 $ 184
------ --- -----
------ --- -----
</TABLE>
The Company is a defendant in various legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the financial position of the Company will not be materially affected by the
final outcome of these legal proceedings.
F-19
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1995, 1994 and
1993 consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Advertising and Public Relations................................................... $ 772 $ 693 $ 394
Amortization of Intangibles........................................................ 323 224 235
Data Processing and Check Clearing................................................. 491 360 304
Director Fees...................................................................... 284 267 291
Franchise Tax...................................................................... 198 159 145
Insurance.......................................................................... 228 314 320
FDIC Insurance..................................................................... 540 973 831
Legal and Professional............................................................. 870 1,006 704
Stationery and Supplies............................................................ 658 538 477
Telephone.......................................................................... 250 202 195
Other Losses....................................................................... 624 177 117
Other.............................................................................. 972 895 844
--------- --------- ---------
Total.......................................................................... $ 6,210 $ 5,808 $ 4,857
--------- --------- ---------
--------- --------- ---------
</TABLE>
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Assets
Cash in Subsidiary Bank................................................................ $ 99 $ 172
Time Deposits in Subsidiary Bank....................................................... 4,979 9,225
--------- ---------
Total Cash and Cash Equivalents.................................................... 5,078 9,397
Investments in Consolidated Subsidiary................................................. 58,114 46,701
Furniture and Equipment................................................................ 80 4
Other Assets........................................................................... 103 158
--------- ---------
Total Assets....................................................................... $ 63,375 $ 56,260
--------- ---------
--------- ---------
Liabilities
Accounts Payable and Accrued Liabilities............................................... $ 35 $ 34
Dividends Payable...................................................................... 620 495
--------- ---------
Total Liabilities.................................................................. 655 529
Shareholders' Equity....................................................................... 62,720 55,731
--------- ---------
Total Liabilities and Shareholders' Equity......................................... $ 63,375 $ 56,260
--------- ---------
--------- ---------
</TABLE>
F-20
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income
Dividends Received from Subsidiary Bank........................................ $ -- $ 456 $ 2,382
Interest Income................................................................ 338 330 4
--------- --------- ---------
Total Income............................................................... 338 786 2,386
--------- --------- ---------
Expense
Interest on Note Payable....................................................... -- 16 112
Salaries and Employee Benefits................................................. -- 7 1
Occupancy Expense.............................................................. 4 4 4
Director Fees.................................................................. 119 83 72
Equipment Expense.............................................................. 3 3 3
Franchise Tax.................................................................. 80 57 53
Legal and Professional......................................................... 24 30 32
Other.......................................................................... 77 90 42
--------- --------- ---------
Total Expense.............................................................. 307 290 319
--------- --------- ---------
Income Before Income Tax Benefit and Equity in Undistributed Net Income of
Subsidiary........................................................................ 31 496 2,067
Income Tax (Benefit) Expense....................................................... 15 7 (123)
--------- --------- ---------
Income Before Equity in Undistributed Income of Subsidiary......................... 16 489 2,190
Equity in Undistributed Net Income of Subsidiary................................... 8,709 6,696 3,821
--------- --------- ---------
Net Income................................................................. $ 8,725 $ 7,185 $ 6,011
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY)
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income.................................................................. $ 8,725 $ 7,185 $ 6,011
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities
Depreciation and Amortization........................................... 5 4 6
Undistributed Net Income of Subsidiary.................................. (8,709) (6,697) (3,820)
(Increase) Decrease in Other Assets..................................... 52 (85) 80
Increase (Decrease) in Income Taxes Payable............................. (1) (3) 4
Decrease in Deferred Income Taxes....................................... -- (1) (19)
Increase (Decrease) in Accounts Payable and Accrued Liabilities......... 2 (6) (21)
--------- --------- ---------
Net Cash Provided by Operating Activities........................... 74 397 2,241
--------- --------- ---------
Cash Flows from Investing Activities
Purchase of Equipment....................................................... (78) (3) --
Investment in Subsidiary.................................................... (2,000) -- --
--------- --------- ---------
Net Cash Used In Investing Activities............................... (2,078) (3) --
--------- --------- ---------
Cash Flows from Financing Activities
Repayment of Note Payable................................................... -- (1,150) (1,450)
Proceeds from Issuance of Common Stock...................................... 38 11,110 --
Cash Dividends Paid on Fractional Shares.................................... -- -- (3)
Cash Dividends Paid on Preferred Stock...................................... -- (258) (522)
Cash Dividends Paid on Common Stock......................................... (2,353) (991) --
Redemption of Preferred Stock............................................... -- (37) --
--------- --------- ---------
Net Cash Provided by (Used in) Financing Activities................. (2,315) 8,674 (1,975)
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,319) 9,068 266
Cash and Cash Equivalents at Beginning of Year.................................. 9,397 329 63
--------- --------- ---------
Cash and Cash Equivalents at End of Year........................................ $ 5,078 $ 9,397 $ 329
--------- --------- ---------
--------- --------- ---------
Supplemental Disclosures of Cash Flow Information
Interest Paid............................................................... $ -- $ 25 $ 132
Income Taxes Paid........................................................... 4,752 3,799 2,986
Supplemental Schedule of Noncash Investing and Financing Activities
Stock Split Effected as a Stock Dividend (Note 10).......................... N/A N/A 697
--------- --------- ---------
--------- --------- ---------
</TABLE>
The amount of retained earnings in the Bank at December 31, 1995 was $12.0
million. On December 31, 1995, the aggregate amount of dividends which legally
could be paid to the Corporation without prior approval of various regulatory
agencies was approximately $8.7 million.
F-22
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 ("Statement 107"),
"Disclosures about Fair Value Instruments", requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for the Company's financial
instruments.
DEBT SECURITIES
For securities held as investments, fair market value equals quoted market
price, if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for a similar security.
Investments not classified as Held to Maturity or Trading are classified as
Available for Sale and measured at fair value in the consolidated balance sheets
with unrealized holding gains and losses reported as a separate component of
shareholders' equity until realized.
The following table presents the amortized cost and estimated fair value of
securities classified as Available for Sale at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities....................................................... $ 6,000 $ 6,012
U.S. Government Agency Securities.............................................. 55,502 55,668
Other Securities............................................................... 1,471 1,470
----------- -----------
Total...................................................................... $ 62,973 $ 63,150
----------- -----------
----------- -----------
</TABLE>
The following table presents the carrying value and estimated fair value of
securities classified as Held to Maturity at December 31, 1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury Securities........................................................ $ 28,787 $ 28,776
U.S. Government Agency Securities............................................... 34,230 34,425
States and Political Subdivisions Securities.................................... 5,474 5,761
--------- -----------
Total....................................................................... $ 68,491 $ 68,962
--------- -----------
--------- -----------
</TABLE>
LOANS
The Company does not consider its loan portfolio to have the homogeneous
categories of loans for which the fair value could be estimated by using quoted
market prices for securities backed by similar loans. Therefore, the fair value
of all loans is estimated by discounting future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities. Assumptions regarding credit risk,
cash flows and discount rates are judgmentally determined using available market
information and specific borrower information.
F-23
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents information for loans at or for the year ended
December 31, 1995:
<TABLE>
<CAPTION>
CARRYING AVERAGE CALCULATED
AMOUNT YIELD FAIR VALUE
----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial and Agriculture
Adjustable..................................................... $ 136,213 9.50% $ 137,308
Fixed.......................................................... 35,298 9.33 34,083
Real Estate
Adjustable..................................................... 128,406 10.13 127,039
Fixed.......................................................... 106,791 9.89 106,483
Consumer........................................................... 44,146 10.61 43,929
----------- -----------
Total Loans, Net of Unearned Discount.............................. 450,854 9.87 448,842
----------- -----------
Allowance for Loan Losses.......................................... (4,542) --
----------- -----------
Total Loans, Net................................................... $ 446,312 $ 448,842
----------- -----------
----------- -----------
</TABLE>
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The following table presents the
carrying value and estimated fair value of deposit liabilities at December 31,
1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Noninterest Bearing Demand Deposits........................................... $ 120,414 $ 120,414
Savings....................................................................... 36,133 36,133
Money Market Checking and Savings Accounts.................................... 127,687 127,687
Time Deposits................................................................. 295,497 297,200
----------- -----------
Total Deposits............................................................ $ 579,731 $ 581,434
----------- -----------
----------- -----------
</TABLE>
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the cost of
borrowing funds in the market. The Company has not attempted to determine the
amount of increase in net assets that would result from the benefit of
considering the low-cost funding provided by deposit liabilities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
WRITTEN
These financial instruments are not sold or traded, and estimated fair
values are not readily available. The carrying amount of commitments to extend
credit and standby letters of credit is the net unamortized deferred cost or
income arising from these unrecognized financial instruments. The estimated fair
value of these commitments is considered to be the carrying value. Financial
guarantees written consist of obligations for credit cards issued to certain
customers. Substantially all of the liability for financial guarantees written
is collateralized by deposits pledged to the Company.
F-24
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents the contract amount, carrying amount and
estimated fair value for commitments to extend credit, standby letters of credit
and financial guarantees written at December 31, 1995:
<TABLE>
<CAPTION>
CONTRACT CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commitments to Extend Credit......................................... $ 75,930 $ (157) $ (157)
Standby Letters of Credit............................................ 2,611 10 10
Financial Guarantees Written......................................... 439 -- --
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax liabilities,
property, plant, equipment and goodwill. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in many
of the estimates.
(16) ACQUISITION ACTIVITY
On January 10, 1996, the Company announced definitive agreements have been
signed under which Texas State Bank, the principal operating subsidiary of the
Corporation, will acquire through merger the First State Bank & Trust Co.,
Mission, Texas, and The Border Bank, Hidalgo, Texas (the "Mergers"). The
definitive agreements have been approved by the appropriate Boards of Directors
of the Corporation, Texas State Bank, First State Bank & Trust Co. and The
Border Bank. Under the terms of the definitive agreements, Texas State Bank will
acquire First State Bank & Trust Co. for a total cash consideration of $79.0
million and will acquire The Border Bank for a total cash consideration of $20.5
million.
The following pro forma combined condensed balance sheet was based on the
assumption that the acquisition had been consummated on December 31, 1995. The
Mergers will be accounted for using the purchase method of accounting.
The Mergers are subject to completion of satisfactory due diligence by the
Corporation and must be approved by the shareholders of First State Bank & Trust
Co. and The Border Bank. The Mergers must also be approved by the appropriate
regulators. Closing is also contingent upon the Corporation having successfully
raised $40.0 million of additional capital to partially fund these transactions
on terms and conditions acceptable to the Corporation.
F-25
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
During August 1995, the Bank acquired two branch bank locations, one in Rio
Grande City, Texas, and the other in Roma, Texas (the "RGC/Roma Branch
Acquisitions"). The transaction included the purchase of $43.7 million in loans
and the assumption of approximately $79.7 million in deposit liabilities of
these branches. Investment securities were not acquired. Purchase accounting
adjustments for the purchase of loans and the assumption of deposit liabilities
of the RGC/Roma Branch Acquisitions were immaterial. This transaction was
accounted for as a purchase.
The Company's consolidated balance sheets at December 31, 1995 reflected the
assets and liabilities of the RGC/Roma Branch Acquisitions. The results of
operations of the RGC/Roma Branch Acquisitions were included in the Company's
consolidated financial statements of income from the date of acquisition.
The following unaudited pro forma combined condensed statements of income
for the years ended December 31, 1995 and 1994, assume the Mergers and the
RGC/Roma Branch Acquisitions occurred January 1, 1994. Intangibles arising from
the Mergers and RGC/Roma Branch Acquisitions are approximately $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.
F-26
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED BALANCE SHEET
DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS STATE BORDER PRO FORMA PRO FORMA
REGIONAL BANK BANK ADJUSTMENTS BALANCE
------------ --------- --------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets
Cash and Due From Banks.......................... $ 30,933 $ 16,270 $ 3,982 $ 42,533A $ 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 2,937C 262,168
Loans, Net of Unearned Discount.................. 450,854 188,424 47,345 (1,337)G 685,286
Less: Allowance for Loan Losses.................. (4,542) (4,196) (1,100) -- (9,838)
------------ --------- --------- ------------ -----------
Net Loans.................................... 446,312 184,228 46,245 (1,337) 675,448
Premises and Equipment, Net...................... 18,374 5,487 3,297 7,000D 34,158
Accrued Interest Receivable...................... 6,319 7,172 2,242 -- 15,733
Other Real Estate................................ 1,273 431 237 -- 1,941
Goodwill......................................... 4,641 -- -- 7,250F 11,891
Core Deposit..................................... 1,000 -- -- 14,351H 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
7,557E
------------ --------- --------- ------------ -----------
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 2,180A 8,376
(6,000)F
Paid-In Capital.................................. 29,239 21,000 9,000 40,353A 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) 21F 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>
F-27
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS RGC/ ROMA STATE BORDER PRO FORMA
REGIONAL BRANCHES BANK BANK ADJUSTMENTS
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income...................................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (4,059)K
Interest Expense..................................... 17,041 2,817 13,103 4,415 131L
----------- ----------- ----------- ----------- -------------
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 294M
Equipment Expense................................ 1,959 217 341 148 --
Other Noninterest Expense........................ 5,631 1,281 2,531 729 2,189N
----------- ----------- ----------- ----------- -------------
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>
F-28
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
TEXAS RGC/ ROMA STATE BORDER PRO FORMA
REGIONAL BRANCHES BANK BANK ADJUSTMENTS
----------- ----------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income...................................... $ 34,631 $ 6,429 $ 30,831 $ 8,879 $ (3,202)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>
F-29
<PAGE>
TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) ACQUISITION ACTIVITY (CONTINUED)
The unaudited pro forma combined condensed balance sheet combines the three
entities at December 31, 1995. In combining the entities, the following
adjustments were made:
(A) To record the estimated proceeds of the $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.
F-30
<PAGE>
FIRST STATE BANK & TRUST CO.
SELECTED FINANCIAL INFORMATION
The selected financial information under the captions "Summary of
Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the three year period ended December 31, 1995 has been derived from
the financial statements of First State Bank & Trust Co. ("First State Bank"),
which financial statements have been audited by KPMG Peat Marwick LLP,
independent auditors. The financial statements of First State Bank at December
31, 1995 and 1994 and for each of the years in the three-year period ended
December 31, 1995 are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income........................................................ $ 32,472 $ 30,831 $ 31,623
Interest Expense....................................................... 13,103 11,767 12,968
----------- ----------- -----------
Net Interest Income.................................................... 19,369 19,064 18,654
Provision for Loan Losses.............................................. 2,425 2,189 2,287
Noninterest Income..................................................... 1,402 1,301 1,326
Noninterest Expense.................................................... 6,264 6,142 7,335
----------- ----------- -----------
Income before Income Tax Expense....................................... 12,082 12,034 10,358
Income Tax Expense..................................................... 3,436 3,192 2,260
----------- ----------- -----------
Net Income............................................................. $ 8,646 $ 8,842 $ 8,098
----------- ----------- -----------
----------- ----------- -----------
PER SHARE DATA
Net Income............................................................. $ 43.23 $ 44.21 $ 40.49
Book Value............................................................. 296.94 276.32 249.59
Cash Dividends Paid on Common Stock.................................... 25.00 15.00 10.00
Average Shares Outstanding
(in thousands)........................................................ 200 200 200
PERIOD-END BALANCE SHEET DATA
Total Assets........................................................... $ 404,470 $ 403,098 $ 402,895
Loans.................................................................. 188,424 194,306 194,853
Investment Securities.................................................. 166,761 179,153 170,588
Interest-Earning Assets................................................ 378,535 375,659 377,247
Deposits............................................................... 343,610 345,680 350,243
Stockholders' Equity................................................... 59,387 55,264 49,918
PERFORMANCE RATIOS
Return on Average Assets............................................... 2.12% 2.15% 1.99%
Return on Average Stockholders' Equity................................. 15.28 17.13 17.20
Net Interest Margin.................................................... 5.40 5.34 5.40
Loan to Deposit Ratio.................................................. 54.84 56.21 55.63
Demand Deposit to Total Deposit Ratio.................................. 11.59 10.84 10.28
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other Nonperforming Assets........... 1.67% 1.62% 1.86%
Net Charge-Offs to Average Loans....................................... 1.14 1.14 1.23
Allowance for Loan Losses as a Percentage of:
Loans................................................................ 2.22 2.01 2.00
Nonperforming Loans.................................................. 154.04 152.81 134.26
Nonperforming Assets................................................. 133.00 124.13 107.55
CAPITAL RATIOS
Period-End Stockholders' Equity to Total Assets........................ 14.68% 13.71% 12.39%
Tier 1 Risk-Based Capital.............................................. 18.47 17.99 15.22
Total Risk-Based Capital............................................... 19.78 19.26 16.74
Leverage Capital Ratio................................................. 14.88 13.98 12.49
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-31
<PAGE>
FIRST STATE BANK & TRUST CO.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for First State Bank for each
of the years ended December 31, 1995, 1994 and 1993. This discussion should be
read in conjunction with the financial statements of First State Bank and the
notes thereto appearing elsewhere in this prospectus.
SELECTED FINANCIAL INFORMATION
Net income for the year ended December 31, 1995 was $8.6 million, a decrease
of 2.2% compared to net income of $8.8 million for the year ended December 31,
1994. The earnings per share of $43.23 for the year ended December 31, 1995
decreased $0.98 or 2.2% compared to earnings per share of $44.21 for the year
ended December 31, 1994.
Return on average assets for 1995 was 2.12%, compared to 2.15% for 1994 and
1.99% for 1993. Return on average stockholders' equity was 15.28% for 1995,
compared to 17.13% for 1994 and 17.20% for 1993.
Earnings performance for the year ended December 31, 1995 reflected a small
increase in net interest income offset by an increase in provision for loan
losses. The increase in net interest income for 1995 resulted primarily from
higher interest rates.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Taxable-equivalent net interest income was $20.7 million for the year ended
December 31, 1995, an increase of $101 thousand or 0.5% compared to the year
ended December 31, 1994 and taxable-equivalent net interest income of $20.6
million for the year ended December 31, 1994 increased $204 thousand or 1.0%
compared to the year ended December 31, 1993.
The net yield on interest-earning assets, also referred to as interest rate
margin, represents net interest income divided by average interest-earning
assets. The net interest margin of 5.40% for the year ended December 31, 1995
increased 6 basis points compared to 5.34% for the year ended December 31, 1994.
The net interest rate margin for the year ended December 31, 1994 reflects a
decrease of 6 basis points from the 5.40% for the year ended December 31, 1993.
Average interest-earnings assets declined $2.1 million or 0.6% to $383.1
million for the year ended December 31, 1995. Small declines in commercial and
consumer loans and federal funds sold were partially offset by increases in real
estate loans and investments. Average interest-earning assets increased $8.0
million or 2.1% to $385.3 million for the year ended December 31, 1994. The
increase in average interest-earning assets for 1994 resulted primarily from
increases in investment securities of $11.5 million and loans of $4.2 million
offset by a decline in federal funds sold.
Average interest-earning assets comprised 93.8% of average total assets in
1995, compared to 93.8% in 1994 and 92.9% in 1993.
Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6
million for the year ended December 31, 1995 compared to a decrease of $979
thousand or 0.3% to $318.5 million for the year ended December 31, 1994. These
changes in the mix of interest-earning assets and interest-bearing deposits
caused the ratio of interest-bearing deposits to interest-earning assets to
decline to 80.5% in 1995, compared to 82.7% in 1994 and 84.7% in 1993.
Average noninterest-bearing deposits increased $2.3 million or 6.0% to $40.2
million in 1995 compared to an increase of $1.1 million or 2.9% to $38.0 million
in 1994. The ratio of average noninterest-bearing deposits to average total
deposits was 11.5% for 1995, compared to 10.6% for 1994 and 10.3% for 1993.
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, reported on a taxable-equivalent
F-32
<PAGE>
basis, as well as the average interest-bearing liabilities, expressed both in
dollars and rates. Average balances are derived from weekly balances and the
yields and costs are established by dividing income or expense by the average
balance of the asset or liability. Income and yield on interest-earning assets
include amounts to convert tax-exempt income to a taxable-equivalent basis,
assuming a 34% effective federal income tax rate.
<TABLE>
<CAPTION>
THREE-YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE AVERAGE
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE INTEREST
- ------------------------------- --------- ----------- ----------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial................. $ 60,410 $ 6,849 11.34% $ 63,494 $ 7,076 11.14% $ 61,898 $ 6,636
Real Estate................ 107,183 11,599 10.82 104,954 10,473 9.98 100,860 11,059
Consumer................... 20,436 2,361 11.55 21,884 2,583 11.80 23,400 2,846
--------- ----------- --------- ----------- --------- -----------
Total Loans.............. 188,029 20,809 11.07 190,332 20,132 10.58 186,158 20,541
--------- ----------- --------- ----------- --------- -----------
Investment Securities
Taxable...................... 138,125 8,129 5.89 134,258 7,204 5.37 117,736 7,117
Tax-exempt................... 35,905 3,632 10.12 38,657 4,159 10.76 43,717 4,818
--------- ----------- --------- ----------- --------- -----------
Total Investment
Securities.............. 174,030 11,761 6.76 172,915 11,363 6.57 161,453 11,935
--------- ----------- --------- ----------- --------- -----------
Federal Funds Sold............. 21,079 1,217 5.77 22,018 855 3.88 29,606 871
--------- ----------- --------- ----------- --------- -----------
Total Interest-Earning
Assets.................... 383,138 33,787 8.82 385,265 32,350 8.40 377,217 33,347
--------- ----------- --------- ----------- --------- -----------
Cash and Due from Banks........ 15,274 15,496 19,072
Premises and Equipment, Net.... 5,474 5,492 5,198
Other Assets................... 8,319 8,540 8,617
Less Allowance for Loan
Losses...................... (3,911) (3,904) (3,905)
--------- --------- ---------
Total Assets............. $ 408,294 $ 410,889 $ 406,199
--------- --------- ---------
--------- --------- ---------
LIABILITIES
Interest-Bearing Liabilities
Savings...................... $ 51,495 2,008 3.90 $ 62,046 2,476 3.99 $ 29,901 1,182
Money Market and NOW......... 96,428 2,616 2.71 108,458 3,028 2.79 126,593 4,262
Time Deposits................ 160,629 8,436 5.25 148,041 6,235 4.21 163,030 7,503
--------- ----------- --------- ----------- --------- -----------
Total Savings and Time
Deposits................ 308,552 13,060 4.23 318,545 11,739 3.68 319,524 12,947
--------- ----------- --------- ----------- --------- -----------
Federal Funds Purchased and
Other Borrowings............ 837 43 5.14 767 28 3.65 820 21
--------- ----------- --------- ----------- --------- -----------
Total Interest-Bearing
Liabilities............. 309,389 13,103 4.24 319,312 11,767 3.68 320,344 12,968
--------- ----------- --------- ----------- --------- -----------
Demand Deposits................ 40,239 37,958 36,888
Other Liabilities.............. 2,076 2,001 1,889
--------- --------- ---------
Total Liabilities........ 351,704 359,271 359,121
--------- --------- ---------
STOCKHOLDERS' EQUITY........... 56,590 51,618 47,078
--------- --------- ---------
Total Liabilities and
Stockholders' Equity.... $ 408,294 $ 410,889 $ 406,199
--------- --------- ---------
--------- --------- ---------
Net Interest Income............ $ 20,684 $ 20,583 $ 20,379
----------- ----------- -----------
----------- ----------- -----------
Net Yield on Total Interest-
Earning Assets................ 5.40% 5.34%
----- -----
----- -----
<CAPTION>
TAXABLE-EQUIVALENT BASIS (1) YIELD/ RATE
- ------------------------------- -----------
<S> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial................. 10.72%
Real Estate................ 10.96
Consumer................... 12.16
Total Loans.............. 11.03
Investment Securities
Taxable...................... 6.04
Tax-exempt................... 11.02
Total Investment
Securities.............. 7.39
Federal Funds Sold............. 2.94
Total Interest-Earning
Assets.................... 8.84
Cash and Due from Banks........
Premises and Equipment, Net....
Other Assets...................
Less Allowance for Loan
Losses......................
Total Assets.............
LIABILITIES
Interest-Bearing Liabilities
Savings...................... 3.95
Money Market and NOW......... 3.37
Time Deposits................ 4.60
Total Savings and Time
Deposits................ 4.05
Federal Funds Purchased and
Other Borrowings............ 2.56
Total Interest-Bearing
Liabilities............. 4.05
Demand Deposits................
Other Liabilities..............
Total Liabilities........
STOCKHOLDERS' EQUITY...........
Total Liabilities and
Stockholders' Equity....
Net Interest Income............
Net Yield on Total Interest-
Earning Assets................ 5.40%
-----
-----
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily issued by
state and local governments or authorities, is adjusted by an increment
which equates tax-exempt income to interest from taxable assets (assuming a
34% effective federal income tax rate).
F-33
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category.
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEARS ENDED DECEMBER 31, 1995 NET -----------------------------
COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ 677 $(244) $ 921 $--
Investment Securities
Taxable..................................................................... 925 208 718 (1)
Tax-Exempt.................................................................. (527) (296) (230) (1)
Federal Funds Sold............................................................ 362 (36) 398 --
------- ------ ------- -----
Total Interest Income..................................................... 1,437 (368) 1,807 (2)
------- ------ ------- -----
Interest Expense
Deposits...................................................................... 1,321 (368) 1,697 (8)
Other Borrowings.............................................................. 15 3 12 --
------- ------ ------- -----
Total Interest Expense.................................................... 1,336 (365) 1,709 (8)
------- ------ ------- -----
Net Interest Income Before Allocation Rate/Volume............................... 101 (3) 98 6
------- ------ ------- -----
Allocation of Rate/Volume....................................................... -- -- 6 (6)
------- ------ ------- -----
Changes in Net Interest Income.................................................. $ 101 $ (3) $ 104 $--
------- ------ ------- -----
------- ------ ------- -----
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEARS ENDED DECEMBER 31, 1994 NET -----------------------------
COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------- ------ ------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (409) $ 460 $ (856) $ (13)
Investment Securities
Taxable..................................................................... 87 998 (900) (11)
Tax-Exempt.................................................................. (659) (558) (101) --
Federal Funds Sold............................................................ (16) (223) 207 --
------- ------ ------- -----
Total Interest Income..................................................... (997) 677 (1,650) (24)
------- ------ ------- -----
Interest Expense
Deposits...................................................................... (1,208) (39) (1,179) 10
Other Borrowings.............................................................. 7 (1) 8 --
------- ------ ------- -----
Total Interest Expense.................................................... (1,201) (40) (1,171) 10
------- ------ ------- -----
Net Interest Income Before Allocation Rate/Volume............................... 204 717 (479) (34)
------- ------ ------- -----
Allocation of Rate/Volume....................................................... -- (20) (14) 34
------- ------ ------- -----
Changes in Net Interest Income.................................................. $ 204 $ 697 $ (493) $--
------- ------ ------- -----
------- ------ ------- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
F-34
<PAGE>
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 34% effective federal income tax rate.
<TABLE>
<CAPTION>
NET YIELD ON QUARTER
EARNING ASSETS % CHANGE --------------------------------------------------
TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST
- ------------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1995
Net Interest Income................. 0.5% $ 20,684 $ 5,065 $ 4,833 $ 5,484 $ 5,303
Average Earning Assets.............. (0.6) 383,138 376,061 386,085 388,399 382,005
Net Yield........................... 5.40% 5.34% 4.97% 5.66% 5.63%
1994
Net Interest Income................. 1.0% $ 20,583 $ 4,842 $ 5,029 $ 5,149 $ 5,563
Average Earning Assets.............. 2.1 385,265 374,776 383,327 394,337 388,623
Net Yield........................... 5.34% 5.13% 5.21% 5.24% 5.81%
1993
Net Interest Income................. 15.1% $ 20,379 $ 5,359 $ 4,788 $ 5,237 $ 4,995
Average Earning Assets.............. 16.4 377,217 373,468 384,155 387,205 364,036
Net Yield........................... 5.40% 5.69% 4.95% 5.42% 5.56%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1995 was $2.4
million an increase of $236 thousand or 10.8% from the year ended December 31,
1994. The provision for loan losses for the year ended December 31, 1994 of $2.2
million reflects a decrease of $98 thousand or 4.3% from the $2.3 million
provision for loan losses for the year ended December 31,1993. Provisions for
loan losses are charged to earnings to bring the total allowance for loan losses
to a level deemed appropriate by management based upon such factors as
historical experience, the volume and type of lending conducted by First State
Bank, the amount of nonperforming assets, regulatory policies, generally
accepted accounting principles, general economic conditions, particularly as
they relate to First State Bank's lending area, and other factors related to the
collectibility of First State Bank's loan portfolio. See "Allowance for Loan
Losses."
In January 1995, First State Bank adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan" and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on First State
Bank's results of operations.
NONINTEREST INCOME
Noninterest income of $1.4 million for the year ended December 31, 1995
increased $101 thousand or 7.8% compared to the year ended December 31, 1994,
and noninterest income of $1.3 million for the year ended December 31, 1994
decreased $25 thousand or 1.9% compared to $1.3 million for the year ended
December 31, 1993.
First State Bank offers trust services, but does not actively pursue this
type of business. Trust service fees were $24 thousand, $37 thousand and $3
thousand for the years ended December 31, 1995, 1994 and 1993, respectively. The
book value of assets managed at December 31, 1995 was approximately $11.5
million. Assets held by the trust department of First State Bank in fiduciary or
agency capacities are not assets of First State Bank and are not included in the
balance sheet.
F-35
<PAGE>
A detailed summary of noninterest income during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
% CHANGE FROM % CHANGE FROM
NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts................ $ 1,146 6.3% $ 1,078 0.1% $ 1,077
Other Service Charges.............................. 151 7.1 141 64.0 86
--------- ----- --------- ----- ---------
Total Service Charges............................ 1,297 6.4 1,219 4.8 1,163
Trust Service Fees................................. 24 (35.1) 37 * 3
Other Operating Income............................. 81 80.0 45 71.7 159
--------- ----- --------- ----- ---------
Total............................................ $ 1,402 7.8% $ 1,301 (1.8)% $ 1,325
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
</TABLE>
- ---------
* Not meaningful.
NONINTEREST EXPENSE
Noninterest expense of $6.3 million for the year ended December 31, 1995
increased $122 thousand or 2.0% compared to the year ended December 31, 1994,
and noninterest expense of $6.1 million for the year ended December 31,1994
decreased $1.2 million or 16.3% compared with $7.3 million for the year ended
December 31, 1993.
The largest category of noninterest expense, Total Salaries and Employee
Benefits ("Personnel"), of $2.8 million for the year ended December 31, 1995
increased $262 thousand or 10.2% compared to year ended December 31, 1994
levels. Personnel expenses of $2.6 million for the year ended December 31, 1994
increased $224 thousand or 9.6% compared to year ended December 31, 1993 levels
of $2.3 million. Personnel expense increased primarily due to an increase in
compensation levels.
Occupancy expense of $568 thousand for the year ended December 31, 1995
increased $13 thousand or 2.3% compared to the year ended December 31,1994, and
occupancy expense of $555 thousand for the year ended December 31, 1994
decreased $85 thousand or 13.3% when compared to occupancy expense of $640
thousand for the year ended December 31, 1993.
Equipment expense was $341 thousand, $278 thousand and $261 thousand for the
years ended December 31, 1995, 1994 and 1993, respectively.
Other noninterest expense of $2.4 million for the year ended December 31,
1995 decreased $114 thousand or 4.5% compared to the year ended December 31,
1994 and other noninterest expense of $2.5 million for the year ended December
31, 1994 decreased $1.5 million or 36.8% when compared with the $4.0 million for
the year ended December 31, 1993. The increase in other noninterest expense in
1995 resulted from an increase in legal and professional, caused primarily from
audit fees incurred in 1995, and increases in stationery, supplies and postage,
all of which were offset by a reduction in FDIC insurance premiums. The
principal factor attributable to the decrease in other noninterest expense for
the year ended December 31, 1994 was a cost to settle litigation which was
recorded in 1993 and is included in other losses in the detailed summary. In
1993, First State Bank settled a lender liability claim by a former borrower.
F-36
<PAGE>
A detailed summary of noninterest expense during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
% %
CHANGE FROM CHANGE FROM
NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and Wages................................. $ 2,390 11.9% $ 2,136 10.2% $ 1,939
Employee Benefits.................................. 434 1.9 426 6.8 399
--------- ----- --------- ----- ---------
Total Salaries and Employee Benefits........... 2,824 10.2 2,562 9.6 2,338
--------- ----- --------- ----- ---------
Net Occupancy Expense.............................. 568 2.3 555 (13.3) 640
--------- ----- --------- ----- ---------
Equipment Expense.................................. 341 22.7 278 6.5 261
--------- ----- --------- ----- ---------
Other Real Estate (Income) Expense, Net............ 96 (51.5) 198 204.6 65
--------- ----- --------- ----- ---------
Other Noninterest Expense
Advertising and Public Relations................. 202 (5.2) 213 (17.4) 258
Data Processing and Check Clearing............... 372 2.5 363 30.1 279
Director Fees.................................... 62 1.6 61 (7.6) 66
Franchise Tax.................................... 131 3.1 127 49.4 85
FDIC Insurance................................... 397 (50.5) 802 4.0 771
Legal and Professional........................... 526 66.5 316 (33.2) 473
Stationery and Supplies.......................... 203 17.3 173 8.1 160
Telephone........................................ 39 8.3 36 33.3 27
Postage.......................................... 138 30.2 106 (3.6) 110
Other Losses..................................... 83 53.7 54 (96.5) 1,556
Other............................................ 282 (5.4) 298 21.1 246
--------- ----- --------- ----- ---------
Total Other Noninterest Expense................ 2,435 (4.5) 2,549 (36.8) 4,031
--------- ----- --------- ----- ---------
Total.......................................... $ 6,264 2.0% $ 6,142 (16.3)% $ 7,335
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. First State Bank does not provide
postretirement benefits other than nonqualified deferred compensation plans for
the benefit of the President and two other former officers of First State Bank.
INCOME TAX
Income tax expense amounted to $3.4 million for the year ended December 31,
1995 compared to $3.2 million for the year ended December 31, 1994. Tax expense
varies from one year to the next with changes in the level of income before
taxes, changes in the amount of tax-exempt interest income, and the relationship
of these changes to each other.
First State Bank's effective tax rate for 1995 was 28.4% compared with 26.5%
in 1994. Income tax expense differs from the amount computed at statutory rates
primarily due to tax-exempt interest from certain investment securities and
loans.
Effective January 1, 1993, First State Bank adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes".
Through December 31, 1992, First State Bank accounted for income taxes under
Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed
First State Bank's method of accounting for income taxes from the deferred
method required under APB 11 to the asset and liability method. Under the
deferred method, annual
F-37
<PAGE>
income tax expense is matched with pretax accounting income by providing
deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for the recognition of future deductions or taxable amounts.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
NET INCOME
Net income was $8.6 million, $8.8 million, and $8.1 million for the years
ended December 31, 1995, 1994, and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The average assets and liabilities of First State Bank have remained stable
over the last three years. Average interest-earning assets of $383.1 million
declined $2.1 million or 0.6% for the year ended December 31, 1995 compared to
the year ended December 31, 1994. Average interest-earning assets of $385.3
million increased $8.0 million or 2.1% for the year ended December 31, 1994
compared to $377.2 million for the year ended December 31, 1993. Average loans
to average interest-earning assets was 49.1% in 1995, compared to 49.4% in 1994
and 49.4% in 1993. Average investment securities amounted to $174.0 million,
$172.9 million and $161.5 million in 1995, 1994 and 1993 respectively.
Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6
million for the year ended December 31, 1995 and declined $979 thousand or 0.3%
to $318.5 million for the year ended December 31, 1994. The ratio of average
demand deposits to average total deposits for the years ended December 31, 1995,
1994 and 1993 was 11.5%, 10.6%, and 10.3%, respectively.
F-38
<PAGE>
The following table presents First State Bank's average balance sheets
during the last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
AVERAGE BALANCE SHEETS 1995 1994 1993
- --------------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans...................................................................... $ 188,029 $ 190,332 $ 186,158
Investment Securities
Taxable.................................................................. 138,125 134,258 117,736
Tax-Exempt............................................................... 35,905 38,657 43,717
Federal Funds Sold......................................................... 21,079 22,018 29,606
----------- ----------- -----------
Total Interest-Earning Assets.......................................... 383,138 385,265 377,217
Cash and Due From Banks.................................................... 15,274 15,496 19,072
Bank Premises and Equipment, Net........................................... 5,474 5,492 5,198
Other Assets............................................................... 8,319 8,540 8,617
Allowance for Loan Losses.................................................. (3,911) (3,904) (3,905)
----------- ----------- -----------
Total.................................................................. $ 408,294 $ 410,889 $ 406,199
----------- ----------- -----------
LIABILITIES
Demand Deposits
Commercial and Individual................................................ $ 40,239 $ 37,958 $ 36,888
----------- ----------- -----------
Total Demand Deposits.................................................. 40,239 37,958 36,888
----------- ----------- -----------
Savings.................................................................... 51,495 62,046 29,901
Money Market Checking and Savings.......................................... 96,428 108,458 126,593
Time Deposits.............................................................. 160,629 148,041 163,030
----------- ----------- -----------
Total Interest-Bearing Deposits........................................ 308,552 318,545 319,524
----------- ----------- -----------
Total Deposits............................................................. 348,791 356,503 356,412
----------- ----------- -----------
Short-Term Borrowings...................................................... 837 767 820
Other Liabilities.......................................................... 2,076 2,001 1,889
STOCKHOLDERS' EQUITY....................................................... 56,590 51,618 47,078
----------- ----------- -----------
Total.................................................................. $ 408,294 $ 410,889 $ 406,199
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
First State Bank offers a broad range of commercial banking services to
individuals and businesses. The amount of cash and due from banks held on any
one day is significantly influenced by changes in cash items in the process of
collection. At December 31, 1995, cash and due from banks was $16.3 million,
$1.7 million less than at December 31, 1994.
INVESTMENT SECURITIES
Investment securities consist of two categories: Available for Sale and Held
to Maturity. Securities classified as Held to Maturity are those securities
First State Bank has both the positive intent and ability to hold to maturity
and are carried at amortized cost. Securities classified as Available for Sale
are those securities which First State Bank intends to hold for an indefinite
period of time but not necessarily to maturity. These securities may be sold as
part of asset/liability management strategy, or in response to significant
movements in interest rates, liquidity needs, regulatory capital considerations,
and other similar factors. These securities are carried at fair value in the
accompanying balance sheet. The percentage of the investment portfolio allocated
to Available for Sale and Held to Maturity was 14.1% and 85.9%, respectively at
December 31, 1995 compared with 18.5% and 81.5%, respectively at December 31,
1994.
F-39
<PAGE>
The following table presents the estimated market value of Securities
Available for Sale at December 31, 1995 and 1994. No securities were classified
as Securities Available for Sale in years prior to 1994 as management of First
State Bank adopted Statement 115 in January 1994.
<TABLE>
<CAPTION>
% CHANGE
FROM PRIOR
SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994
- ------------------------------------------------------------------------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities...................................................... $ 8,504 16.9% $ 7,274
U.S. Government Agency Securities............................................. 14,974 (42.1) 25,879
--------- ----- ---------
Total....................................................................... $ 23,478 (29.2)% $ 33,153
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 6,497 $ 2,007 $ -- $ -- $ 8,504 $ 8,504
U.S. Government Agency
Securities............................. 10,470 4,531 -- -- 15,001 14,974
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 16,967 $ 6,538 $ -- $ -- $ 23,505 $ 23,478
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 4.79% 5.58% -- -- 4.97%
U.S. Government Agency
Securities............................. 4.87 6.22 -- -- 5.28
Total................................. 4.84 6.03 -- -- 5.17
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
The following table presents amortized cost of Securities Held to Maturity
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE FROM % CHANGE FROM
SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------- ----------- ----------------- ----------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 6,921 0.6% $ 6,879 (59.4)% $ 16,931
U.S. Government Agency Securities...... 96,074 1.0 95,139 (10.9) 106,739
States and Political Subdivisions
Securities............................ 39,145 (8.6) 42,814 (1.1) 43,297
Mortgage-Backed Securities............. 118 (17.5) 143 -- --
Other Securities....................... 1,025 -- 1,025 (71.7) 3,621
----------- ----- ----------- ----- -----------
Total................................ $ 143,283 (1.9)% $ 146,000 (14.4)% $ 170,588
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
</TABLE>
Investments in entities within the State of Texas comprised 91.2% of the
total investment in states and political subdivisions. No single issue accounted
for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the
obligations of states and political subdivisions held by First State Bank at
December 31, 1995, 52.5% were rated A or better by Moody's Investor Services,
Inc.
F-40
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- --------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... $ 4,483 $ 2,438 $ -- $ -- $ 6,921 $ 7,070
U.S. Government Agency Securities...... 11,701 82,381 1,992 -- 96,074 95,490
States and Political Subdivisions
Securities............................ 5,267 16,246 13,203 4,429 39,145 41,377
Mortgage-Backed Securities............. -- 118 -- -- 118 121
Other Securities....................... -- 1,000 -- 25 1,025 940
--------- ----------- ----------- ----------- ----------- -----------
Total................................ $ 21,451 $ 102,183 $ 15,195 $ 4,454 $ 143,283 $ 144,998
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities............... 7.83% 6.60% -- % -- % 7.40%
U.S. Government Agency Securities...... 4.05 5.83 6.48 -- 5.63
States and Political Subdivisions
Securities............................ 10.06 10.03 9.61 9.08 9.78
Mortgaged-Backed Securities............ -- 8.47 -- -- 8.47
Other Securities....................... -- -- -- 4.00 4.00
Total................................ 6.32 6.46 9.20 9.05 6.81
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
At December 31, 1995, U.S. Government Agency securities with a carrying
value of approximately $11.4 million contained interest features which adjust
according to various dual indices and/or which could adjust to zero. These
features relate only to the interest payments and do not affect the principal
amount due. At December 31, 1995, the weighted average coupon of these
securities equalled 3.00%. One issue with a book value of $3.5 million has
adjusted to zero percent and will mature in May 1996. The following table
presents the maturities, amortized cost and estimated market value of such
securities at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
LESS FIVE YEARS YEARS YEARS COST (1) VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale....................... $ 3,500 $ -- $ -- $ -- $ 3,500 $ 3,448
Held to Maturity......................... 5,950 2,000 -- -- 7,950 7,782
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 9,450 $ 2,000 $ -- $ -- $ 11,450 $ 11,230
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
LOANS
First State Bank closely monitors the markets in which it conducts its
lending. A certain degree of risk is inherent in the extension of credit.
Management has instituted credit policies designed to monitor and control the
level of losses and nonperforming assets. These policies require evaluation of
new credit requests and continuing review of existing credits to identify,
monitor and quantify any evidence of deterioration of quality or potential loss.
F-41
<PAGE>
First State Bank attempts to diversify risk with the objective of achieving
optimum rates of return while minimizing losses for the benefit of stockholders
and protection of depositors. Diversification of the loan portfolio by type of
loan, industry concentration and type of borrower also tends to reduce risk by
minimizing the adverse impact of any single event or set of occurrences.
Total loans at December 31, 1995 decreased $5.9 million or 3.0% to $188.4
million compared to the year-end balance at December 31, 1994. Total loans at
December 31, 1994 of $194.3 million decreased $547 thousand or 0.3% compared to
the year-end balance of $194.9 million at December 31, 1993. The principal
reason for the decrease in total loans at year-end 1995 was reductions in
agricultural and agricultural mortgage loans outstanding.
Real estate loans, including construction, commercial mortgage, agricultural
mortgage and 1-4 family mortgage, continue to represent the largest component of
First State Bank's loan portfolio. The percent of real estate loans to total
loans was 56.2%, 53.2% and 53.0%, at December 31, 1995, 1994 and 1993,
respectively.
The decline in agricultural and agricultural mortgage loans resulted
primarily from reduced borrowing by certain customers and several large
borrowers who discontinued farming and paid off their loans. This was offset by
increases in other lines which are normally paid down at this time of the year.
See "Nonperforming Assets."
The following table presents the composition of the loan portfolio at the
end of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial...................................... $ 52,390 $ 54,550 $ 54,758 $ 57,822 $ 50,655
Commercial-Tax Exempt........................... 2,044 2,353 1,969 1,954 1,570
----------- ----------- ----------- ----------- -----------
Total Commercial Loans........................ 54,434 56,903 56,727 59,776 52,225
Agricultural.................................... 8,893 12,183 11,539 15,082 14,913
Real Estate
Construction.................................. 23,949 21,001 13,852 12,016 11,050
Commercial Mortgage........................... 40,123 37,031 50,477 45,486 41,223
Agricultural Mortgage......................... 9,673 11,356 8,788 9,989 7,960
1-4 Family Mortgage........................... 32,221 34,072 30,058 28,774 29,922
Consumer........................................ 19,131 21,760 23,412 21,872 19,997
----------- ----------- ----------- ----------- -----------
Total Loans................................... $ 188,424 $ 194,306 $ 194,853 $ 192,995 $ 177,290
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-42
<PAGE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
----------------------------------------------------
AFTER ONE YEAR
ONE YEAR THROUGH AFTER FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial.................................................. $ 37,448 $ 16,073 $ 913 $ 54,434
Agricultural................................................ 8,149 691 53 8,893
Real Estate................................................. 36,431 58,626 10,909 105,966
Consumer.................................................... 12,615 6,403 113 19,131
--------- --------------- ----------- -----------
Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
Variable-Rate Loans......................................... $ 17,920 $ 23,592 $ 5,704 $ 47,216
Fixed-Rate Loans............................................ 76,723 58,201 6,284 141,208
--------- --------------- ----------- -----------
Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424
--------- --------------- ----------- -----------
--------- --------------- ----------- -----------
</TABLE>
As shown in the preceding table, loans maturing within one year totaled
$94.6 million or 50.2% of total loans at December 31, 1995. First State Bank may
renew or extend a loan on maturity based on management's assessment of
individual loans. Extension or renewal of loans without reduction of principal
for more than one twelve-month period are generally avoided, unless loans are
fully secured, or are revolving lines of credit subject to annual analysis and
renewal.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations.
First State Bank's policy generally is to place a loan on nonaccrual status
when payment of principal or interest is contractually past due 90 days, or
earlier when concern exists as to ultimate collection of principal and interest.
At the time a loan is placed on nonaccrual status, interest previously accrued
but uncollected is reversed and charged against current income. At December 31,
1995, three of the loans on nonaccrual status totaling approximately $1.8
million had balances in excess of $100 thousand.
Loans which are contractually past due 90 days or more, which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more for the years ended December 31, 1995,
1994 and 1993 that are not classified as nonaccrual totaled $4.9 million, $3.2
million and $3.4 million, respectively. Included in this classification at
December 31, 1995 were agricultural loans of $2.4 million which represent
carryovers from the 1995 crop year and for which borrowers are awaiting disaster
payments and/or insurance proceeds.
Nonperforming assets of $3.2 million at December 31, 1995 increased $1
thousand compared to December 31, 1994 levels of $3.2 million and decreased $475
thousand or 13.1% for the year ended December 31, 1994 compared to December 31,
1993 levels of $3.6 million.
First State Bank's classification of nonperforming loans includes those
loans for which management believes collection is doubtful. Management is not
aware of any specific borrower relationships that are not reported as
nonperforming where management has serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms which would cause
nonperforming assets to increase materially.
F-43
<PAGE>
An analysis of the components of nonperforming assets for the last five
years is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
NONPERFORMING ASSETS 1995 1994 1993 1992 1991
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans.............................................. $ 2,724 $ 2,562 $ 2,907 $ 993 $ 4,376
Renegotiated Loans............................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Nonperforming Loans......................................... 2,724 2,562 2,907 993 4,376
Other Nonperforming Assets (Primarily Other Real Estate)...... 431 592 722 671 1,519
--------- --------- --------- --------- ---------
Total Nonperforming Assets.................................. 3,155 3,154 3,629 1,664 5,895
Accruing Loans 90 Days or More Past Due....................... 4,859 3,173 3,439 3,351 3,890
--------- --------- --------- --------- ---------
Total Nonperforming Assets and Accruing Loans 90 Days or
More Past Due.............................................. $ 8,014 $ 6,327 $ 7,068 $ 5,015 $ 9,785
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming Loans as a % of Total Loans..................... 1.45% 1.32% 1.49% 0.51% 2.47%
Nonperforming Assets as a % of Total Loans and Other
Nonperforming Assets......................................... 1.67 1.62 1.86 0.86 3.30
Nonperforming Assets as a % of Total Assets................... 0.78 0.78 0.90 0.44 1.84
Nonperforming Assets Plus Accruing Loans 90 Days or More Past
Due as a % of Total Loans and Other Nonperforming Assets..... 4.24 3.25 3.61 2.59 5.47
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Interest income that would have been recorded for the years ended December
31, 1995, 1994 and 1993 on nonaccrual loans had such loans performed in
accordance with their original contract terms was approximately $531 thousand,
$820 thousand and $232 thousand, respectively.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged off. Based on total allocations, the provision is recorded to maintain
the allowance at a level deemed appropriate by management. While management uses
available information to recognize losses on loans, there can be no assurance
that future additions to the allowance will not be necessary. The allowance for
loan losses at December 31, 1995 was $4.2 million, which represents an increase
of $281 thousand or 7.2% as compared to the allowance for loan losses at
December 31, 1994. Management believes that the allowance for loan losses at
December 31, 1995 adequately reflects the risks in the loan portfolio. However,
various regulatory agencies, as an integral part of their examination process,
periodically review First State Bank's allowance for loan losses. Such agencies
may require First State Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
As a result of criticisms reflected in the October 4, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of First
State Bank and the Banking Commissioner of Texas on December 14, 1993. The
Memorandum required that First State Bank, among other provisions, increase
Board of Directors supervision over loan activities, revise the existing loan
policy, increase the allowance for loan losses and reduce criticized assets.
Additionally, First State Bank's Board of Directors is required to
F-44
<PAGE>
submit to the Commissioner and Regional Director of the FDIC a written report of
the actions taken to comply with the Memorandum. Management has made efforts to
comply with the requirements of the Memorandum.
The following table summarizes the activity in the allowance for loan losses
for the last five years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year.................................. $ 3,915 $ 3,903 $ 3,903 $ 3,905 $ 3,503
Provision for Loan Losses..................................... 2,425 2,189 2,287 5,179 4,015
Charge-Offs
Commercial.................................................. 184 213 265 1,036 3,021
Agricultural................................................ 173 -- 18 790 --
Real Estate................................................. 1,518 1,405 1,397 3,042 90
Consumer.................................................... 390 704 720 388 602
--------- --------- --------- --------- ---------
Total Charge-Offs......................................... 2,265 2,322 2,400 5,256 3,713
--------- --------- --------- --------- ---------
Recoveries
Commercial.................................................. 32 45 33 9 37
Agricultural................................................ -- -- 10 4 --
Real Estate................................................. 10 11 4 25 15
Consumer.................................................... 79 89 66 37 48
--------- --------- --------- --------- ---------
Total Recoveries.......................................... 121 145 113 75 100
--------- --------- --------- --------- ---------
Net Charge-Offs (Recoveries).................................. 2,144 2,177 2,287 5,181 3,613
--------- --------- --------- --------- ---------
Balance at End of Year........................................ $ 4,196 $ 3,915 $ 3,903 $ 3,903 $ 3,905
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of Allowance for Loan Losses to Loans Outstanding, Net
of Unearned Discount......................................... 2.22% 2.01% 2.00% 2.02% 2.20%
Ratio of Allowance for Loan Losses to Nonperforming Assets.... 133.00 124.13 107.55 234.56 66.24
Ratio of Net Charge-Offs to Average Total Loans
Outstanding, Net of Unearned Discount........................ 1.14 1.14 1.23 2.82 2.16
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
------------------------- ------------------------- ------------------------- -------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.............. $ 645 28.9% $ 741 29.3% $ 717 29.1% $ 698 31.0%
Agricultural............ 279 4.7 108 6.3 107 5.9 142 7.8
Real Estate............. 1,469 56.2 1,855 53.2 2,325 53.0 1,713 49.9
Consumer................ 254 10.2 278 11.2 328 12.0 354 11.3
Unallocated............. 1,549 -- 933 -- 426 -- 996 --
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total............... $ 4,196 100.0% $ 3,915 100.0% $ 3,903 100.0% $ 3,903 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1991
-------------------------
% OF
LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- ------------
<S> <C> <C>
Commercial.............. $ 1,420 29.4%
Agricultural............ 127 8.4
Real Estate............. 1,617 50.9
Consumer................ 400 11.3
Unallocated............. 341 --
----------- -----
Total............... $ 3,905 100.0%
----------- -----
----------- -----
</TABLE>
F-45
<PAGE>
PREMISES AND EQUIPMENT
Bank premises and equipment of $5.5 million at December 31,1995 increased
$37 thousand or 0.7% compared to $5.4 million at December 31, 1994. The net
increase for the year ended December 31, 1995 is primarily attributable to the
completion of a branch facility of First State Bank begun in 1994.
DEPOSITS
Total deposits of $343.6 million at December 31, 1995 decreased $2.1 million
or 0.6% compared to December 31, 1994 levels and total deposits of $345.7
million at the December 31, 1994 decreased $4.6 million or 1.3% compared to
December 31, 1993 levels of $350.2 million. Total public funds (including public
funds demand deposits, public funds money market and NOW account and public
funds time deposits) were $79.2 million, $66.2 million, and $61.7 million. First
State Bank actively seeks consumer and commercial deposits. The following table
presents the composition of total deposits at the
end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
% CHANGE FROM % CHANGE FROM
TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------- ----------- ----------------- ----------- ----------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual............ $ 39,238 6.9% $ 36,707 5.1% $ 34,934
Public Funds......................... 573 (26.1) 775 (29.3) 1,096
----------- ----- ----------- ----- -----------
Total Demand Deposits.............. 39,811 6.2 37,482 4.0 36,030
----------- ----- ----------- ----- -----------
Interest-Bearing Deposits
Savings.............................. 46,623 (26.4) 63,322 36.4 46,422
Money Market Checking and Savings
Commercial and Individual.......... 68,407 (13.6) 79,137 (18.3) 96,821
Public Funds....................... 36,041 15.8 31,116 15.3 26,993
Time Deposits
Commercial and Individual.......... 110,126 9.8 100,277 (9.2) 110,376
Public Funds....................... 42,602 24.0 34,346 2.2 33,601
----------- ----- ----------- ----- -----------
Total Interest-Bearing Deposits.... 303,799 (1.4) 308,198 (1.9) 314,213
----------- ----- ----------- ----- -----------
Total Deposits................... $ 343,610 (0.6)% $ 345,680 (1.3)% $ 350,243
----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- -----------
Weighted Average Rate on
Interest-Bearing Deposits............. 4.05% 3.77% 3.60%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by First
State Bank and are not sought through brokered sources. Time deposits continue
to be a significant source of funds.
The following table presents the maturities of time deposits of $100,000 or
more at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994
- ---------------------------------------------------------------------------------------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Three Months or Less.................................................................... $ 59,695 $ 57,110
After Three through Six Months.......................................................... 22,434 17,152
After Six through Twelve Months......................................................... 11,212 8,929
After Twelve Months..................................................................... 1,116 653
--------- ---------
Total............................................................................... $ 94,457 $ 83,844
--------- ---------
--------- ---------
Weighted Average Rate on Time Deposits of $100,000 or More.............................. 5.37% 4.81%
--------- ---------
--------- ---------
</TABLE>
F-46
<PAGE>
Mexico is a part of the trade territory of First State Bank and foreign
deposits from Mexican sources have traditionally been a source of funding.
Although First State Bank experienced a short term negative impact on its
Mexican deposits due to the recent devaluation of the peso, First State Bank's
Mexican deposit levels have since recovered.
The following table presents foreign deposits, primarily from Mexican
sources, at December 31, 1995:
<TABLE>
<CAPTION>
FOREIGN DEPOSITS
- ----------------------------------------------------------------------------------------- DECEMBER 31, 1995
-----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Demand Deposits.......................................................................... $ 674
--------
Interest-Bearing Deposits
Savings................................................................................ 1,267
Money Market Checking and Savings...................................................... 5,106
Time Deposits Under $100,000........................................................... 3,261
Time Deposits of $100,000 or More...................................................... 13,587
--------
Total Interest-Bearing Deposits...................................................... 23,221
--------
Total Foreign Deposits............................................................... $ 23,895
--------
--------
Percentage of Total Deposits............................................................. 7.0%
--------
--------
Weighted Average Rate on Foreign Deposits................................................ 4.80%
--------
--------
</TABLE>
LIQUIDITY
Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew or acquire additional deposit
liabilities is a major source of liquidity. First State Bank's principal sources
of funds are primarily within the local markets of First State Bank and consist
of deposits, interest and principal payments on loans and investment securities.
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At December 31,
1995, First State Bank's liquidity ratio, defined as cash, U.S.
Government-backed securities, and federal funds sold as a percentage of deposits
was 48.1% compared to 45.2% at December 31, 1994.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in the First State Bank's trade area.
During 1995, funds for $34.3 million of investment purchases and the $2.1
million net decrease in deposits came from various sources, including $3.4
million net repayments on loans, $47.8 million proceeds from maturing or called
securities and $8.6 million of net income.
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") requires
that federal bank regulatory authorities take "prompt corrective action" with
respect to any depository institution which does not meet specified minimum
capital requirements. The applicable regulations establish five capital levels
which require or permit the Federal Deposit Insurance Corporation (the "FDIC")
and other regulatory authorities to take supervisory action. The relevant
classifications range from "well capitalized" to "critically capitalized." The
classifications are generally determined by applicable ratios of the
institution, including Tier I capital to risk-weighted assets, total capital to
risk-weighted assets and leverage ratios. Based on First State Bank's capital
ratios at December 31, 1995, First State Bank was classified as "well
capitalized" under the applicable regulations. As a result, First State Bank
does not believe that the prompt corrective action regulations have any material
effect on its activities or operations.
F-47
<PAGE>
The funds management policy of First State Bank is to maintain a liability
sensitive position. Changes in net interest income occur when interest rates on
loans and investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. The interest rate sensitivity
gap represents the dollar amount of difference between rate sensitive assets and
rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is
determined by dividing rate sensitive assets by rate sensitive liabilities. A
ratio of 1.0 indicates a perfectly matched position, in which case the effect on
net interest income due to interest rate movements would be zero.
Rate sensitive liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1995 by $83.3 million.
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------------
1-3 4-6 7-12 1-5 OVER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
- ----------------------------------- ------------ ------------ ---------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans.............................. $ 73,015 $ 19,222 $ 31,702 $ 58,201 $ 6,284 $ 188,424
Investment Securities
Available for Sale............... 8,962 1,499 6,932 6,085 -- 23,478
Held to Maturity................. 23,359 4,278 17,763 78,260 19,623 143,283
Federal Funds Sold................. 23,350 -- -- -- -- 23,350
------------ ------------ ---------- ----------- --------- -----------
Total Interest-Earning
Assets........................ 128,686 24,999 56,397 142,546 25,907 378,535
------------ ------------ ---------- ----------- --------- -----------
Savings............................ 46,623 -- -- -- -- 46,623
Money Market Checking and Savings
Accounts.......................... 104,448 -- -- -- -- 104,448
Time Deposits...................... 78,974 36,017 27,155 10,580 -- 152,726
Other Borrowings................... 157 -- -- -- -- 157
------------ ------------ ---------- ----------- --------- -----------
Total Interest-Bearing
Liabilities................... 230,202 36,017 27,155 10,580 -- 303,954
------------ ------------ ---------- ----------- --------- -----------
Rate Sensitivity GAP (1)........... $ (101,516) $ (11,018) $ 29,242 $ 131,966 $ 25,907 $ 74,581
------------ ------------ ---------- ----------- --------- -----------
------------ ------------ ---------- ----------- --------- -----------
Cumulative Rate Sensitivity
GAP............................... $ (101,516) $ (112,534) $ (83,292) $ 48,674 $ 74,581
------------ ------------ ---------- ----------- ---------
------------ ------------ ---------- ----------- ---------
Ratio of Cumulative Rate
Sensitivity GAP to Total Assets... (25.10)% (27.82)% (20.59)%
------------ ------------ ----------
------------ ------------ ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities...... 0.56:1 0.58:1 0.72:1
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
EFFECTS OF INFLATION
Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring
F-48
<PAGE>
the spread between interest costs and yields through adjustments to maturities
and interest rates of assets and liabilities. In addition, inflation tends to
increase demand for loans from financial institutions as industrial companies
attempt to maintain a constant level of goods in inventory and assets. As
consumers of goods and services, financial institutions are affected by
inflation as prices increase, causing an increase in costs of salaries, employee
benefits, occupancy expense and similar items.
CAPITAL RESOURCES
Stockholders' equity of $59.4 million at December 31, 1995 reflects a net
increase of $4.1 million or 7.5% compared to stockholders' equity of $55.3
million at December 31,1994. This net increase was primarily attributable to
earnings for 1995 of $8.6 million. The net increase in stockholders' equity
reflects dividends paid on common stock of $5.0 million in 1995.
The risk-based capital standards as established by the FDIC apply to First
State Bank. The numerator of the risk-based capital ratio for banks includes
Tier I capital, consisting of common stockholders' equity and qualifying
cumulative and noncumulative perpetual preferred stock; and Tier II capital,
consisting of other preferred stock, reserve for possible loan losses and
certain subordinated and term-debt securities. Beginning on December 31, 1993,
goodwill is deducted from Tier I capital. At no time is Tier II capital allowed
to exceed Tier I capital in the calculation of total capital. The denominator or
asset portion of the risk-based capital ratio aggregates generic classes of
balance sheet and off-balance sheet exposures, each weighted by one of four
factors, ranging from 0% to 100%, based on the relative risk of the exposure
class.
Ratio targets are set for both Tier I and Total Capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum Total Capital ratio is 8.0%. The FDIC has guidelines for a leverage
capital ratio that is an additional evaluation of capital adequacy of banks. The
leverage ratio is defined to be First State Bank's Tier I capital divided by its
risk adjusted total assets. An insured depository institution is "well
capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio is
equal to or greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to
or grater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater
than 5.0%. Based on capital ratios, First State Bank is within the definition of
"well capitalized" for FDIC purposes at December 31, 1995.
First State Bank's Tier I Risk-Based Capital Ratio was approximately 18.47%
and 17.99% at December 31, 1995 and 1994, respectively. First State Bank's Total
Risk-Based Capital Ratio was approximately 19.78% and 19.26% at December 31,
1995 and 1994, respectively. First State Bank's Tier I Leverage Capital Ratio
was approximately 14.88% and 13.98% at December 31, 1995 and 1994, respectively.
The following table presents First State Bank's risk-based capital
calculation:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
RISK-BASED CAPITAL 1995 1994
- ------------------------------------------------------------------------------------ ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total Stockholders' Equity, before unrealized gains or losses on Securities
Available for Sale................................................................. $ 59,405 $ 55,760
Less-Goodwill and Other Deductions.................................................. -- --
------------- -------------
Total Tier I Capital................................................................ 59,405 55,760
Total Tier II Capital............................................................... 4,196 3,915
------------- -------------
Total Qualifying Capital............................................................ $ 63,601 $ 59,675
------------- -------------
------------- -------------
Risk Adjusted Assets (Including Off-Balance Sheet Exposure)......................... $ 321,575 $ 309,874
------------- -------------
------------- -------------
Tier I Risk-Based Capital Ratio..................................................... 18.47% 17.99%
Total Risk-Based Capital Ratio...................................................... 19.78 19.26
Leverage Capital Ratio.............................................................. 14.88 13.98
------------- -------------
------------- -------------
</TABLE>
F-49
<PAGE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, First State Bank adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
For loans covered by Statement 114, First State Bank makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by First
State Bank using discounted cash flows, except when it is determined that the
sole source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such case, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows. At the
time a loan is placed on nonaccrual status, interest previously recognized but
uncollected is reversed and charged against current income. Subsequent interest
payments received on nonaccrual loans are either applied against principal or
reported as income, depending upon management's assessment of the ultimate
collectibility of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 did
not have a material effect on First State Bank's results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans.
Statement 123 encourages entities to adopt a "fair value" based method of
accounting for stock-based compensation plans which requires an estimate of the
fair value of stock options or other equity instruments which employees become
entitled to when they have rendered requisite service or satisfied other
conditions necessary to earn the right to benefit from the instruments.
Compensation cost is then determined based on the fair value estimate and is
recognized over the service period, which is usually the vesting period.
Statement 123 also requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, implementation of Statement 123 should have no material effect on First
State Bank's financial statements.
F-50
<PAGE>
FOURTH QUARTER RESULTS
The following table presents a summary of operations for the last five
quarters:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------ ---------
CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income............................................... $ 8,284 $ 8,197 $ 8,891 $ 8,414 $ 7,714
Interest Expense.............................................. 3,219 3,364 3,407 3,111 2,873
--------- --------- --------- --------- ---------
Net Interest Income........................................... 5,065 4,833 5,484 5,303 4,841
Provision for Loan Losses..................................... 1,625 583 136 81 1,359
Noninterest Income............................................ 77 552 385 388 190
Noninterest Expense........................................... 1,656 1,506 1,629 1,473 1,516
--------- --------- --------- --------- ---------
Income Before Taxable-Equivalent Adjustment and Income Tax.... 1,861 3,296 4,104 4,137 2,156
Taxable-Equivalent Adjustment................................. 308 330 335 341 340
Applicable Income Tax Expense................................. 483 800 1,067 1,088 423
--------- --------- --------- --------- ---------
Net Income.................................................... $ 1,070 $ 2,166 $ 2,702 $ 2,708 $ 1,393
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Common Share................................... $ 5.35 $ 10.83 $ 13.51 $ 13.54 $ 6.97
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
First State Bank & Trust Co.:
We have audited the accompanying balance sheets of First State Bank & Trust
Co. (the "Bank") as of December 31, 1995 and 1994, and the related statements of
earnings, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of First State Bank & Trust Co.
as of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the each of the years in the three-year period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Bank changed its
method of accounting for investment securities in 1994 to adopt the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 31, 1996
F-52
<PAGE>
FIRST STATE BANK & TRUST CO.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2).......................................... $ 16,269,484 $ 18,007,420
Federal funds sold........................................................ 23,350,000 2,200,000
---------------- ----------------
Total cash and cash equivalents............................... 39,619,484 20,207,420
---------------- ----------------
Investment securities available for sale (note 3)......................... 23,478,011 33,153,515
Investment securities held to maturity (note 3)........................... 143,282,719 145,999,757
Loans, net of unearned discount (note 4).................................. 188,424,300 194,305,658
Less allowance for loan losses (note 5)................................... 4,196,028 3,914,948
---------------- ----------------
Net loans..................................................... 184,228,272 190,390,710
---------------- ----------------
Bank premises and equipment, net of accumulated depreciation and
amortization (note 6).................................................... 5,487,065 5,449,897
Accrued interest receivable............................................... 7,172,017 6,232,652
Other real estate owned................................................... 431,160 591,781
Other assets.............................................................. 743,615 857,724
Deferred federal income taxes (note 8).................................... 27,162 214,498
---------------- ----------------
$ 404,469,505 $ 403,097,954
---------------- ----------------
---------------- ----------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing............................................... $ 39,810,680 $ 37,481,439
Interest-bearing (note 7)......................................... 303,799,742 308,198,878
---------------- ----------------
Total deposits................................................ 343,610,422 345,680,317
Other borrowings.................................................. 156,553 1,092,000
Accrued interest payable.......................................... 718,652 547,157
Deferred compensation payable (note 9)............................ 529,430 506,389
Other liabilities................................................. 67,069 8,497
---------------- ----------------
Total liabilities............................................. 345,082,126 347,834,360
---------------- ----------------
Stockholders' equity:
Common stock, $20 par value, 200,000 shares authorized, issued and
outstanding.......................................................... 4,000,000 4,000,000
Certified surplus..................................................... 21,000,000 21,000,000
Undivided profits..................................................... 34,405,357 30,759,829
Unrealized loss on securities available for sale (note 3)............. (17,978) (496,235)
---------------- ----------------
Total stockholders' equity.................................... 59,387,379 55,263,594
Commitments and contingent liabilities (notes 4 and 10)
---------------- ----------------
$ 404,469,505 $ 403,097,954
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-53
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Loans........................................................ $ 20,728,570 $ 20,026,524 $ 20,454,890
Investment securities........................................ 10,526,478 9,949,080 10,297,111
Federal funds sold........................................... 1,217,370 855,109 870,640
-------------- -------------- --------------
Total interest income.................................... 32,472,418 30,830,713 31,622,641
-------------- -------------- --------------
Interest expense:
Savings, NOW and money market deposits....................... 4,623,914 5,503,762 5,443,720
Time deposits................................................ 8,436,377 6,235,155 7,502,979
Other borrowings............................................. 42,689 27,874 21,444
-------------- -------------- --------------
Total interest expense................................... 13,102,980 11,766,791 12,968,143
-------------- -------------- --------------
Net interest income...................................... 19,369,438 19,063,922 18,654,498
Provision for loan losses (note 5)............................... 2,425,323 2,188,960 2,287,000
-------------- -------------- --------------
Net interest income after provision for loan losses...... 16,944,115 16,874,962 16,367,498
Noninterest income:
Service charges on deposit accounts.......................... 1,145,720 1,078,481 1,076,729
Other service charges and fees............................... 151,991 141,083 85,742
Other........................................................ 104,403 81,598 163,325
-------------- -------------- --------------
Total noninterest income................................. 1,402,114 1,301,162 1,325,796
-------------- -------------- --------------
Noninterest expense:
Salaries and employee benefits............................... 2,823,641 2,562,973 2,338,022
Net occupancy expense........................................ 568,673 554,942 639,994
Equipment expense............................................ 340,948 278,082 260,962
Legal and professional fees.................................. 526,025 316,080 473,455
Data processing fees......................................... 372,130 363,596 279,119
Other real estate and repossessed asset expense, net......... 96,377 197,856 65,072
FDIC assessment.............................................. 397,282 801,740 770,595
Other........................................................ 1,139,267 1,067,232 2,507,707
-------------- -------------- --------------
Total noninterest expense................................ 6,264,343 6,142,501 7,334,926
-------------- -------------- --------------
Income before income tax expense......................... 12,081,886 12,033,623 10,358,368
Income tax expense (note 8)...................................... 3,436,358 3,191,573 2,260,025
-------------- -------------- --------------
Net income............................................... $ 8,645,528 $ 8,842,050 $ 8,098,343
-------------- -------------- --------------
-------------- -------------- --------------
Net income per share............................................. $ 43.23 $ 44.21 $ 40.49
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-54
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
CERTIFIED UNDIVIDED AVAILABLE FOR STOCKHOLDERS'
COMMON STOCK SURPLUS PROFITS SALE EQUITY
------------- -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992............ $ 4,000,000 $ 21,000,000 $ 18,819,436 $ -- $ 43,819,436
Cash dividends on common
stock.................................. -- -- (2,000,000) -- (2,000,000)
Net income for 1993..................... -- -- 8,098,343 -- 8,098,343
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1993............ 4,000,000 21,000,000 24,917,779 -- 49,917,779
Effect of change to adopt an accounting
principle -- accounting for unrealized
gain (loss) on securities available for
sale (note 3).......................... -- -- -- 137,434 137,434
Cash dividends on common
stock.................................. -- -- (3,000,000) -- (3,000,000)
Change in unrealized gain (loss) on
securities available for sale (note
3)..................................... -- -- -- (633,669) (633,669)
Net income for 1994..................... -- -- 8,842,050 -- 8,842,050
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1994............ 4,000,000 21,000,000 30,759,829 (496,235) 55,263,594
Cash dividends on common
stock.................................. -- -- (5,000,000) -- (5,000,000)
Change in unrealized gain (loss) on
securities available for sale (note
3)..................................... -- -- -- 478,257 478,257
Net income for 1995..................... -- -- 8,645,528 -- 8,645,528
------------- -------------- -------------- ------------- --------------
Balance at December 31, 1995............ $ 4,000,000 $ 21,000,000 $ 34,405,357 $ (17,978) $ 59,387,379
------------- -------------- -------------- ------------- --------------
------------- -------------- -------------- ------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-55
<PAGE>
FIRST STATE BANK & TRUST CO.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 8,645,528 $ 8,842,050 $ 8,098,343
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization of bank premises and
equipment.......................................... 370,813 363,443 327,355
Net discount accretion on investment securities..... (428,999) (138,022) (22,619)
Provision for loan losses........................... 2,425,323 2,188,960 2,287,000
Losses on sales of other real estate owned.......... 96,377 197,856 68,774
(Increase) decrease in accrued interest receivable,
federal income tax refundable and other assets..... (884,298) 788,385 294,713
Increase (decrease) in accrued interest payable and
other liabilities.................................. 253,108 (13,207) (294,201)
---------------- ---------------- ----------------
Total adjustments............................... 1,832,324 3,387,415 2,661,022
---------------- ---------------- ----------------
Net cash provided by operating activities....... 10,477,852 12,229,465 10,759,365
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from investment security maturities and
principal repayments................................... 20,161,980 19,455,000 22,464,681
Proceeds from called investment securities.............. 27,685,000 15,066,415 13,736,583
Purchase of investment securities....................... (34,300,805) (43,700,191) (74,882,531)
Net decrease (increase) in loans........................ 3,260,671 (2,886,642) (4,867,463)
Recoveries on loans charged off......................... 120,104 143,405 114,571
Purchases of bank premises and equipment................ (407,981) (150,048) (1,268,904)
Proceeds from sales of other real estate owned.......... 420,585 1,106,919 489,939
---------------- ---------------- ----------------
Net cash provided by (used in) investing
activities..................................... 16,939,554 (10,965,142) (44,213,124)
---------------- ---------------- ----------------
Cash flows from financing activities:
(Decrease) increase in deposits......................... (2,069,895) (4,569,866) 17,679,043
(Decrease) increase in other borrowings................. (935,447) (559,288) 76,333
Dividends paid on common stock.......................... (5,000,000) (3,000,000) (2,000,000)
---------------- ---------------- ----------------
Net cash (used in) provided by financing
activities..................................... (8,005,342) (8,129,154) 15,755,376
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents.................................... 19,412,064 (6,864,831) (17,698,383)
Cash and cash equivalents at beginning of year.............. 20,207,420 27,072,251 44,770,634
---------------- ---------------- ----------------
Cash and cash equivalents at end of year.................... $ 39,619,484 $ 20,207,420 $ 27,072,251
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental disclosure of cash flow information:
Interest paid........................................... $ 12,931,485 $ 11,779,735 $ 13,259,963
Taxes paid.............................................. 3,815,113 3,243,371 2,304,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
Supplemental schedule of noncash investing and financing
activities -- foreclosure of assets in partial satisfaction
of loans receivable........................................ $ 357,000 $ 1,174,000 $ 611,000
---------------- ---------------- ----------------
---------------- ---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-56
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. A summary of the more significant accounting policies follows:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks and federal
funds sold are considered to be cash equivalents. Federal funds sold generally
have one-day maturities.
TRUST ASSETS
Assets held by the trust department in fiduciary or agency capacities are
not assets of the Bank and are not included in the balance sheets. Trust assets
at December 31, 1995 and 1994 are approximately $11,542,000 and $11,400,000
respectively.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: held to maturity,
trading or available for sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as held to maturity and measured at amortized cost in the balance sheet only if
management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the balance sheet with unrealized holding gains and losses included in
earnings. Investments not classified as held to maturity nor trading are
classified as available for sale and measured at fair value in the balance sheet
with unrealized holding gains and losses, net of applicable income taxes,
reported in a separate component of stockholders' equity until realized.
Effective January 1, 1994, the Bank adopted Statement 115, which had no
impact on the Bank's income statement as all securities were classified as
either held to maturity or available for sale. Accounting for securities
classified as held to maturity will continue on the basis of amortized cost.
Securities classified as available for sale will be measured at market value
with the net unrealized holding gains and losses reported in a separate
component of stockholders' equity until realized. Purchases of investment
securities are classified as available for sale or held to maturity at time of
purchase as determined by management.
Premiums and discounts are amortized and accreted using a method which
approximates level yield. Gains and losses on available for sale investment
securities sold are recognized in operations at the time of sale based on the
specific identification method. Security purchases and sales are recorded on the
trade date.
F-57
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Management continually reviews the loan portfolio to identify loans which,
with respect to principal or interest, have or may become collection problems. A
loan is generally placed on nonaccrual status when principal or interest is past
due 90 days or more, and the loan is not both well-secured and in the process of
collection. A loan is also placed on nonaccrual status immediately if, in the
opinion of management, full collection of principal or interest is unlikely. At
the time a loan is placed on nonaccrual status, interest previously recognized
but uncollected is reversed and charged against current income. Subsequent
interest payments received on nonaccrual loans are either applied against
principal or reported as income, depending on management's assessment of the
ultimate collectibility of principal.
Unearned interest on installment loans is recognized as income over the
terms of the related loans on a basis which results in approximately level rates
of return over the terms of the loans.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which
addresses the accounting by creditors for impairment of certain loans, as
defined. In October 1994, Statement 114 was amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan,
Income Recognition and Disclosures." Implementation of these pronouncements in
the first quarter of 1995 did not have a material effect on the Bank's financial
statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations as
deemed necessary by management to maintain the allowance for loan losses at an
amount considered adequate to absorb known or possible loan losses in the Bank's
loan portfolio. The provision is determined based on management's evaluation of
the loan portfolio, giving consideration to existing economic conditions,
changes in the loan portfolio, historical loan loss factors and other relevant
information. Management believes that the allowance for loan losses is adequate.
Loans are charged against the allowance for loan losses when management
believes the collection of principal is unlikely. Recoveries of amounts
previously charged off are credited to the allowance.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost. Expenditures for
improvements are capitalized. Repairs and maintenance which do not extend the
life of bank premises and equipment are charged to expense as incurred.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Any gain or loss resulting from
disposition of premises and equipment is reflected in earnings.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at fair value at the date of foreclosure
which is subsequently considered cost. At subsequent dates, other real estate is
carried at the lower of fair value less estimated costs to sell or cost. Fair
values are determined generally by reference to appraisals. Rental income earned
and expenses incurred related to real estate owned are recognized during the
period earned or incurred and are included in noninterest expense at their net
amount.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities
F-58
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are measured using tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
(2) RESERVE REQUIREMENTS
The Bank is required to maintain certain daily reserve balances on hand or
on deposit with the Federal Reserve Bank in accordance with Federal Reserve
Board requirements. These deposits are noninterest bearing and not available for
investment purposes. Cash and due from bank balances maintained in accordance
with such requirements at December 31, 1995 was approximately $5,611,000.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value, which is the carrying value,
of investment securities available for sale at December 31, 1995 and December
31, 1994 are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE
- ----------------------------------------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. treasuries................................ $ 8,505,399 $ 7,907 $ (9,156) $ 8,504,150
U.S. government agencies....................... 14,999,852 43,818 (69,809) 14,973,861
-------------- ----------- ------------ --------------
$ 23,505,251 $ 51,725 $ (78,965) $ 23,478,011
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
<CAPTION>
1994
---------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE
- ----------------------------------------------- -------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
U.S. treasuries................................ $ 7,485,019 $ -- $ (210,769) $ 7,274,250
U.S. government agencies....................... 26,420,372 33,482 (574,589) 25,879,265
-------------- ----------- ------------ --------------
$ 33,905,391 $ 33,482 $ (785,358) $ 33,153,515
-------------- ----------- ------------ --------------
-------------- ----------- ------------ --------------
</TABLE>
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding
losses on securities available for sale, net of income tax, as a decrease in
stockholders' equity of $17,978 and $496,235, respectively.
The amortized cost, which is the carrying value, and estimated market value
of investment securities held to maturity at December 31, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1995
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY COST GAINS LOSSES MARKET VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. treasuries............................................................ $ 6,921,316 $ 148,684 $ -- $ 7,070,000
U.S. government agencies................................................... 96,073,990 580,034 (1,163,653) 95,490,371
Mortgage-backed securities................................................. 117,931 3,131 -- 121,062
Obligations of state and political subdivisions............................ 39,144,482 2,273,531 (41,554) 41,376,459
Other...................................................................... 1,025,000 -- (85,000) 940,000
------------ ---------- ----------- ------------
$143,282,719 $3,005,380 $(1,290,207) $144,997,892
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
F-59
</TABLE>
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
1994
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY COST GAINS LOSSES MARKET VALUE
------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. treasuries............................................................ $ 6,878,988 $ 14,614 $ (67,051) $ 6,826,551
U.S. government agencies................................................... 95,138,721 46,299 (4,281,522) 90,903,498
Mortgage-backed securities................................................. 143,244 716 -- 143,960
Obligations of state and political subdivisions............................ 42,813,804 1,181,413 (794,410) 43,200,807
Other...................................................................... 1,025,000 -- (145,000) 880,000
------------ ---------- ----------- ------------
$145,999,757 $1,243,042 $(5,287,983) $141,954,816
------------ ---------- ----------- ------------
------------ ---------- ----------- ------------
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED MARKET
AVAILABLE FOR SALE AMORTIZED COST VALUE
- -------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
Due in one year or less............................................. $ 16,967,383 $ 16,896,451
Due after one year through five years............................... 6,537,868 6,581,560
---------------- ----------------
$ 23,505,251 $ 23,478,011
---------------- ----------------
---------------- ----------------
<CAPTION>
HELD TO MATURITY
- --------------------------------------------------------------------
<S> <C> <C>
Due in one year or less............................................. $ 21,450,361 $ 21,517,429
Due after one year through five years............................... 102,176,590 102,449,356
Due after five years through ten years.............................. 15,109,876 16,169,479
Due after ten years................................................. 4,427,961 4,740,566
Mortgage-backed securities.......................................... 117,931 121,062
---------------- ----------------
$ 143,282,719 $ 144,997,892
---------------- ----------------
---------------- ----------------
</TABLE>
Included in held to maturity and available for sale securities at December
31, 1995 are approximately $7,950,000 and $3,447,000, respectively, of
investment securities that pay interest based on a set coupon rate with a
foreign exchange rate adjustment or based directly on a foreign index. The held
to maturity securities have a market value of $7,681,000. All of the securities
mature during 1996 and 1997, with the exception of one security maturing in the
year 2000. The securities are paying interest at a rate of approximately 3.00%.
One security of approximately $500,000 has an interest rate floor of 3.00%. The
interest rate on the other securities could reset to zero. No loss of principal
is anticipated by management on any of the aforementioned securities.
There were no sales for the year ended December 31, 1995 and December 31,
1994 from either the available for sale or held to maturity categories.
Securities with a carrying value of approximately $88,016,000 and
$84,645,000 were pledged to secure public deposits of $79,216,000 and
$66,238,000 at December 31, 1995 and 1994, respectively.
F-60
<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.
F-61
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS (CONTINUED)
Outstanding commitments and letters of credit at December 31, 1995 and 1994
are approximately as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commitments to extend credit........................................... $ 18,465,000 $ 16,276,000
Letters of credit...................................................... 3,916,000 3,932,000
-------------- --------------
-------------- --------------
</TABLE>
(5) ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Balance at beginning of year............................................ $ 3,914,948 $ 3,903,420
Provision for loan losses............................................... 2,425,323 2,188,960
Loans charged off....................................................... (2,264,347) (2,320,837)
Recoveries.............................................................. 120,104 143,405
-------------- --------------
Balance at end of year.................................................. $ 4,196,028 $ 3,914,948
-------------- --------------
-------------- --------------
</TABLE>
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment and related accumulated depreciation and
amortization at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Land..................................................... -- $ 636,397 $ 636,397
Premises................................................. 40 years 5,085,032 4,896,758
Furniture, fixtures and equipment........................ 10 years 2,930,492 2,759,784
Automobiles.............................................. 3 years 147,605 98,605
-------------- --------------
8,799,526 8,391,544
Less accumulated depreciation and amortization........... (3,312,461) (2,941,647)
-------------- --------------
$ 5,487,065 $ 5,449,897
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense was approximately $371,000, $360,000 and $327,000 for
the years ended December 31, 1995, 1994 and 1993, respectively.
(7) INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Savings, money market and NOW accounts.............................. $ 151,071,040 $ 173,575,728
Certificates of deposit less than $100,000.......................... 58,271,834 50,780,305
Certificates of deposit of $100,000 or more......................... 94,456,868 83,842,845
---------------- ----------------
$ 303,799,742 $ 308,198,878
---------------- ----------------
---------------- ----------------
</TABLE>
Interest expense for certificates of deposit of $100,000 or more for the
years ended December 31, 1995, 1994 and 1993 was approximately $5,544,000,
$4,148,000 and $4,850,000, respectively.
F-62
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Federal:
Current tax expense.................................... $ 3,495,399 $ 3,331,309 $ 2,190,957
Deferred tax (benefit) expense......................... (59,041) (139,736) 69,068
------------- ------------- -------------
Income tax expense................................. $ 3,436,358 $ 3,191,573 $ 2,260,025
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The income tax expense for the years ended December 31, 1995, 1994 and 1993
differs from the amount computed by applying the federal income tax rate of 34%
to income before income tax expense as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Computed "expected" tax expense.......................... $ 4,107,841 $ 4,091,432 $ 3,521,845
Increase (reduction) in tax resulting from:
Tax-exempt interest, net............................. (799,767) (1,002,634) (1,092,876)
Utilization of alternative minimum tax credit........ -- -- (229,267)
Other, net........................................... 128,284 102,775 60,323
------------- -------------- --------------
$ 3,436,358 $ 3,191,573 $ 2,260,025
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................................. $ 269,552 $ 228,920
Deferred compensation..................................................... 180,006 172,172
Other real estate......................................................... 2,833 2,369
Unrealized losses on investment securities................................ 9,261 255,638
----------- -----------
461,652 659,099
----------- -----------
Deferred tax liabilities -- premises and equipment............................ 434,490 444,601
----------- -----------
Net deferred tax asset................................................ $ 27,162 $ 214,498
----------- -----------
----------- -----------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(9) EMPLOYEE BENEFITS
The Bank has three separate deferred compensation plans for the benefit of
certain Bank employees. The plans provide for retirement benefits to be paid to
the specific employee (or a designated beneficiary or estate if death occurs
prior to payment of the full amount of deferred compensation) on reaching age
65. One plan entered into on December 10, 1963, commenced payments of
approximately $13,000 each year on January 4, 1988, continuing annually
thereafter through June 2003. A second plan, entered into on September 1, 1979,
provides for payments of approximately $13,000 each year which was scheduled to
commence on April 1, 1990, continuing annually thereafter through June 2005;
however, the employee elected to receive an amount less than that provided for
in the plan over a longer period of time. The third plan provides for a
retirement benefit payable of $50,000 per year commencing in March
F-63
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) EMPLOYEE BENEFITS (CONTINUED)
1999 and continuing annually thereafter for 20 years. The amounts charged to
compensation expense related to the deferred compensation plans for the years
ended December 31, 1995, 1994 and 1993 were $15,300, $13,600 and $11,800,
respectively.
The Bank owns and is the beneficiary of three life insurance policies on the
employees or former employees covered by the deferred compensation plans. The
life insurance policy face values are amounts approximately equal to the total
benefits paid under the plans.
(10) CONTINGENT LIABILITIES
The Bank is involved in certain claims and suits occurring in the ordinary
course of business. Management believes that the probable resolution of such
claims and suits will not have a material adverse affect on the financial
condition of the Bank.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1995 and methods and assumptions
used to determine the estimated fair values are set forth below for the Bank's
financial instruments:
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL VALUE FAIR VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks......................................... $ 16,269,484 $ 16,269,484
Federal funds sold.............................................. 23,350,000 23,350,000
Investment securities........................................... 166,760,730 168,475,903
Net loans....................................................... 184,228,272 184,165,336
Financial liabilities -- deposits................................... 343,610,422 343,872,059
Off-balance sheet instruments:
Commitments to extend credit.................................... 18,465,000 18,465,000
Letters of credit............................................... 3,916,000 3,916,000
---------------- ----------------
---------------- ----------------
</TABLE>
CASH AND DUE FROM BANKS
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
FEDERAL FUNDS SOLD
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
INVESTMENT SECURITIES
The fair values of investment securities are estimated based on quoted
market prices from investment dealers and companies.
NET LOANS
The fair value of loans is estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type and the fair
value of loans is estimated using current market rates for the type of loan.
DEPOSITS
The fair value of deposits with short-term or no stated maturity, such as
checking, savings, NOW accounts and money market accounts, is equal to the
amounts payable at December 31, 1995. The fair value of certificates of deposits
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
F-64
<PAGE>
FIRST STATE BANK & TRUST CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit are
estimated using current interest rates and committed rates.
(12) REGULATORY SUPERVISION
As a result of criticisms reflected in the October 4, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of the Bank
and the Banking Commissioner of Texas on December 14, 1993. The Memorandum
required that the Bank, among other provisions, increase Board of Director
supervision over loan activities, revise the existing loan policy, increase the
allowance for loan losses and reduce criticized assets. Additionally, the Bank's
Board of Directors is required to submit to the Commissioner and Regional
Director of the FDIC, a written report of the actions taken to comply with the
Memorandum within fifteen days after the end of each calendar quarter. Failure
to comply with the requirements of the Memorandum could subject the Bank to
additional action by bank regulatory authorities. Management has made efforts to
comply with the requirements of the Memorandum and believes such additional
action will not be taken by regulatory authorities.
(13) PENDING TRANSACTION
On January 9, 1996, a definitive agreement was signed under which First
State Bank & Trust Co. will be purchased by Texas State Bank, the principal
operating subsidiary of Texas Regional Bancshares, Inc. The agreement has been
approved by the Boards of Directors of First State Bank & Trust Co., Texas State
Bank and Texas Regional Bancshares, Inc. The sale of the Bank is subject to
approval by the appropriate regulatory agencies and contingent upon, among other
things, Texas Regional Bancshares, Inc. having successfully raised additional
capital to partially fund the transaction.
F-65
<PAGE>
THE BORDER BANK
SELECTED FINANCIAL INFORMATION
The selected financial information under the captions "Summary of
Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the three-year period ended December 31, 1995 has been derived from
the financial statements of The Border Bank ("Border Bank"), which financial
statements have been audited by KPMG Peat Marwick LLP, independent auditors. The
financial statements of Border Bank at December 31, 1995 and 1994 and for each
of the years in the three-year period ended December 31, 1995 are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income.......................................................... $ 9,016 $ 8,879 $ 8,928
Interest Expense......................................................... 4,415 3,771 3,892
----------- ----------- -----------
Net Interest Income...................................................... 4,601 5,108 5,036
Provision for Loan Losses................................................ 485 397 265
Noninterest Income....................................................... 316 403 286
Noninterest Expense...................................................... 2,167 2,185 2,481
----------- ----------- -----------
Income before Income Tax Expense......................................... 2,265 2,929 2,576
Income Tax Expense....................................................... 381 604 501
----------- ----------- -----------
Net Income............................................................... $ 1,884 $ 2,325 $ 2,075
----------- ----------- -----------
----------- ----------- -----------
PER SHARE DATA
Net Income............................................................... $ 9.42 $ 11.62 $ 10.38
Book Value............................................................... 85.38 79.21 70.35
Cash Dividends Paid on Common Stock...................................... 4.00 2.00 2.00
Average Shares Outstanding (in thousands)................................ 200 200 200
PERIOD-END BALANCE SHEET DATA
Total Assets............................................................. $ 119,505 $ 117,123 $ 114,874
Loans.................................................................... 47,345 45,859 48,382
Investment Securities.................................................... 54,236 58,720 54,438
Interest-Earning Assets.................................................. 110,331 109,079 105,520
Deposits................................................................. 101,995 100,865 100,521
Stockholders' Equity..................................................... 17,075 15,842 14,070
PERFORMANCE RATIOS
Return on Average Assets................................................. 1.62% 1.98% 1.83%
Return on Average Stockholders' Equity................................... 11.50 15.73 15.79
Net Interest Margin...................................................... 4.92 5.34 5.49
Loan to Deposit Ratio.................................................... 46.42 45.47 48.13
Demand Deposit to Total Deposit Ratio.................................... 7.00 6.95 6.79
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and Other Nonperforming Assets............. 0.91% 1.05% 1.64%
Net Charge-Offs to Average Loans......................................... 0.62 0.25 0.53
Allowance for Loan Losses as a Percentage of:
Loans.................................................................. 2.32 1.96 1.29
Nonperforming Loans.................................................... 582.01 398.67 106.30
Nonperforming Assets................................................... 254.04 186.93 78.10
CAPITAL RATIOS
Period-End Stockholders' Equity to Total Assets.......................... 14.29% 13.53% 12.25%
Tier 1 Risk-Based Capital................................................ 18.12 18.01 15.89
Total Risk-Based Capital................................................. 19.29 19.02 16.59
Leverage Capital Ratio................................................... 14.51 13.58 12.20
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-66
<PAGE>
THE BORDER BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for Border Bank for each of
the years ended December 31, 1995, 1994 and 1993. This discussion should be read
in conjunction with the financial statements of Border Bank and the notes
thereto appearing elsewhere in this prospectus.
SELECTED FINANCIAL INFORMATION
Net income for the year ended December 31, 1995 was $1.9 million, a decrease
of 19.0% compared to net income of $2.3 million for the year ended December 31,
1994. The earnings per share of $9.42 for the year ended December 31, 1995
decreased $2.20 or 18.9% compared to earnings per share of $11.62 for the year
ended December 31, 1994.
Return on average assets for 1995 was 1.62%, compared to 1.98% for 1994 and
1.83% for 1993. Return on average stockholders' equity was 11.50% for 1995,
compared to 15.73% for 1994 and 15.79% for 1993.
Earnings performance for the year ended December 31, 1995 reflected a
decrease in net interest income, a decrease in noninterest income and an
increase in provision for loan losses. The decrease in net interest income for
1995 resulted primarily from an increase in interest expense.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Taxable-equivalent net interest income was $5.2 million for the year ended
December 31, 1995, a decrease of $529 thousand or 9.2% compared to the year
ended December 31, 1994 and taxable-equivalent net interest income of $5.8
million for the year ended December 31, 1994 increased $52 thousand or 0.9%
compared to the year ended December 31, 1993.
The net yield on interest-earning assets, also referred to as interest rate
margin, represents net interest income divided by average interest-earning
assets. The net interest rate margin of 4.92% for the year ended December 31,
1995 decreased 42 basis points compared to 5.34% for the year ended December 31,
1994. The decrease in net interest rate margin is due primarily to higher rates
paid on time deposits. The net interest rate margin for the year ended December
31, 1994 reflects a decrease of 15 basis points from the 5.49% for the year
ended December 31, 1993.
Average interest-earning assets declined $1.5 million or 1.4% to $106.5
million for the year ended December 31, 1995. The decrease in interest-earning
assets was consistent for all categories of interest-earning assets, including
loans, investment securities and federal funds sold. Average interest-earning
assets increased $3.8 million or 3.7% to $108.0 million for the year ended
December 31, 1994. The increase in average interest-earning assets for 1994
resulted primarily from an increase in investment securities of $5.8 million
offset by declines in loans and federal funds sold.
Average interest-earning assets comprised 91.6% of average total assets in
1995, compared to 92.0% in 1994 and 91.8% in 1993.
Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2
million for the year ended December 31, 1995 compared to an increase of $2.2
million or 2.4% to $95.3 million for the year ended December 31, 1994. These
changes in the mix of interest-earning assets and interest-bearing deposits
caused the ratio of interest-bearing deposits to interest-earning assets to
decline to 86.6% in 1995, compared to 88.2% in 1994 and 89.3% in 1993.
Average noninterest-bearing deposits increased $180 thousand or 2.6% to $7.1
million in 1995 compared to an increase of $113 thousand or 1.7% to $6.9 million
in 1994. The ratio of average noninterest-bearing deposits to average total
deposits was 7.2% for 1995, compared to 6.8% for each of 1994 and 1993.
F-67
<PAGE>
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, reported on a taxable-equivalent basis, as well as the average
interest-bearing liabilities, expressed both in dollars and rates. Average
balances are derived from weekly balances and the yields and costs are
established by dividing income or expense by the average balance of the asset or
liability. Income and yield on interest-earning assets include amounts to
convert tax-exempt income to a taxable-equivalent basis, assuming a 34%
effective federal income tax rate.
<TABLE>
<CAPTION>
THREE-YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------- ---------------------------------- ----------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST
- ----------------------------------- --------- ----------- ---------- --------- ----------- ---------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial..................... $ 16,289 $ 1,765 10.84% $ 18,858 $ 2,070 10.98% $ 17,074 $ 1,794
Real Estate.................... 27,452 3,159 11.51 25,051 2,761 11.02 27,868 3,115
Consumer....................... 2,748 402 14.63 3,229 497 15.39 3,131 502
--------- ----------- --------- ----------- --------- -----------
Total Loans.................. 46,489 5,326 11.46 47,138 5,328 11.30 48,073 5,411
--------- ----------- --------- ----------- --------- -----------
Investment Securities
Taxable.......................... 36,837 2,185 5.93 36,735 2,053 5.59 31,911 2,046
Tax-exempt....................... 18,744 1,886 10.06 19,148 1,948 10.17 18,203 1,976
--------- ----------- --------- ----------- --------- -----------
Total Investment
Securities.................. 55,581 4,071 7.32 55,883 4,001 7.16 50,114 4,022
--------- ----------- --------- ----------- --------- -----------
Federal Funds Sold................. 4,462 259 5.80 5,010 212 4.23 5,995 177
--------- ----------- --------- ----------- --------- -----------
Total Interest-Earning
Assets........................ 106,532 9,656 9.06 108,031 9,541 8.83 104,182 9,610
--------- ----------- --------- ----------- --------- -----------
Cash and Due from Banks............ 4,568 5,146 5,473
Premises and Equipment, Net........ 3,456 2,841 1,945
Other Assets....................... 2,644 2,267 2,451
Less Allowance for Loan Losses... (901) (829) (614)
--------- --------- ---------
Total Assets................. $ 116,299 $ 117,456 $ 113,437
--------- --------- ---------
--------- --------- ---------
LIABILITIES
Interest-Bearing Liabilities
Savings.......................... $ 15,071 603 4.00 $ 15,320 612 4.00 $ 11,006 443
Money Market Checking and
Savings......................... 11,843 344 2.90 14,158 395 2.79 14,994 530
Time Deposits.................... 65,335 3,468 5.31 65,801 2,764 4.20 67,069 2,919
--------- ----------- --------- ----------- --------- -----------
Total Savings and Time
Deposits.................... 92,249 4,415 4.79 95,279 3,771 3.96 93,069 3,892
--------- ----------- --------- ----------- --------- -----------
Demand Deposits.................... 7,119 6,939 6,826
Other Liabilities.................. 548 459 398
--------- --------- ---------
Total Liabilities............ 99,916 102,677 100,293
--------- --------- ---------
STOCKHOLDERS' EQUITY............... 16,383 14,779 13,144
--------- --------- ---------
Total Liabilities and
Stockholders' Equity........ $ 116,299 $ 117,456 $ 113,437
--------- --------- ---------
--------- --------- ---------
Net Interest Income................ $ 5,241 $ 5,770 $ 5,718
----------- ----------- -----------
----------- ----------- -----------
Net Yield on Total Interest-Earning
Assets............................ 4.92% 5.34%
----- -----
----- -----
<CAPTION>
YIELD/
TAXABLE-EQUIVALENT BASIS (1) RATE
- ----------------------------------- ----------
<S> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial..................... 10.51%
Real Estate.................... 11.18
Consumer....................... 16.03
Total Loans.................. 11.26
Investment Securities
Taxable.......................... 6.41
Tax-exempt....................... 10.86
Total Investment
Securities.................. 8.03
Federal Funds Sold................. 2.95
Total Interest-Earning
Assets........................ 9.22
Cash and Due from Banks............
Premises and Equipment, Net........
Other Assets.......................
Less Allowance for Loan Losses...
Total Assets.................
LIABILITIES
Interest-Bearing Liabilities
Savings.......................... 4.03
Money Market Checking and
Savings......................... 3.53
Time Deposits.................... 4.35
Total Savings and Time
Deposits.................... 4.18
Demand Deposits....................
Other Liabilities..................
Total Liabilities............
STOCKHOLDERS' EQUITY...............
Total Liabilities and
Stockholders' Equity........
Net Interest Income................
Net Yield on Total Interest-Earning
Assets............................ 5.49%
-----
-----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily issued
by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable
assets (assuming a 34% effective federal income tax rate).
F-68
<PAGE>
The following table presents the effects of changes in volume, rate and
rate/volume on interest income and interest expense for major categories of
interest-earning assets and interest-bearing liabilities. Nonaccrual loans are
included in assets, thereby reducing yields (see "Nonperforming Assets"). The
allocation of the rate/volume variance has been made pro-rata on the percentage
that volume and rate variances produce in each category.
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEARS ENDED DECEMBER 31, NET ---------------------------
1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------ ------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (2) $ (73) $ 74 $ (3)
Investment Securities
Taxable..................................................................... 132 6 125 1
Tax-Exempt.................................................................. (62) (41) (21) --
Federal Funds Sold............................................................ 47 (23) 70 --
------ ------ ----- -----
Total Interest Income..................................................... 115 (131) 248 (2)
------ ------ ----- -----
Interest Expense - Deposits..................................................... 644 (120) 766 (2)
------ ------ ----- -----
Net Interest Income Before Allocation Rate/Volume............................... (529) (11) (518) --
------ ------ ----- -----
Allocation of Rate/Volume....................................................... -- -- -- --
------ ------ ----- -----
Changes in Net Interest Income.................................................. $(529) $ (11) $(518) $--
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
<TABLE>
<CAPTION>
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN
YEARS ENDED DECEMBER 31, NET ---------------------------
1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME
- -------------------------------------------------------------------------------- ------ ------ ----- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees......................................................... $ (83) $(105) $ 19 $ 3
Investment Securities
Taxable..................................................................... 7 309 (301) (1)
Tax-Exempt.................................................................. (28) 103 (132) 1
Federal Funds Sold............................................................ 35 (29) 64 --
------ ------ ----- -----
Total Interest Income..................................................... (69) 278 (350) 3
------ ------ ----- -----
Interest Expense - Deposits..................................................... (121) 92 (210) (3)
------ ------ ----- -----
Net Interest Income Before Allocation Rate/Volume............................... 52 186 (140) 6
Allocation of Rate/Volume -- 3 3 (6)
------ ------ ----- -----
Changes in Net Interest Income.................................................. $ 52 $ 189 $(137) $--
------ ------ ----- -----
------ ------ ----- -----
</TABLE>
- ---------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest
from taxable assets (assuming a 34% effective federal income tax rate).
F-69
<PAGE>
NET YIELD ON EARNING ASSETS
The following table presents net interest income, average earning assets and
the net yield by quarter for the past three years. Income and yield on earning
assets include amounts to convert tax-exempt income to a taxable-equivalent
basis, assuming a 34% effective federal income tax rate.
<TABLE>
<CAPTION>
NET YIELD ON QUARTER
EARNING ASSETS % CHANGE ----------------------------------------------------------
TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST
- ----------------------------------- ------------ ------------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1995
Net Interest Income................ (9.2)% $ 5,241 $ 1,253 $ 1,262 $ 1,326 $ 1,400
Average Earning Assets............. (1.4) 106,532 107,507 105,765 106,854 106,001
Net Yield.......................... 4.92% 4.62% 4.73% 4.98% 5.36%
1994
Net Interest Income................ 0.9% $ 5,770 $ 1,412 $ 1,438 $ 1,463 $ 1,457
Average Earning Assets............. 3.6 108,031 108,540 109,808 107,981 105,794
Net Yield.......................... 5.34% 5.16% 5.20% 5.43% 5.58%
1993
Net Interest Income................ 15.2% $ 5,718 $ 1,432 $ 1,414 $ 1,472 $ 1,400
Average Earning Assets............. 15.7 104,182 106,463 106,405 103,597 100,265
Net Yield.......................... 5.49% 5.34% 5.27% 5.70% 5.66%
----- ------------- ------------- ------------- ------------- -------------
----- ------------- ------------- ------------- ------------- -------------
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1995 was $485
thousand, an increase of $88 thousand or 22.2% from $397 thousand for the year
ended December 31, 1994. The provision for loan losses for the year ended
December 31, 1994 reflects an increase of $132 thousand or 49.8% from the $265
thousand provision for loan losses for the year ended December 31,1993.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level deemed appropriate by management based upon such
factors as historical experience, the volume and type of lending conducted by
Border Bank, the amount of nonperforming assets, regulatory policies, generally
accepted accounting principles, general economic conditions, particularly as
they relate to Border Bank's lending area, and other factors related to the
collectibility of Border Bank's loan portfolio. See "Allowance for Loan Losses."
In January 1995, Border Bank adopted Statement of Financial Accounting
Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of
a Loan" and the amendment thereof, Statement of Financial Accounting Standards
No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures". In management's opinion, the adoption
of Statement 114 and Statement 118 did not have a material effect on Border
Bank's results of operations.
NONINTEREST INCOME
Noninterest income of $316 thousand for the year ended December 31, 1995
decreased $87 thousand or 21.6% compared to the year ended December 31, 1994,
and noninterest income of $403 thousand for the year ended December 31, 1994
increased $117 thousand or 40.9% compared to $286 thousand for the year ended
December 31, 1993. The principal factor affecting the level of noninterest
income in 1994 was a reimbursement to Border Bank of $142 thousand by an
insurance company in connection with the prior year settlement of a lawsuit (See
"Noninterest Expense") which was partially offset by a payment by Border Bank of
$48 thousand to resolve unrelated litigation.
F-70
<PAGE>
A detailed summary of noninterest income during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
% %
CHANGE FROM CHANGE FROM
NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts...................... $ 255 7.1% $ 238 27.3% $ 187
Other Service Charges.................................... 33 10.0 30 (21.1) 38
--------- ----- --------- ----- ---------
Total Service Charges................................ 288 7.5 268 19.1 225
Other Operating Income................................... 28 (79.2) 135 121.3 61
--------- ----- --------- ----- ---------
Total................................................ $ 316 (21.6)% $ 403 40.1% $ 286
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
</TABLE>
NONINTEREST EXPENSE
Noninterest expense of $2.2 million for the year ended December 31, 1995
decreased $18 thousand or 0.8% compared to the year ended December 31, 1994, and
noninterest expense of $2.2 million for the year ended December 31,1994
decreased $296 thousand or 11.9% compared with $2.5 million for the year ended
December 31, 1993.
The largest category of noninterest expense, Total Salaries and Employee
Benefits ("Personnel") of $1.1 million for the year ended December 31, 1995
decreased $5 thousand or 0.5% compared to year ended December 31, 1994 levels.
Personnel expense of $1.1 million for the year ended December 31, 1994 increased
$116 thousand or 12.3% compared to year ended December 31, 1993 levels of $945
thousand. Personnel expense increased for the year ended December 31, 1994
primarily due to an increase in compensation levels.
Occupancy expense of $234 thousand for the year ended December 31, 1995
increased $6 thousand or 2.6% compared to the year ended December 31,1994, and
occupancy expense of $228 thousand for the year ended December 31, 1994
increased $57 thousand or 33.3% when compared to occupancy expense of $171
thousand for the year ended December 31, 1993. The increases in 1995 and 1994
are primarily attributable to an expansion to Border Bank which began in 1994.
Equipment expense was $148 thousand, $139 thousand and $144 thousand for the
years ended December 31, 1995, 1994 and 1993, respectively.
Other noninterest expense of $729 thousand for the year ended December 31,
1995 decreased $15 thousand or 2.0% compared to the year ended December 31, 1994
and other noninterest expense of $744 thousand for the year ended December 31,
1994 decreased $474 thousand or 38.9% when compared with the $1.2 million for
the year ended December 31, 1993. The principal factor attributable to the
decrease in other noninterest expense for the year ended December 31, 1994 was a
cost to settle litigation which was recorded in 1993. In 1993, Border Bank
settled a lender liability claim by a former borrower.
The increase in legal and professional fees in 1995 was primarily
attributable to audit fees incurred in 1995.
F-71
<PAGE>
A detailed summary of noninterest expense during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
% %
CHANGE FROM CHANGE FROM
NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- --------------------------------------------------- --------- ------------- --------- ------------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Salaries and Wages................................. $ 906 0.1% $ 905 14.3% $ 792
Employee Benefits.................................. 150 3.8 156 2.0 153
--------- ------ --------- ------ ---------
Total Salaries and Employee Benefits........... 1,056 (0.5) 1,061 12.3 945
--------- ------ --------- ------ ---------
Net Occupancy Expense.............................. 234 2.6 228 33.3 171
--------- ------ --------- ------ ---------
Equipment Expense.................................. 148 6.5 139 (3.5) 144
--------- ------ --------- ------ ---------
Other Real Estate (Income) Expense, Net
Expenses......................................... -- -- -- (100.0) 3
Write-Downs...................................... -- (100.0) 13 -- --
--------- ------ --------- ------ ---------
Total Other Real Estate (Income) Expense,
Net........................................... -- (100.0) 13 333.3 3
--------- ------ --------- ------ ---------
Other Noninterest Expense
Advertising and Public Relations................. 31 (22.5) 40 185.7 14
Data Processing and Check Clearing............... 106 19.1 89 20.3 74
Director Fees.................................... 46 (4.2) 48 41.2 34
Franchise Tax.................................... 38 8.5 35 66.7 21
Insurance........................................ 17 13.3 15 (34.8) 23
FDIC Insurance................................... 124 (45.9) 229 11.2 206
Legal and Professional........................... 215 138.9 90 3.4 87
Stationery and Supplies.......................... 53 (38.4) 86 43.3 60
Telephone........................................ 25 25.0 20 -- 20
Other Losses..................................... -- -- -- (100.0) 604
Other............................................ 74 (19.6) 92 22.7 75
--------- ------ --------- ------ ---------
Total Other Noninterest Expense................ 729 (2.0) 744 (38.9) 1,218
--------- ------ --------- ------ ---------
Total.......................................... $ 2,167 (0.8)% $ 2,185 (11.9)% $ 2,481
--------- ------ --------- ------ ---------
--------- ------ --------- ------ ---------
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
In December 1990, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 106 ("Statement 106"),
"Employers' Accounting for Postretirement Benefits Other Than Pensions", which
is effective for fiscal years beginning after December 15, 1992. Statement 106
requires companies that have postretirement benefit plans to accrue the
estimated cost of providing those benefits to an employee and the employee's
beneficiaries and covered dependents. Border Bank does not provide
postretirement benefits other than a nonqualified deferred compensation plan for
the benefit of a former President.
INCOME TAX
Income tax expense amounted to $381 thousand for the year ended December 31,
1995 compared to $604 thousand for the year ended December 31, 1994. Tax expense
varies from one year to the next with changes in the level of income before
taxes, changes in the amount of tax-exempt interest income, and the relationship
of these changes to each other.
Border Bank's effective tax rate for 1995 was 16.8% compared with 20.6% in
1994. Income tax expense differs from the amount computed at statutory rates
primarily due to tax-exempt interest from certain investment securities.
F-72
<PAGE>
Effective January 1, 1993, Border Bank adopted Statement of Financial
Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes".
Through December 31, 1992, Border Bank accounted for income taxes under
Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed
Border Bank's method of accounting for income taxes from the deferred method
required under APB 11 to the asset and liability method. Under the deferred
method, annual income tax expense is matched with pretax accounting income by
providing deferred taxes at current tax rates for timing differences between the
determination of net income for financial reporting and tax purposes. The
objective of the asset and liability method is to establish deferred tax assets
and liabilities for the recognition of future deductions or taxable amounts.
Deferred tax expense or benefit is recognized as a result of the change in the
asset or liability during the year.
NET INCOME
Net income was $1.9 million, $2.3 million and $2.1 million for the years
ended December 31, 1995, 1994 and 1993, respectively.
ANALYSIS OF FINANCIAL CONDITION
BALANCE SHEET COMPOSITION
The average assets and liabilities of Border Bank have remained stable over
the last three years. Average interest-earning assets of $106.5 million declined
$1.5 million or 1.4% for the year ended December 31, 1995 compared to the year
ended December 31, 1994. Average interest-earning assets of $108.0 million
increased $3.8 million or 3.7% for the year ended December 31, 1994 compared to
$104.2 million for the year ended December 31, 1993. Average loans to average
interest-earning assets was 43.6% in 1995 and 1994 compared to 46.1% in 1993.
Average investment securities amounted to $55.6 million, $55.9 million and $50.1
million in 1995, 1994 and 1993, respectively.
Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2
million for the year ended December 31, 1995 after increasing $2.2 million or
2.4% to $95.3 million for the year ended December 31, 1994. The ratio of average
demand deposits to average total deposits for the years ended December 31, 1995,
1994 and 1993 was 7.2%, 6.8%, and 6.8%, respectively.
F-73
<PAGE>
The following table presents Border Bank's average balance sheets during the
last three years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
AVERAGE BALANCE SHEETS 1995 1994 1993
- --------------------------------------------------------------------------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans...................................................................... $ 46,489 $ 47,138 $ 48,073
Investment Securities
Taxable.................................................................. 36,837 36,735 31,911
Tax-Exempt............................................................... 18,744 19,148 18,203
Federal Funds Sold......................................................... 4,462 5,010 5,995
----------- ----------- -----------
Total Interest-Earning Assets............................................ 106,532 108,031 104,182
Cash and Due From Banks.................................................... 4,568 5,146 5,473
Bank Premises and Equipment, Net........................................... 3,456 2,841 1,945
Other Assets............................................................... 2,644 2,267 2,451
Allowance for Loan Losses.................................................. (901) (829) (614)
----------- ----------- -----------
Total.................................................................... $ 116,299 $ 117,456 $ 113,437
----------- ----------- -----------
LIABILITIES
Demand Deposits............................................................ $ 7,119 $ 6,939 $ 6,826
----------- ----------- -----------
Savings.................................................................... 15,071 15,320 11,006
Money Market Checking and Savings.......................................... 11,843 14,158 14,994
Time Deposits.............................................................. 65,335 65,801 67,069
----------- ----------- -----------
Total Interest-Bearing Deposits.......................................... 92,249 95,279 93,069
----------- ----------- -----------
Total Deposits............................................................. 99,368 102,218 99,895
----------- ----------- -----------
Other Liabilities.......................................................... 548 459 398
STOCKHOLDERS' EQUITY....................................................... 16,383 14,779 13,144
----------- ----------- -----------
Total.................................................................... $ 116,299 $ 117,456 $ 113,437
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
Border Bank offers a broad range of commercial banking services to
individuals and businesses. The amount of cash and due from banks held on any
one day is significantly influenced by changes in cash items in process of
collection. At December 31, 1995, cash and due from banks was $4.0 million, $0.9
million more than at December 31, 1994.
INVESTMENT SECURITIES
Investment securities consist of two categories: Available for Sale and Held
to Maturity. Securities classified as Held to Maturity are those securities
Border Bank has both the positive intent and ability to hold to maturity and are
carried at amortized cost. Securities classified as Available for Sale are those
securities which Border Bank intends to hold for an indefinite period of time
but not necessarily to maturity. These securities may be sold as part of
asset/liability management strategy, or in response to significant movements in
interest rates, liquidity needs, regulatory capital considerations, and other
similar factors. These securities are carried at fair value in the accompanying
balance sheet. The percentage of the investment portfolio allocated to Available
for Sale and Held to Maturity was 12.5% and 87.5%, respectively at December 31,
1995 compared with 14.9% and 85.1%, respectively at December 31, 1994.
F-74
<PAGE>
The following table presents the estimated market value of Securities
Available for Sale at December 31, 1995 and 1994. No securities were classified
as Securities Available for Sale in years prior to 1994 as management of Border
Bank adopted Statement 115 in January 1994:
<TABLE>
<CAPTION>
% CHANGE
FROM PRIOR
SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994
- --------------------------------------------------------------------------------- --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury Securities......................................................... $ 3,007 55.2% $ 1,937
U.S. Government Agency Securities................................................ 3,772 (44.4) 6,788
--------- ----- ---------
Total.......................................................................... $ 6,779 22.3% $ 8,725
--------- ----- ---------
--------- ----- ---------
</TABLE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Available for Sale at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ---------------------------------------- --------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ $ 1,499 $ 1,506 $ -- $ -- $ 3,005 $ 3,007
U.S. Government Agency
Securities............................. 1,994 1,785 -- -- 3,779 3,772
--------- ----------- ----------- ----------- ----------- -----------
Total................................. $ 3,493 $ 3,291 $ -- $ -- $ 6,784 $ 6,779
--------- ----------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities................ 5.13% 5.60% -- % -- % 5.37%
U.S. Government Agency
Securities............................. 4.97 7.19 -- -- 6.02
Total................................. 5.04 6.46 -- -- 5.73
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Available for Sale is stated at par plus
any remaining unamortized premium paid less any remaining unamortized
discount received.
The following table presents amortized cost of Securities Held to Maturity
at December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
% CHANGE % CHANGE
FROM PRIOR FROM PRIOR
SECURITIES HELD TO MATURITY 1995 YEAR 1994 YEAR 1993
- ------------------------------------------------------ --------- ------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities.............................. $ -- -- % $ -- (100)% $ 3,497
U.S. Government Agency Securities..................... 27,247 (1.6) 27,689 (11.0) 31,116
States and Political Subdivisions Securities.......... 18,633 (7.9) 20,233 4.7 19,326
Other Securities...................................... 1,577 (23.9) 2,073 315.4 499
--------- ----- --------- ----- ---------
Total............................................... $ 47,457 (5.1)% $ 49,995 (8.2)% $ 54,438
--------- ----- --------- ----- ---------
--------- ----- --------- ----- ---------
</TABLE>
Investments in entities within the State of Texas comprised 92.6% of the
total investment in states and political subdivisions. No single issue accounted
for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the
obligations of states and political subdivisions held by Border Bank at December
31, 1995, 51.2% were rated A or better by Moody's Investor Services, Inc.
F-75
<PAGE>
The following table presents the maturities, amortized cost, estimated
market value and weighted average yields of Securities Held to Maturity at
December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
SECURITIES HELD TO MATURITY LESS FIVE YEARS YEARS YEARS COST (1) VALUE
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. $ 2,500 $ 24,247 $ 500 $ -- $ 27,247 $ 27,058
States and Political Subdivisions
Securities.............................. 1,054 6,694 7,176 3,709 18,633 19,895
Other Securities......................... -- 1,577 -- -- 1,577 1,644
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 3,554 $ 32,518 $ 7,676 $ 3,709 $ 47,457 $ 48,597
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Agency
Securities.............................. 3.00% 5.85% 6.51% -- % 5.60%
States and Political Subdivisions
Securities.............................. 10.24 11.12 9.30 8.73 9.89
Other Securities......................... -- 6.98 -- -- 6.98
Total.................................. 5.15 6.99 9.12 8.73 7.33
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
At December 31, 1995, U.S. Government Agency securities with a carrying
value of approximately $4.0 million contained interest features which adjust
according to various dual indices and/or which could adjust to zero. These
features relate only to the interest payments and do not affect the principal
amount due. At December 31, 1995, the weighted average coupon of these
securities equalled 2.76%. One issue with a book value of $1.5 million has
adjusted to zero percent and will mature in May 1996. The following table
presents the maturities, amortized cost and estimated market value of such
securities at December 31, 1995:
<TABLE>
<CAPTION>
AMORTIZED COST (1) MATURING
--------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET
LESS FIVE YEARS YEARS YEARS COST (1) VALUE
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for Sale....................... $ 1,000 $ -- $ -- $ -- $ 1,000 $ 987
Held to Maturity......................... 2,000 1,000 -- -- 3,000 2,922
----------- ----------- ----------- ----------- ----------- -----------
Total.................................. $ 3,000 $ 1,000 $ -- $ -- $ 4,000 $ 3,908
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
- ---------
(1) Amortized cost for Securities Held to Maturity is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discount received.
F-76
<PAGE>
LOANS
Border Bank closely monitors the markets in which it conducts its lending. A
certain degree of risk is inherent in the extension of credit. Management has
instituted credit policies designed to monitor and control the level of losses
and nonperforming assets. These policies require evaluation of new credit
requests and continuing review of existing credits in order to identify, monitor
and quantify any evidence of deterioration of quality or potential loss.
Border Bank attempts to diversify risk with the objective of achieving
optimum rates of return while minimizing losses for the benefit of stockholders
and protection of depositors. Diversification of the loan portfolio by type of
loan, industry concentration and type of borrower also tends to reduce risk by
minimizing the adverse impact of any single event or set of occurrences.
Total loans of $47.3 million for the year ended December 31, 1995 increased
$1.5 million or 3.2% compared to the year ended December 31,1994 levels of $45.9
million and decreased $2.5 million or 5.2% for the year ended December 31,1994
compared to levels of $48.4 million at December 31, 1993. The increase in loans
outstanding at December 31, 1995 compared to December 31, 1994 was the result of
increases in real estate loans which were offset by small declines in commercial
and consumer loans. The largest component of the portfolio continues to be
commercial mortgages. At December 31, 1995, commercial mortgages totaled $20.2
million or 42.7% of the total loan portfolio. At December 31, 1994 commercial
mortgages were $15.9 million or 34.7% of the total loan portfolio.
Border Bank has made loans to individuals or companies that are residents
of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured
loans include loans secured by deposits in Border Bank, real estate loans
secured by properties located within the United States and loans on real estate
and equipment where the collateral is located in Mexico. Following is a summary
of loans to individuals and companies that are residents of, or domiciled in,
Mexico at the end of each of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash secured................................................................... $ 3,715 $ 3,084 $ 6,890
Secured by U.S. real estate.................................................... 867 979 741
Secured by assets located outside U.S.......................................... 5,935 6,609 3,493
Other.......................................................................... 1,309 1,506 1,312
--------- --------- ---------
$ 11,826 $ 12,178 $ 12,436
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table presents the composition of the loan portfolio at the
end of each of the last five years:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991
- ------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commercial............................................. $ 15,721 $ 16,954 $ 17,839 $ 12,650 $ 13,782
Agricultural........................................... 1 2 54 16 120
Real estate
Construction......................................... 751 957 1,445 703 703
Commercial Mortgage.................................. 20,217 15,903 15,430 16,880 14,663
Agricultural Mortgage................................ 1,131 629 1,543 1,827 2,026
1-4 Family Mortgage.................................. 7,207 8,362 8,765 7,661 6,050
Consumer............................................... 2,317 3,052 3,306 3,058 2,644
--------- --------- --------- --------- ---------
Total Loans.......................................... $ 47,345 $ 45,859 $ 48,382 $ 42,795 $ 39,988
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-77
<PAGE>
The contractual maturity schedule of the loan portfolio at December 31, 1995
is presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES
DECEMBER 31, 1995
------------------------------------------------
ONE AFTER ONE YEAR AFTER
YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
--------- --------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial..................................................... $ 12,527 $ 3,194 $ -- $ 15,721
Agricultural................................................... 1 -- -- 1
Real Estate.................................................... 13,921 13,970 1,415 29,306
Consumer....................................................... 1,480 837 -- 2,317
--------- --------------- --------- ---------
Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345
--------- --------------- --------- ---------
--------- --------------- --------- ---------
Variable-Rate Loans............................................ $ 10,085 $ 8,660 $ 910 $ 19,655
Fixed-Rate Loans............................................... 17,844 9,341 505 27,690
--------- --------------- --------- ---------
Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345
--------- --------------- --------- ---------
--------- --------------- --------- ---------
</TABLE>
As shown in the preceding table, loans maturing within one year totaled
$27.9 million or 59.0% of total loans at December 31, 1995. Border Bank may
renew or extend a loan upon maturity based on management's assessment of
individual loans. Extension or renewal of loans without reduction of principal
for more than one twelve-month period are generally avoided, unless loans are
fully secured, or are revolving lines of credit subject to at least annual
analysis and renewal.
NONPERFORMING ASSETS
Nonperforming assets consist of nonaccrual loans, loans for which the
interest rate has been renegotiated below originally contracted rates and real
estate or other assets that have been acquired in partial or full satisfaction
of loan obligations. At December 31, 1995, there were twelve loans totalling
$189 thousand on nonaccrual status, none of which had a balance greater than $40
thousand.
Border Bank's policy generally is to place a loan on nonaccrual status when
payment of principal or interest is contractually past due 90 days, or earlier
when concern exists as to ultimate collection of principal and interest. At the
time a loan is placed on nonaccrual status, interest previously accrued but
uncollected is reversed and charged against current income.
Loans which are contractually past due 90 days or more, which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more for the years ended December 31, 1995,
1994 and 1993 that are not classified as nonaccrual totaled $1.1 million, $414
thousand, and $395 thousand, respectively. The increase for the year ended
December 31, 1995 as compared to the year ended December 31, 1994 is partly
attributable to two credits totaling $491 thousand included in that category,
which are secured by real estate and in the process of collection.
Nonperforming assets of $433 thousand at December 31, 1995 decreased $49
thousand or 10.2% compared to December 31, 1994 levels of $482 thousand and
decreased $317 thousand or 39.7% for the year ended December 31, 1994 compared
to December 31, 1993 levels of $799 thousand.
Border Bank's classification of nonperforming loans includes those loans for
which management believes collection is doubtful. Management is not aware of any
specific borrower relationships that are not reported as nonperforming where
management has serious doubts as to the ability of such borrowers to comply with
the present loan repayment terms which would cause nonperforming assets to
increase materially.
F-78
<PAGE>
An analysis of the components of nonperforming assets for the last five
years is presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
NONPERFORMING ASSETS 1995 1994 1993 1992 1991
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans.................................................. $ 189 $ 226 $ 587 $ 790 $ 844
Renegotiated Loans................................................ -- -- -- -- --
--------- --------- --------- --------- ---------
Nonperforming Loans............................................. 189 226 587 790 844
Other Nonperforming Assets
(Primarily Other Real Estate).................................... 244 256 212 62 124
--------- --------- --------- --------- ---------
Total Nonperforming Assets...................................... 433 482 799 852 968
Accruing Loans 90 Days or More Past Due........................... 1,085 414 395 35 49
--------- --------- --------- --------- ---------
Total Nonperforming Assets and Accruing Loans 90 Days or More
Past Due....................................................... $ 1,518 $ 896 $ 1,194 $ 887 $ 1,017
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming Loans as a % of Total Loans......................... 0.40% 0.49% 1.21% 1.85% 2.11%
Nonperforming Assets as a % of Total Loans and Other Nonperforming
Assets........................................................... 0.91 1.05 1.64 2.00 2.41
Nonperforming Assets as a % of Total Assets....................... 0.36 0.41 0.70 0.80 1.07
Nonperforming Assets Plus Accruing Loans
90 Days or More Past Due as a % of Total Loans and Other
Nonperforming Assets........................................... 3.19 1.94 2.46 2.07 2.54
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Interest income that would have been recorded for the years ended December
31, 1995 and 1994 on nonaccrual loans had such loans performed in accordance
with their original contract terms was approximately $2 thousand and $34
thousand, respectively.
ALLOWANCE FOR LOAN LOSSES
Management analyzes the loan portfolio to determine the adequacy of the
allowance for loan losses and the appropriate provision required to maintain an
adequate allowance. In assessing the adequacy of the allowance, management
reviews the size, quality and risks of loans in the portfolio and considers
factors such as specific known risks, past experience, the status and amount of
nonperforming assets and economic conditions. A specific percentage is allocated
to total loans in good standing and additional amounts are added for individual
loans considered to have specific loss potential. Loans identified as losses are
charged off. Based on total allocations, the provision is recorded to maintain
the allowance at a level deemed appropriate by management. While management uses
available information to recognize losses on loans, there can be no assurance
that future additions to the allowance will not be necessary. The allowance for
loan losses at December 31, 1995 was $1.1 million, which represents an increase
of $199 thousand or 22.1% as compared to the allowance for loan losses at
December 31, 1994. Management believes that the allowance for loan losses at
December 31, 1995 adequately reflects the risks in the loan portfolio. However,
various regulatory agencies, as an integral part of their examination process,
periodically review Border Bank's allowance for loan losses. Such agencies may
require Border Bank to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
Management of Border Bank does not consider loans to residents of, and
companies domiciled in, Mexico to present an unusual risk. Border Bank's net
charge-offs from these loans has not been significant and it has not
specifically allocated allowance for loan losses to these loans.
As a result of criticisms reflected in the June 28, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of Border
Bank and the Banking Commissioner of Texas on October 8, 1993. The
F-79
<PAGE>
Memorandum required that Border Bank, among other provisions, increase Board of
Directors supervision over loan activities, revise the existing loan policy,
increase the allowance for loan losses and reduce criticized assets.
Additionally, Border Bank's Board of Directors is required to submit to the
Commissioner and Regional Director of the FDIC a written report of the actions
taken to comply with the Memorandum. Management has made efforts to comply with
the requirements of the Memorandum.
The following table summarizes the activity in the allowance for loan losses
for the last five years:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991
- ------------------------------------------------------------------ --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year...................................... $ 901 $ 624 $ 612 $ 500 $ 490
Provision for Loan Losses......................................... 485 397 265 486 157
Charge-Offs
Commercial...................................................... 135 40 38 206 48
Agricultural.................................................... -- -- -- --
Real Estate..................................................... -- 10 222 71 60
Consumer........................................................ 169 83 21 98 57
--------- --------- --------- --------- ---------
Total Charge-Offs............................................. 304 133 281 375 165
--------- --------- --------- --------- ---------
Recoveries
Commercial...................................................... 6 11 7 -- 7
Agricultural.................................................... -- -- -- -- --
Real Estate..................................................... -- -- 17 -- --
Consumer........................................................ 12 2 4 1 11
--------- --------- --------- --------- ---------
Total Recoveries.............................................. 18 13 28 1 18
--------- --------- --------- --------- ---------
Net Charge-Offs (Recoveries)...................................... 286 120 253 374 147
--------- --------- --------- --------- ---------
Balance at End of Year............................................ $ 1,100 $ 901 $ 624 $ 612 $ 500
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Ratio of Allowance for Loan Losses to Loans Outstanding, Net of
Unearned Discount................................................ 2.32% 1.96% 1.29% 1.43% 1.25%
Ratio of Allowance for Loan Losses to Nonperforming Assets........ 254.04 186.93 78.10 74.83 51.65
Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net
of Unearned Discount............................................. 0.62 0.25 0.53 0.86 0.45
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the end of each of the
last five years is presented in the table below:
<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1995 1994 1993 1992
------------------------- ------------------------- ------------------------- -------------------------
% OF % OF % OF % OF
LOANS LOANS LOANS LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $ 147 33.2% $ 66 37.0% $ 52 36.9% $ 41 29.6%
Agricultural....... -- -- -- -- -- 0.1 -- --
Real Estate........ 293 61.9 129 56.4 279 56.2 245 63.3
Consumer........... 153 4.9 164 6.6 173 6.8 156 7.1
Unallocated........ 507 -- 542 -- 120 -- 170 --
----------- ----- ----- ----- ----- ----- ----- -----
Total.......... $ 1,100 100.0% $ 901 100.0% $ 624 100.0% $ 612 100.0%
----------- ----- ----- ----- ----- ----- ----- -----
----------- ----- ----- ----- ----- ----- ----- -----
<CAPTION>
1991
-------------------------
% OF
LOANS
IN EACH
CATEGORY TO
TOTAL
AMOUNT LOANS
----------- ------------
<S> <C> <C>
Commercial......... $ 42 34.5%
Agricultural....... 1 0.3
Real Estate........ 225 58.6
Consumer........... 139 6.6
Unallocated........ 93 --
----- -----
Total.......... $ 500 100.0%
----- -----
----- -----
</TABLE>
F-80
<PAGE>
PREMISES AND EQUIPMENT
Bank premises and equipment of $3.3 million at December 31,1995 increased
$77 thousand or 2.4% compared to $3.2 million at December 31, 1994. The net
increase for the year ended December 31, 1995 is primarily attributable to the
completion of an expansion of Border Bank, which began in 1994, and the purchase
of additional land for future expansion.
DEPOSITS
Total deposits of $102.0 million at December 31, 1995 increased $1.1 million
or 1.1% compared to December 31, 1994 levels and total deposits of $100.9
million for the year ended December 31, 1994 increased $344 thousand or 0.3%
compared to December 31, 1993 levels of $100.5 million. The relatively small
changes in deposits are consistent in all categories of deposits including
public funds and reflect the stable level of deposits at Border Bank. Total
public funds (including public funds demand deposits, public funds money market
and NOW accounts and public funds time deposits) were $10.0 million, $9.8
million and $10.6 million at December 31, 1995, 1994 and 1993, respectively.
Border Bank actively seeks consumer and commercial deposits. The following table
presents the composition of total deposits at the end of the last three years:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
% %
CHANGE FROM CHANGE FROM
TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993
- ---------------------------------------------------------------------- -------- ----------- -------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual........................................... $ 5,639 0.9% $ 5,588 2.1% $ 5,475
Public Funds........................................................ 1,498 5.2 1,424 5.3 1,352
-------- --- -------- ----- --------
Total Demand Deposits........................................... 7,137 1.8 7,012 2.7 6,827
-------- --- -------- ----- --------
Interest-Bearing Deposits
Savings............................................................. 16,365 -- 16,364 22.2 13,391
Money Market Checking and Savings
Commercial and Individual......................................... 10,839 (5.6) 11,486 (13.4) 13,263
Public Funds...................................................... 1,464 2.4 1,430 (11.6) 1,617
Time Deposits
Commercial and Individual......................................... 59,122 2.6 57,635 (0.2) 57,749
Public Funds...................................................... 7,068 1.9 6,938 (9.6) 7,674
-------- --- -------- ----- --------
Total Interest-Bearing Deposits................................... 94,858 1.1 93,853 0.2 93,694
-------- --- -------- ----- --------
Total Deposits.................................................. $101,995 1.1% $100,865 0.3% $100,521
-------- --- -------- ----- --------
-------- --- -------- ----- --------
Weighted Average Rate on Interest-Bearing Deposits.................... 4.81% 4.34% 3.93%
-------- -------- --------
-------- -------- --------
</TABLE>
Time deposits of $100,000 or more are solicited from markets served by
Border Bank and are not sought through brokered sources. Time deposits continue
to be a significant source of funds.
F-81
<PAGE>
The following table presents the maturities of time deposits of $100,000 or
more at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994
- ---------------------------------------------------------------------------------------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Three Months or Less.................................................................... $ 29,084 $ 34,555
After Three through Six Months.......................................................... 10,348 7,017
After Six through Twelve Months......................................................... 4,813 3,240
After Twelve Months..................................................................... 425 303
--------- ---------
Total............................................................................... $ 44,670 $ 45,115
--------- ---------
--------- ---------
Weighted Average Rate on Time Deposits of $100,000 or More.............................. 5.61% 4.96%
--------- ---------
--------- ---------
</TABLE>
Based upon the location of Border Bank with regard to the international
boundary with Mexico, foreign deposits from Mexican sources represent a major
source of funding. Although Border Bank experienced some short-term negative
impact on its Mexican deposits due to the recent devaluation of the peso, Border
Bank's Mexican deposit levels have since recovered.
The following table presents foreign deposits, primarily from Mexican
sources, at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
FOREIGN DEPOSITS 1995 1994
- ------------------------------------------------------------------------------------------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Demand Deposits............................................................................ $ 2,221 $ 2,600
--------- ---------
Interest-Bearing Deposits
Savings.................................................................................. 12,289 11,971
Money Market Checking and Savings........................................................ 7,880 8,604
Time Deposits Under $100,000............................................................. 14,997 13,075
Time Deposits of $100,000 or More........................................................ 29,148 27,240
--------- ---------
Total Interest-Bearing Deposits........................................................ 64,314 60,890
--------- ---------
Total Foreign Deposits................................................................. $ 66,535 $ 63,490
--------- ---------
--------- ---------
Percentage of Total Deposits............................................................... 65.2% 62.9%
--------- ---------
--------- ---------
Weighted Average Rate on Foreign Deposits.................................................. 4.80% 4.16%
--------- ---------
--------- ---------
</TABLE>
LIQUIDITY
Liquidity management assures that adequate funds are available to meet
deposit withdrawals, loan demand and maturing liabilities. Insufficient
liquidity can result in higher costs of obtaining funds, while excessive
liquidity can lead to a decline in earnings due to the cost of foregoing
alternative investments. The ability to renew or acquire additional deposit
liabilities is a major source of liquidity. Border Bank's principal sources of
funds are primarily within the local markets of Border Bank and consist of
deposits, interest and principal payments on loans and investment securities.
Asset liquidity is provided by cash and assets which are readily marketable,
or which can be pledged, or which will mature in the near future. These include
cash, federal funds sold and U.S. Government-backed securities. At December 31,
1995, Border Bank's liquidity ratio, defined as cash, U.S. Government-backed
securities, and federal funds sold as a percentage of deposits was 45.8%
compared to 43.6% at December 31, 1994 and compared to 39.0% at December 31,
1993.
Liability liquidity is provided by access to core funding sources,
principally various customers' interest-bearing and noninterest-bearing deposit
accounts in Border Bank's trade area.
F-82
<PAGE>
During 1995, funds for $10.7 million of investment purchases and $1.9
million of net loan growth came from various sources, including a net increase
in deposits of $1.1 million, $15.6 million proceeds from maturing or called
securities and $1.9 million of net income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet specified
minimum capital requirements. The applicable regulations establish five capital
levels which require or permit the Federal Deposit Insurance Corporation (the
"FDIC") and other regulatory authorities to take supervisory action. The
relevant classifications range from "well capitalized" to "critically
capitalized." The classifications are generally determined by applicable ratios
of the institution, including Tier I capital to risk-weighted assets, total
capital to risk-weighted assets and leverage ratios. Based on Border Bank's
capital ratios at December 31, 1995, Border Bank was classified as "well
capitalized" under the applicable regulations. As a result, Border Bank does not
believe that the prompt corrective action regulations have any material effect
on its activities or operations.
The funds management policy of Border Bank is to maintain a liability
sensitive position. Changes in net interest income occur when interest rates on
loans and investments change in a different time period from that of changes in
interest rates on liabilities, or when the mix and volume of interest-earning
assets and interest-bearing liabilities change. The interest rate sensitivity
gap represents the dollar amount of difference between rate sensitive assets and
rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is
determined by dividing rate sensitive assets by rate sensitive liabilities. A
ratio of 1.0 indicates a perfectly matched position, in which case the effect on
net interest income due to interest rate movements would be zero.
Rate sensitive liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1995 by $33.2 million.
F-83
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities by maturity at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
7-12 OVER
INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS 1-5 YEARS 5 YEARS TOTAL
- --------------------------------------- ---------- ---------- ---------- --------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans.................................. $ 28,078 $ 3,383 $ 6,037 $ 9,341 $ 506 $ 47,345
Investment Securities
Available for Sale................... 1,986 -- 1,488 3,305 -- 6,779
Held to Maturity..................... 4,374 4,944 1,060 25,693 11,386 47,457
Federal Funds Sold..................... 8,750 -- -- -- -- 8,750
---------- ---------- ---------- --------- --------- -----------
Total Interest-Earning Assets...... 43,188 8,327 8,585 38,339 11,892 110,331
---------- ---------- ---------- --------- --------- -----------
Savings................................ 16,365 -- -- -- -- 16,365
Money Market Checking and Savings
Accounts.............................. 12,303 -- -- -- -- 12,303
Time Deposits.......................... 42,556 14,670 7,383 1,580 -- 66,189
---------- ---------- ---------- --------- --------- -----------
Total Interest-Bearing
Liabilities....................... 71,224 14,670 7,383 1,580 -- 94,857
---------- ---------- ---------- --------- --------- -----------
Rate Sensitivity GAP (1)............... $ (28,036) $ (6,343) $ 1,202 $ 36,759 $ 11,892 $ 15,474
---------- ---------- ---------- --------- --------- -----------
---------- ---------- ---------- --------- --------- -----------
Cumulative Rate Sensitivity GAP........ $ (28,036) $ (34,379) $ (33,177) $ 3,582 $ 15,474
---------- ---------- ---------- --------- ---------
---------- ---------- ---------- --------- ---------
Ratio of Cumulative Rate Sensitivity
GAP to Total Assets................... (23.46)% (28.77)% (27.76)%
---------- ---------- ----------
---------- ---------- ----------
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to Cumulative
Rate Sensitive Interest-Bearing
Liabilities........................... 0.61:1 0.60:1 0.64:1
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ---------
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
EFFECTS OF INFLATION
Financial institutions are impacted differently by inflation than are
industrial companies. While industrial and manufacturing companies generally
have significant investments in inventories and fixed assets, financial
institutions ordinarily do not have such investments. As a result, financial
institutions are generally in a better position than industrial companies to
respond to inflationary trends by monitoring the spread between interest costs
and interest income yields through adjustments to maturities and interest rates
of assets and liabilities. In addition, inflation tends to increase demand for
loans from financial institutions as industrial companies attempt to maintain a
constant level of goods in inventory and assets. As consumers of goods and
services, financial institutions are affected by inflation as prices increase,
causing an increase in costs of salaries, employee benefits, occupancy expense
and similar items.
CAPITAL RESOURCES
Stockholders' equity of $17.1 million at December 31, 1995 reflects a net
increase of $1.2 million or 7.8% compared to stockholders' equity of $15.8
million at December 31, 1994. This net increase was primarily attributable to
earnings for 1995 of $1.9 million. The net increase in stockholders' equity
reflects dividends paid on common stock of $800 thousand in 1995. Border Bank
also declared and paid a $500 thousand dividend in January 1996.
The risk-based capital standards as established by the FDIC apply to Border
Bank. The numerator of the risk-based capital ratio for banks includes Tier I
capital, consisting of common stockholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
F-84
<PAGE>
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Beginning on December 31, 1993, goodwill is deducted
from Tier I capital. At no time is Tier II capital allowed to exceed Tier I
capital in the calculation of total capital. The denominator or asset portion of
the risk-based capital ratio aggregates generic classes of balance sheet and
off-balance sheet exposures, each weighted by one of four factors, ranging from
0% to 100%, based on the relative risk of the exposure class.
Ratio targets are set for both Tier I capital and Total Capital (Tier I plus
Tier II capital). The minimum level of Tier I capital to total assets is 4.0%
and the minimum Total Capital ratio is 8.0%. The FDIC has guidelines for a
leverage ratio that is an additional evaluation of capital adequacy of banks.
The leverage ratio is defined to be Border Bank's Tier I capital divided by its
risk adjusted total assets. An insured depository institution is "Well
Capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio is
equal to or greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to
or greater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater
than 5.0%. Based on capital ratios, Border Bank is within the definition of
"Well Capitalized" for FDIC purposes at December 31, 1995.
Border Bank's Tier I Risk-Based Capital Ratio was approximately 18.12% and
18.01% at December 31, 1995 and 1994, respectively. Border Bank's Total
Risk-Based Capital Ratio was approximately 19.29% and 19.02% at December 31,
1995 and 1994, respectively. Border Bank's Tier I Leverage Capital Ratio was
approximately 14.51% and 13.58% at December 31, 1995 and 1994, respectively.
The following table presents Border Bank's risk-based capital calculation:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
RISK-BASED CAPITAL 1995 1994
- ----------------------------------------------------------------------------------------- --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Total Stockholders' Equity, before unrealized gains or losses on Securities Available for
Sale.................................................................................... $ 17,079 $ 15,994
Less -- Goodwill and Other Deductions.................................................... -- --
--------- ---------
Total Tier I Capital..................................................................... 17,079 15,994
Total Tier II Capital.................................................................... 1,100 901
--------- ---------
Total Qualifying Capital................................................................. $ 18,179 $ 16,895
--------- ---------
--------- ---------
Risk Adjusted Assets (Including Off-Balance Sheet Exposure).............................. $ 94,232 $ 88,822
--------- ---------
--------- ---------
Tier I Risk-Based Capital Ratio.......................................................... 18.12% 18.01%
Total Risk-Based Capital Ratio........................................................... 19.29 19.02
Leverage Capital Ratio................................................................... 14.51 13.58
--------- ---------
--------- ---------
</TABLE>
CURRENT ACCOUNTING ISSUES
Effective January 1, 1995, Border Bank adopted Statement 114 and the
amendment thereof, Statement 118. Under Statement 114, a loan is considered
impaired when, based upon current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. Statement 114 requires that an impaired loan be
valued utilizing (i) the present value of expected future cash flows discounted
at the effective interest rate of the loan, (ii) the fair value of the
underlying collateral, or (iii) the observable market price of the loan.
Statement 118 amended Statement 114 by expanding the related disclosure
requirements and permitting use of existing methods for recognizing interest
income on impaired loans.
Loans which were restructured prior to the adoption of Statement 114 and
which are performing in accordance with the renegotiated terms are not required
to be reported as impaired. Loans restructured subsequent to the adoption of
Statement 114 are required to be reported as impaired in the year of
restructuring. Thereafter, such loans can be removed from the impaired loan
disclosure if the loans were paying a market rate of interest at the time of
restructuring and are performing in accordance with their renegotiated terms.
F-85
<PAGE>
For loans covered by Statement 114, Border Bank makes an assessment for
impairment when and while such loans are on nonaccrual status or when the loan
has been restructured. When a loan with unique risk characteristics has been
identified as being impaired, the amount of impairment will be measured by
Border Bank using discounted cash flows, except when it is determined that the
sole source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such case, the current fair value of the collateral,
reduced by costs to sell, will be used in place of discounted cash flows. At the
time a loan is placed on nonaccrual status, interest previously recognized but
uncollected is reversed and charged against current income. Subsequent interest
payments received on nonaccrual loans are either applied against principal or
reported as income, depending upon management's assessment of the ultimate
collectibility of principal.
In management's opinion, the adoption of Statement 114 and Statement 118 has
not had, and is not anticipated to have, a material effect on Border Bank's
results of operations.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement
123 establishes financial accounting and reporting standards for stock-based
employee compensation plans.
Statement 123 encourages entities to adopt a "fair value" based method of
accounting for stock-based compensation plans which requires an estimate of the
fair value of stock options or other equity instruments which employees become
entitled to when they have rendered requisite service or satisfied other
conditions necessary to earn the right to benefit from the instruments.
Compensation cost is then determined based on the fair value estimate and is
recognized over the service period, which is usually the vesting period.
Statement 123 also requires that an employer's financial statements include
certain disclosures about stock-based employee compensation arrangements
regardless of the method used to account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. In management's
opinion, the implementation of Statement 123 should have no material effect on
Border Bank's financial statements.
FOURTH QUARTER RESULTS
The following table presents a summary of operations for the last five
quarters:
<TABLE>
<CAPTION>
1995 1994
------------------------------------------ ---------
CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH
TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Interest Income............................................... $ 2,390 $ 2,379 $ 2,447 $ 2,441 $ 2,370
Interest Expense.............................................. 1,137 1,117 1,121 1,040 958
--------- --------- --------- --------- ---------
Net Interest Income........................................... 1,253 1,262 1,326 1,401 1,412
Provision for Loan Losses..................................... 351 62 20 52 15
Noninterest Income............................................ 89 84 68 75 71
Noninterest Expense........................................... 595 485 567 520 657
--------- --------- --------- --------- ---------
Income Before Taxable-Equivalent Adjustment and Income Tax.... 396 799 807 904 811
Taxable-Equivalent Adjustment................................. 155 156 164 166 157
Applicable Income Tax Expense................................. (5) 115 135 135 179
--------- --------- --------- --------- ---------
Net Income.................................................... $ 246 $ 528 $ 508 $ 603 $ 475
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net Income Per Common Share................................... $ 1.23 $ 2.64 $ 2.54 $ 3.02 $ 2.38
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-86
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The Border Bank:
We have audited the accompanying balance sheets of The Border Bank (the
"Bank") as of December 31, 1995 and 1994, and the related statements of
earnings, changes in stockholders' equity and cash flows for each of the years
in the three-year period ended December 31, 1995. These financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Border Bank as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for the each of the years in the three-year period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Bank changed its
method of accounting for investment securities in 1994 to adopt the provisions
of Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
January 31, 1996
F-87
<PAGE>
THE BORDER BANK
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2).......................................... $ 3,981,763 $ 3,079,938
Federal funds sold........................................................ 8,750,000 4,500,000
---------------- ----------------
Total cash and cash equivalents............................... 12,731,763 7,579,938
---------------- ----------------
Investment securities available for sale (note 3)......................... 6,778,515 8,725,350
Investment securities held to maturity (note 3)........................... 47,457,398 49,994,782
Loans, net of unearned discount (note 4).................................. 47,344,518 45,858,959
Less allowance for loan losses (note 5)................................... 1,100,100 900,663
---------------- ----------------
Net loans..................................................... 46,244,418 44,958,296
---------------- ----------------
Bank premises and equipment, net of accumulated depreciation and
amortization (note 6).................................................... 3,297,249 3,220,156
Accrued interest receivable............................................... 2,242,370 1,726,997
Other real estate owned................................................... 237,149 220,790
Other assets.............................................................. 405,691 576,634
Deferred federal income taxes (note 8).................................... 110,156 120,395
---------------- ----------------
$ 119,504,709 $ 117,123,338
---------------- ----------------
---------------- ----------------
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Noninterest-bearing............................................... $ 7,137,218 $ 7,012,379
Interest-bearing (note 7)......................................... 94,858,120 93,852,472
---------------- ----------------
Total deposits................................................ 101,995,338 100,864,851
Accrued interest payable.............................................. 246,702 207,772
Deferred compensation payable (note 9)................................ 107,600 107,600
Other liabilities..................................................... 79,851 100,734
---------------- ----------------
Total liabilities............................................. 102,429,491 101,280,957
---------------- ----------------
Stockholders' equity:
Common stock, $10 par value, 200,000 shares authorized, issued and
outstanding.......................................................... 2,000,000 2,000,000
Certified surplus..................................................... 9,000,000 9,000,000
Undivided profits..................................................... 6,078,518 4,994,409
Unrealized loss on securities available for sale (note 3)............. (3,300) (152,028)
---------------- ----------------
Total stockholders' equity.................................... 17,075,218 15,842,381
Commitments and contingent liabilities (notes 4 and 10)
---------------- ----------------
$ 119,504,709 $ 117,123,338
---------------- ----------------
---------------- ----------------
</TABLE>
See accompanying notes to financial statements.
F-88
<PAGE>
THE BORDER BANK
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans............................................................ $ 5,326,329 $ 5,328,325 $ 5,411,271
Investment securities............................................ 3,430,612 3,338,920 3,340,360
Federal funds sold............................................... 259,176 211,885 176,570
------------- ------------- -------------
Total interest income........................................ 9,016,117 8,879,130 8,928,201
------------- ------------- -------------
Interest expense:
Savings, NOW and money market deposits........................... 947,113 1,023,946 987,085
Time deposits.................................................... 3,468,212 2,747,527 2,904,981
------------- ------------- -------------
Total interest expense....................................... 4,415,325 3,771,473 3,892,066
------------- ------------- -------------
Net interest income.......................................... 4,600,792 5,107,657 5,036,135
Provision for loan losses (note 5)................................... 485,283 396,523 265,219
------------- ------------- -------------
Net interest income after provision for loan losses.......... 4,115,509 4,711,134 4,770,916
Noninterest income:
Service charges on deposit accounts.............................. 255,241 237,979 186,743
Other service charges and fees................................... 32,554 29,644 38,678
Other............................................................ 28,385 135,260 60,629
------------- ------------- -------------
Total noninterest income..................................... 316,180 402,883 286,050
------------- ------------- -------------
Noninterest expense:
Salaries and employee benefits................................... 1,055,597 1,060,701 945,165
Net occupancy expense............................................ 381,852 367,077 314,787
Legal and professional fees...................................... 215,052 89,935 86,781
Data processing fees............................................. 106,169 89,035 73,699
Directors' fees.................................................. 46,200 47,600 33,600
FDIC assessment.................................................. 121,269 229,312 205,873
Other............................................................ 241,051 301,428 820,777
------------- ------------- -------------
Total noninterest expense.................................... 2,167,190 2,185,088 2,480,682
------------- ------------- -------------
Income before income tax expense............................. 2,264,499 2,928,929 2,576,284
Income tax expense (note 8).......................................... 380,390 604,132 500,840
------------- ------------- -------------
Net income................................................... $ 1,884,109 $ 2,324,797 $ 2,075,444
------------- ------------- -------------
------------- ------------- -------------
Net income per share................................................. $ 9.42 $ 11.62 $ 10.38
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
THE BORDER BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
SECURITIES TOTAL
CERTIFIED UNDIVIDED AVAILABLE STOCKHOLDERS'
COMMON STOCK SURPLUS PROFITS FOR SALE EQUITY
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992................... $ 2,000,000 $ 7,000,000 $ 3,394,168 $ -- $ 12,394,168
Cash dividends on common stock................. -- -- (400,000) -- (400,000)
Transfer of Undivided profits to Certified
surplus....................................... -- 2,000,000 (2,000,000) -- --
Net income for 1993............................ 2,075,444 -- 2,075,444
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1993................... 2,000,000 9,000,000 3,069,612 -- 14,069,612
Effect of change to adopt an accounting
principle -- accounting for unrealized gain
(loss) on securities available for sale (note
3)............................................ -- -- -- (37,546) (37,546)
Cash dividends on common stock................. -- -- (400,000) -- (400,000)
Change in unrealized gain (loss) on securities
available for sale (note 3)................... -- -- (114,482) (114,482)
Net income for 1994............................ -- -- 2,324,797 -- 2,324,797
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1994................... 2,000,000 9,000,000 4,994,409 (152,028) 15,842,381
Cash dividends on common stock................. -- -- (800,000) -- (800,000)
Change in unrealized gain (loss) on securities
available for sale (note 3)................... -- -- -- 148,728 148,728
Net income for 1995............................ -- -- 1,884,109 -- 1,884,109
------------- ------------- -------------- ------------ --------------
Balance at December 31, 1995................... $ 2,000,000 $ 9,000,000 $ 6,078,518 $ (3,300) $ 17,075,218
------------- ------------- -------------- ------------ --------------
------------- ------------- -------------- ------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-90
<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.
F-91
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to prevailing practices within the banking
industry. A summary of the more significant accounting policies follows:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and due from banks and federal
funds sold are considered to be cash equivalents. Federal funds sold generally
have one-day maturities.
INVESTMENT SECURITIES
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 115 ("Statement 115"),
"Accounting for Certain Investments in Debt and Equity Securities." Statement
115 establishes standards of financial accounting and reporting for investments
in equity securities that have a readily determinable fair value and for all
investments in debt securities. At acquisition, a bank is required to classify
debt and equity securities into one of three categories: held to maturity,
trading or available for sale. At each reporting date, the appropriateness of
the classification is reassessed. Investments in debt securities are classified
as held to maturity and measured at amortized cost in the balance sheet only if
management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the balance sheet with unrealized holding gains and losses included in
earnings. Investments not classified as held to maturity nor trading are
classified as available for sale and measured at fair value in the balance sheet
with unrealized holding gains and losses, net of applicable income taxes,
reported in a separate component of stockholders' equity until realized.
Effective January 1, 1994, the Bank adopted Statement 115, which had no
impact on the Bank's income statement as all securities were classified as
either held to maturity or available for sale. Accounting for securities
classified as held to maturity will continue on the basis of amortized cost.
Securities classified as available for sale will be measured at market value
with the net unrealized holding gains and losses reported in a separate
component of stockholders' equity until realized. Purchases of investment
securities are classified as available for sale or held to maturity at time of
purchase as determined by management.
Premiums and discounts are amortized and accreted using a method which
approximates level yield. Gains and losses on available for sale investment
securities sold are recognized in operations at the time of sale based on the
specific identification method. Security purchases and sales are recorded on the
trade date.
LOANS
Management continually reviews the loan portfolio to identify loans which,
with respect to principal or interest, have or may become collection problems. A
loan is generally placed on nonaccrual status when principal or interest is past
due 90 days or more, and the loan is not both well-secured and in the process of
collection. A loan is also placed on nonaccrual status immediately if, in the
opinion of management, full collection of principal or interest is unlikely. At
the time a loan is placed on nonaccrual
F-92
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
status, interest previously recognized but uncollected is reversed and charged
against current income. Subsequent interest payments received on nonaccrual
loans are either applied against principal or reported as income, depending on
management's assessment of the ultimate collectibility of principal.
Unearned interest on installment loans is recognized as income over the
terms of the related loans on a basis which results in approximately level rates
of return over the terms of the loans.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which
addresses the accounting by creditors for impairment of certain loans, as
defined. In October 1994, Statement 114 was amended by Statement of Financial
Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan,
Income Recognition and Disclosures." Implementation of these pronouncements in
the first quarter of 1995 did not have a material effect on the Bank's financial
statements.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established by a charge to operations as
deemed necessary by management to maintain the allowance for loan losses at an
amount considered adequate to absorb known or possible loan losses in the Bank's
loan portfolio. The provision is determined based on management's evaluation of
the loan portfolio, giving consideration to existing economic conditions,
changes in the loan portfolio, historical loan loss factors and other relevant
information. Management believes that the allowance for loan losses is adequate.
Loans are charged against the allowance for loan losses when management
believes the collection of principal is unlikely. Recoveries of amounts
previously charged off are credited to the allowance.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are recorded at cost. Expenditures for
improvements are capitalized. Repairs and maintenance which do not extend the
life of bank premises and equipment are charged to expense as incurred.
Depreciation and amortization are calculated using the straight-line method over
the estimated useful lives of the assets. Any gain or loss resulting from
disposition of premises and equipment is reflected in earnings.
OTHER REAL ESTATE OWNED
Other real estate owned is recorded at fair value at the date of foreclosure
which is subsequently considered cost. At subsequent dates, other real estate is
carried at the lower of fair value minus estimated costs to sell or cost. Fair
values are determined generally by reference to appraisals. Rental income earned
and expenses incurred related to real estate owned are recognized during the
period earned or incurred and are included in noninterest expense at their net
amount.
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. Deferred tax expense or benefit is recognized as a result of the change
in the asset or liability during the year.
F-93
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) RESERVE REQUIREMENTS
The Bank is required to maintain certain daily reserve balances on hand or
on deposit with the Federal Reserve Bank in accordance with Federal Reserve
Board requirements. These deposits are noninterest bearing and not available for
investment purposes. Cash and due from bank balances maintained in accordance
with such requirements at December 31, 1995 was approximately $25,000.
(3) INVESTMENT SECURITIES
The amortized cost and estimated market value, which is the carrying value,
of investment securities available for sale at December 31, 1995 and December
31, 1994 are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. treasuries............................... $ 3,004,777 $ 5,927 $ (4,104) $ 3,006,600
U.S. government agencies...................... 3,778,740 9,186 (16,011) 3,771,915
------------- ----------- ------------ -------------
$ 6,783,517 $ 15,113 $ (20,115) $ 6,778,515
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
<CAPTION>
1994
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE
- ---------------------------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
U.S. treasuries............................... $ 1,995,054 $ -- $ (58,304) $ 1,936,750
U.S. government agencies...................... 6,960,640 -- (172,040) 6,788,600
------------- ----------- ------------ -------------
$ 8,955,694 $ -- $ (230,344) $ 8,725,350
------------- ----------- ------------ -------------
------------- ----------- ------------ -------------
</TABLE>
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding
losses on securities available for sale, net of income tax, as a decrease in
stockholders' equity of $3,300 and $152,028, respectively.
The amortized cost, which is the carrying value, and estimated market value
of investment securities held to maturity at December 31, 1995 and December 31,
1994 are as follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE
- ---------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. government agencies................ $ 27,247,565 $ 156,236 $ (345,402) $ 27,058,399
Obligations of state and political
subdivisions........................... 18,633,086 1,265,601 (3,361) 19,895,326
Other................................... 1,576,747 66,429 -- 1,643,176
-------------- ------------- -------------- --------------
$ 47,457,398 $ 1,488,266 $ (348,763) $ 48,596,901
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
<CAPTION>
1994
-------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE
- ---------------------------------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. government agencies................ $ 27,689,133 $ 9,648 $ (1,176,060) $ 26,522,721
Obligations of state and political
subdivisions........................... 20,232,429 527,174 (414,166) 20,345,437
Other................................... 2,073,220 12,341 (82,746) 2,002,815
-------------- ------------- -------------- --------------
$ 49,994,782 $ 549,163 $ (1,672,972) $ 48,870,973
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
F-94
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
AVAILABLE FOR SALE AMORTIZED COST MARKET VALUE
- ----------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Due in one year or less................................................ $ 3,492,918 $ 3,474,200
Due after one year through five years 3,290,599 3,304,315
-------------- --------------
$ 6,783,517 $ 6,778,515
-------------- --------------
-------------- --------------
<CAPTION>
HELD TO MATURITY
- -----------------------------------------------------------------------
<S> <C> <C>
Due in one year or less................................................ $ 3,552,921 $ 3,550,443
Due after one year through five years.................................. 32,518,814 32,856,305
Due after five years through ten years................................. 7,676,266 8,229,114
Due after ten years.................................................... 3,709,397 3,961,039
-------------- --------------
$ 47,457,398 $ 48,596,901
-------------- --------------
-------------- --------------
</TABLE>
Included in held to maturity and available for sale securities at December
31, 1995 are approximately $2,500,000 and $987,000, respectively, of investment
securities that pay interest based on a set coupon rate with a foreign exchange
rate adjustment or based directly on a foreign index. The held to maturity
securities have a market value of $2,472,000. All of the securities mature
during 1996 and 1997, with the exception of one security maturing in the year
2000. The securities are paying interest at a rate of approximately 2.76%. One
security of approximately $500,000 has an interest rate floor of 3.00%. The
interest rate on the other securities could reset to zero. No loss of principal
is anticipated by management on any of the aforementioned securities.
There were no sales for the years ended December 31, 1995 and 1994 from
either the available for sale or held to maturity categories.
Securities with a carrying value of approximately $13,437,000 and
$12,614,000 were pledged at December 31, 1995 and 1994, respectively, to secure
public deposits of $10,049,000 and $9,796,000
(4) LOANS
Loans at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commercial............................................................. $ 15,452,457 $ 15,416,038
Real estate:
Construction....................................................... 751,231 956,662
Commercial......................................................... 20,216,699 15,903,244
Agriculture........................................................ 1,130,755 629,500
1-4 single family residence........................................ 7,206,746 8,362,315
Consumer............................................................... 2,557,042 3,418,871
Overdraft and other.................................................... 270,000 1,537,503
-------------- --------------
47,584,930 46,224,133
Less unearned discount................................................. (240,412) (365,174)
-------------- --------------
$ 47,344,518 $ 45,858,959
-------------- --------------
-------------- --------------
</TABLE>
F-95
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) LOANS (CONTINUED)
The majority of the Bank's loans are to companies and individuals which are
headquartered or are employed in the Rio Grande Valley, but may conduct business
on a statewide national or international scale. Repayment of those loans is
dependent on the economy in that area, the economic situation in Mexico and
surrounding areas.
The Border Bank makes loans to individuals or companies that are residents
of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured
loans include loans secured by deposits in the Bank, real estate in the United
States or Mexico, or equipment. At December 31, 1995 and 1994, the Bank had
outstanding approximately $11,826,000 and $12,178,000, respectively, of such
loans. Interest income related to such loans for the years ended December 31,
1995, 1994 and 1993 was approximately $1,329,000, $732,000 and $1,110,000,
respectively.
All loans to officers, directors and stockholders of the Bank and associates
of such persons are, in the opinion of management, made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable loans of like quality
and risk of collectibility. The outstanding balance of direct and indirect
personal borrowings of executive officers and directors of the Bank at December
31, 1995 and 1994 was approximately $1,704,000 and $2,403,000, respectively.
Nonaccrual loans approximated $189,000 and $226,000 at December 31, 1995 and
1994, respectively. If interest on these loans had been accrued at the original
contractual rates, interest income would have been increased by approximately
$2,400 and $34,000 for the years ended December 31, 1995 and 1994. There were no
renegotiated loans outstanding at December 31, 1995 and 1994.
In the normal course of business, the Bank enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the balance sheets. These transactions are referred to as
"off-balance sheet commitments." The Bank enters into these transactions to meet
the financing needs of its customers. These transactions include commitments to
extend credit and letters of credit which involve elements of credit risk. The
Bank minimizes its exposure to loss under these commitments by subjecting them
to credit approval and monitoring procedures.
Outstanding commitments and letters of credit at December 31, 1995 and 1994
are approximately as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Commitments to extend credit.............................................. $ 2,151,000 $ 1,663,000
Letters of credit......................................................... 470,000 279,000
------------- -------------
------------- -------------
</TABLE>
(5) ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses for the years
ended December 31, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -----------
<S> <C> <C>
Balance at beginning of year................................................ $ 900,663 $ 623,778
Provision for loan losses................................................... 485,283 396,523
Loans charged off........................................................... (304,353) (132,175)
Recoveries.................................................................. 18,507 12,537
------------- -----------
Balance at end of year...................................................... $ 1,100,100 $ 900,663
------------- -----------
------------- -----------
</TABLE>
F-96
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment and related accumulated depreciation and
amortization at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1995 1994
------------ -------------- --------------
<S> <C> <C> <C>
Land..................................................... -- $ 630,757 $ 500,785
Premises................................................. 40 years 2,990,006 2,914,459
Furniture, fixtures and equipment........................ 10 years 987,740 965,797
Automobiles.............................................. 3 years 52,230 46,636
Less accumulated depreciation and amortization........... (1,363,484) (1,207,521)
-------------- --------------
$ 3,297,249 $ 3,220,156
-------------- --------------
-------------- --------------
</TABLE>
Depreciation expense was approximately $164,000, $148,000 and $119,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
(7) INTEREST-BEARING DEPOSITS
Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Savings, money market and NOW accounts................................. $ 28,668,215 $ 29,279,190
Certificates of deposit less than $100,000............................. 21,520,413 19,458,632
Certificates of deposit of $100,000 or more............................ 44,669,492 45,114,650
-------------- --------------
$ 94,858,120 $ 93,852,472
-------------- --------------
-------------- --------------
</TABLE>
Interest expense for certificates of deposit of $100,000 or more for the
years ended December 31, 1995, 1994 and 1993 was approximately $1,649,000,
$1,980,000 and $1,476,000, respectively.
(8) INCOME TAXES
The components of income tax expense for the years ended December 31, 1995,
1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current tax expense.......................................... $ 446,766 $ 570,177 $ 460,787
Deferred tax (benefit) expense............................... (66,376) 33,955 40,053
----------- ----------- -----------
Income tax expense....................................... $ 380,390 $ 604,132 $ 500,840
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The income tax expense for the years ended December 31, 1995, 1994 and 1993
differs from the amount computed by applying the federal income tax rate of 34%
to income before income tax expense as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Computed "expected" tax expense............................... $ 769,930 $ 995,836 $ 875,937
Increase (reduction) in tax resulting from:
Tax-exempt interest, net.................................. (423,414) (405,528) (405,384)
Other, net................................................ 33,874 13,824 30,287
------------ ------------ ------------
$ 380,390 $ 604,132 $ 500,840
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-97
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................................. $ 282,431 $ 215,392
Deferred compensation..................................................... 36,584 36,584
Other real estate......................................................... 4,250 4,250
Unrealized losses on investment securities................................ 1,701 78,317
Alternative minimum tax carryforward...................................... 94,831 94,831
----------- -----------
419,797 429,374
----------- -----------
Deferred tax liabilities:
Premises and equipment.................................................... 277,106 254,019
Other assets.............................................................. 32,535 54,960
----------- -----------
309,641 308,979
----------- -----------
Net deferred tax asset................................................ $ 110,156 $ 120,395
----------- -----------
----------- -----------
</TABLE>
Management believes that it is more likely than not that the results of
future operations will generate sufficient taxable income to realize the
deferred tax assets.
(9) EMPLOYEE BENEFITS
The Bank has a deferred compensation plan for the benefit of one individual.
The plan provides for a retirement benefit, payable to the individual (or
designated beneficiary or estate if death occurs prior to payment of the full
amount of deferred compensation), of $13,350 each year beginning March 15, 1995
and continuing thereafter for fourteen years.
The Bank owns and is the beneficiary of a life insurance policy on the
former employee covered by the deferred compensation plan. The face value of the
life insurance policy is approximately equal to the total benefits to be paid
under the plan.
(10) CONTINGENT LIABILITIES
The Bank is involved in certain claims and suits occurring in the ordinary
course of business. Management believes that the probable resolution of such
claims and suits will not have a material adverse affect on the financial
condition of the Bank.
F-98
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1995 and methods and assumptions
used to determine the estimated fair values are set forth below for the Bank's
financial instruments:
<TABLE>
<CAPTION>
CARRYING OR
NOTIONAL VALUE FAIR VALUE
---------------- ----------------
<S> <C> <C>
Financial assets:
Cash and due from banks......................................... $ 3,981,763 $ 3,981,763
Federal funds sold.............................................. 8,750,000 8,750,000
Investment securities........................................... 54,235,913 55,375,416
Net loans....................................................... 46,244,418 46,121,036
Financial liabilities -- deposits................................... 101,995,338 102,134,065
Off-balance sheet instruments:
Commitments to extend credit.................................... 2,151,000 2,151,000
Letters of credit............................................... 470,100 470,100
---------------- ----------------
---------------- ----------------
</TABLE>
CASH AND DUE FROM BANKS
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
FEDERAL FUNDS SOLD
Carrying value approximates fair value because of the short maturity of
these instruments and no anticipated credit concerns.
INVESTMENT SECURITIES
The fair values of investment securities are estimated based on quoted
market prices from investment dealers and companies.
NET LOANS
The fair value of loans is estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type and the fair
value of loans is estimated using current market rates for the type of loan.
DEPOSITS
The fair value of deposits with short-term or no stated maturity, such as
checking, savings, NOW accounts and money market accounts, is equal to the
amounts payable at December 31, 1995. The fair value of certificates of deposits
is based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.
COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT
The fair value of commitments to extend credit and letters of credit are
estimated using current interest rates and committed rates.
(12) REGULATORY SUPERVISION
As a result of criticisms reflected in the June 28, 1993 Report of
Examination by the Texas Department of Banking, a Memorandum of Understanding
(the "Memorandum") was entered into between the Board of Directors of the Bank
and the Banking Commissioner of Texas on October 8, 1993. The Memorandum
required that the Bank, among other provisions, increase Board of Director
supervision over loan activities, revise the existing loan policy, increase the
allowance for loan losses and reduce criticized assets. Additionally, the Bank's
Board of Directors are required to submit to the Commissioner and Regional
Director of the FDIC, a written report of the actions taken to comply with the
Memorandum
F-99
<PAGE>
THE BORDER BANK
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) REGULATORY SUPERVISION (CONTINUED)
within fifteen days after the end of each calendar quarter. Failure to comply
with the requirements of the Memorandum could subject the Bank to additional
action by bank regulatory authorities. Management has made efforts to comply
with the requirements of the Memorandum and believes such additional action will
not be taken by regulatory authorities.
(13) PENDING TRANSACTION
On January 9, 1996, a definitive agreement was signed under which the Border
Bank will be purchased by Texas State Bank, the principal operating subsidiary
of Texas Regional Bancshares, Inc. The agreement has been approved by the Boards
of Directors of the Border Bank, Texas State Bank and Texas Regional Bancshares,
Inc. The sale of the Bank is subject to approval by the appropriate regulatory
agencies and contingent upon, among other things, Texas Regional Bancshares,
Inc. having successfully raised additional capital to partially fund the
transaction.
(14) SUBSEQUENT EVENT
On January 12, 1996, the Bank declared and paid a dividend of $2.50 per
share, or $500,000 in the aggregate, to shareholders of record at that date.
F-100
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Available Information.......................... 2
Prospectus Summary............................. 3
Risk Factors................................... 7
Use of Proceeds................................ 9
The Company.................................... 10
Proposed Mergers............................... 12
Price Range of Common Stock and Dividend
Policy........................................ 15
Capitalization................................. 17
Texas Regional Bancshares, Inc. Selected
Consolidated Financial Information............ 18
Texas Regional Bancshares, Inc. Pro Forma
Combined Condensed Financial Information...... 19
Texas Regional Bancshares, Inc. Management's
Discussion and Analysis of Financial Condition
and Results of Operations..................... 23
Business....................................... 48
Management..................................... 64
Principal Holders of Capital Stock............. 71
Selling Shareholder............................ 72
Description of Capital Stock................... 73
Shares Eligible for Future Sale................ 73
Underwriting................................... 75
Legal Matters.................................. 76
Experts........................................ 76
Index to Financial Statements.................. F-1
</TABLE>
2,200,000 SHARES
[TEXAS REGIONAL BANCSHARES LOGO]
TEXAS REGIONAL
BANCSHARES, INC.
COMMON STOCK
------------
PROSPECTUS
------------
ALEX. BROWN & SONS
INCORPORATED
FIRST SOUTHWEST COMPANY
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized list of all expenses expected to be incurred
with respect to the offering described in this Registration Statement, other
than underwriting discounts and commissions:
<TABLE>
<CAPTION>
SEC Registration Fee..................................................... $ 18,321
<S> <C>
Other Filing and Listing Fees............................................ 23,313
Printing and Distribution Costs.......................................... 118,366
Accounting Fees.......................................................... 100,000
Legal Fees............................................................... 175,000
Miscellaneous............................................................ 65,000
---------
Total.................................................................. $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Articles 2.02A(16) and 2.02-1 of the Texas Business Corporation Act grants
to each corporation organized thereunder the power to indemnify its directors
and officers against liability, and to purchase and maintain liability insurance
for those persons as, and to the extent, permitted by Article 2.02-1 of the
Texas Business Corporation Act. In addition, reference is hereby made to Article
V of the Bylaws of the Registrant incorporated herein by reference.
The general effect of Articles 2.02.A.(16) and 2.02-1 of the Texas Business
Corporation Act and Article V of the Bylaws of Texas Regional is that the person
may be indemnified only if it is determined that the person conducted himself in
good faith, reasonably believed that the conduct was in the corporation's best
interests (or not opposed to its best interests), and in the case of criminal
proceeding he had no reasonable cause to believe the conduct was unlawful. In
any case, a person may not be indemnified if the basis for liability was a
personal benefit improperly received by the person or if the person is found
liable to the corporation. The indemnification may generally include judgments,
penalties, fines, settlements and reasonable expenses incurred. Unless the
indemnification has been made mandatory in the Articles of Incorporation or
Bylaws of the company, a determination of indemnification must be made by a
majority vote of a quorum of directors who at the time are not named defendants
or respondents, or (if such a quorum can not be obtained) by a committee of the
board composed of two or more directors who are not named defendants or
respondents, or by special legal counsel selected in accordance with prescribed
procedures, or by shareholders in a vote that excludes shares held by directors.
Management of Texas Regional is taking the position that the indemnification
under Art. 2.02-1.B has been made mandatory by Article V of Texas Regional's
Bylaws. In addition Article 2.02-1 provides that the corporation shall indemnify
a director or officer against reasonable expenses incurred by him in connection
with a proceeding in which he is or was a defendant or respondent because he is
or was a director or officer in which he has been wholly successful in his
defense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. EXHIBITS:
<TABLE>
<C> <S>
*1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen,
Texas, First State Bank & Trust Co., Mission, Texas ("First State Bank"),
Texas Regional Bancshares, Inc., and certain shareholders of First State Bank,
dated as of January 9, 1996 (incorporated by reference from Form 8-K,
Commission File No. 0-14517).
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
2.2 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen,
Texas, The Border Bank, Hidalgo, Texas ("Border Bank"), Texas Regional
Bancshares, Inc., and certain shareholders of Border Bank, dated as of January
9, 1996 (incorporated by reference from Form 8-K, Commission File No.
0-14517).
**2.3 Amendment No. 1 to Agreement and Plan of Reorganization by and between Texas
State Bank, McAllen, Texas, First State Bank, Texas Regional Bancshares, Inc.,
and certain shareholders of First State Bank, dated as of ,
1996.
**2.4 Amendment No. 1 to Agreement and Plan of Reorganization by and between Texas
State Bank, McAllen, Texas, Border Bank, Texas Regional Bancshares, Inc., and
certain shareholders of Border Bank, dated as of , 1996.
3.1 Articles of Incorporation of Texas Regional Bancshares, Inc. (incorporated by
reference from Form 10, Commission File No. 0-14517).
3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc.,
filed December 28, 1983 (incorporated by reference from Form 10, Commission
File No. 0-14517).
3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc.,
filed June 25, 1986 (incorporated by reference from Form S-1, Commission File
No. 33-28340).
3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc.,
filed April 4, 1988 (incorporated by reference from Form S-1, Commission File
No. 33-28340).
3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc.,
filed April 12, 1991 (incorporated by reference from Form 10-K, Commission
File No. 0-14517).
3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc.,
filed March 2, 1992 (incorporated by reference from Form 10-K, Commission File
No. 0-14517).
3.7 Resolution Eliminating from the Articles of Incorporation certain preferred
series of shares of Texas Regional Bancshares, Inc., filed February 21, 1995
(incorporated by reference from 1994 Form 10-K, Commission File No. 0-14517).
3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated by
reference from Form S-1, Commission File No. 33-74992).
4 Relevant portions of Texas Regional Bancshares, Inc. Articles of Incorporation
and Bylaws (incorporated by reference as Exhibit 3.1 through 3.8).
*5 Opinion of McGinnis, Lochridge & Kilgore, L.L.P.
10.1 Incentive Stock Option Plan (incorporated by reference from Form 10,
Commission File No. 0-14517).
10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from Form 10,
Commission File No. 0-14517).
*10.3 1995 Non-Statutory Stock Option Plan.
10.4 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k)
provisions) (incorporated by reference from Form S-8, Commission File No.
33-39386).
10.5 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock Ownership
Plan, adopted July 9, 1991 (incorporated by reference from 1991 Form 10-K,
Commission File No. 0-14517).
10.6 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock Ownership
Plan, adopted May 12, 1992 (incorporated by reference from 1992 Form 10-K,
Commission File No. 0-14517).
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.7 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock Ownership
Plan, adopted September 8, 1992, effective January 1, 1992 (incorporated by
reference from Form S-1, Commission File No. 33-74992).
10.8 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock Ownership
Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by
reference from Form S-1, Commission File No. 33-74992).
10.9 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock Ownership
Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by
reference from 1994 Form 10-K, Commission File No. 0-14517).
*10.10 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock Ownership
Plan (with 401(k) provision), adopted as of August 8, 1995.
*10.11 Glen E. Roney Amended and Restated Deferred Compensation Plan dated as of
January 9, 1996.
*21 Subsidiaries of the Registrant
23.1 Consent of McGinnis, Lochridge & Kilgore, L.L.P. (included in their opinion
filed as Exhibit 5).
*23.2 Consent of KPMG Peat Marwick LLP.
*23.3 Consent of KPMG Peat Marwick, LLP.
*23.4 Consent of KPMG Peat Marwick, LLP.
*27 Financial Data Schedule
</TABLE>
- ------------------------
* Filed herewith.
** To be filed by amendment.
b. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of McAllen, State of Texas,
on March 6, 1996.
TEXAS REGIONAL BANCSHARES, INC.
By: /s/ G. E. RONEY
--------------------------------------
G. E. Roney
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------------------ -------------------------------------- -----------------
<S> <C> <C>
/s/ G. E. RONEY Chairman of the Board, President and March 6, 1996
------------------------------------------- Director (Principal Executive
G. E. Roney Officer)
/s/ GEORGE R. CARRUTHERS Chief Financial Officer (Principal March 6, 1996
------------------------------------------- Financial Officer)
George R. Carruthers
/s/ ANN SEFCIK Controller (Principal Accounting March 6, 1996
------------------------------------------- Officer)
Ann Sefcik
/s/ MORRIS ATLAS Director March 6, 1996
-------------------------------------------
Morris Atlas
/s/ FRANK N. BOGGUS Director March 6, 1996
-------------------------------------------
Frank N. Boggus
/s/ ROBERT G. FARRIS Director March 6, 1996
-------------------------------------------
Robert G. Farris
/s/ JOE M. KILGORE Director March 6, 1996
-------------------------------------------
Joe M. Kilgore
/s/ C. KENNETH LANDRUM, M.D. Director March 6, 1996
-------------------------------------------
C. Kenneth Landrum, M.D.
/s/ JULIE G. UHLHORN Director March 6, 1996
-------------------------------------------
Julie G. Uhlhorn
/s/ PAUL G. VEALE, SR. Director March 6, 1996
-------------------------------------------
Paul G. Veale, Sr.
/s/ JACK WHETSEL Director March 6, 1996
-------------------------------------------
Jack Whetsel
</TABLE>
II-4
<PAGE>
2,200,000 Shares
TEXAS REGIONAL BANCSHARES, INC.
Class A Voting Common Stock
($1.00 Par Value)
UNDERWRITING AGREEMENT
______________________, 1996
Alex. Brown & Sons Incorporated
First Southwest Company
As Representatives of the
Several Underwriters
c/o Alex. Brown & Sons Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Texas Regional Bancshares, Inc., a Texas corporation (the "Company") and the
shareholder of the Company identified on Schedule II hereto (the "Selling
Shareholder"), propose to sell to the several underwriters (the "Underwriters")
named in Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,200,000 shares of the Company's Class A
Voting Common Stock, $1.00 par value (the "Firm Shares"), of which 2,180,000
shares will be sold by the Company and 20,000 shares will be sold by the Selling
Shareholder. The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company and the Selling Shareholder are sometimes referred to
herein collectively as the "Sellers." The Company also proposes to sell at the
Underwriters' option an aggregate of up to 330,000 additional shares of the
Company's Class A Voting Common Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company and the Selling
Shareholder (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The Firm Shares and
the Option Shares (to the extent the aforementioned
<PAGE>
option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SHAREHOLDER.
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-1 (File No. 33-_______) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and has
been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the Prospectus
referred to below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date of
this Agreement. "Prospectus" means (a) the form of prospectus first filed
with the Commission pursuant to Rule 424(b) or (b) the last preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of
the Shares, together with the term sheet or abbreviated term sheet filed
with the Commission pursuant to Rule 424(b)(7) under the Act. Each
preliminary prospectus included in the Registration Statement prior to the
time it becomes effective is herein referred to as a "Preliminary
Prospectus."
(ii) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Texas, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Texas State Bank (the
"Bank") is the only subsidiary, direct or indirect, of the Company. The
Bank has been duly organized and is validly existing either as a banking
corporation under the laws of the State of Texas or as a corporation in good
standing under the laws of the
-2-
<PAGE>
jurisdiction of its incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement. The Company and the Bank are duly qualified to
transact business in all jurisdictions in which the conduct of their
business requires such qualification. The outstanding shares of capital
stock of the Bank have been duly authorized and validly issued, are
fully paid and non-assessable and to the extent shown in Exhibit 21 to
the Registration Statement, are owned by the Company free and clear of
all liens, encumbrances and equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations to
issue or other rights to convert any obligations into shares of capital
stock or ownership interests in the Bank are outstanding.
(iii) The outstanding shares of Class A Voting Common Stock of the
Company, including all shares to be sold by the Selling Shareholder, have
been duly authorized and validly issued and are fully paid and non-
assessable; the portion of the Shares to be issued and sold by the Company
has been duly authorized and when issued and paid for as contemplated herein
will be validly issued, fully paid and non-assessable; and no preemptive
rights of shareholders exist with respect to any of the Shares or the issue
and sale thereof. Neither the filing of the Registration Statement nor the
offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Class A Voting Common Stock.
Neither the filing of the Registration Statement nor the offering or sale of
the Shares as contemplated by this Agreement gives rise to any rights, other
than those that have been waived or satisfied, for or relating to the
registration of any shares of Class A Voting Common Stock. Except as
described in the Registration Statement, there are no contracts, agreements
or understandings between the Company and any person granting such person
the right to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be owned by
such person or to require the Company to include such securities in the
securities registered pursuant to the Registration Statement or in any
securities being registered pursuant to any other registration statement
filed by the Company under the Act.
(iv) The information set forth under the caption "Capitalization" in
the Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(v) The Commission has not issued an order preventing or suspending
the use of any Preliminary Prospectus or Prospectus relating to the proposed
offering of the Shares nor instituted proceedings for that purpose. The
Registration Statement
-3-
<PAGE>
contains, and the Prospectus and any amendments or supplements thereto
will contain, all statements which are required to be stated therein by,
and will conform to, the requirements of the Act and the Rules and
Regulations. No contract or document of a character required to be
described in the Registration Statement or the Prospectus or to be filed
as an exhibit to the Registration Statement is not so described or filed
as required. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact,
and do not omit, and will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments and supplements thereto do
not contain, and will not contain, any untrue statement of a material
fact, and do not omit, and will not omit, to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Registration Statement or the Prospectus, or any such amendment
or supplement, in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of any Underwriter
through the Representatives, specifically for use in the preparation
thereof.
(vi) The consolidated financial statements of the Company and the Bank,
together with related notes and schedules as set forth or incorporated by
reference in the Registration Statement, present fairly the consolidated
financial position and the results of operations and cash flows of the
Company and the Bank, at the indicated dates and for the indicated periods.
Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The pro forma financial statements and other pro forma
financial information included in the Registration Statement and the
Prospectus present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to pro
forma financial statements, have been properly compiled on the pro forma
bases described therein, and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions or circumstances
referred to therein.
(vii) KPMG Peat Marwick LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
(viii) Except as disclosed in the Prospectus, neither the
-4-
<PAGE>
Company nor the Bank is in violation in any material respect of any
directive or order from or agreement or understanding with the Banking
Department of Texas (the "Department"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Board of Governors of the Federal Reserve
System (the "FRB") or any other governmental authority to make any
material change in the method of conducting or that restricts their
respective businesses.
(ix) Neither the Company nor the Bank is or with the giving of notice
or lapse of time or both, will be, in violation of or in default under its
charter or by-laws or under any agreement, lease, contract, indenture or
other instrument or obligation to which it is a party or by which it, or any
of its properties, is bound and which violation or default is of material
significance in respect of the business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company and the Bank taken as a whole. The execution and delivery of this
Agreement and the Agreements and Plans of Reorganization, dated January 9,
1996, as amended, among the Company, the Bank and each of First State Bank &
Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo,
Texas ("Border Bank") (the "Merger Agreements") and the consummation of the
transactions herein and therein contemplated and the fulfillment of the
terms hereof and thereof will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or the Bank or, to the best knowledge of the Company, First State
Bank or Border Bank is a party, or of the charter or by-laws of the Company
or the Bank or, to the best knowledge of the Company, First State Bank or
Border Bank, or any order, rule or regulation applicable to the Company or
the Bank or, to the best knowledge of the Company, First State Bank or
Border Bank of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
(x) There is no action or proceeding pending or, to the best knowledge
of the Company, threatened against the Company, the Bank, First State Bank
or Border Bank including but not limited to actions or proceedings related
to environmental, discrimination or bank regulatory matters, before any
court or administrative agency which might, individually or in the
aggregate, prevent or adversely affect the transactions contemplated by this
Agreement or the Merger Agreements or result in any material adverse change
in the business, condition or prospects of the Company and the Bank taken as
a whole, except as set forth in the Registration Statement.
(xi) The Company and the Bank and, to the best knowledge of the
Company, First State Bank and Border Bank have good and indefeasible title
to all of the properties and assets reflected in their respective financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no
-5-
<PAGE>
lien, mortgage, pledge, charge or encumbrance of any kind except those
reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. The Bank
occupies its leased properties under valid and binding leases and, to the
best knowledge of the Company, no default has occurred or is continuing
thereunder that might result in any material adverse change in the
earnings, business, management, properties, assets, rights, operations,
condition or prospects of the Company and the Bank taken as a whole.
(xii) The Company and the Bank and, to the best knowledge of the
Company, First State Bank and Border Bank have filed all Federal, State and
foreign income tax returns which have been required to be filed and have
paid all taxes indicated by said returns and all assessments received by
them or any of them to the extent that such taxes have become due and are
not being contested in good faith. All tax liabilities of the Company have
been adequately provided for in the financial statements of the Company that
have been included in the Registration Statement. To the best knowledge of
the Company, all tax liabilities of First State Bank or Border Bank have
been adequately provided for in the financial statements of First State Bank
or Border Bank, as the case may be, that have been included in the
Registration Statement.
(xiii) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Bank taken as a whole or, to
the best knowledge of the Company, First State Bank or Border Bank, whether
or not occurring in the ordinary course of business, and there has not been
any material transaction entered into or any material transaction that is
probable of being entered into by the Company or the Bank or, to the best
knowledge of the Company, First State Bank or Border Bank, other than
transactions in the ordinary course of business and changes and transactions
described in the Registration Statement, as it may be amended or
supplemented. The Company and the Bank and, to the best knowledge of the
Company, First State Bank and Border Bank have no material contingent
obligations which are not disclosed in their respective financial statements
that have been included in the Registration Statement.
(xiv) This Agreement has been duly authorized, executed and delivered by
the Company. The Merger Agreements have been duly authorized, executed and
delivered by the Company and, to the best knowledge of the Company, First
State Bank and Border Bank.
(xv) All material conditions precedent to the closing of the
transactions contemplated in the Merger Agreements have been satisfied or
waived by the Company as of the date of this Agreement, except for the
consummation of the offering
-6-
<PAGE>
contemplated hereby and the delivery by the Company of the purchase price
to the shareholders of First State Bank and Border Bank.
(xvi) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by
the Company of this Agreement, the execution and delivery by the Company
and, to the best knowledge of the Company, First State Bank and Border Bank
of the Merger Agreements and the consummation of the transactions herein and
therein contemplated (including but not limited to the Department, the FDIC
or the FRB but excluding such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(xvii) The Company and the Bank and, to the best knowledge of the
Company, First State Bank and Border Bank hold all material licenses,
certificates and permits from governmental authorities which are necessary
to the conduct of their businesses; and none of the Company, the Bank or, to
the best knowledge of the Company, First State Bank or Border Bank has
infringed any patents, patent rights, trade names, trademarks or copyrights,
which infringement is material to the business of the Company and the Bank
taken as a whole, First State Bank or Border Bank, respectively.
(xviii) Neither the Company, nor to the Company's best knowledge, any of
its affiliates (as defined in Rule 405 under the Act), has taken or may
take, directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of the shares of Class A
Voting Common Stock to facilitate the sale or resale of the Shares. The
Company acknowledges that the Underwriters may engage in passive market
making transactions in the Shares on The Nasdaq Stock Market in accordance
with Rule 10b-6A under the Exchange Act.
(xix) The Company is duly registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended (the "BHCA"). The deposit
accounts of the Bank are insured by the FDIC up to the maximum amount
permitted by law; the Bank has not received notice of any proceeding to be
brought by the FDIC or any other regulatory agency for the purpose of
terminating such deposit insurance, and the Bank is not the subject of any
proceeding in which it is proposed that there be imposed any regulatory
sanction or restriction on the Bank nor has the Company received any such
notice in respect of such purpose. To the best knowledge of the Company,
the deposit accounts of
-7-
<PAGE>
First State Bank and Border Bank are insured by the FDIC up to the
maximum amount permitted by law; neither First State Bank nor Border Bank
has received notice of any proceeding to be brought by the FDIC or any
other regulatory agency for the purpose of terminating such deposit
insurance and neither First State Bank nor Border Bank is the subject of
any proceeding in which it is proposed that there be imposed any
regulatory sanction or restriction on First State Bank or Border Bank,
nor has the Company received any such notice in respect of such purpose.
(xx) The Company has not been advised, and has no reason to believe,
that any of the Company, the Bank, First State Bank or Border Bank is not
conducting business in compliance with all applicable laws, rules and
regulations of the jurisdictions in which it is conducting business,
including but not limited to all applicable local, State and Federal
environmental laws and regulations and all regulations, decisions,
directives, orders and policies of the Department, the FDIC and the FRB;
except where failure to be so in compliance would not materially adversely
affect the condition (financial or otherwise) business, results of
operations or prospects of the Company and the Bank taken as a whole, First
State Bank or Border Bank.
(xxi) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization;
(B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access to assets
is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xxii) The Company and the Bank and, to the best knowledge of the
Company, First State Bank and Border Bank carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(xxiii) The Company and, to the best knowledge of the Company, First State
Bank and Border Bank are in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in ERISA)
for which the Company would have any liability; the Company has not incurred
and does not expect to incur liability under (A) Title IV of ERISA with
respect to termination of, or withdrawal from, any "pension plan" or
-8-
<PAGE>
(B) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(b) The Selling Shareholder represents and warrants as follows:
(i) Such Selling Shareholder now has and at the Closing Date (as such
date is hereinafter defined) will have good and indefeasible title to the
Firm Shares to be sold by such Selling Shareholder, free and clear of any
liens, encumbrances, equities and claims, and full right, power and
authority to effect the sale and delivery of such Firm Shares; and upon the
delivery of, against payment for, such Firm Shares pursuant to this
Agreement, the Underwriters will acquire good and indefeasible title
thereto, free and clear of any liens, encumbrances, equities and claims.
(ii) Such Selling Shareholder has full right, power and authority to
execute and deliver this Agreement, the Power of Attorney, and the Custodian
Agreement referred to below and to perform its obligations under such
agreements. The execution and delivery of this Agreement and the
consummation by such Selling Shareholder of the transactions herein
contemplated and the fulfillment by such Selling Shareholder of the terms
hereof will not require any consent, approval, authorization, or other order
of any court, regulatory body, administrative agency or other governmental
body (except as may be required under the Act, state securities laws or Blue
Sky laws) and will not result in a breach of any of the terms and provisions
of, or constitute a default under, organizational documents of such Selling
Shareholder, if not an individual, or any indenture, mortgage, deed of trust
or other agreement or instrument to which such Selling Shareholder is a
party, or of any order, rule or regulation applicable to such Selling
Shareholder of any court or of any regulatory body or administrative agency
or other governmental body having jurisdiction.
(iii) Such Selling Shareholder has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Class A Voting Common
Stock of the Company to facilitate the sale or resale of the Shares and,
other than as permitted by the Act, the Selling Shareholder will not
distribute any prospectus or other offering material in connection with the
offering of the Shares.
(iv) Without having undertaken to determine independently
-9-
<PAGE>
the accuracy or completeness of either the representations and warranties
of the Company contained herein or the information contained in the
Registration Statement, such Selling Shareholder has no reason to believe
that the representations and warranties of the Company contained in this
Section 1 are not true and correct, is familiar with the Registration
Statement and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement which has
adversely affected or may adversely affect the business of the Company or
the Bank; and the sale of the Firm Shares by such Selling Shareholder
pursuant hereto is not prompted by any information concerning the Company
or the Bank which is not set forth in the Registration Statement or the
documents incorporated by reference therein. The information pertaining
to such Selling Shareholder under the caption "Selling Shareholder" in
the Prospectus is complete and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Sellers agree
to sell to the Underwriters and each Underwriter agrees, severally and not
jointly, to purchase, at a price of $______ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereto,
subject to adjustments in accordance with Section 9 hereof. The number of
Firm Shares to be purchased by each Underwriter from each Seller shall be as
nearly as practicable in the same proportion to the total number of Firm
Shares being sold by each Seller as the number of Firm Shares being
purchased by each Underwriter bears to the total number of Firm Shares to be
sold hereunder. The obligations of the Company and of the Selling
Shareholder shall be several and not joint.
(b) Certificates in negotiable form for the total number of the Shares to
be sold hereunder by the Selling Shareholder have been placed in custody
with ___________ as custodian (the "Custodian") pursuant to the Custodian
Agreement executed by the Selling Shareholder for delivery of all Firm
Shares to be sold hereunder by the Selling Shareholder for delivery of all
Firm Shares to be sold hereunder by the Selling Shareholder. The Selling
Shareholder specifically agrees that the Firm Shares represented by the
certificates held in custody for the Selling Shareholder under the Custodian
Agreement are subject to the interests of the Underwriters hereunder, that
the arrangements made by the Selling Shareholder for such custody are to
that extent irrevocable, and that the obligations of the Selling Shareholder
hereunder shall not be terminated by any act or deed of the Selling
Shareholder (or by any other person, firm or corporation including the
Company, the Custodian or the Underwriters) or by operation of law
(including the death of an individual Selling Shareholder or the dissolution
of a corporate Selling Shareholder) or by the occurrence of any other event
or
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events, except as set forth in the Custodian Agreement. If any such
event should occur prior to the delivery to the Underwriters of the Firm
Shares hereunder, certificates for the Firm Shares shall be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as
if such event had not occurred. The Custodian is authorized to receive and
acknowledge receipt of the proceeds of sale of the Shares held by it against
delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made by wire
transfer to the account of the Bank at the Federal Reserve Bank of Dallas
(account number 114909013) for further credit to the Company for the shares
to be sold by it and for further credit to _____________, as Custodian, for
the shares to be sold by the Selling Shareholder, in each case against
delivery of certificates therefor to the Representatives for the several
accounts of the Underwriters. Such payment and delivery are to be made at
the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street,
Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business
day after the date of this Agreement or at such other time and date not
later than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing Date."
(As used herein, "business day" means a day on which the New York Stock
Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) The
certificates for the Firm Shares will be delivered in such denominations and
in such registrations as the Representatives request in writing not later
than the second full business day prior to the Closing Date, and will be
made available for inspection by the Representatives at least one business
day prior to the Closing Date.
(d) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of
this Section 2. The option granted hereby may be exercised in whole or in
part by giving written notice (i) at any time before the Closing Date and
(ii) only once thereafter within 30 days after the date of this Agreement,
by you, as Representatives of the several Underwriters, to the Company,
setting forth the number of Option Shares as to which the several
Underwriters are exercising the option, the names and denominations in which
the Option Shares are to be registered and the time and date at which such
certificates are to be delivered. The time and date at which certificates
for Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to
the Closing Date (such time and date being herein referred to as the "Option
Closing Date"). If the date of exercise of the option
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is three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The number of
Option Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to the
total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over- allotments in the sale of
the Firm Shares by the Underwriters. You, as Representatives of the
several Underwriters, may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the Company.
To the extent, if any, that the option is exercised, payment for the
Option Shares shall be made on the Option Closing Date in New York
Clearing House funds by certified or bank cashier's check drawn to the
order of the Company for the Option Shares to be sold by it against
delivery of certificates therefor at the offices of Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland.
(e) If on the Closing Date, the Selling Shareholder fails to sell the Firm
Shares which the Selling Shareholder has agreed to sell on such date as set
forth in SCHEDULE II hereto, the Company agrees that it will sell or arrange
for the sale of that number of shares of Class A Voting Common Stock to the
Underwriters which represents the Firm Shares which the Selling Shareholder
has failed to so sell, as set forth in SCHEDULE II hereto, or such lesser
number as may be requested by the Representatives.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable
to do so. The Firm Shares are to be initially offered to the public at the
initial public offering price set forth in the Prospectus. The
Representatives may from time to time thereafter change the public offering
price and other selling terms. To the extent, if at all, that any Option
Shares are purchased pursuant to Section 2 hereof, the Underwriters will
offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several
other Underwriters.
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<PAGE>
4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDER.
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule 430A
of the Rules and Regulations is followed, to prepare and timely file with
the Commission under Rule 424(b) of the Rules and Regulations a Prospectus
in a form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations, and (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations.
(ii) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C) of
any request of the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, and
(D) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the Prospectus or
of the institution of any proceedings for that purpose. The Company will
use its best efforts to prevent the issuance of any such stop order
preventing or suspending the use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in endeavoring
to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it is
not now so qualified or required to file such a consent. The Company will,
from time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications in
effect for so long a period as the Representatives may reasonably request
for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period when
delivery of a Prospectus
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is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representatives
may reasonably request. The Company will deliver to the Representatives
at or before the Closing Date four signed copies of the Registration
Statement and all amendments thereto including all exhibits filed
therewith, and will deliver to the Representatives such number of copies
of the Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event shall
occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
(vi) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an earnings
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earnings statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(vii) The Company will, for a period of five years from the Closing
Date, deliver to the Representatives copies of annual reports and copies of
all other documents, reports and information furnished by the Company to its
shareholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined in
the Rules and Regulations, which are not consolidated in the Company's
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<PAGE>
financial statements.
(viii) No offering, sale, short sale or other disposition of any shares
of Class A Voting Common Stock of the Company or other securities
convertible into or exchangeable or exercisable for shares of Class A Voting
Common Stock or derivative of Class A Voting Common Stock (or agreement for
such) will be made for a period of 120 days after the date of this
Agreement, directly or indirectly, by the Company otherwise than hereunder
or with the prior written consent of Alex. Brown & Sons Incorporated (except
that the Company may, without such consent, offer Class A Voting Common
Stock to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan
(including 401(k) provisions) (the "KSOP"), existing employee stock
option plans or other employee benefit plans).
(ix) The Company will use its best efforts to list, subject to notice
of issuance, the Shares on the National Association of Securities Dealers
Automated Quotation National Market System ("NASD-NMS").
(x) The Company has caused each officer and director of the Company
and the Selling Shareholder to furnish to you, on or prior to the date of
this agreement, a letter or letters, in form and substance satisfactory to
the Underwriters, pursuant to which each such person shall agree not to
offer, sell, sell short or otherwise dispose of any shares of Class A Voting
Common Stock of the Company or other capital stock of the Company, or any
other securities convertible, exchangeable or exercisable for Class A Voting
Common Stock or derivative of Class A Voting Common Stock owned by such
person or request the registration for the offer or sale of any of the
foregoing (or as to which such person has the right to direct the
disposition of) for a period of 120 days after the date of this Agreement,
directly or indirectly, except with the prior written consent of Alex.
Brown & Sons Incorporated ("Lockup Agreements").
(xi) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus.
(xii) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or the Bank to register as an investment company
under the Investment Company Act of 1940, as amended.
(xiii) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the Class
A Voting Common Stock.
(xiv) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price of
any securities of the Company.
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<PAGE>
(b) The Selling Shareholder covenants and agrees with the several
Underwriters that:
(i) No offering, sale, short sale or other disposition of any shares
of Class A Voting Common Stock of the Company or other capital stock of the
Company or other securities convertible, exchangeable or exercisable for
Class A Voting Common Stock of the Company or derivative of Class A Voting
Common Stock of the Company owned by the Selling Shareholder or request for
the registration for the offer or sale of any of the foregoing (or as to
which the Selling Shareholder has the right to direct the disposition of)
will be made for a period of 120 days after the date of this Agreement,
directly or indirectly, by such Selling Shareholder otherwise than hereunder
or with the prior written consent of Alex. Brown & Sons Incorporated.
(ii) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act
of 1983 with respect to the transactions herein contemplated, the Selling
Shareholder agrees to deliver to you prior to or at the Closing Date a
properly completed and executed United States Treasury Department Form W-9
(or other applicable form or statement specified by Treasury Department
regulations in lieu thereof).
(iii) Such Selling Shareholder will not take, directly or indirectly,
any action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation of
the price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement,
including, without limiting the generality of the foregoing, the following:
accounting fees of the Company; the fees and disbursements of counsel for
the Company and the Selling Shareholder; the cost of printing and delivering
to, or as requested by, the Underwriters copies of the Registration
Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the
Agreement Among Underwriters, the Underwriters' Selling Memorandum, the
Underwriters' Questionnaire, the Underwriters' Invitation Letter, the
Listing Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees and expenses
incident to securing any required review by the NASD of the terms of the
sale of the Shares; the Listing Fee of the NASD-NMS; and the expenses,
including but not limited to the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the Shares
under State securities or Blue Sky laws. The Selling Shareholder also shall
bear his pro rata portion of the Underwriters' discounts and
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commissions. Any transfer taxes imposed on the sale of the Shares to the
several Underwriters will be paid by the Sellers pro rata. The Sellers
shall not, however, be required to pay for the any of the Underwriters'
expenses (other than those related to State securities or Blue Sky laws)
except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11
hereof, or by reason of any failure, refusal or inability on the part of
the Company or the Selling Shareholder to perform any undertaking or
satisfy any condition of this Agreement or to comply with any of the
terms hereof on their part to be performed, unless such failure to
satisfy said condition or to comply with said terms be due to the default
or omission of any Underwriter, then the Company shall reimburse the
several Underwriters for reasonable out-of-pocket expenses, including but
not limited to fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the
Shares or in contemplation of performing their obligations hereunder; but
the Company and the Selling Shareholder shall not in any event be liable
to any of the several Underwriters for damages on account of loss of
anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing
Date are subject to the accuracy, to of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of
the Company and the Selling Shareholder contained herein, and to the
performance by the Company and the Selling Shareholder of their covenants
and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all filings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the
Registration Statement or otherwise) shall have been disclosed to the
Representatives and complied with to their reasonable satisfaction. No stop
order suspending the effectiveness of the Registration Statement, as amended
from time to time, shall have been issued and no proceedings for that
purpose shall have been taken or, to the best knowledge of the Company or
the Selling Shareholder, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date which would prevent the issuance of the Shares.
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<PAGE>
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinions of McGinnis Lochridge
& Kilgore, L.L.P., counsel for the Company, dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters (and
stating that it may be relied upon by counsel to the Underwriters) to the
effect that:
(i) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Texas, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; the Bank has been duly
organized and is validly existing as a banking association in good standing
under the laws of the jurisdiction of its incorporation, with corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and the Bank are duly
qualified to transact business in all jurisdictions in which the conduct of
their business requires such qualification, or in which the failure to
qualify would have a materially adverse effect upon the business of the
Company and the Bank taken as a whole; and the outstanding shares of capital
stock of the Bank have been duly authorized and validly issued and are fully
paid and non-assessable and, to the best knowledge of such counsel, are
owned by the Company free and clear of all liens, encumbrances and equities
and claims, and no options, warrants or other rights to purchase, agreements
or other obligations to issue or other rights to convert any obligations
into any shares of capital stock or of ownership interests in the Bank are
outstanding.
(ii) The Company has authorized and outstanding capital stock as set
forth under the caption "Capitalization" in the Prospectus; the
authorized shares of the Company's Class A Voting Common Stock have been
duly authorized; the outstanding shares of the Company's Class A Voting
Common Stock, including the Shares to be sold by the Selling Shareholder,
have been duly authorized and validly issued and are fully paid and
non-assessable; all of the Shares conform to the description thereof
contained in the Prospectus; the certificates for the Shares are in due
and proper form; the Shares, including the Option Shares, if any, to be
sold by the Company pursuant to this Agreement have been duly authorized
and will be validly issued, fully paid and non-assessable when issued and
paid for as contemplated by this Agreement; and no preemptive rights of
stockholders exist with respect to any of the Shares or the issue or sale
thereof.
(iii) Except as described in or contemplated by the Prospectus, to the
best knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or
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rights of any character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of such
stock; and except as described in the Prospectus, to the best knowledge
of such counsel, no holder of any securities of the Company or any other
person has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any
of the Shares or the right to have any Common Shares or other securities
of the Company included in the Registration Statement or the right, as a
result of the filing of the Registration Statement, to require
registration under the Act of any shares of Class A Voting Common Stock
or other securities of the Company.
(iv) The Registration Statement has become effective under the Act and,
to the best knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, all Preliminary Prospectuses, the
Prospectus and each amendment or supplement thereto comply as to form in all
material respects with the requirements of the Act and the applicable rules
and regulations thereunder (except that such counsel need express no opinion
as to the financial statements and related schedules included therein).
(vi) The statements under the captions "Proposed Mergers," "Business --
Supervision and Regulation," "Business -- Capital Resources," "Description
of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus,
insofar as such statements constitute a summary of documents referred to
therein or matters of law, fairly summarize in all material respects the
information called for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents required
to be filed as exhibits to the Registration Statement or described in the
Registration Statement or the Prospectus, including without limitation the
Merger Agreements, which are not so filed or described as required, and such
contracts and documents as are summarized in the Registration Statement or
the Prospectus are fairly summarized in all material respects.
(viii) To such counsel's best knowledge, except as disclosed in the
Prospectus or as disclosed in writing delivered to the Underwriters prior to
the Closing Date, none of the Company, the Bank, First State Bank or Border
Bank are in violation of any directive or order from or agreement or
understanding with the Department, the FDIC, the FRB or any other
governmental authority to make any material change in the method of
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conducting or that restricts their respective businesses. Such counsel
knows of no material legal proceedings pending or threatened against the
Company, the Bank, First State Bank or Border Bank, including but not
limited to actions or proceedings related to environmental, discrimination
or bank regulatory matters, except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the Merger
Agreements and the consummation of the transactions herein and therein
contemplated do not and will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default under, the charter or
by-laws of the Company or the Bank, or any agreement or instrument known to
such counsel to which the Company or the Bank is a party or by which the
Company or the Bank may be bound or, so far as is known to such counsel,
violate any statute, judgment, decree, order, rule or regulation of any
court or governmental body having jurisdiction over the Company or the Bank,
or any of its or their property; there is no regulatory cease and desist
order or other order, memorandum or understanding or agreement between the
Company, the Bank and the Department, the FDIC or the FRB that would govern,
limit, or prohibit the Company from entering into and performing its
obligations under this Agreement or the Merger Agreements.
(x) This Agreement has been duly authorized, executed and delivered by
the Company. The Merger Agreements have been duly authorized, executed and
delivered by the Company.
(xi) All material conditions precedent to the closing of the
transactions contemplated by the Merger Agreements with respect to the
obligations of the Company have been satisfied or waived by the Company as
of the date of this Agreement, except for the consummation of the offering
contemplated hereby and the delivery by the Company of the purchase price to
the shareholders of First State Bank and Border Bank.
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery
of this Agreement or the Merger Agreements and the consummation of the
transactions herein and therein contemplated (other than as may be required
by the NASD or as required by State securities and Blue Sky laws as to which
such counsel need express no opinion) except such as have been obtained or
made, specifying the same.
(xiii) The Company is duly registered as a bank holding company under the
BHCA. The deposit accounts of the Bank are insured by the FDIC up to the
maximum amount permitted by law; to counsel's best knowledge, the Bank has
not received notice of any proceeding to be brought by the FDIC or any other
regulatory agency for the purpose of terminating such deposit insurance or
imposing any regulatory sanction or restriction on
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the Bank, nor has the Company received any such notice in respect of such
purpose.
(xiv) To counsel's best knowledge, the Company has not been advised, and
has no reason to believe, that either it or the Bank is not conducting
business in compliance with all applicable laws, rules and regulations of
the jurisdictions in which it is conducting business, including, without
limitation, all applicable local, State and Federal environmental laws and
regulations and all regulations, decisions, directives, orders and policies
of the FDIC, the Department and the FRB; except where failure to be so in
compliance would not materially adversely affect the condition (financial or
otherwise), business, results of operations or prospects of the Company and
the Bank taken as a whole.
In rendering such opinion McGinnis, Lochridge & Kilgore, L.L.P. may rely
as to matters governed by the laws of states other than Texas or Federal
laws on local counsel in such jurisdictions, provided that McGinnis
Lochridge & Kilgore, L.L.P. shall state that they believe that they and the
Underwriters are justified in relying on such other counsel. In addition to
the matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein), and
(ii) the Prospectus, or any amendment or supplement thereto, on the date it
was filed pursuant to Rule 424(b) under the Act and as of the Closing Date
or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact necessary
in order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). Such opinion shall also include a statement to the effect that
such counsel has participated in the preparation of the Merger Agreements
and, nothing has come to the attention of such counsel which leads them to
believe that the representations and warranties of First State Bank and
Border Bank contained in the Merger Agreements were not true, in all
material respects, as of the date of the Merger Agreements and are not true,
in all material respects, as of the date of this Agreement. With respect to
such statements, McGinnis, Lochridge & Kilgore, L.L.P. may state that their
belief is based upon the procedures set forth therein, but is without
independent check and verification.
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<PAGE>
(c) The Representatives shall have received from counsel for the Selling
Shareholder, an opinion dated the Closing Date, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) This Agreement has been duly authorized, executed and delivered
on behalf of the Selling Shareholder.
(ii) The Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than as required by State
securities and Blue Sky laws as to which such counsel need express no
opinion), to sell, assign, transfer and deliver the portion of the Shares to
be sold by the Selling Shareholder.
(iii) The Custodian Agreement and the Power of Attorney executed and
delivered by the Selling Shareholder are valid and binding.
(iv) The Underwriters (assuming that they are bona fide purchasers
within the meaning of the Uniform Commercial Code) have acquired good and
indefeasible title to the Shares being sold by the Selling Shareholder on
the Closing Date, free and clear of all liens, encumbrances, equities and
claims.
(d) The Representatives shall have received from Jones, Day, Reavis &
Pogue, counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of
this Section 6 (except that such counsel need express no view as to matters
relating to First State Bank and Border Bank in subparagraph (ix) of
Paragraph (b) of this Section 6), and that the Company is a duly organized
and validly existing corporation under the laws of the State of Texas. In
rendering such opinion, Jones, Day, Reavis & Pogue may rely as to all
matters governed other than by the laws of the State of Texas or Federal
laws on the opinion of counsel referred to in Paragraph (b) of this Section
6. In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that (i) the Registration
Statement, or any amendment thereto, as of the time it became effective
under the Act (but after giving effect to any modifications incorporated
therein pursuant to Rule 430A under the Act) as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading (except
that such counsel need express no view as to financial statements, schedules
and statistical information therein), and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
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<PAGE>
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading (except
that such counsel need express no view as to financial statements, schedules
and statistical information therein). With respect to such statement,
Jones, Day, Reavis & Pogue may state that their belief is based upon the
procedures set forth therein, but is without independent check and
verification.
(e) The Representatives shall have received at or prior to the Closing
Date from Jones, Day, Reavis & Pogue a memorandum or summary, in form and
substance satisfactory to the Representatives, with respect to the
qualification for offering and sale by the Underwriters of the Shares under
the State securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably have designated to the Company.
(f) The Representatives shall have received, on the Closing Date and the
Option Closing Date, as the case may be, a letter dated the Closing Date or
the Option Closing Date, as the case may be, in form and substance
satisfactory to the Representatives of KPMG Peat Marwick LLP confirming that
they are independent public accountants within the meaning of the Act and
the applicable published Rules and Regulations thereunder and stating that
in their opinion the financial statements and schedules of the Company,
First State Bank and Border Bank examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations; and containing such other statements and information
as is ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial and
statistical information of the Company, First State Bank and Border Bank
contained in the Registration Statement and Prospectus.
(g) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Chief Executive Officer and the Chief Financial Officer of the Company
to the effect that, as of the Closing Date or the Option Closing Date, as
the case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act and
no stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for such purpose have been taken or are, to
his best knowledge, contemplated by the Commission;
(ii) He does not know of any litigation instituted or threatened
against the Company, First State Bank or Border Bank of a character required
to be disclosed in the Registration
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<PAGE>
Statement which is not so disclosed; he does not know of any material
contract required to be filed as an exhibit to the Registration Statement
which is not so filed;
(iii) The representations and warranties of the Company contained in
Section 1 hereof (including without limitation those with respect to First
State Bank and Border Bank) are true and correct as of the Closing Date or
the Option Closing Date, as the case may be;
(iv) All filings required to have been made pursuant to Rule 424 or
430A under the Act have been made;
(v) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the Registration
Statement, the statements contained in the Registration Statement were true
and correct, and such Registration Statement and Prospectus did not omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, and since the effective date of
the Registration Statement, no event has occurred with respect to the
Company, the Bank or, to the best of his knowledge, First State Bank or
Border Bank which should have been set forth in a supplement to or an
amendment of the Prospectus which has not been so set forth in such
supplement or amendment; and
(vi) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company
and the Bank taken as a whole or, to the best of his knowledge, First State
Bank or Border Bank, or the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Bank taken as a whole or, to the best of his
knowledge, First State Bank or Border Bank, whether or not arising in the
ordinary course of business.
(h) The Company and the Selling Shareholder shall have furnished to the
Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein
and related matters as the Representatives may reasonably have requested.
(i) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on the Nasdaq Stock Market.
(j) The Lockup Agreements described in Section 4(a)(x) are in full force
and effect.
(k) All material conditions precedent to the closing of the
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<PAGE>
transactions contemplated by the Merger Agreements have been satisfied as
of the Closing Date, except for the consummation of the offering
contemplated hereby and the delivery by the Company of the purchase price
to the shareholders of First State Bank and Border Bank.
(l) The Representatives shall have received a letter addressed to the
Underwriters and dated the date hereof from the Company or each of First
State Bank and Border Bank, as determined by the Representatives, with
respect to certain information supplied by First State Bank or Border Bank,
as applicable, for use in the Registration Statement, and the
Representatives shall have received a certificate, dated the Closing Date,
or the Option Closing Date, as applicable, and signed by an authorized
representative of the entity that delivered such letters, as to the accuracy
of such information as of the Closing Date or Option Closing Date. Each
such letter and certificate shall be in form and substance acceptable to the
Representatives.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Jones, Day,
Reavis & Pogue, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representatives by notifying the Company and the Selling Shareholder
of such termination in writing or by telegram at or prior to the Closing
Date or the Option Closing Date, as the case may be.
In such event, the Company, the Selling Shareholder and the Underwriters
shall not be under any obligation to each other (except to the extent
provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) Subject to the limitations in paragraph 8(d), the Company and the
Selling Shareholder, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of
-25-
<PAGE>
the Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) arise out of or are based
upon (i) any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, or (ii) the
omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not
misleading; and will reimburse each Underwriter and each such controlling
person upon demand for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with
investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental
inquiry related to the offering of the Shares, whether or not such
Underwriter or controlling person is a party to any action or proceeding;
provided, however, that the Company and the Selling Shareholder will not
be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement, or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. In no
event, however, shall the liability of the Selling Shareholder for
indemnification under this Section 8(a) exceed the proceeds received by
the Selling Shareholder from the Underwriters in the offering. This
indemnity agreement will be in addition to any liability which the
Company or the Selling Shareholder may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Shareholder and each person,
if any, who controls the Company or the Selling Shareholder within the
meaning of the Act, against any losses, claims, damages or liabilities to
which the Company or any such director, officer, Selling Shareholder or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto, or (ii) the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in the light of the circumstances
under which they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, Selling
Shareholder or controlling
-26-
<PAGE>
person in connection with investigating or defending any such loss,
claim, damage, liability, action or proceeding; provided, however, that
each Underwriter will be liable in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration Statement,
any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may
be sought pursuant to this Section 8, such person (the "indemnified party")
shall promptly notify the person against whom such indemnity may be sought
(the "indemnifying party") in writing. No indemnification provided for in
Section 8(a) or (b) shall be available to any party who shall fail to give
notice as provided in this Section 8(c) if the party to whom notice was not
given was unaware of the proceeding to which such notice would have related
and was materially prejudiced by the failure to give such notice, but the
failure to give such notice shall not relieve the indemnifying party or
parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of the provisions of
Section 8(a) or (b). In case any such proceeding shall be brought against
any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party similarly notified, to assume the defense thereof,
with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the
right to retain its own counsel at its own expense. Notwithstanding the
foregoing, the indemnifying party shall pay as incurred (or within 30 days
of presentation) the fees and expenses of the counsel retained by the
indemnified party in the event (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such
counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and
employ counsel acceptable to the indemnified party within a reasonable
period of time after notice of commencement of the action. It is understood
that the indemnifying party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees and expenses of more than one
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<PAGE>
separate firm for all such indemnified parties. Such firm shall be
designated in writing by you in the case of parties indemnified pursuant
to Section 8(a) and by the Company and the Selling Shareholder in the
case of parties indemnified pursuant to Section 8(b). The indemnifying
party shall not be liable for any settlement of any proceeding effected
without its written consent but if settled with such consent or if there
be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by
reason of such settlement or judgment. In addition, the indemnifying
party will not, without the prior written consent of the indemnified
party, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified
party is an actual or potential party to such claim, action or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability
arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a)
or (b) above in respect of any losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Selling Shareholder on the one hand and the Underwriters on the other from
the offering of the Shares. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable law then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only
such relative benefits but also the relative fault of the Company and the
Selling Shareholder on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Shareholder on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholder bear to the
total underwriting discounts and commissions received by the Underwriters,
in each case as set forth in the table on the cover page of the Prospectus.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Selling Shareholder on the one hand or the
Underwriters on
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<PAGE>
the other and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholder and the Underwriters agree that it
would not be just and equitable if contributions pursuant to this Section
8(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to
above in this Section 8(d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions
or proceedings in respect thereof) referred to above in this Section 8(d)
shall be deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this subsection
(d), (i) no Underwriter shall be required to contribute any amount in excess
of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter, (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation, and (iii) the Selling Shareholder shall not be
required to contribute any amount in excess of the lesser of (A) that
proportion of the total of such losses, claims, damages or liabilities
indemnified or contributed against equal to the proportion of the total
Shares sold hereunder which is being sold by such Selling Shareholder, or
(B) the proceeds received by such Selling Shareholder from the Underwriters
in the offering. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment
thereto, each party against whom contribution may be sought under this
Section 8 hereby consents to the jurisdiction of any court having
jurisdiction over any other contributing party, agrees that process issuing
from such court may be served upon him or it by any other contributing party
and consents to the service of such process and agrees that any other
contributing party may join him or it as an additional defendant in any such
proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party
as such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set
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<PAGE>
forth in this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter, or to the
Company, its directors or officers or any person controlling the Company
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or the
Selling Shareholder, you, as Representatives of the Underwriters, shall use
your reasonable efforts to procure within 36 hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company and the
Selling Shareholder such amounts as may be agreed upon and upon the terms
set forth herein, the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase. If
during such 36 hours you, as such Representatives, shall not have procured
such other Underwriters, or any others, to purchase the Firm Shares or
Option Shares, as the case may be, agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares with
respect to which such default shall occur does not exceed 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the other
Underwriters shall be obligated, severally, in proportion to the respective
numbers of Firm Shares or Option Shares, as the case may be, which they are
obligated to purchase hereunder, to purchase the Firm Shares or Option
Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of shares of
Firm Shares or Option Shares, as the case may be, with respect to which such
default shall occur exceeds 10% of the Firm Shares or Option Shares, as the
case may be, covered hereby, the Company and the Selling Shareholder or you,
as the Representatives of the Underwriters, will have the right, by written
notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company or of the Selling Shareholder
except to the extent provided in Section 8 hereof. In the event of a
default by any Underwriter or Underwriters, as set forth in this Section 9,
the Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or
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<PAGE>
in any other documents or arrangements may be effected. The term
"Underwriter" includes any person substituted for a defaulting
Underwriter. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202,
Attention:_________________; with a copy to Alex. Brown & Sons Incorporated,
135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General
Counsel; if to the Company or the Selling Shareholder, to Texas Regional
Bancshares, Inc., Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen,
Texas 78501, Attention: Glen E. Roney, Chief Executive Officer.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m.
on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any material adverse change
or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the Company and the Bank
taken as a whole, First State Bank or Border Bank or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company and the Bank taken as a whole, First
State Bank or Border Bank, whether or not arising in the ordinary course of
business, (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on
the financial markets of the United States would, in your reasonable
judgment, make it impracticable to market the Shares or to enforce contracts
for the sale of the Shares, or (iii) suspension of trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
limitation on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange, (iv) the enactment,
publication, decree or other promulgation of any
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<PAGE>
statute, regulation, rule or order of any court or other governmental
authority which in your opinion materially and adversely affects or may
materially and adversely affect the business or operations of the
Company, (v) declaration of a banking moratorium by United States or New
York State authorities, (vi) the suspension of trading of the Company's
common stock by the Commission on the NASD-NMS or (vii) the taking of any
action by any governmental body or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse
effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Shareholder and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person
will have any right or obligation hereunder. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign merely
because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company, the Selling Shareholder and the Underwriters acknowledge and
agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the
Registration Statement consists of the information set forth in the last
paragraph on the front cover page (insofar as such information relates to
the Underwriters), legends required by Item 502(d) of Regulation S-K under
the Act, the information under the caption "Underwriting" in the Prospectus
and [insert other relevant sections].
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements contained
in this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of
any Underwriter or controlling person thereof, or by or on behalf of the
Company or its directors or officers and (c) delivery of and payment for the
Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of Maryland.
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<PAGE>
If the foregoing letter is in accordance with you understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Shareholder, the
Company and the several Underwriters in accordance with its terms.
Any person executing and delivering this Agreement as Attorney-in-Fact for
the Selling Shareholder represents by so doing that he has been duly appointed
as Attorney-in-Fact by the Selling Shareholder pursuant to a validly existing
and binding Power of Attorney which authorizes such Attorney-in-Fact to take
such action.
Very truly yours,
TEXAS REGIONAL BANCSHARES, INC.
By ___________________________________
Glen E. Roney
Chairman of the Board
SELLING SHAREHOLDER
By ___________________________________
___________________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
FIRST SOUTHWEST COMPANY
As Representatives of the several
Underwriters listed on Schedule I
By: Alex. Brown & Sons Incorporated
By: _______________________________
Authorized Officer
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<PAGE>
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
- ----------- ---------------------
<S> <C>
Alex. Brown & Sons Incorporated
First Southwest Company
---------
Total 2,200,000
</TABLE>
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<PAGE>
SCHEDULE II
SCHEDULE OF SELLING SHAREHOLDER
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Shareholder to be Sold
- ------------------- ---------------------
<S> <C>
------
Total 20,000
</TABLE>
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<PAGE>
[LETTERHEAD]
(512) 495-6033
March 6, 1996
Texas Regional Bancshares, Inc.
Kerria Plaza, Suite 301
3700 N. 10th Street
McAllen, Texas 78501
RE: Issuance of 2,180,000 shares of Class A Voting Common Stock of Texas
Regional Bancshares, Inc.
Gentlemen:
We have acted as counsel for Texas Regional Bancshares, Inc. (the
"Corporation"), a Texas corporation, in connection with a proposed
registration by the Corporation with the Securities and Exchange Commission
on a Form S-1 Registration Statement (the "Registration Statement") under the
Securities Act of 1933, as amended, of up to 2,180,000 shares of newly issued
shares of Class A Voting Common Stock of Texas Regional Bancshares, Inc. (the
"Common Stock").
Before rendering this opinion, we have examined such corporate and other
documents, and such questions of law, as we have considered necessary and
appropriate for the purposes of this opinion, and have relied, as to factual
matters, on certificates and other statements of officers of the Corporation
and others. Based upon the foregoing, we are of the opinion that the shares
of Common Stock of the Corporation which will be issued in the offering
described in the Registration Statement will, upon full payment therefor in
cash by the subscriber, be validly issued, fully paid and non-assessable.
We hereby consent to the use of our name in the Registration Statement
and the filing of this opinion as an exhibit to the Registration Statement,
but we do not thereby admit that we are
<PAGE>
Texas Regional Bancshares, Inc.
March 6, 1996
Page 2
within the class of persons whose consent is required under the terms of the
Securities Act of 1933, as amended.
Very truly yours,
McGINNIS, LOCHRIDGE & KILGORE, L.L.P.
/s/ WILLIAM A. ROGERS, JR.
--------------------------------------
William A. Rogers, Jr., Partner
WAR/dw
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
1995 NONSTATUTORY STOCK OPTION PLAN
PURPOSE. The purpose of the 1995 Nonstatutory Stock Option Plan
(hereinafter "Plan") is to provide a special incentive to selected key
employees of Texas Regional Bancshares, Inc. (hereinafter "Company") and its
subsidiaries to promote the Company's business. The Plan is designed to
accomplish this purpose by offering such employees an opportunity to purchase
shares of the Class A voting common stock (hereinafter "Common Stock") of the
Company. For purposes of the Plan a subsidiary is any corporation in which
the Company owns, directly or indirectly, stock possessing fifty percent
(50%) or more of the total combined voting power of all classes of stock or
over which the Company has effective operating control.
II.
ADMINISTRATION. The Plan shall be administered by a Nonstatutory Option
Committee (hereinafter "Committee") to be established by the Board of
Directors of the Company. The Committee shall consist of three or more
members, one of whom shall be neither an officer nor an employee of the
Company. The Committee shall have authority, consistent with the Plan,
(a) to determine which of the key employees of the
Company and its subsidiaries shall be granted options;
(b) to determine the time or times when options shall
be granted and the number of shares of Common Stock to be
subject to each option;
(c) to determine the option price of the shares
subject to each option and the method of payment of such
price;
(d) to determine the time or times when each option
becomes exercisable and the duration of the exercise period,
subject to the limitations contained in Paragraph VI(b);
(e) to prescribe the form or forms of the instruments
evidencing any options granted under the Plan and of any
other instruments required under the Plan and to change such
forms from time to time;
(f) to adopt, amend and rescind rules and regulations
for the administration of the Plan and the options and for
its own acts and proceedings; and
<PAGE>
(g) to decide all questions and settle all
controversies and disputes which may arise in connection
with the Plan. All decisions, determinations and
interpretations of the Committee shall be binding on all
parties concerned.
III.
PARTICIPANTS. The participants in the Plan shall be key employees of
the Company or of any of its subsidiaries, whether or not also officers or
directors, as may be selected from time to time by the Committee in its
discretion. Directors who are not employees shall not be eligible. In any
grant of options after the initial grant, employees who were previously
granted options or sold shares under the Plan may be included or excluded.
IV.
LIMITATIONS. No option shall be granted under the Plan after
December 1, 2005, but options theretofore granted may extend beyond that
date. Subject to adjustment as provided in Section VIII of the Plan, the
number of shares of Common Stock of the Company which may be issued under the
Plan shall not exceed 90,000 in the aggregate. To the extent that any option
granted under the Plan shall expire or terminate unexercised or for any
reason become unexercisable as to any shares subject thereto, such shares
shall thereafter be available for further grants under the Plan, within the
limit specified above.
V.
STOCK TO BE ISSUED. Stock to be issued under the Plan may constitute an
original issue of authorized stock or may consist of previously issued stock
acquired by the Company, as shall be determined by the Board of Directors.
The Board of Directors and the proper officers of the Company shall take any
appropriate action required for such issuance.
VI.
TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan
shall be subject to the following terms and conditions (except as provided in
Section VII) and to such other terms and conditions as the Committee shall
determine to be appropriate to accomplish the purposes of the Plan:
(a) OPTION PRICE. The option price under each option
shall be determined by the Committee and may be more, equal
to or less than the then current fair market value of the
-2-
<PAGE>
Company's Class A common stock as the Committee may deem to
be appropriate, but in no event may such price be less than
par value; provided, however, that in the event the
Committee shall determine to grant an option at less than
the then current fair market value of the Company's Class A
common stock, such option shall not be granted without the
prior approval of the Board of Directors.
(b) PERIOD OF OPTIONS. The period of an option shall
not exceed ten years from the date of grant.
(c) EXERCISE OF OPTIONS.
(i) Each option shall be made exercisable at such
time or times, whether or not in installments, as the
Committee shall prescribe at the time the option is granted.
(ii) A person electing to exercise an option shall
give written notice to the Company, as specified by the
Committee, of his election and of the number of shares he
has elected to purchase, such notice to be accompanied by
such instruments or documents as may be required by the
Committee, and unless otherwise directed by the Committee
shall at the time of such exercise tender the purchase price
of the shares he has elected to purchase.
(d) PAYMENT FOR ISSUANCE OF SHARES. Upon exercise of
any option granted hereunder, payment in full shall be made
at the time of such exercise for all such shares then being
purchased.
The Company shall not be obligated to issue any shares unless and until,
in the opinion of the Company's counsel, (i) all applicable laws and
regulations have been complied with, (ii) in the event the outstanding Common
Stock is at the time listed upon any stock exchange, the shares to be issued
have been listed or authorized to be added to the list upon official notice
of issuance upon such exchange, and (iii) all other legal matters in
connection with the issuance and delivery of shares have been approved by the
Company's counsel. Without limiting the generality of the foregoing, the
Company may require from the participant such investment representation or
such agreement, if any, as counsel for the Company may consider necessary in
order to comply with the Securities Act of 1933 as then in effect, and may
require that the participant agree that any sale of the shares will be made
only in such manner as is permitted by the Committee and that he will notify
the Company when he intends to make any disposition of the shares whether by
sale, gift or otherwise. The participant shall take any action reasonably
requested by the Company in such connection. A participant shall have the
rights of a stockholder only as to shares actually acquired by him under the
Plan.
-3-
<PAGE>
(e) NONTRANSFERABILITY OF OPTIONS. No option may be transferred by the
participant otherwise than by will or by the laws of descent and
distribution, and during the participant's lifetime the option may be
exercised only by him.
(f) CONSIDERATION FOR OPTION. Each person receiving a stock option
must agree that he will remain in the employ of the Company upon the terms of
employment then existing (unless different terms are mutually agreed upon)
for at least one (1) year from (i) the date of the granting of the option or
(ii) the date of expiration of the then current employment contract,
whichever is later, subject to the right of the Company to terminate his
employment at any time.
(g) TERMINATION OF EMPLOYMENT. If the employment of a participant
terminates for any reason other than his death or permanent disability (as
hereinafter defined), he may thereafter exercise his option as provided
below, but only to the extent he was entitled to exercise the option on the
date when his employment terminated. If such termination of employment is
voluntary on the part of the participant, he may exercise his option only
within ten days after the date of termination of his employment (unless a
longer period not in excess of three months is allowed by the Committee). If
such termination of employment is involuntary on the part of the participant,
he may exercise his option only within three months after the date of
termination of his employment. In no event, however, may such participant
exercise his option at a time when the option would not be exercisable had
the participant remained an employee. For purposes of this subsection (g), a
participant's employment shall not be considered terminated in the case of
sick leave or other bona fide leave of absence approved by the Company or a
subsidiary, or in the case of a transfer to the employment of a subsidiary or
to the employment of the Company. Anything herein to the contrary
notwithstanding, an option may be exercised only to the extent exercisable on
the date of termination of employment by death, disability or otherwise.
(h) RETIREMENT. If prior to the expiration date of his option an
optionee shall retire with the Company's consent, such option may be
exercised in the same manner as if the optionee had continued in the
Company's employ; provided however, the Committee may terminate all
unexercised options if it shall determine that the retired optionee had
engaged in any activity detrimental to the Company's interests.
(i) DEATH OR PERMANENT DISABILITY. If a participant dies or becomes
"permanently disabled" (as hereinafter defined) at a time when he is entitled
to exercise an option, then at any time or times within one (1) year after
his death or determination of permanent disability (or such further period as
the Committee may allow) such option may be exercised, as to all or any of
the shares which the participant was entitled to purchase immediately prior
to
-4-
<PAGE>
his death or determination of permanent disability, by his executor or
administrator or the person or persons to whom the option is transferred by
will or the applicable laws of descent and distribution (in the case of
death) or by his legal guardian (in the case of permanent disability), and
except as so exercised such option shall expire at the end of such period.
In no event, however, may an option be exercised after the expiration of the
option period.
For purposes of the Plan, the term "permanent disability" shall mean any
physical and/or mental condition which, in the sole discretion of a majority
of the Committee, renders the participant unable to discharge his duties in
the employ of the Company or any subsidiary for a period of ninety (90)
consecutive days.
VII.
REPLACEMENT OPTIONS. The Company may grant options under the Plan on
terms differing from those provided for in Section VI where such options are
granted in substitution for options held by employees of other corporations
who concurrently become employees of the Company or a subsidiary as the
result of a merger, consolidation or other reorganization of the employing
corporation with the Company or subsidiary, or the acquisition by the Company
or a subsidiary of the business, property or stock of the employing
corporation. The Committee may direct that the substitute options be granted
on such terms and conditions as the Committee considers appropriate in the
circumstances.
VIII.
CHANGES IN STOCK. In the event of a stock dividend, stock split or
recapitalization or merger in which the Company is the surviving corporation,
or other similar capital change, the number and kind of shares of stock of
the Company to be subject to the Plan and to options then outstanding or to
be granted thereunder, the maximum number of shares which may be issued or
sold under the Plan, the option price and other relevant provisions shall be
appropriately adjusted by the Board of Directors of the Company, the
determination of which shall be binding on all persons.
IX.
EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any
employee of the Company or a subsidiary any right to continue employment with
the Company or a subsidiary, as the case may be, nor does it interfere in any
way with the right of the Company or a subsidiary to terminate the employment
of any of its employees at any time.
-5-
<PAGE>
X.
AMENDMENTS. The Committee may at any time discontinue granting options
under the Plan. The Board of Directors of the Company may at any time or
times amend the Plan or amend any outstanding option or options for the
purpose of satisfying the requirements of any changes in applicable laws or
regulations or for any other purpose which may at the time be permitted by
law, provided that except to the extent required or permitted under Section
VIII no such amendment shall, without the approval of the stockholders of the
Company, increase the maximum number of shares available under the Plan, or
without the consent of the participant void or diminish options previously
granted, nor increase or accelerate the conditions and actions required for
the exercise of the same, except that nothing herein shall limit the
Company's right to call stock issued for deferred payment to be evidenced by
promissory note, where the participant is in default of his obligations on
such note.
IN WITNESS whereof, this Plan shall be effective upon adoption by the
Company's Board of Directors and shall continue in effect until its
termination is recommended by said Board.
-6-
<PAGE>
AMENDMENT NUMBER 6 TO THE
TEXAS REGIONAL BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN
(WITH 401(K) PROVISIONS)
Texas Regional Bancshares, Inc., a corporation organized and operating
under the laws of the State of Texas, and registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended, hereby adopts
the following amendments to the Texas Regional Bancshares, Inc. Employee
Stock Ownership Plan (with 401(k) provisions) (the "Plan"), effective as of
August 8, 1995:
1. The definition of "Service" in Section 2 of the Plan is hereby
deleted and substituted therefor is the following language:
SERVICE:
Employment with (i) the Company, (ii) an Affiliated
Company, (iii) Mid Valley Bank, as predecessor to
the Company's subsidiary, Texas State Bank (with
respect to those Employee participants that were
formerly participants in the Mid Valley Bank
Employees' Pensions Plan), or (iv) First National
Bank of South Texas (with respect to those
Employees who were employed by First National
Bank of South Texas as employees of the Rio
Grande City and Roma branch bank facilities of
First National Bank of South Texas as of the time
of acquisition of such branch bank facilities by
Texas State Bank)."
2. Section 13(a) is hereby amended in its entirety to read as
follows:
"(a) GENERAL RULE. For purpose of vesting, on
Employee's Credited Service includes the number
of Plan Years after January 1, 1984, in which he is
credited with at least 1,000 Hours of Service.
Credited Service shall include such Service with the
Company, any other Employer, any Affiliated
Company, Mid Valley Bank (with respect to those
Employee participants that were formerly
participants in the Mid Valley Bank Employees'
Pension Plan), and First National Bank of South
<PAGE>
Texas (with respect to those Employees who were
employed by First National Bank of South Texas as
employees of the Rio Grande City and Roma branch
bank facilities of First National Bank of South
Texas as of the time of acquisition of such branch
facilities by Texas State Bank)."
3. As a result of the amendments to the Plan pursuant to sections 1
and 2 of this Amendment Number 6, persons who are employees
of First National Bank of South Texas as of the date of acquisition
of First National Bank's Rio Grande City and Roma branch
facilities by Texas State Bank, will become Participants (as that
term is defined in the Plan) as of the date that such persons
become employees of Texas State Bank upon acquisition of such
branch facilities by Texas State Bank, without regard to the
requirement of entry on January 1st or July 1st subsequent to his
or her initial date of service, provided that they are otherwise
qualified to be Participants as set forth in section 3 of the Plan.
The Plan is hereby further amended to provide that such persons
thus become Participants immediately upon commencement of
employment by Texas State Bank as of the date of acquisition of
the branch facilities, without regard to the requirement of entry on
January 1st or July 1st subsequent to his or her initial date of
service, provided that they are otherwise qualified under section 3
of the Plan. Notwithstanding the foregoing, each such employee
shall only be credited (pursuant to and in accordance with the rules
set forth in the Plan) with the amount of compensation paid by
Texas State Bank, and shall not be credited with any part of such
employee's compensation paid by First National Bank of South
Texas, for purposes of determining allocations of Employer
Contributions and Forfeitures and for all other purposes.
4. Defined terms used herein and not otherwise defined herein shall
have the meanings assigned to them in the Plan.
IN WITNESS WHEREOF, the undersigned, a duly authorized officer of Texas
Regional Bancshares, Inc., hereby adopts this Amendment Number 6 to the Texas
Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k)
provisions) effective as of August 8, 1995.
Texas Regional Bancshares, Inc.
By: /s/ G.E. Roney
-----------------------------------
Name: G.E. Roney
-----------------------------------
Title: Chairman of the Board & President
---------------------------------
2
<PAGE>
GLEN E. RONEY
AMENDED AND RESTATED
DEFERRED COMPENSATION PLAN
This Amended and Restated Deferred Compensation Plan, made and entered
into as of January 9, 1996 between Texas State Bank of McAllen, a Texas
banking corporation, having its principal office in McAllen, Texas (said Bank
being hereinafter referred to as the "Company") and Glen E. Roney of McAllen,
Texas (hereinafter referred to as the "Employee"), amends the Glen E. Roney
Deferred Compensation Plan originally executed as of December 31, 1993, to
incorporate changes necessary for a favorable private letter ruling from the
IRS and restates the Plan, as amended, in its entirety.
WHEREAS, the Employee serves as the Chief Executive Officer of the
Company and in that capacity his services are valued by the Company, and it
is the desire of the Company to have the benefit of the Employee's continued
loyalty, service and counsel and also to assist him in providing for the
contingencies of death and old age dependence; and
WHEREAS, the Company has made a determination to provide the Employee
certain retirement and death benefits as more particularly hereinafter
described:
NOW, THEREFORE, it is hereby agreed by and between the Employee and the
Company that:
1. RETIREMENT BENEFIT. Provided that the Employee complies with the
terms and provisions hereof (including the requirement of continued
employment, subject to the exceptions provided in paragraph 6 hereof) the
Company will pay to Employee $100,000 per year, beginning October 29, 2002,
and continuing regularly on the same calendar day of each year thereafter,
until the Employee has been paid the aggregate sum of $1,500,000. In the
event that the Employee should die after said payments have commenced but
before the aggregate amount herein provided is fully paid, the unpaid balance
of payments due will continue to be paid by the Company to those
beneficiaries designated in paragraph 2 below.
2. DEATH BENEFIT. Should the Employee die before October 29, 2002,
while in the employ of the Company (subject to the exceptions provided in
paragraph 3(a) hereof), the Company beginning at a date to be determined by
the Company but within 30 days from the date of death, will pay $100,000 per
year until the aggregate sum of $1,500,000 has been paid, to the following
beneficiary or beneficiaries:
<PAGE>
Rita K. Roney, provided that if Rita K. Roney does not
survive the Employee for a period of at least thirty (30)
days, such sum shall be payable to the Employee's estate.
The beneficiary or beneficiaries named herein may be changed (without the
consent of any prior beneficiary) at any time by the Employee by written
notification to the Company.
3. CONDITIONS. The obligations of the Company under the terms hereof
are subject to the following conditions and requirements:
a. The obligation of the Company to make payments as herein
provided is conditioned upon, the employment of the Employee by the Company
of one or more of its subsidiaries continuously until the earlier of the date
of Employee's death or October 29, 2002, except that such requirement and
limitation shall not be applicable (and the Employee shall not be required to
be continuously employed by the Company) if, prior to such date, (i) the
Employee's annual cash compensation paid by the Company is substantially
reduced from the cash compensation paid by the Company to the Employee during
1993, or (ii) Employee's duties on behalf of the Company are modified such
that Employee is no longer performing the function of Chief Executive Officer
of the Company, or (iii) Employee ceases his employment as a result of a
disability that makes it impossible for Employee to carry his duties as Chief
Executive Officer of the Company, or (iv) Employee is discharged the Company
without cause.
b. The obligation of the Company to make payments as herein
provided is further conditioned upon the requirement that, during the period
that retirement payments are being, made, the Employee shall not engage in
business activities which are in competition with the Company without first
obtaining the written consent of the Company.
4. LEAVE OF ABSENCE. The Company may, in its sole discretion, permit
the Employee to take a leave of absence for a period not to exceed one year.
During this time, the Employee shall still be considered an employee of the
Company for purposes of this Agreement.
5. ASSIGNABILITY. The Employee's rights to benefit payments under this
Agreement are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors of the Employee or the Employee's beneficiaries.
6. EMPLOYMENT RIGHTS. This Agreement creates no right in the Employee
to continue in the Company's employ for any specified length of time, nor
does it create any obligations on the part of the Company, except as
expressly set forth in this Agreement.
-2-
<PAGE>
7. TRUST. The Employee acknowledges that he has the status of a
general unsecured creditor of the Company, and the Plan constitutes a mere
promise by the Company to make benefit payments in the future. Any trust
created by the Company and any assets held by the trust to assist the Company
in meeting its obligations under the Plan will conform to the terms of the
model trust described in Revenue Procedure 92-64. It is the intention of the
parties that this deferred compensation plan be unfunded for tax purposes and
for purposes of Title I of ERISA. The Company has executed and made the
initial funding of a trust in the form of that certain Amended and Restated
Trust Under Glen E. Roney Amended and Restated Deferred Compensation Plan
attached hereto as Annex A, which is intended to conform to the terms of the
model trust described in Revenue Procedure 92-64. The amount of the initial
funding was determined by the Company in its sole discretion. The purpose of
the Trust is to receive contributions from the Company and make disbursements
to the Employee pursuant to this Agreement. To the extent that the Company
has funded the Trust, the payments to be made to Employee pursuant to this
Agreement shall be paid out of assets of the Trust, provided that Employee
acknowledges and agrees that notwithstanding the funding of such Trust, the
Employee shall nonetheless have only an unsecured claim against the general
assets of the Company. Employee acknowledges that any assets held by the
Trust will be subject to the claims of the Company's general creditors under
federal and state law in the event the Company becomes Insolvent, as
described or defined in Section 3(a) of the Trust. In the event of a
shortfall in funds available in the Trust, the deficit shall be paid by the
Company. Notwithstanding anything herein to the contrary, upon a Change of
Control (as defined in the Trust), the Company shall fully fund the Trust
with funds adequate to fully discharge any then remaining obligation of the
Company under the terms of this Agreement.
8. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Texas.
9. AMENDMENTS. This Agreement may be amended, but only by an
instrument in writing executed by both the Company and the Employee. As soon
as reasonably practicable, the Company will initiate a private letter ruling
request with the Internal Revenue Service, on terms and provisions reasonably
acceptable to the Company and the Employee to the effect that the benefits
payable to the Employee under the terms of this Plan will not be taxable to
the Employee until actual receipt thereof by the Employee. Notwithstanding
the foregoing or anything herein to the contrary, the Company and the
Employee covenant to mutually agree to amend this Plan, as and to the extent
reasonably necessary to obtain such a favorable private letter ruling.
Except as otherwise provided in this paragraph, Employee and the Company
agree that the agreements and obligations herein set forth shall be binding
upon the Company and the Employee and their respective successors, assigns,
beneficiaries, heirs, executors and administrators.
-3-
<PAGE>
EXECUTED as of the date first written above.
TEXAS STATE BANK OF McALLEN
By: /s/ GEORGE R. CARRUTHERS
-------------------------------------
Name: George R. Carruthers
------------------------------
Title: EVP & CFO
------------------------------
/s/ GLEN E. RONEY
----------------------------------------
Glen E. Roney
-4-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Name Jurisdiction
---- ------------
Texas State Bank Texas
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Texas Regional Bancshares Inc.:
We consent to the use of our report dated January 26, 1996 on the
consolidated financial statements of Texas Regional Bancshares, Inc. included
herein and the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 6, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
First State Bank & Trust Co.:
We consent to the use of our report dated January 31, 1996 on the
financial statements of First State Bank & Trust Co. included herein and the
reference to our firm under the heading "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 6, 1996
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
The Border Bank:
We hereby consent to the use of our report dated January 31, 1996 on the
financial statements of The Border Bank included herein and the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
Houston, Texas
March 6, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, Consolidated Statements of Income, found on pages
F-3 and F-4 of the Company's Form S-1 filed March 6, 1996, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 30,933
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 63,150
<INVESTMENTS-CARRYING> 68,491
<INVESTMENTS-MARKET> 68,962
<LOANS> 450,854
<ALLOWANCE> 4,542
<TOTAL-ASSETS> 646,769
<DEPOSITS> 579,731
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,561
<LONG-TERM> 0
0
0
<COMMON> 6,196
<OTHER-SE> 56,524
<TOTAL-LIABILITIES-AND-EQUITY> 646,769
<INTEREST-LOAN> 37,131
<INTEREST-INVEST> 7,289
<INTEREST-OTHER> 1,172
<INTEREST-TOTAL> 45,592
<INTEREST-DEPOSIT> 17,990
<INTEREST-EXPENSE> 18,052
<INTEREST-INCOME-NET> 27,540
<LOAN-LOSSES> 1,685
<SECURITIES-GAINS> (111)
<EXPENSE-OTHER> 18,977
<INCOME-PRETAX> 13,396
<INCOME-PRE-EXTRAORDINARY> 13,396
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,725
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
<YIELD-ACTUAL> 5.33
<LOANS-NON> 2,092
<LOANS-PAST> 642
<LOANS-TROUBLED> 6
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,511
<CHARGE-OFFS> 1,640
<RECOVERIES> 536
<ALLOWANCE-CLOSE> 4,542
<ALLOWANCE-DOMESTIC> 3,966
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 576
</TABLE>
