<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended December 31, 1995
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commision File No. 0-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2294235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 North 10th Suite 301, McAllen, Texas 78501
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 210-631-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
-------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Voting Common, $1.00 Per Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 8-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 18, 1996 was $83,320,599.
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 18, 1996 are as follows:
Class A Voting Common - 6,196,791 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting on May 20, 1996 Part III
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company"), 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 (the "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.
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.
1
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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.
The Bank has also expanded the services which it provides to third party
correspondent banks. The Bank data processing center, for example, presently
serves three banks in addition to providing data processing services for all
Bank banking locations.
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, the 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.
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 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 $188.1 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, Penhas, 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.
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 expect 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, costs 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 economics of a combined advertising program.
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.
2
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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.
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.
3
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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.
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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.
5
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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.
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.
6
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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.
7
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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
8
<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.
9
<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
10
<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 examina-
tion, 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
11
<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
12
<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.
13
<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>
14
<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.
15
<PAGE>
ITEM 2. 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.
16
<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.
17
<PAGE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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
</TABLE>
19
<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.
The Company paid no dividends on its Common Stock prior to June 1994.
Beginning in June 1994, the Company paid a quarterly dividend of $0.08 per share
of its Common Stock. During 1995, the Company increased its quarterly dividend
to $0.10 per share, and currently intends to continue to pay such dividend in
the foreseeable future. On March 12, 1996, the Company's Board of Directors
declared a dividend of $0.10 per share of Common Stock payable to shareholders
of record as of April 8, 1996.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors and
will depend on conditions then existing, including Texas Regional's
profitability, liquidity, financial condition, capital requirements and other
relevant factors, including regulatory restrictions applicable to the Company.
The Company's principal source of the funds to pay dividends on the Common Stock
is dividends from Texas State Bank. The payment of dividends by Texas State Bank
is subject to certain restrictions imposed by federal and state banking laws,
regulations and authorities. At 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.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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.
<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>
21
<PAGE>
ITEM 7. 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 herein.
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
22
<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.
23
<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).
24
<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).
25
<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............. 22.4 399,295 426,691 407,217 393,264 370,008
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
26
<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
27
<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.
28
<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.
29
<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.
30
<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
31
<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.
32
<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.
33
<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>
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
34
<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 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>
35
<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.
36
<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.
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>
37
<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.
38
<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
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
----------- -------------- ----------- -------------- ----------- -------------- ----------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial.... $ 965 32.5% $ 1,057 30.0% $ 1,348 31.6% $ 1,096 34.6%
Agricultural... 304 5.6 478 5.1 138 4.7 148 5.9
Real Estate... 2,401 52.3 1,644 55.9 1,705 54.5 1,380 50.3
Consumer...... 296 9.6 257 9.0 215 9.2 254 9.2
Unallocated... 576 -- 75 -- 29 -- 51 --
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total....... $ 4,542 100.0% $ 3,511 100.0% $ 3,435 100.0% $ 2,929 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1991
---------------------------
% OF LOANS
IN EACH
CATEGORY
TO TOTAL
AMOUNT LOANS
----------- --------------
<S> <C> <C>
Commercial.... $ 787 35.4%
Agricultural.. 104 5.7
Real Estate... 1,346 48.3
Consumer...... 209 10.6
Unallocated... 101 --
----------- -----
Total....... $ 2,547 100.0%
----------- -----
----------- -----
</TABLE>
PREMISES AND EQUIPMENT
Premises and equipment of $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
39
<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>
40
<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%
41
<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.
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.
42
<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
43
<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>
44
<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
45
<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.
46
<PAGE>
ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
To Our Shareholders
The management of Texas Regional Bancshares, Inc. and its subsidiary has the
responsibility for preparing the accompanying consolidated financial
statements and for their integrity and objectivity. The statements were
prepared in accordance with generally accepted accounting principles. The
consolidated financial statements include amounts that are based on
management's best estimates and judgments. Management also prepared the other
information in the annual report and is responsible for its accuracy and
consistency with the consolidated financial statements.
Management maintains a comprehensive system of internal control to assure the
proper authorization of transactions, the safeguarding of assets, and the
reliability of the financial records. The system of internal control provides
for appropriate division of responsibility and is documented by written
policies and procedures that are communicated to employees. The Company
maintains a strong internal auditing program that independently assesses the
effectiveness of the internal controls and recommends possible improvements
thereto. Management believes that as of December 31, 1995, the Company
maintains an effective system of internal control.
The Audit Committee of the Board of Directors reviews the systems of internal
control and financial reporting. The Committee meets and consults regularly
with management, the internal auditors and the independent accountants to
review the scope and results of their work.
The accounting firm of KPMG Peat Marwick LLP has performed an independent
audit of the Company's consolidated financial statements. Management has made
available to KPMG Peat Marwick LLP all of the Company's financial records and
related data, as well as the minutes of shareholders' and directors'
meetings. Furthermore, management believes that all representations made to
KPMG Peat Marwick LLP during its audit were valid and appropriate. the
firms's report appears below.
/s/ G.E. RONEY
- ---------------------------
Glen E. Roney
Chairman of the Board, President & Chief Executive Officer
/S/ GEORGE R. CARRUTHERS
- ---------------------------
/s/ George R. Carruthers
Executive Vice President & Chief Financial Officer
January 26, 1996
47
<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
48
<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.
49
<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.
50
<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.
51
<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.
52
<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
53
<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
54
<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.
55
<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>
56
<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.
57
<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.
58
<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................................................... $ 757 $ 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.
59
<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.
60
<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.
61
<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.
62
<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.
63
<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.
Options to acquire 52,595 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.
The following is a summary of option transactions for the years ended
December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
1985 NONSTATUTORY 1985 INCENTIVE 1985 STOCK 1995 NONSTATUTORY
STOCK OPTION PLAN STOCK OPTION PLAN BONUS PLAN STOCK OPTION PLAN
----------------- ----------------- --------------- -----------------
OPTION OPTION OPTION OPTION
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ------ ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1992 - $ - - $ - - $ -
Granted - - - - - -
Exercised - - - - - -
Canceled - - - - - -
------- ------ ------- ------ ------- ------ ------- ------
Balance December 31, 1993 - - - - - -
Granted 126,717 12.00 52,595 12.00 - -
Exercised - - - - - -
Canceled - - 3,162 12.00 - -
------- ------ ------- ------ ------- ------ ------- ------
Balance December 31, 1994 126,717 12.00 49,433 12.00 - -
Granted - - - - - - 90,000 $17.25
Exercised - - 3,162 12.00 - - - -
Canceled - - - - - - - -
------- ------ ------- ------ ------- ------ ------- ------
Balance December 31, 1995 126,717 $12.00 46,271 $12.00 - $ - 90,000 $17.25
------- ------ ------- ------ ------- ------ ------- ------
------- ------ ------- ------ ------- ------ ------- ------
</TABLE>
Effective as of December 14, 1993, the Company adopted a Deferred
Compensation Plan for the benefit of Glen E. Roney. The Deferred Compensation
Plan provides for a retirement benefit payable to Mr. Roney (or his designated
beneficiary or his estate if Mr. Roney dies prior to payment of the full amount
of deferred compensation) of $100,000 per year commencing October 29, 2002, and
continuing annually thereafter for fourteen years. If Mr. Roney dies prior to
commencement of the retirement benefit, payments would commence immediately and
be paid to his designated beneficiary or his estate. The Company also adopted
the Trust Under Glen E. Roney Deferred Compensation Plan, in the form prescribed
by applicable regulations adopted by the Internal Revenue Service for
nonqualified deferred compensation plans. Among other things, the Plan and Trust
provide for an initial deposit into the Trust by the Company and subsequent
deposits in the discretion of the Board of Directors, and further provide for
full funding of the amount necessary to discharge the retirement benefit in the
event of a change of control, as that term is defined in the Trust. The Company
has incurred Deferred Compensation expense and has funded into the Trust
$87,000, $87,000 and $116,000 respectively, for the years ended December 31,
1995, 1994 and 1993, respectively.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included on the consolidated balance
64
<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.
65
<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>
66
<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>
67
<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.
68
<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.
69
<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.
70
<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.
71
<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.
72
<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 $ 42,533 A $ 51,831
(41,172)F
(715)B
Federal Funds Sold............................... 3,600 23,350 8,750 (30,850)F 4,850
------------ --------- --------- ------------ -----------
Total Cash and Cash Equivalents.............. 34,533 39,620 12,732 (30,204) 56,681
Securities Available for Sale.................... 63,150 23,478 6,779 (27,478)F 65,929
Securities Held to Maturity...................... 68,491 143,283 47,457 2,937 C 262,168
Loans, Net of Unearned Discount.................. 450,854 188,424 47,345 (1,337)G 685,286
Less: Allowance for Loan Losses.................. (4,542) (4,196) (1,100) -- (9,838)
------------ --------- --------- ------------ -----------
Net Loans.................................... 446,312 184,228 46,245 (1,337) 675,448
Premises and Equipment, Net...................... 18,374 5,487 3,297 7,000 D 34,158
Accrued Interest Receivable...................... 6,319 7,172 2,242 -- 15,733
Other Real Estate................................ 1,273 431 237 -- 1,941
Goodwill......................................... 4,641 -- -- 7,250 F 11,891
Core Deposit..................................... 1,000 -- -- 14,351 H 15,351
Organization Cost................................ 70 -- -- -- 70
Other Assets..................................... 2,606 771 515 (137)J 3,755
------------ --------- --------- ------------ -----------
Total Assets............................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
Liabilities
Deposits
Noninterest-Bearing.......................... $ 120,414 $ 39,810 $ 7,137 $ (715)B $ 166,646
Interest-Bearing............................. 459,317 303,800 94,858 (394)I 857,581
------------ --------- --------- ------------ -----------
Total Deposits........................... 579,731 343,610 101,995 (1,109) 1,024,227
Federal Funds Purchased and Securities Sold Under
Repurchase Agreements........................... 757 -- -- -- 757
Other Borrowings................................. -- 157 -- -- 157
Accounts Payable and Accrued Liabilities......... 3,561 1,316 434 (137)J 12,731
7,557 E
------------ --------- --------- ------------ -----------
Total Liabilities........................ 584,049 345,083 102,429 6,311 1,037,872
------------ --------- --------- ------------ -----------
Shareholders' Equity
Preferred Stock.................................. -- -- -- -- --
Common Stock..................................... 6,196 4,000 2,000 2,180 A 8,376
(6,000)F
Paid-In Capital.................................. 29,239 21,000 9,000 40,353 A 69,592
(30,000)F
Retained Earnings................................ 27,168 34,405 6,078 (40,483)F 27,168
Unrealized Gain (Loss) on Securities Available
for Sale........................................ 117 (18) (3) 21 F 117
------------ --------- --------- ------------ -----------
Total Shareholders' Equity............... 62,720 59,387 17,075 (33,929) 105,253
------------ --------- --------- ------------ -----------
Total Liabilities and Shareholders'
Equity.................................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125
------------ --------- --------- ------------ -----------
------------ --------- --------- ------------ -----------
</TABLE>
73
<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 4,415 131 L
----------- ----------- ----------- ----------- -------------
Net Interest Income.................................. 26,464 3,520 19,369 4,601 (4,190)
Provision for Loan Losses............................ 1,666 19 2,425 485 --
----------- ----------- ----------- ----------- -------------
Net Interest Income After Provision for Loan
Losses.......................................... 24,798 3,501 16,944 4,116 (4,190)
----------- ----------- ----------- ----------- -------------
Noninterest Income
Service Charges on Deposit Accounts.............. 3,312 469 1,146 255 --
Other Service Charges............................ 825 97 151 33 --
Trust Service Fees............................... 1,256 -- 24 -- --
Other Operating Income........................... 926 24 81 28 --
----------- ----------- ----------- ----------- -------------
Total Noninterest Income..................... 6,319 590 1,402 316 --
----------- ----------- ----------- ----------- -------------
Noninterest Expense
Salaries and Employee Benefits................... 9,247 1,334 2,824 1,056 --
Net Occupancy Expense............................ 1,010 176 568 234 294 M
Equipment Expense................................ 1,959 217 341 148 --
Other Noninterest Expense........................ 5,631 1,281 2,531 729 2,189 N
----------- ----------- ----------- ----------- -------------
Total Noninterest Expense.................... 17,847 3,008 6,264 2,167 2,483
----------- ----------- ----------- ----------- -------------
Income Before Income Tax Expense..................... 13,270 1,083 12,082 2,265 (6,673)
Income Tax Expense................................... 4,630 367 3,436 381 (2,105)
----------- ----------- ----------- ----------- -------------
Net Income........................................... $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568)
----------- ----------- ----------- ----------- -------------
----------- ----------- ----------- ----------- -------------
Primary Earnings Per Common Share
Net Income....................................... $ 1.39
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 6,218
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.39
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 6,227
-----------
-----------
<CAPTION>
PRO FORMA
BALANCE
-----------
<S> <C>
Interest Income...................................... $ 87,271
Interest Expense..................................... 37,507
-----------
Net Interest Income.................................. 49,764
Provision for Loan Losses............................ 4,595
-----------
Net Interest Income After Provision for Loan
Losses.......................................... 45,169
-----------
Noninterest Income
Service Charges on Deposit Accounts.............. 5,182
Other Service Charges............................ 1,106
Trust Service Fees............................... 1,280
Other Operating Income........................... 1,059
-----------
Total Noninterest Income..................... 8,627
-----------
Noninterest Expense
Salaries and Employee Benefits................... 14,461
Net Occupancy Expense............................ 2,282
Equipment Expense................................ 2,665
Other Noninterest Expense........................ 12,361
-----------
Total Noninterest Expense.................... 31,769
-----------
Income Before Income Tax Expense..................... 22,027
Income Tax Expense................................... 6,709
-----------
Net Income........................................... $ 15,318
-----------
-----------
Primary Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 8,398
-----------
Fully Diluted Earnings Per Common Share
Net Income....................................... $ 1.82
Weighted Average Number of Common Shares
Outstanding (In Thousands)...................... 8,407
-----------
-----------
</TABLE>
74
<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 3,771 131 L
----------- ----------- ----------- ----------- -------------
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............................ 961 191 555 228 294 M
Equipment Expense................................ 1,648 310 278 139 --
Other Noninterest Expense........................ 5,883 1,579 2,747 757 2,189 N
----------- ----------- ----------- ----------- -------------
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>
75
<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 or 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.
76
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with accountants on accounting or
financial disclosure matters within the twenty-four months prior to December 31,
1995.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors and executive officers of the
Company is set forth in Texas Regional's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 20, 1996 in the sections entitled "Election of
Directors" and "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the compensation of the executive officers of
the Company is set forth in Texas Regional's's Proxy Statement for the Annual
Meeting of Shareholders to be held on May 20, 1996 in the section entitled
"Executive Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Ownership of the Company's common stock by certain beneficial owners and by
management is set forth in the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 20, 1996 in the section entitled "Stock
Ownership of Management and Others".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning transactions between management and others and
the Company is set forth in the Company's Proxy Statement for the Annual Meeting
of Shareholders to be held on May 20, 1996 in the section entitled "Transactions
with Management and Others".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the registrant and
its subsidiaries, are included herein:
Independent Auditors' Report
Consolidated Balance Sheets-December 31, 1995 and 1994
Consolidated Statements of Income-Years Ended
December 31, 1995, 1994, and 1993
Consolidated Statements of Changes in Shareholders' Equity-
Years Ended December 31, 1995, 1994, and 1993
Consolidated Statements of Cash Flows-Years Ended
December 31, 1995, 1994, and 1993
Notes to Consolidated Financial Statements - December 31,
1995, 1994 and 1993
(2) Financial Statement Schedules are omitted because the required
information is not applicable.
77
<PAGE>
(3) Exhibits
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).
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).
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).
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 (incorporated by reference
from Form S-1, Commission File No. 333-1467)
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).
78
<PAGE>
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 (incorporated by reference from Form S-1, Commission File
No. 333-1467).
10.11 Glen E. Roney Amended and Restated Deferred Compensation Plan
dated as of January 9, 1996 (incorporated by reference from
Form S-1, Commission File No. 333-1467).
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
79
<PAGE>
(b) Reports on Form 8-K
A report on Form 8-K and on Amended Form 8-K report were filed by Texas
Regional Bancshares, Inc. on January 23, 1996 and March 20, 1996
respectively.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TEXAS REGIONAL BANCSHARES, INC.
(Registrant)
By: /s/ G.E. Roney
----------------------------
Glen E. Roney
Chairman of the Board, President
and Chief Executive Officer
Date: March 27, 1996
80
<PAGE>
Pursuant to the requirement of the securities exchange Act of 1934, this
report has signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Signature Title Date
---------- ----- ----
/s/Morris Atlas Director March 27, 1996
- ------------------------------
Morris Atlas
/s/Frank N. Boggus Director March 27, 1996
- ------------------------------
Frank N. Boggus
/s/George R. Carruthers Executive Vice President
- ------------------------------ & Chief Financial Officer March 27, 1996
George R. Carruthers
/s/Robert G. Farris Director March 27, 1996
- ------------------------------
Robert G. Farris
/s/Joe M. Kilgore Director March 27, 1996
- ------------------------------
Joe M. Kilgore
/s/C. Kenneth Landrum,M.D. Director March 27, 1996
- ------------------------------
C. Kenneth Landrum,M.D.
/s/Glen E. Roney Chairman of the Board,
- ------------------------------ President, Chief Executive March 27, 1996
Glen E. Roney Officer & Director
/s/Nancy Schultz Senior Vice President &
- ------------------------------ Secretary/Treasurer March 27, 1996
Nancy Schultz
/s/Ann Sefcik Controller & Assistant
- ------------------------------ Secretary March 27, 1996
Ann Sefcik
/s/Julie G. Uhlhorn Director March 27, 1996
- ------------------------------
Julie G. Uhlhorn
/s/Paul G. Veale Director March 27, 1996
- ------------------------------
Paul G. Veale
/s/Jack Whetsel Director March 27, 1996
- ------------------------------
Jack Whetsel
81
<PAGE>
INDEX TO EXHIBITS FILED HEREWITH
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT
- ------- ------------
21 Subsidiaries of the Registrant
27 Financial Data Schedule
82
<PAGE>
EXHIBIT 21
TEXAS REGIONAL BANCSHARES, INC.
List of Subsidiaries
March 22, 1996
JURISDICTION OF PERCENTAGE
INCORPORATION/ OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ---- --------------- ----------------
Texas State Bank Texas 100%
Domicile: McAllen, Tx
<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
on pages F-3 and F-4 of the Company's Form S-1 filed March 6, 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>
