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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commission 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 S-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. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 28, 1997 was $238,207,229.00.
The number of shares outstanding of each of the registrant's classes of
common stock, as of March 10, 1997 are as follows:
Class A Voting Common - 8,708,898 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting on April 14, 1997 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. On May 14, 1996, the Company
completed its secondary public offering of 2.5 million shares of the Company's
Class A Voting Common Stock (priced at $22.25 per share). The Company also
completed the acquisition of First State Bank & Trust Co., Mission, Texas and
The Border Bank, Hidalgo, Texas, (the "Mergers"), through merger with the
Company's subsidiary Texas State Bank (the "Bank"). The Bank operates fifteen
banking locations in the Rio Grande Valley: five banking locations in McAllen
(including its main office), three banking locations in Mission, two banking
locations in Weslaco, and one banking location each in Harlingen, Hidalgo,
Penitas, Rio Grande City and Roma. The Bank's sixteenth banking location will be
in Edinburg, Texas with anticipated opening in late 1997. At December 31, 1996,
Texas Regional had consolidated total assets of $1.2 billion, loans outstanding
(net of unearned discount) of $757.7 million, total deposits of $1.1 billion,
and shareholders' equity of $128.1 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.
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's data processing center, for example, presently
serves three banks in addition to providing data processing services for all of
the Bank's banking locations.
Management believes there may be 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. There are currently no agreements or understandings related to any
acquisition.
<PAGE>
COMPETITION
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, Hidalgo, Mission,
Penitas and Weslaco), Cameron County (Harlingen), and Starr County (Rio Grande
City and Roma).
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.
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 (the "BHCA"), as amended, and therefore is subject
to regulation and supervision by the Federal Reserve Board (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 Federal Deposit Insurance
Corporation (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 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
<PAGE>
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 Federal Deposit
Insurance Corporation Improvement Act of 1991 (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 creditrelated 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.
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.
<PAGE>
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. 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.
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 "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 riskbased capital ratio of 6.0% or greater, and a leverage
ratio of 5.0% or greater, and it is not subject to an order, written agreement,
capital directive, or prompt corrective action directive to meet and maintain a
specific capital level for any capital measure. An institution is considered
adequately capitalized if it has a total risk-based capital ratio of 8.0% or
greater, a Tier I risk-based capital ratio of 4.0% or greater and a leverage
capital ratio of 3.0% or greater (if the institution is rated composite 1 in its
most recent report of examination, subject to appropriate federal banking agency
guidelines), and the institution does not meet the definition of a well
capitalized institution. An institution is considered undercapitalized if it has
a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0%
(or a leverage ratio that is less than 3.0% if the institution is rated
composite 1 in its most recent report of examination, subject to appropriate
federal banking agency guidelines). A significantly undercapitalized institution
is one which has a total risk-based capital ratio that is less than 6.0%, a Tier
I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is
less than 3.0%. A critically undercapitalized
<PAGE>
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, 1996, Texas State
Bank was classified as "well capitalized" under the applicable regulations. As a
result, the Company does not believe that FDICIA's prompt corrective action
regulations will have any material effect on the activities or operations of
Texas State Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment
rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100
of deposits.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination 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.
The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on
September 30, 1996. Among its provisions, the Funds Act authorizes the Financing
Corporation (the "FICO") to impose periodic assessments on depository
institutions that are members of BIF in addition to institutions that are
members of the Savings Association Insurance Fund (the "SAIF") in order to
spread the cost of the interest payments on the outstanding FICO bonds over a
larger number of institutions. Until this change in the law, only SAIF-member
institutions bore the cost of funding these interest payments. Thus, BIF-member
institutions will share in the cost of financing outstanding FICO bonds. An
institution's FICO assessments will fluctuate based on a defined rate applied to
deposits held in periods after the date the legislation was enacted. The FICO
BIF annual rate is 1.296 basis points for the period January 1, 1997 through
June 30, 1997.
<PAGE>
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 moderateincome 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 on February 5, 1996.
INTERSTATE BANKING AND BRANCHING LEGISLATION
The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"),
authorizes interstate acquisitions of banks and bank holding companies without
geographic limitation beginning one year after enactment. In addition, beginning
June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as
long as neither of the states has opted out of interstate branching between the
date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states
may enact laws permitting interstate bank merger transactions prior to June 1,
1997. A bank may establish a de novo branch in a state in which the bank does
not maintain a branch if the state expressly permits de novo branching. Once a
bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where any bank involved in the merger transaction could
have established or acquired branches under applicable federal or state law. A
bank that has established a branch in a state through de novo branching may
establish and acquire additional branches in such state in the same manner and
to the same extent as a bank having a branch in such state as a result of an
interstate merger. If a state opts out of interstate branching within the
specified time period, no bank in any other state may establish a branch in the
opting out state, whether through an acquisition or de novo. On August 28, 1995,
Texas enacted legislation opting out of interstate branching.
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, 1996, 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
offbalance 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 riskweighted 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."
<PAGE>
The FRB also has adopted guidelines which supplement the risk-based
regulations to include a minimum leverage ratio of Tier I capital to average
total consolidated assets ("Leverage ratio") of 3.0%. The FRB has emphasized
that the foregoing standards are supervisory minimums and that a banking
organization will be permitted to maintain such minimum levels of capital only
if it has well diversified risk, including no undue interest rate exposure;
excellent asset quality; high liquidity; good earnings; and is in general
considered to be a strong banking organization, rated composite 1 under
applicable federal guidelines, and the banking organization is not experiencing
or anticipating significant growth. All other banking organizations are required
to maintain a Leverage ratio of at least 4.0% to 5.0%. These rules further
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain capital positions substantially above
the minimum supervisory levels and comparable to peer group averages, without
significant reliance on intangible assets. The FRB continues to consider a
"tangible Tier I leverage ratio" in evaluation proposals for expansion or new
activities. The tangible Tier I leverage ratio is the ratio of a banking
organization's Tier I capital, less deductions for intangibles otherwise
includable in Tier I capital, to total tangible assets.
Bank regulators continue to consider raising capital requirements applicable
to banking organizations beyond current levels. However, the Company is unable
to predict whether higher capital requirements will be imposed and, if so, at
what levels and on what schedules, and therefore cannot predict what effect such
higher requirements may have on the Company and the Bank.
ECONOMIC ENVIRONMENT
The earnings of the Bank are affected not only by general economic
conditions but also by the policies of various governmental regulatory
authorities. The FRB regulates the supply of credit in order to influence
general economic conditions, primarily through open market operations in United
States government obligations, varying the discount rate of financial
institution borrowings, varying reserve requirements against financial
institutions and their subsidiaries. The deregulation of interest rates has had
and is expected to continue to have an impact on the competitive environment in
which the Bank operates.
Governmental policies 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. However, the Company cannot accurately predict the nature or extent of
any effect which such policies may have on its future business and earnings.
PERSONNEL
At December 31, 1996, Texas Regional employed 534 full-time equivalent
employees. The Company's employees are not unionized, and management believes
employee relations to be favorable. In March 1997, the Texas Regional Board of
Directors amended and restated the Deferred Compensation Plan for Glen E. Roney,
and the related Trust Under the Glen E. Roney Deferred Compensation Plan, the
purpose of which was to change the identification of the Trustee.
<PAGE>
Item 2. Properties
All of Texas Regional's banking locations are owned by Texas Regional, except
for the Company's Roma banking location. The Harlingen, McAllen, Mission and
Weslaco banking locations include extensive drive-through facilities. The Kerria
Plaza banking location and the main office of Texas Regional are located within
the Kerria Plaza Building. Management believes that it will be desirable in the
future to consider the establishment of additional banking locations. New
drive-in facilities are recently completed or under construction for Harlingen,
Hidalgo and Sharyland. The Bank has also recently awarded a contract for
construction of a new branch facility in Edinburg, Texas.
Texas State Bank has commissioned an architectural firm to prepare plans for a
new building to be built on the site of the Bank's present main banking facility
in McAllen. Management anticipates that the building will include the main
offices of the Bank and Texas Regional, and will include space for lease to
third party tenants and for future growth. The architectural firm's preliminary
cost estimate for the project is $16.2 million for the building and $1.5 million
for a related parking garage, with a projected completion date of the third
quarter of 1998.
With the completion of the Mergers, Texas State Bank acquired three banking
locations in Mission, Texas, and one banking location each in Penitas, South
McAllen and Hidalgo, Texas.
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
<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 on the Nasdaq National Market tier of The Nasdaq Stock Market 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 Stock Market
during the past two years, and (ii) the total number of shares involved in such
transactions.
PRICE PER SHARE CASH
-------------------- DIVIDENDS NUMBER OF
HIGH LOW DECLARED SHARES
--------- --------- ----------- -----------
1996
First Quarter........... $23.50 $17.00 $0.10 396,700
Second Quarter.......... 26.00 20.00 0.10 2,484,147
Third Quarter........... 29.25 23.50 0.10 934,507
Fourth Quarter.......... 34.50 28.25 0.10 1,242,633
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
During the two years ended December 31, 1996, an aggregate of 29,700 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. On March 11, 1997, 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 15, 1997.
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, 1996, an aggregate of $16.2 million was
available for payment of dividends by the Bank to the Company under the
applicable limitations and without regulatory approval.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information below for, and as of, each
of the years in the five-year period ended December 31, 1996 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>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest Income $ 78,226 $ 45,592 $ 34,631 $ 29,691 $ 27,737
Interest Expense 33,248 18,052 11,690 10,494 10,876
- ------------------------------------------------------------------------------------------
Net Interest Income 44,978 27,540 22,941 19,197 16,861
Provision for Loan Losses 2,120 1,685 1,085 392 220
Noninterest Income 9,395 6,518 5,772 5,032 3,817
Noninterest Expense 27,962 18,977 16,507 14,513 13,910
- ------------------------------------------------------------------------------------------
Income Before Income Tax Expense 24,291 13,396 11,121 9,324 6,548
Income Tax Expense 7,912 4,671 3,936 3,345 2,029
Cumulative Effect of Change in
Accounting Principle - - - 32 -
- ------------------------------------------------------------------------------------------
Net Income $ 16,379 $ 8,725 $ 7,185 $ 6,011 $ 4,519
==========================================================================================
Per Share Data
Net Income - Primary $ 2.08 $ 1.40 $ 1.19 $ 1.31 $ 1.04
Net Income - Fully-Diluted 2.08 1.40 1.16 1.16 0.92
Book Value at Year-End 14.71 10.12 9.00 7.73 6.42
Cash Dividends Declared
Per Common Share 0.40 0.40 0.24 - -
Average Shares Outstanding (in Thousands)
Primary 7,887 6,218 5,791 4,186 4,045
Fully-Diluted 7,893 6,227 6,035 5,170 4,890
Year-End Balance Sheet Data
Total Assets $1,230,577 $646,769 $531,834 $473,263 $414,331
Loans 757,656 450,854 339,939 290,500 252,118
Investments Securities 318,136 131,641 126,828 127,540 100,353
Interest-Earning Assets 1,086,307 586,095 468,067 422,965 374,671
Deposits 1,091,735 579,731 472,108 429,521 375,016
Shareholders' Equity 128,148 62,720 55,731 39,983 34,318
Performance Ratios
Return on Average Assets 1.62% 1.51% 1.43% 1.34% 1.23%
Return on Average Shareholders'
Equity 16.11 14.69 14.11 16.15 15.23
Net Interest Margin 5.14 5.33 5.12 4.84 5.21
Loan to Deposit Ratio 69.40 77.77 72.00 67.63 67.23
Demand Deposit to Total
Deposit Ratio 15.46 20.77 21.11 20.81 21.61
Asset Quality Ratios
Nonperforming Assets to Loans and
Foreclosed Assets 0.97% 0.79% 1.41% 1.69% 2.31%
Net Charge-Offs (Recoveries) to
Average Loans 0.21 0.30 0.33 (0.04) 0.21
Allowance for Loan Losses as a Percentage of:
Loans 1.32 1.01 1.03 1.18 1.16
Nonperforming Loans 155.62 216.49 143.42 146.05 257.83
Nonperforming Assets 135.72 126.62 72.96 69.39 49.43
Capital Ratios
Equity to Assets Ratio 10.41% 9.70% 10.48% 8.45% 8.28%
Tier I Capital Ratio 13.17 11.70 14.71 12.05 11.85
Total Capital Ratio 14.44 12.64 15.67 13.21 12.91
Leverage Capital Ratio 8.45 8.96 10.37 7.88 8.15
==========================================================================================
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1996 was $16.4 million, reflecting a
net increase of $7.7 million or a 87.7% increase compared to net income of $8.7
million for the year ended December 31, 1995. The earnings per share of $2.08
for the year ended December 31, 1996 increased $0.68 or 48.6% compared to the
earnings per share of $1.40 for the year ended December 31, 1995. Earnings
performance for the year ended December 31, 1996 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.
On May 14, 1996, Texas Regional Bancshares, Inc. ("Texas Regional" or the
"Corporation") completed its secondary public offering of 2.5 million shares of
the Company's Class A Voting Common Stock (priced at $22.25 per share). On May
14, 1996, Texas Regional Bancshares, Inc. also completed the acquisition of
First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo,
Texas, (the "Mergers"), through merger with Texas State Bank (the "Bank"), the
principal operating subsidiary of Texas Regional Bancshares, Inc. (collectively,
the "Company"). The purchase price of the Mergers was financed with a
combination of proceeds from the 2.5 million share common equity offering and
cash on the balance sheet of the Company. The Mergers included the assumption of
$241.8 million in loans and the assumption of $450.4 million in deposit
liabilities.
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 RGC/Roma Branch Acquisitions included the purchase of $43.7
million in loans and the assumption of approximately $79.7 million in deposit
liabilities of these branches.
The Mergers and the RGC/Roma Branch Acquisitions were accounted for as
purchases; therefore, the results of operations of the two acquired banks and
the two branches are included in the consolidated financial statements from the
date of each respective acquisition. Accordingly, certain income statement and
balance sheet comparisons may not be appropriate.
<PAGE>
The following table highlights key performance trends since 1992:
<TABLE>
<CAPTION>
Selected Financial Data Years Ended December 31,
(Dollars in Thousands, Except Per Share Data) 1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest Income ..................................... $ 78,226 $ 45,592 $ 34,631 $ 29,691 $ 27,737
Interest Expense .................................... 33,248 18,052 11,690 10,494 10,876
------------- ------------- ------------- ------------- -------------
Net Interest Income ................................. 44,978 27,540 22,941 19,197 16,861
Provision for Loan Losses ........................... 2,120 1,685 1,085 392 220
Noninterest Income .................................. 9,395 6,518 5,772 5,032 3,817
Noninterest Expense ................................. 27,962 18,977 16,507 14,513 13,910
------------- ------------- ------------- ------------- -------------
Income Before Income Tax Expense .................... 24,291 13,396 11,121 9,324 6,548
Income Tax Expense .................................. 7,912 4,671 3,936 3,345 2,029
Cumulative Effect of Change in
Accounting Principle ................................ -- -- -- 32 --
------------- ------------- ------------- ------------- -------------
Net Income .......................................... $ 16,379 $ 8,725 $ 7,185 $ 6,011 $ 4,519
============= ============= ============= ============= =============
PER SHARE DATA
Net Income - Primary ................................ $ 2.08 $ 1.40 $ 1.19 $ 1.31 $ 1.04
Net Income - Fully-Diluted .......................... 2.08 1.40 1.16 1.16 0.92
Book Value at Year-End .............................. 14.71 10.12 9.00 7.73 6.42
Cash Dividends Declared Per Common Share ............ 0.40 0.40 0.24 -- --
Average Shares Outstanding (in Thousands)
Primary ............................................. 7,887 6,218 5,791 4,186 4,045
Fully-Diluted ....................................... 7,893 6,227 6,035 5,170 4,890
YEAR-END BALANCE SHEET DATA
Total Assets ........................................ $ 1,230,577 $ 646,769 $ 531,834 $ 473,263 $ 414,331
Loans ............................................... 757,656 450,854 339,939 290,500 252,118
Investments Securities .............................. 318,136 131,641 126,828 127,540 100,353
Interest-Earning Assets ............................. 1,086,307 586,095 468,067 422,965 374,671
Deposits ............................................ 1,091,735 579,731 472,108 429,521 375,016
Shareholders' Equity ................................ 128,148 62,720 55,731 39,983 34,318
PERFORMANCE RATIOS
Return on Average Assets ............................ 1.62% 1.51% 1.43% 1.34% 1.23%
Return on Average Shareholders' Equity .............. 16.11 14.69 14.11 16.15 15.23
Net Interest Margin ................................. 5.14 5.33 5.12 4.84 5.21
Loan to Deposit Ratio ............................... 69.40 77.77 72.00 67.63 67.23
Demand Deposit to Total Deposit Ratio ............... 15.46 20.77 21.11 20.81 21.61
ASSET QUALITY RATIOS
Nonperforming Assets to Loans and
Foreclosed Assets ................................... 0.97% 0.79% 1.41% 1.69% 2.31%
Net Charge-Offs (Recoveries) to
Average Loans ....................................... 0.21 0.30 0.33 (0.04) 0.21
Allowance for Loan Losses as a Percentage of:
Loans ............................................... 1.32 1.01 1.03 1.18 1.16
Nonperforming Loans ................................. 155.62 216.49 143.42 146.05 257.83
Nonperforming Assets ................................ 135.72 126.62 72.96 69.39 49.43
CAPITAL RATIOS
Equity to Assets Ratio .............................. 10.41% 9.70% 10.48% 8.45% 8.28%
Tier I Capital Ratio ................................ 13.17 11.70 14.71 12.05 11.85
Total Capital Ratio ................................. 14.44 12.64 15.67 13.21 12.91
Leverage Capital Ratio .............................. 8.45 8.96 10.37 7.88 8.15
============= ============= ============= ============= =============
</TABLE>
<PAGE>
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 $46.6 million for the year ended
December 31, 1996, an increase of $18.9 million or 67.9% compared to the year
ended December 31, 1995, and taxable-equivalent net interest income of $27.8
million for the year ended December 31, 1995, increased $4.7 million or 20.3%
compared to the year ended December 31, 1994. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on those loans had been accrued at the original
contractual rates, additional interest income would have approximated $765,000,
$247,000, and $476,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The net yield on total interest-earning assets, also referred to as net 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 5.14% for the year ended December 31, 1996 decreased 19
basis points compared to 5.33% for the year ended December 31, 1995 while 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.
The decrease in the interest rate margin for the year ended December 31, 1996 is
reflective of the shift in the mix of interest-earning assets, primarily as a
result of the Mergers, which has resulted in a slightly lower interest rate
margin due to a higher percentage of earning assets being invested in lower
yielding investment securities, including federal funds sold. The mix of average
interest-earning assets for the year ended December 31, 1996 compared to year
ended December 31, 1995 was changed by total average loans of $619.6 million
increasing $249.3 million or 67.3%, total average investment securities of
$258.3 million increasing $127.3 million or 97.2% and average federal funds sold
of $28.8 million increasing $9.0 million or 45.4%. The decrease in loan yield
for 1996 reflects the general decrease in average interest rates in 1996
compared to 1995. The increase in loan yield for 1995 reflects the general
increase in average interest rates in 1995 compared to 1994. The increase in
investment securities yield for the years ended December 31, 1996 and 1995
resulted from lower yielding investment securities maturing and the reinvesting
of the proceeds into higher yields. The increase in interest on deposits during
the years ended December 31, 1996 and 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, reported on a tax-equivalent basis, 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 35%
effective tax rate for 1996 and a 34% effective income tax rate for 1995 and
1994.
<PAGE>
THREE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ---------------------------- ---------------------------
Taxable-Equivalent Basis(1) AVERAGE YIELD/ Average Yield/ Average Yield/
(Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate
----------- ------- ----- --------- ------- ----- --------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loans
Commercial ........................ $ 219,923 $21,324 9.70% $ 125,321 $12,355 9.86% $ 107,459 $ 8,959 8.34%
Real Estate ....................... 339,834 34,247 10.08 208,035 21,197 10.19 172,925 16,415 9.49
Consumer .......................... 59,824 6,064 10.14 36,918 3,647 9.88 28,654 2,631 9.18
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Loans ....................... 619,581 61,635 9.95 370,274 37,199 10.05 309,038 28,005 9.06
----------- ------- ----- --------- ------- ----- --------- ------- ----
Investment Securities
Taxable ........................... 231,844 14,240 6.14 126,086 7,004 5.55 125,912 5,863 4.66
Tax-Exempt ........................ 26,451 2,427 9.18 4,907 431 8.78 4,114 368 8.95
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Investment
Securities ........................ 258,295 16,667 6.45 130,993 7,435 5.68 130,026 6,231 4.79
----------- ------- ----- --------- ------- ----- --------- ------- ----
Federal Funds Sold ................ 28,793 1,554 5.40 19,807 1,172 5.92 11,490 519 4.52
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Interest-
Earning Assets .................... 906,669 79,856 8.81 521,074 45,806 8.79 450,554 34,755 7.71
----------- ------- ----- --------- ------- ----- --------- ------- ----
Cash and Due from Banks ........... 43,785 -- 31,151 -- -- 30,392 -- --
Premises and Equipment,
Net ............................... 29,866 -- -- 16,365 -- -- 15,358 -- --
Other Assets ...................... 35,943 -- -- 13,507 -- -- 11,562 -- --
Allowance for
Loan Losses ....................... (8,138) -- -- (4,158) -- -- (3,663) -- --
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Assets ...................... $ 1,008,125 -- -- $ 577,939 -- -- $ 504,203 -- --
=========== ======= ===== ========= ======= ===== ========= ======= ====
LIABILITIES
Interest-Bearing Liabilities
Savings ........................... $ 75,360 2,374 3.15 $ 31,360 840 2.68 $ 29,791 763 2.56
Money Market Checking
and Savings ....................... 205,707 5,763 2.80 129,012 3,484 2.70 133,565 3,232 2.42
Time Deposits ..................... 465,262 25,091 5.39 249,167 13,666 5.48 191,885 7,624 3.97
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Savings and
Time Deposits ..................... 746,329 33,228 4.45 409,539 17,990 4.39 355,241 11,619 3.27
----------- ------- ----- --------- ------- ----- --------- ------- ----
Federal Funds Purchased
and Securities Sold
Under Repurchase
Agreements ........................ 507 20 3.94 1,093 46 4.21 651 23 3.53
Short-Term Borrowings ............. -- -- -- 232 16 6.90 436 32 7.34
Note Payable ...................... -- -- -- -- -- -- 265 16 6.04
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Interest-Bearing
Liabilities ....................... 746,836 33,248 4.45 410,864 18,052 4.39 356,593 11,690 3.28
----------- ------- ----- --------- ------- ----- --------- ------- ----
Demand Deposits ................... 150,779 -- -- 103,842 -- -- 93,807 -- --
Other Liabilities ................. 8,831 -- -- 3,835 -- -- 2,896 -- --
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Liabilities ................. 906,446 -- -- 518,541 -- -- 453,296 -- --
----------- ------- ----- --------- ------- ----- --------- ------- ----
SHAREHOLDERS' EQUITY .............. 101,679 -- -- 59,398 -- -- 50,907 -- --
----------- ------- ----- --------- ------- ----- --------- ------- ----
Total Liabilities and
Shareholders'
Equity ............................ $ 1,008,125 -- -- $ 577,939 -- -- $ 504,203 -- --
=========== ======= ===== ========= ======= ===== ========= ======= ====
Net Interest Income ............... -- $46,608 -- -- $27,754 -- -- $23,065 --
=========== ======= ===== ========= ======= ===== ========= ======= ====
Net Yield on Total Interest-
Earning Assets .................... -- -- 5.14% -- -- 5.33% -- -- 5.12%
=========== ======= ===== ========= ======= ===== ========= ======= ====
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest from
taxable assets (assuming a 35% effective federal income tax rate for 1996
and a 34% effective federal income tax rate for 1995 and 1994).
<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.
TAXABLE-EQUIVALENT BASIS(1)
YEAR ENDED DECEMBER 31,
1996 COMPARED TO 1995
<TABLE>
<CAPTION>
DUE TO CHANGE IN
NET -------------------------------------------
(DOLLARS IN THOUSANDS) CHANGE VOLUME RATE RATE/VOLUME
-------- -------- ----- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
LOANS, INCLUDING FEES .................................... $ 24,436 $ 25,055 $(370) $(249)
INVESTMENT SECURITIES
TAXABLE .................................................. 7,236 5,870 744 622
TAX-EXEMPT ............................................... 1,996 1,892 20 84
FEDERAL FUNDS SOLD ....................................... 382 532 (103) (47)
-------- -------- ----- -----
TOTAL INTEREST INCOME .................................... 34,050 33,349 291 410
======== ======== ===== =====
INTEREST EXPENSE
DEPOSITS ................................................. 15,238 14,785 246 207
FEDERAL FUNDS PURCHASED AND
SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS .................................... (26) (25) (3) 2
SHORT-TERM BORROWINGS .................................... (16) (16) -- --
-------- -------- ----- -----
TOTAL INTEREST EXPENSE ................................... 15,196 14,744 243 209
-------- -------- ----- -----
NET INTEREST INCOME BEFORE ALLOCATION OF
RATE/VOLUME .............................................. 18,854 18,605 48 201
-------- -------- ----- -----
ALLOCATION OF RATE/VOLUME ................................ -- 145 56 (201)
-------- -------- ----- -----
CHANGES IN NET INTEREST INCOME ........................... $ 18,854 $ 18,750 $ 104 $--
======== ======== ===== =====
</TABLE>
Taxable-Equivalent Basis(1)
Year Ended December 31,
1995 Compared to 1994
<TABLE>
<CAPTION>
Due to Change in
Net ------------------------------------------
(Dollars in Thousands) Change Volume Rate Rate/Volume
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Interest Income
Loans, Including Fees ....................................... $ 9,194 $ 5,548 $ 3,059 $ 587
Investment Securities
Taxable ..................................................... 1,141 8 1,121 12
Tax-Exempt .................................................. 63 71 (7) (1)
Federal Funds Sold .......................................... 653 376 161 116
-------- ------- ------- -----
Total Interest Income ....................................... 11,051 6,003 4,334 714
======== ======= ======= =====
Interest Expense
Deposits .................................................... 6,371 1,776 3,979 616
Federal Funds Purchased and
Securities Sold Under
Repurchase Agreements ....................................... 23 16 4 3
Short-Term Borrowings ....................................... (16) (15) (2) 1
Note Payable ................................................ (16) (16) -- --
-------- ------- ------- -----
Total Interest Expense ...................................... 6,362 1,761 3,981 620
-------- ------- ------- -----
Net Interest Income Before Allocation of
Rate/Volume ................................................. 4,689 4,242 353 94
-------- ------- ------- -----
Allocation of Rate/Volume ................................... -- 265 (171) (94)
-------- ------- ------- -----
Changes in Net Interest Income .............................. $ 4,689 $ 4,507 $ 182 $--
======== ======= ======= =====
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax- exempt income to interest from
taxable assets (assuming a 35% effective federal income tax rate for 1996
and 34% effective federal income tax rate for 1995 and 1994).
<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 35% effective federal income tax rate for 1996 and 34%
effective federal income tax rate for 1995 and 1994.
<TABLE>
<CAPTION>
Net Yield on Earning Assets Quarter
Taxable-Equivalent Basis % Change -------------------------------------------------------------
(Dollars in Thousands) Prior Year Year Fourth Third Second First
---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996
NET INTEREST INCOME ............. 67.9% $ 46,608 $ 13,713 $ 14,019 $ 10,981 $ 7,895
AVERAGE EARNING ASSETS .......... 74.0 906,669 1,098,972 1,090,068 847,169 590,467
NET YIELD 5.14% 4.96% 5.12% 5.21% 5.38%
1995
Net Interest Income ............. 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489
Average Earning Assets .......... 15.7 521,074 574,033 542,783 492,880 474,600
Net Yield 5.33% 5.28% 5.15% 5.36% 5.54%
1994
Net Interest Income ............. 19.3% $ 23,065 $ 6,289 $ 5,891 $ 5,677 $ 5,208
Average Earning Assets .......... 12.8 450,554 469,604 455,802 448,356 428,454
Net Yield ....................... 5.12% 5.31% 5.13% 5.08% 4.93%
========== ========== ========== ========== ========= ==========
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses for the year ended December 31, 1996 was $2.1
million, an increase of $435,000 or 25.8% from the $1.7 million for the year
ended December 31, 1995. The provision for loan losses for the year ended
December 31, 1995 of $1.7 million reflects an increase of $600,000 or 55.3% from
the $1.1 million provision for loan losses for the year ended December 31, 1994.
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, 1996, compared to the provision for the year
ended December 31, 1995, was primarily attributable to loan growth of $306.8
million and net charge-offs of $1.3 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 $9.4 million for the year ended December 31, 1996
increased $2.9 million or 44.1% compared to $6.5 million for the year ended
December 31, 1995, and 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. All categories of noninterest income for the year
ended December 31, 1996 increased when compared to the year ended December 31,
1995, except other operating income, and the increase was primarily attributable
to the increased volume of business conducted by the Company as a result of the
Mergers. 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 $6.0 million for the year ended December 31, 1996, increased
$1.7 million or 38.2% compared to $4.3 million for the year ended December 31,
1995. Total Service Charges of $4.3 million for the year ended December 31, 1995
increased $392,000 or 10.0% compared to $3.9 million for the year ended December
31, 1994. The increase in Total Service Charges for the years ended December 31,
1996, 1995 and 1994 is attributable to increased account transaction fees as a
result of the deposit growth experienced by the Company primarily as a result of
the Mergers and the RGC/Roma Branch Acquisitions. 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 on-going events in Mexico, primarily the peso devaluation, have
resulted in a decrease in volume and spread on peso exchange fee activity.
<PAGE>
Trust Service Fees of $1.5 million for the year ended December 31, 1996
increased $249,000 or 19.8% compared to $1.3 million for the year ended December
31, 1995, and 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. The increase in Trust Service Fees in each of the years 1996
and 1995 is attributable to increases in both the number of trust accounts and
the book value of assets managed. The book value of assets managed at December
31, 1996 and 1995 was $267.3 million and $237.4 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 a $401,000 gain for the year ended
December 31, 1996, compared to an $111,000 loss for the year ended December 31,
1995. The sale of securities in 1996 was designed to reduce asset sensitivity of
callable bonds (bonds callable in 1997 were replaced with bonds callable in
1998) and improve bond quality (sold odd-lot and non-rated municipal bonds).
Other Operating Income of $594,000 for the year ended December 31, 1996
decreased $7,000 or 1.2% compared to $601,000 for the year ended December 31,
1995 and Other Operating Income of $601,000 for the year ended December 31, 1995
increased $192,000 or 46.9% compared to year ended December 31, 1994.
A detailed summary of noninterest income during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
Noninterest Income
Years Ended December 31, % CHANGE FROM % Change From
(Dollars in Thousands) 1996 PRIOR YEAR 1995 Prior YeaR 1994
------ ------------- ------- ------------- ------
<S> <C> <C> <C> <C> <C>
Service Charges on Deposit Accounts ....................... $4,982 43.5% $ 3,472 14.4% $3,035
Other Service Charges ..................................... 1,003 16.8 859 (5.0) 904
------ ----- ------- ---- ------
Total Service Charges ................................... 5,985 38.2 4,331 10.0 3,939
Trust Service Fees ........................................ 1,505 19.8 1,256 8.2 1,161
Net Investment Securities Gains (Losses) .................. 401 461.3 (111) * 8
Data Processing Service Fees .............................. 910 106.3 441 72.9 255
Other Operating Income .................................... 594 (1.2) 601 46.9 409
------ ----- ------- ---- ------
Total ................................................... $9,395 44.1% $ 6,518 12.9% $5,772
====== ===== ======= ==== ======
</TABLE>
*Not meaningful.
NONINTEREST EXPENSE
Noninterest expense of $28.0 million for the year ended December 31, 1996
increased $9.0 million or 47.3% compared to $19.0 million for the year ended
December 31, 1995, and noninterest expense of $19.0 million for the year ended
December 31, 1995 increased $2.5 million or 15.0% compared with $16.5 million
for the year ended December 31, 1994. These increases for the years ended
December 31, 1996 and 1995 were primarily attributable to the Mergers in 1996
and the RGC/Roma Branch Acquisitions in 1995.
The largest category of noninterest expense, Salaries and Employee Benefits
("Personnel"), of $13.9 million for the year ended December 31, 1996 increased
$4.4 million or 45.5% compared to year ended December 31, 1995 levels of $9.6
million. Personnel expenses 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 increased for the year ended December 31,
1996 primarily due to staffing increases, including the staff acquired as a
result of the Mergers.
Net Occupancy Expense of $2.0 million for the year ended December 31, 1996
increased $882,000 or 82.5% compared to $1.1 million for the year ended December
31, 1995, and Net Occupancy Expense of $1.1 million for the year ended December
31, 1995 increased $108,000 or 11.2% when compared to a Net Occupancy Expense of
$961,000 for the year ended December 31, 1994. The increase for the year ended
December 31, 1996 is primarily attributable to the occupancy expenses associated
with the Mergers.
Equipment Expense of $3.2 million for the year ended December 31, 1996 increased
$1.1 million or 56.1% compared to $2.0 million for the year ended December 31,
1995 and Equipment Expense of $2.0 million for the year ended December 31, 1995
increased $380,000 or 23.1% when compared with $1.6 million for the year ended
December 31, 1994. The Equipment Expense increase noted during the year ended
December 31, 1996 is primarily attributable to equipment obtained in the Mergers
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. The category Other Real Estate (Income) Expense, Net reflects
net income of $67,000 for the year ended December 31, 1996 which compares
favorably to $107,000 net expense for the year ended December 31, 1995. Other
Real Estate (Income) Expense, Net of $107,000 net expense for the year ended
December 31, 1995 increased $32,000 or 42.7% compared to $75,000 net expense for
the year ended December 31, 1994. The net
<PAGE>
improvement for year ended December 31, 1996 is primarily attributable to net
reduction in Other Real Estate owned and a net gain on the sale of foreclosed
properties. 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 $1.2 million for the year ended
December 31, 1996 increased $425,000 or 55.1% compared to $772,000 for the year
ended December 31, 1995. The increase in advertising and public relations
expense is primarily attributable to a new marketing program and additional
advertising in the service area of the Mergers.
Amortization of Intangibles of $1.6 million for the year ended December 31, 1996
increased $1.3 million or 393.2% compared to $323,000 for the year ended
December 31, 1995. The increase in Amortization of Intangibles is due to the
amortization of goodwill and core deposit premium associated with the Mergers.
Insurance Expense of $195,000 for the year ended December 31, 1996 decreased
$33,000 or 14.5% compared to $228,000 for the year ended December 31, 1995. The
decrease in insurance expense was due to the cancellation of a $5.0 million life
insurance policy during the year ended December 31, 1995. Total premiums paid on
the $5.0 million life insurance policy during the year ended December 31, 1995
were approximately $69,000.
FDIC Insurance of $3,000 for the year ended December 31, 1996, decreased
$537,000 or 99.4% compared to $540,000 for the year ended December 31, 1995 due
to a rebate and a premium rate reduction. 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.
All Other Noninterest Expense categories, not previously discussed, reflect a
net increase for year ended December 31, 1996 compared to the year ended
December 31, 1995 and was attributable to an increased volume of business,
primarily due to the Mergers.
A detailed summary of noninterest expense during the last three years is
presented in the following table:
<TABLE>
<CAPTION>
Noninterest Expense
Years Ended December 31, % CHANGE FROM % Change From
(Dollars in Thousands) 1996 PRIOR YEAR 1995 Prior Year 1994
-------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
Salaries and Wages ................................ $ 11,033 45.1% $ 7,605 20.1% $ 6,334
Employee Benefits ................................. 2,881 47.1 1,958 16.5 1,681
-------- ----- -------- ----- --------
Total Salaries and Employee Benefits .......... 13,914 45.5 9,563 19.3 8,015
-------- ----- -------- ----- --------
Net Occupancy Expense ............................. 1,951 82.5 1,069 11.2 961
-------- ----- -------- ----- --------
Equipment Expense ................................. 3,165 56.1 2,028 23.1 1,648
-------- ----- -------- ----- --------
Other Real Estate (Income) Expense, Net
Rent Income ..................................... (107) (36.4) (146) 6.6 (137)
(Gain) Loss on Sale ............................. (203) (686.7) 3 50.0 2
Expenses ........................................ 200 52.7 131 33.7 98
Write-Downs ..................................... 43 (63.9) 119 6.3 112
-------- ----- -------- ----- --------
Total Other Real Estate (Income) Expense, Net ... (67) (162.6) 107 42.7 75
-------- ----- -------- ----- --------
Other Noninterest Expense
Advertising and Public Relations ................ 1,197 55.1 772 11.4 693
Amortization of Intangibles ..................... 1,593 393.2 323 44.2 224
Data Processing and Check Clearing .............. 942 91.9 491 36.4 360
Director Fees ................................... 343 20.8 284 6.4 267
Franchise Tax ................................... 245 23.7 198 24.5 159
Insurance ....................................... 195 (14.5) 228 (27.3) 314
FDIC Insurance .................................. 3 (99.4) 540 (44.5) 973
Legal and Professional .......................... 1,279 47.0 870 (13.5) 1,006
Postage, Delivery and Freight ................... 463 43.3 323 21.9 265
Stationery and Supplies ......................... 907 37.8 658 22.3 538
Telephone ....................................... 346 38.4 250 23.8 202
Other Losses .................................... 627 0.5 624 252.5 177
Miscellaneous Expense ........................... 859 32.3 649 3.0 630
-------- ----- -------- ----- --------
Total Other Noninterest Expense ............... 8,999 44.9 6,210 6.9 5,808
-------- ----- -------- ----- --------
Total ....................................... $ 27,962 47.3% $ 18,977 15.0% $ 16,507
======== ===== ======== ===== ========
</TABLE>
<PAGE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company does not provide postretirement benefits other than pensions and a
nonqualified deferred compensation plan for the benefit of Glen E. Roney,
Chairman of the Board, President and Chief Executive Officer and with the
consummation of the Mergers, the Company acquired four existing separate
nonqualified deferred compensation plans for the benefit of certain employees.
INCOME TAX
The Company recorded income tax expense of $7.9 million for the year ended
December 31, 1996 compared to $4.7 million for the year ended December 31, 1995.
The increase in income tax expense for the year ended December 31, 1996 is due
primarily to an increased level of pretax income during the year ended December
31, 1996.
NET INCOME
Net income was $16.4 million, $8.7 million and $7.2 million for the years ended
December 31, 1996, 1995 and 1994, 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, primarily due to the Mergers and in
part to the vitality of the Rio Grande Valley economy and in part to the
RGC/Roma Branch Acquisitions. The continued 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 continued 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 on-going Mexican financial problems will materially affect the
Company's growth and earnings prospects.
Average interest-earning assets of $906.7 million increased $385.6 million or
74.0% for the year ended December 31, 1996 compared to $521.1 million for the
year ended December 31, 1995 and $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. Average loans increased $249.3 million or 67.3% to $619.6 million for the
year ended December 31, 1996 compared to December 31, 1995 levels of $370.3
million, while average investment securities of $258.3 million increased $127.3
million or 97.2% for the year ended December 31, 1996 compared to December 31,
1995 levels of $131.0 million. Total average assets increased $430.2 million or
74.4% to $1.0 billion for the year ended December 31, 1996 compared to December
31, 1995 levels and $73.7 million or 14.6% to $577.9 million for the year ended
December 31, 1995 compared to December 31, 1994 levels of $504.2 million.
Average interest-bearing deposits increased $336.8 million or 82.2% to $746.3
million for the year ended December 31, 1996 compared to the year ended December
31, 1995 levels of $409.5 million. Demand deposits also increased $46.9 million
or 45.2% for the year ended December 31, 1996 to $150.8 million compared to the
year ended December 31, 1995 levels of $103.8 million.
<PAGE>
The following table presents the Company's average balance sheets during the
last three years:
<TABLE>
<CAPTION>
Average Balance Sheets
Years Ended December 31,
(Dollars in Thousands) 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Assets
Loans ............................................................ $ 619,581 $ 370,274 $ 309,038
Investment Securities
Taxable ....................................................... 231,844 126,086 125,912
Tax-Exempt .................................................... 26,451 4,907 4,114
Federal Funds Sold ............................................... 28,793 19,807 11,490
----------- ----------- -----------
Total Interest-Earning Assets .............................. 906,669 521,074 450,554
Cash and Due From Banks .......................................... 43,785 31,15 30,392
Bank Premises and Equipment, Net ................................. 29,866 16,365 15,358
Other Assets ..................................................... 35,943 13,507 11,562
Allowance for Loan Losses ........................................ (8,138) (4,158) (3,663)
----------- ----------- -----------
Total ......................................................... $ 1,008,125 $ 577,939 $ 504,203
----------- ----------- -----------
Liabilities
Demand Deposits
Commercial and Individual ..................................... $ 144,777 $ 96,773 $ 91,039
Public Funds .................................................. 6,002 7,069 2,768
----------- ----------- -----------
Total Demand Deposits ...................................... 150,779 103,842 93,807
----------- ----------- -----------
Savings
Commercial and Individual ..................................... 74,788 30,748 29,791
Public Funds .................................................. 572 612 --
Money Market Checking and Savings
Commercial and Individual ..................................... 157,624 101,881 109,689
Public Funds .................................................. 48,083 27,131 23,876
Time Deposits
Commercial and Individual ..................................... 406,645 232,966 172,175
Public Funds .................................................. 58,617 16,201 19,710
----------- ----------- -----------
Total Interest-Bearing Deposits ............................ 746,329 409,539 355,241
----------- ----------- -----------
Total Deposits ................................................... 897,108 513,381 449,048
Federal Funds Purchased and
Securities Sold Under Repurchase Agreements ................... 507 1,093 651
Short-Term Borrowings ............................................ -- 232 436
Note Payable ..................................................... -- -- 265
Other Liabilities ................................................ 8,831 3,835 2,896
Shareholders' Equity ............................................. 101,679 59,398 50,907
----------- ----------- -----------
Total ......................................................... $ 1,008,125 $ 577,939 $ 504,203
----------- ----------- -----------
</TABLE>
CASH AND DUE FROM BANKS
Texas State Bank, through its main office and branches, 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 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, 1996,
cash and due from banks was $56.1 million.
<PAGE>
INVESTMENT SECURITIES
Investment securities consist of U. S. Treasury, federal agency, state, county
and municipal securities, mortgage-backed, corporate debt and equity securities.
Under the provision of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("Statement
115"), 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 net of applicable income taxes until realized.
On October 18, 1995, 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 securities in the Other category are classified as
Available for Sale.
At December 31, 1996, 1995 and 1994, no securities were classified as Trading.
The following table presents estimated market value of Securities Available for
Sale at December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Securities Available for Sale % CHANGE FROM % Change From
(Dollars in Thousands) 1996 PRIOR YEAR 1995 Prior Year 1994
-------- ------------- ------- ------------- -------
<S> <C> <C> <C> <C> <C>
U.S. Treasury ...................................... $ 8,973 49.3% $ 6,012 (77.8)% $27,132
U.S. Government Agency ............................. 157,705 183.3 55,668 104.9 27,167
Mortgage-Backed .................................... 92 * -- (100.0) 498
States and Political Subdivisions .................. 22,811 * -- -- --
Other .............................................. 2,720 85.0 1,470 * 17
-------- ----- ------- ----- -------
Total ............................................ $192,301 204.5% $63,150 15.2% $54,814
======== ===== ======= ===== =======
</TABLE>
* Not meaningful.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of the Securities Available for Sale at
December 31, 1996:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
-------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
SECURITIES AVAILABLE FOR SALE ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS TEN YEARS TEN YEARS COST(1) VALUE
---------- ----------- ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY .............................. $ 6,996 $ 1,969 $ -- $ -- $ 8,965 $ 8,973
U.S. GOVERNMENT AGENCY ..................... 47,676 105,991 4,284 -- 157,951 157,705
MORTGAGE-BACKED ............................ -- 91 -- -- 91 92
STATES AND POLITICAL SUBDIVISIONS .......... 5,033 7,604 8,207 926 21,770 22,811
OTHER ...................................... -- 50 50 2,618 2,718 2,720
---------- ----------- ---------- --------- -------- --------
TOTAL .................................... $ 59,705 $ 115,705 $ 12,541 $ 3,544 $191,495 $192,301
========== =========== ========== ========= ======== ========
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY .............................. 5.89% 5.81% -- % -- % 5.87 %
U.S. GOVERNMENT AGENCY ..................... 5.85 6.40 6.96 -- 6.24
MORTGAGE-BACKED ............................ -- 8.50 -- -- 8.50
STATES AND POLITICAL SUBDIVISIONS .......... 9.36 9.28 8.79 8.41 9.09
OTHER ...................................... -- 6.50 7.50 5.99 6.02
TOTAL .................................... 6.10 6.58 8.16 6.62 6.54
========================================================================================================================
</TABLE>
(1) Amortized cost for Securities Available for Sale is stated at par plus any
remaining unamortized premium paid or less any remaining unamortized
discounts received.
<PAGE>
The following table presents amortized cost of Securities Held to Maturity at
December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Securities Held to Maturity % CHANGE FROM % Change From
(Dollars in Thousands) 1996 PRIOR YEAR 1995 Prior Year 1994
------------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
U.S. Treasury ......................................... $ 38,160 32.6% $ 28,787 (1.7)% $ 29,270
U.S. Government Agency ................................ 81,003 136.6 34,230 (4.8) 35,973
States and Political Subdivisions ..................... 6,672 21.9 5,474 (4.6) 5,736
Mortgage-Backed ....................................... -- -- -- (100.0) 1,035
-------- ----- -------- ----- --------
Total ................................................. $125,835 83.7% $ 68,491 (4.9)% $ 72,014
======== ===== ======== ===== ========
</TABLE>
Investments in entities within the State of Texas reflect 92.4% of total
investments in states and political subdivisions. No single issuer accounted for
as much as 10% of total shareholders' equity at December 31, 1996. Of the
obligations of states and political subdivisions held by the Company at December
31, 1996, 62.5% were rated A or better by Moody's Investor Services, Inc.
The following table presents the maturities, amortized cost, estimated market
value and weighted average yields of Securities Held to Maturity at December 31,
1996:
<TABLE>
<CAPTION>
AMORTIZED COST(1) MATURING
----------------------------------------------------
AFTER ONE AFTER FIVE ESTIMATED
SECURITIES HELD TO MATURITY ONE YEAR THROUGH THROUGH AFTER AMORTIZED MARKET
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS TEN YEARS TEN YEARS COST(1) VALUE
---------- ---------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
U.S. TREASURY ........................ $ 22,269 $ 15,891 $ -- $ -- $ 38,160 $ 38,430
U.S. GOVERNMENT AGENCY ............... 5,000 76,003 -- -- 81,003 81,588
STATES AND POLITICAL
SUBDIVISIONS ...................... 756 4,718 1,095 103 6,672 6,878
---------- ---------- ----------- ----------- ----------- --------
TOTAL .......................... $ 28,025 $ 96,612 $ 1,095 $ 103 $ 125,835 $126,896
========== ========== =========== =========== =========== ========
WEIGHTED AVERAGE YIELDS
(TAXABLE-EQUIVALENT BASIS)
- ---------------------------------------------------------------------------------------------------------
U.S. TREASURY ........................ 5.57% 6.62% --% --% 6.01%
U.S. GOVERNMENT AGENCY ............... 5.31 6.72 -- -- 6.64
STATES AND POLITICAL
SUBDIVISIONS ...................... 7.08 8.05 9.45 10.35 8.32
TOTAL .......................... 5.59 6.77 9.45 10.35 6.53
=========================================================================================================
</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 risk 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 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 benefited from increased
loan demand due to passage of the North American Free Trade Agreement ("NAFTA")
and the strong population growth in the Rio Grande Valley. More recently, the
continued 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 devaluations 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 on-going Mexican financial problems will not
have a material adverse effect on the Company's growth and earnings prospects,
in part because the Company presently has a low percentage of loans secured by
Mexican assets or that otherwise rely on collateral located in Mexico.
<PAGE>
The extension of credits denominated in a currency other than that of the
country in which a borrower is located are called "cross-border" credits. With
the completion of the Mergers, the Company has acquired some dollar-denominated
cross-border credits to individuals or companies that are residents of, or
domiciled in Mexico. The Company's total cross-border credits at December 31,
1996 of $7.7 million were less than 1.0% of consolidated assets. See
"NONPERFORMING ASSETS" for additional information on cross-border credits.
Total loans of $757.7 million for the year ended December 31, 1996 increased
$306.8 million or 68.0% compared to the year ended December 31, 1995 levels of
$450.9 million and increased $110.9 million or 32.6% for the year ended December
31, 1995 compared to levels of $339.9 million at December 31, 1994. The increase
in total loans for the year ended December 31, 1996 is primarily attributable to
the Mergers. The increase in total loans for the year ended December 31, 1995 is
primarily attributable to the RGC/Roma Branch Acquisitions, funding a large
leveraged employee stock ownership trust loan (hereafter described) and
management's efforts to improve the earnings mix of earning assets by increasing
loan volume. The increase in Commercial loans in general, and Commercial
Tax-Exempt loans in particular, for the year ended December 31, 1995 was
primarily attributable to the funding of a $34.0 million employee stock
ownership trust loan which is collateralized by stock and assets of the employer
and approximately $27.5 million of cash equivalent assets. Commercial Tax-Exempt
loans increased $358,000 or 1.0% to $34.8 million for the year ended December
31, 1996 compared to $34.4 million for the year ended December 31, 1995 and was
primarily attributable to a $4.0 million loan to an industrial development
authority. 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 following table presents the
composition of the loan portfolio at the end of each of the last five years:
<TABLE>
<CAPTION>
Loan Portfolio Composition December 31,
(Dollars in Thousands) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial ............................... $198,752 $112,042 $101,866 $ 91,697 $ 87,240
Commercial Tax-Exempt .................... 34,777 34,419 -- -- --
-------- -------- -------- -------- --------
Total Commercial Loans ................... 233,529 146,461 101,866 91,697 87,240
-------- -------- -------- -------- --------
Agricultural ............................. 32,639 25,097 17,199 13,829 14,789
-------- -------- -------- -------- --------
Real Estate
Construction ........................... 47,400 29,967 18,809 11,846 9,534
Commercial Mortgage .................... 243,198 129,953 113,677 98,635 69,407
Agricultural Mortgage .................. 28,803 17,057 10,263 5,153 7,547
1-4 Family Mortgage .................... 100,301 59,052 47,425 42,647 40,403
-------- -------- -------- -------- --------
Total Real Estate ........................ 419,702 236,029 190,174 158,281 126,891
-------- -------- -------- -------- --------
Consumer ................................. 71,786 43,267 30,700 26,693 23,198
-------- -------- -------- -------- --------
Total Loans ............................ $757,656 $450,854 $339,939 $290,500 $252,118
-------- -------- -------- -------- --------
</TABLE>
The contractual maturity schedule of the loan portfolio at December 31, 1996 is
presented in the following table:
<TABLE>
<CAPTION>
LOAN MATURITIES ONE AFTER ONE YEAR AFTER
DECEMBER 31, 1996 YEAR THROUGH FIVE
(DOLLARS IN THOUSANDS) OR LESS FIVE YEARS YEARS TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
COMMERCIAL ...................................... $113,944 $ 72,017 $12,791 $198,752
COMMERCIAL TAX-EXEMPT ........................... 6,854 8,638 19,285 34,777
AGRICULTURAL .................................... 28,755 2,740 1,144 32,639
REAL ESTATE
CONSTRUCTION .................................. 36,673 9,890 837 47,400
COMMERCIAL MORTGAGE ........................... 50,806 147,915 44,477 243,198
AGRICULTURAL MORTGAGE ......................... 5,361 13,533 9,909 28,803
1-4 FAMILY MORTGAGE ........................... 21,017 74,790 4,494 100,301
CONSUMER ........................................ 31,621 39,674 491 71,786
-------- -------- ------- --------
TOTAL ......................................... $295,031 $369,197 $93,428 $757,656
======== ======== ======= ========
VARIABLE-RATE LOANS ............................. $128,208 $147,571 $72,696 $348,475
FIXED-RATE LOANS ................................ 166,823 221,626 20,732 409,181
-------- -------- ------- --------
TOTAL ......................................... $295,031 $369,197 $93,428 $757,656
======== ======== ======= ========
</TABLE>
As shown in the preceding table, loans maturing within one year totaled $295.0
million at year- end 1996. 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 and properly margined by cash or marketable securities, or are revolving
lines subject to annual analysis and renewal.
<PAGE>
NONPERFORMING ASSETS
The Bank has several procedures in place to assist in maintaining the overall
quality of its loan portfolio. The Bank has established underwriting guidelines
to be followed by its officers and monitors its delinquency levels for any
negative or adverse trends, particularly with respect to credits which have
total exposures of $10,000 or more.
Nonperforming assets consist of nonaccrual loans, loans for which the interest
rate has been renegotiated below originally contracted rates and real estate or
other assets that have been acquired in partial or full satisfaction of loan
obligations. 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.
Following consummation of the Mergers, management has continued to review and
evaluate loans acquired as a result of the Mergers. As a result, in part, of
that continuing review, management has classified as nonaccrual during the
fourth quarter of 1996 three cross-border credits totaling $3.4 million. As of
December 31, 1996, seven loan relationships in excess of $100,000, including
three cross-border credits previously discussed, totaling $5.8 million accounted
for 89.9% of the total nonaccrual loans. These large nonaccrual credits are
secured primarily by real estate. The remaining nonaccrual loans represent loans
of less than $100,000 each.
Loans which are contractually past due 90 days or more, which are both well
secured or guaranteed by financially responsible third parties and in the
process of collection, generally are not placed on nonaccrual status. The amount
of such loans past due 90 days or more for the years ended December 31, 1996,
1995 and 1994 that are not classified as nonaccrual totaled $4.1 million,
$642,000, and $226,000, respectively. The increase in accruing loans past due 90
days or more at December 31, 1996 as compared to the year ended December 31,
1995 is partly attributable to six credits in excess of $100,000 included in the
category, which are in the process of collection.
Nonperforming Assets of $7.4 million at December 31, 1996 increased $3.8 million
or 106.0% compared to December 31, 1995 levels of $3.6 million and decreased
$1.2 million or 25.5% for the year ended December 31, 1995 compared to December
31, 1994 levels of $4.8 million. As previously discussed, the continued review
and evaluation of loans acquired as a result of the Mergers has identified
additional cross-border credits which management has classified as
nonperforming. 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 Foreclosed Assets
at December 31, 1996 increased to 1.51% from 0.94% at December 31, 1995 due
primarily to the increase in Nonaccrual Loans and Accruing Loans 90 Days or More
Past Due.
The Company's classification of nonperforming loans includes those loans for
which management believes collection is doubtful. Management is not aware of any
specific borrower relationships that are not reported as nonperforming where
management has serious doubts as to the ability of such borrowers to comply with
the present loan repayment terms which would cause nonperforming assets to
increase materially.
Impairment of loans having recorded investments of $6.4 million at December 31,
1996 and $2.0 million at December 31, 1995 has been recognized in conformity
with Statement 114, as amended by Statement 118. The average recorded investment
in impaired loans during 1996 and 1995 was $4.8 million and $1.9 million,
respectively. The total allowance for loan losses related to these loans was
$506,000 and $172,000 on December 31, 1996 and 1995, respectively. Interest
income on impaired loans of $532,000 and $91,000 was recognized for cash
payments received in 1996 and 1995, respectively.
<PAGE>
An analysis of the components of nonperforming assets for the last five years is
presented in the following table:
<TABLE>
<CAPTION>
Nonperforming Assets December 31,
(Dollars in Thousands) 1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans ........................................................... $ 6,445 $2,092 $2,435 $2,305 $1,060
Renegotiated Loans ......................................................... 1 6 13 47 76
------- ------ ------ ------ ------
Nonperforming Loans ...................................................... 6,446 2,098 2,448 2,352 1,136
Foreclosed Assets .......................................................... 945 1,489 2,364 2,598 4,790
------- ------ ------ ------ ------
Total Nonperforming Assets ............................................... 7,391 3,587 4,812 4,950 5,926
Accruing Loans 90 Days or More Past Due .................................... 4,089 642 226 439 474
------- ------ ------ ------ ------
Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due ... $11,480 $4,229 $5,038 $5,389 $6,400
======= ====== ====== ====== ======
Nonperforming Loans as a % of Total Loans .................................. 0.85% 0.47% 0.72% 0.81% 0.45%
Nonperforming Assets as a % of Total Loans and Foreclosed Assets ........... 0.97 0.79 1.41 1.69 2.31
Nonperforming Assets as a % of Total Assets ................................ 0.60 0.55 0.90 1.05 1.43
Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due
as a % of Total Loans and Foreclosed Assets ............................... 1.51 0.94 1.47 1.84 2.49
======= ====== ====== ====== ======
</TABLE>
Interest income that would have been recorded for the year ended December 31,
1996 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, 1996, or since origination, if held for only part of that
year, was approximately $765,000. For the year ended December 31, 1996, the
amount of interest income actually recorded on nonaccrual and renegotiated loans
was approximately $230,000.
Management regularly reviews and monitors the loan portfolio to identify
borrowers experiencing financial difficulties. Management believes that, at
December 31, 1996, all such loans had been identified and included in the
nonaccrual, renegotiated 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 year ended December 31, 1996 was $10.0 million,
which represents an increase of $5.5 million or 120.8% as compared to the
allowance for loan losses at December 31, 1995. Management believes that the
allowance for loan losses at December 31, 1996 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.
<PAGE>
The following table summarizes the activity in the allowance for loan losses for
the last five years:
<TABLE>
<CAPTION>
Allowance for Loan Loss Activity Years Ended December 31,
(Dollars in Thousands) 1996 1995 1994 1993 1992
------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year ......................... $ 4,542 $3,511 $3,435 $ 2,929 $2,547
Balance from Acquisitions ............................ 4,647 450 -- -- 626
Provision for Loan Losses ............................ 2,120 1,685 1,085 392 220
Charge-Offs
Commercial ......................................... 883 813 169 64 229
Agricultural ....................................... 158 416 781 -- 64
Real Estate ........................................ 82 111 153 89 490
Consumer ........................................... 659 300 132 93 84
------- ------ ------ ------- ------
Total Charge-Offs ................................ 1,782 1,640 1,235 246 867
------- ------ ------ ------- ------
Recoveries
Commercial ......................................... 160 401 163 113 233
Agricultural ....................................... -- 66 4 13 41
Real Estate ........................................ 161 4 10 128 51
Consumer ........................................... 183 65 49 106 78
------- ------ ------ ------- ------
Total Recoveries ................................. 504 536 226 360 403
------- ------ ------ ------- ------
Net Charge-Offs (Recoveries) ......................... 1,278 1,104 1,009 (114) 464
------- ------ ------ ------- ------
Balance at End of Year ............................... $10,031 $4,542 $3,511 $ 3,435 $2,929
======= ====== ====== ======= ======
Ratio of Allowance for Loan
Losses to Loans Outstanding,
Net of Unearned Discount ............................ 1.32% 1.01% 1.03% 1.18% 1.16%
Ratio of Allowance for Loan
Losses to Nonperforming Assets ...................... 135.72 126.62 72.96 69.39 49.43
Ratio of Net Charge-Offs (Recoveries)
to Average Total Loans Outstanding,
Net of Unearned Discount ............................ 0.21 0.30 0.33 (0.04) 0.21
======= ====== ====== ======= ======
</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>
1996 1995 1994 1993 1992
Allocation of ------------------- ------------------ ------------------- ----------------- ----------------
the Allowance % OF LOANS % of Loans % of Loans % of Loans % of Loans
for Loan Losses IN EACH in Each in Each in Each in Each
December 31, CATEGORY Category Category Category Category
(Dollars in TO TOTAL to Total to Total to Total to Total
Thousands) AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
------- --------- ------ --------- ------ -------- ------ --------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .................... $ 2,102 30.8% $ 965 32.5% $1,057 30.0% $1,348 31.6% $1,096 34.6%
Agricultural .................. 391 4.3 304 5.6 478 5.1 138 4.7 148 5.9
Real Estate ................... 5,663 55.4 2,401 52.3 1,644 55.9 1,705 54.5 1,380 50.3
Consumer ...................... 432 9.5 296 9.6 257 9.0 215 9.2 254 9.2
Unallocated ................... 1,443 -- 576 -- 75 -- 29 -- 51 --
------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total ....................... $10,031 100.0% $4,542 100.0% $3,511 100.0% $3,435 100.0% $2,929 100.0%
======= ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
PREMISES AND EQUIPMENT
Premises and equipment of $37.1 million at December 31, 1996 increased $18.7
million or 101.7% compared to $18.4 million at December 31, 1995 in addition to
a net increase of $3.1 million or 20.3% for December 31, 1995 compared to $15.3
million at December 31, 1994. The net increase for the year ended December 31,
1996 is primarily attributable to the Mergers. The net increase for the year
ended December 31, 1995 is primarily attributable to the $1.8 million of fixed
assets acquired in the RGC/Roma Branch Acquisitions and $1.0 million for new
equipment and software for the data processing center.
<PAGE>
INTANGIBLES
Intangibles of $26.3 million at December 31, 1996 increased $20.6 million or
360.8% compared to $5.7 million at December 31, 1995 and increased $3.7 million
or 188.1% for December 31, 1995 compared to $2.0 million at December 31, 1994.
The net increase for the year ended December 31, 1996 is attributable to the
intangibles recorded as a result of the Mergers. 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 $1.1 billion at December 31, 1996 increased $512.0 million or
88.3% compared to December 31, 1995 levels of $579.7 million and total deposits
of $579.7 million for the year ended December 31, 1995 increased $107.6 million
or 22.8% compared to December 31, 1994 levels of $472.1 million. The increase in
total deposits at December 31, 1996 compared to December 31, 1995 is primarily
attributable to the Mergers. 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 $168.7 million for the year
ended December 31, 1996 represented an increase of $48.3 million or 40.1%
compared to the year ended December 31, 1995 and $20.8 million or 20.8% for the
year ended December 31, 1995 compared to the year ended December 31, 1994. Total
public funds deposits (consisting of Public Funds Demand Deposits, Savings,
Money Market Checking and Savings and Time Deposits) of $163.2 million for the
year ended December 31, 1996 increased $123.3 million or 308.9% compared to
December 31, 1995 levels of $39.9 million. 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>
Total Deposits December 31, % CHANGE FROM % Change From
(Dollars in Thousands) 1996 PRIOR YEAR 1995 Prior Year 1994
---------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Demand Deposits
Commercial and Individual ..................... $ 162,650 43.5% $ 113,345 16.1% $ 97,597
Public Funds .................................. 6,078 (14.0) 7,069 245.5 2,046
---------- ---- ---------- ------ ----------
Total Demand Deposits ...................... 168,728 40.1 120,414 20.8 99,643
---------- ---- ---------- ------ ----------
Interest-Bearing Deposits
Savings
Commercial and Individual .................. 94,114 165.0 35,521 23.8 28,689
Public Funds ............................... 738 20.6 612 * --
Money Market Checking and Savings
Commercial and Individual .................. 181,495 72.2 105,409 (0.6) 106,062
Public Funds ............................... 53,432 139.8 22,278 (35.8) 34,688
Time Deposits
Commercial and Individual .................. 490,294 71.7 285,545 55.0 184,177
Public Funds ............................... 102,934 * 9,952 (47.2) 18,849
---------- ---- ---------- ------ ----------
Total Interest-Bearing Deposits ............ 923,007 101.0 459,317 23.3 372,465
---------- ---- ---------- ------ ----------
Total Deposits ............................. $1,091,735 88.3% $ 579,731 22.8% $ 472,108
========== ====== ========== ====== ----------
Weighted Average Rate on
Interest-Bearing Deposits ..................... 4.45% 4.39% %3.27%
========== ========== ==========
</TABLE>
* Not meaningful
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. The following table presents the maturities of time
deposits of $100,000 or more as of December 31, 1996 and 1995:
Maturities of Time Deposits of $100,000 or More December 31,
(Dollars in Thousands) 1996 1995
-------- --------
Three Months or Less ..................................... $180,868 $ 47,925
After Three through Six Months ........................... 56,980 20,184
After Six through Twelve Months .......................... 47,093 21,152
After Twelve Months ...................................... 51,510 37,129
-------- --------
Total .................................................. $336,451 $126,390
======== ========
Weighted Average Rate on Time Deposits
of $100,000 or More ..................................... 5.43% 5.54%
======== ========
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 1995,
the Mexican government announced a 20% 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
<PAGE>
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 Mergers during 1996 and the
RGC/Roma Branch Acquisitions during 1995. The following table presents foreign
deposits, primarily from Mexican sources, as of December 31, 1996 and 1995:
Foreign Deposits
December 31,
(Dollars in Thousands) 1996 1995
-------- -------
Demand Deposits ................................... $ 6,366 $ 2,287
-------- -------
Interest-Bearing Deposits
Saving ........................................... 17,894 2,174
Money Market Checking and Savings ................ 20,727 9,178
Time Deposits Under $100,000 ..................... 42,296 19,376
Time Deposits of $100,000 or more ................ 78,111 26,471
-------- -------
Total Interest-Bearing Deposits ................ 159,028 57,199
-------- -------
Total Foreign Deposits ......................... $165,394 $59,486
======== =======
Percentage of Total Deposits ...................... 15.1% 10.3%
======== =======
Weighted Average Rate on Foreign Deposits ......... 4.64% 4.78%
======== =======
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,
1996, the Company's liquidity ratio, defined as cash, U.S. Government-backed
securities and federal funds sold as a percentage of deposits, was 32.3%
compared to 27.5% at December 31, 1995 and compared to 34.2% at December 31,
1994.
Liability liquidity is provided by access to core funding sources, principally
various customers' interest-bearing and noninterest-bearing deposit accounts in
the Company's trade area. The Company does not have 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 1996, funds for $272.7 million of investment purchases and $75.3 million
of net loan growth came from various sources, including a net increase in
deposits of $61.6 million, $159.4 million in proceeds from sale of investment
securities, $118.3 million in proceeds from maturing investment securities and
$16.4 million of net income.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
requires that federal bank regulatory authorities take "prompt corrective
action" with respect to any depository institution which does not meet specified
minimum capital requirements. The applicable regulations establish five capital
levels which require or permit the Federal Reserve Board 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 as of December 31,
1996, 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 Corporation is dependent on dividend and interest income from the Bank and
the sale of stock for its liquidity. Applicable Federal Reserve Board
regulations provide that bank holding companies are permitted by regulatory
authorities to pay cash dividends on their common or preferred stock if
consolidated earnings and consolidated capital are within regulatory guidelines
and the Bank is classified as "well capitalized" for purposes of FDICIA.
The principal sources of liquidity for the Corporation during 1996 were the
proceeds from the 1996 sale of 2.5 million shares of Class A Voting Common Stock
and interest income of $417,000 from the Bank. The funds received were used
primarily to finance the Mergers and pay common stock dividends and other
expenses.
<PAGE>
The funds management policy of the Company 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 liabilities maturing within one year exceeded rate sensitive
assets with comparable maturities at December 31, 1996 by $195.4 million.
Management monitors the rate sensitivity GAP on a regular basis and takes steps
when appropriate to improve the sensitivity. The cumulative rate sensitive GAP
to Total Assets at a period of twelve months or less was (15.9)% at December 31,
1996.
The following table summarizes interest rate sensitive assets and liabilities by
their repricing dates at December 31, 1996:
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1996 1-3 4-6 7-12 1-5 OVER
(DOLLARS IN THOUSANDS) MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
LOANS .......................................... $ 415,134 $ 36,550 $ 63,614 $ 221,626 $ 20,732 $ 757,656
INVESTMENT SECURITIES
AVAILABLE FOR SALE .......................... 5,595 3,326 50,890 115,776 16,714 192,301
HELD TO MATURITY ............................ 7,222 100 20,703 96,612 1,198 125,835
FEDERAL FUNDS SOLD ............................. 10,515 -- -- -- -- 10,515
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST-EARNING ASSETS ............ 438,466 39,976 135,207 434,014 38,644 1,086,307
---------- ---------- ---------- ---------- ---------- ----------
SAVINGS ........................................ 94,852 -- -- -- -- 94,852
MONEY MARKET CHECKING AND
SAVINGS ACCOUNTS ............................ 234,927 -- -- -- -- 234,927
TIME DEPOSITS .................................. 276,656 106,630 95,345 113,308 1,289 593,228
FEDERAL FUNDS PURCHASED AND SECURITIES
SOLD UNDER REPURCHASE AGREEMENTS ............ 632 -- -- -- -- 632
---------- ---------- ---------- ---------- ---------- ----------
TOTAL INTEREST-BEARING
LIABILITIES .............................. 607,067 106,630 95,345 113,308 1,289 923,639
---------- ---------- ---------- ---------- ---------- ----------
RATE SENSITIVITY GAP1 .......................... $ (168,601) $ (66,654) $ 39,862 $ 320,706 $ 37,355 $ 162,668
========== ========== ========== ========== ========== ==========
CUMULATIVE RATE SENSITIVITY GAP ................ $ (168,601) $ (235,255) $ (195,393) $ 125,313 $ 162,668
========== ========== ========== ========== ========== ==========
RATIO OF CUMULATIVE RATE SENSITIVITY
GAP TO TOTAL ASSETS ......................... (13.70)% (19.12)% (15.88)% -- -- --
RATIO OF CUMULATIVE RATE SENSITIVE
INTEREST-EARNING ASSETS TO CUMULATIVE
RATE SENSITIVE INTEREST-BEARING
LIABILITIES .............................. 72.2:1 67.0:1 75.8:1 -- -- --
========== ========== ========== ========== ========== ==========
</TABLE>
(1) Rate sensitive interest-earning assets less rate sensitive
interest-bearing liabilities.
<PAGE>
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 $128.1 million for the year ended December 31, 1996
reflects a net increase of approximately $65.4 million or 104.3% compared to
shareholders' equity of $62.7 million for the year ended December 31, 1995. This
net increase was primarily attributable to the sales of 2.5 million shares of
the Corporations Class A Voting Common stock and earnings for 1996.
The risk-based capital standards as established by the Federal Reserve Board of
Governors apply to Texas Regional and Texas State Bank. The numerator of the
risk-based capital ratio for bank holding companies includes Tier I capital,
consisting of common shareholders' equity and qualifying cumulative and
noncumulative perpetual preferred stock; and Tier II capital, consisting of
other preferred stock, reserve for possible loan losses and certain subordinated
and term-debt securities. Goodwill is deducted from Tier I capital. At no time
is Tier II capital allowed to exceed Tier I capital in the calculation of total
capital. The denominator or asset portion of the risk-based ratio aggregates
generic classes of balance sheet and off-balance sheet exposures, each weighted
by one of four factors, ranging from 0% to 100%, based on the relative risk of
the exposure class.
Ratio targets are set for both Tier I and total capital (Tier I plus Tier II
capital). The minimum level of Tier I capital to total assets is 4.0% and the
minimum total capital ratio is 8.0%. The Federal Reserve Board has guidelines
for a leverage ratio that is designed as an additional evaluation of capital
adequacy of banks and bank holding companies. The leverage ratio is defined to
be the company's Tier I capital divided by its quarterly average total assets
less goodwill and other intangible assets. An insured depository institution is
"well capitalized" for purposes of FDICIA if its Total Capital Ratio is equal to
or greater than 10.0%, and Tier I Capital Ratio is equal to or greater than
6.0%, and Leverage Capital Ratio is equal to or greater than 5.0%. The Company's
Tier I Capital Ratio was approximately 13.17% and 11.70% as of December 31, 1996
and 1995, respectively. The Company's Total Capital Ratio was approximately
14.44% and 12.64% as of December 31, 1996 and 1995, respectively. The Company's
Leverage Capital Ratio was 8.45% and 8.96% at December 31, 1996 and 1995,
respectively. Based on capital ratios, the Company is within the definition of
"well capitalized" for Federal Reserve purposes as of December 31, 1996.
The following table presents the Company's risk-based capital calculation:
<TABLE>
<CAPTION>
Risk-Based Capital December 31,
(Dollars in Thousands) 1996 1995
--------- ---------
<S> <C> <C>
Total Shareholders' Equity before unrealized gains or losses on Securities Available for Sale $ 127,628 $ 62,603
Less Goodwill and Other Deductions .......................................................... (26,251) (5,711)
--------- ---------
Total Tier I Capital ........................................................................ 101,377 56,892
Total Tier II Capital ....................................................................... 9,732 4,542
--------- ---------
Total Qualifying Capital .................................................................... $ 111,109 $ 61,434
========= =========
Risk Adjusted Assets (Including Off-Balance Sheet Exposure) ................................. $ 769,574 $ 486,111
========= =========
Tier I Capital Ratio ........................................................................ 13.17% 11.70%
Total Capital Ratio ......................................................................... 14.44 12.64
Leverage Capital Ratio ...................................................................... 8.45 8.96
========= =========
</TABLE>
<PAGE>
CURRENT ACCOUNTING ISSUES
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ("Statement 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996. Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
In October 1995, the Financial Accounting Standards Board 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 to
when they have rendered requisite service or satisfied other conditions
necessary to earn the right to benefit from the instruments. Compensation cost
is then determined based on the fair value estimate and is recognized over the
service period, which is usually the vesting period. Statement 123 also requires
that an employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method used to
account for them.
The accounting requirements of Statement 123 are effective for transactions
entered into in fiscal years that begin after December 15, 1995. The new
accounting standards prescribed by Statement 123 are optional, and the Company
may continue to account for its plans under previous accounting standards. The
Company does not expect to adopt the new accounting standards, consequently,
Statement 123 will not have a material impact on the Company's consolidated
results of operations or financial position. However, pro forma disclosures of
net earnings and earnings per share must be made as if the Statement 123
accounting standards had been adopted.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, ("Statement 125") "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Statement 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Statement 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. It distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. Management of the Company does
not expect that adoption of Statement 125 will have a material impact on the
Company's financial position, results of operations, or liquidity.
FOURTH QUARTER RESULTS
The fourth quarter net income for 1996 of $5.0 million or $0.56 per share
reflected an increase of $2.6 million or 106.3% compared to $2.4 million or
$0.39 per share for the fourth quarter of 1995. Earnings performance for the
fourth quarter of 1996 as compared to the fourth quarter of 1995 reflects
increases in net interest income, noninterest income and noninterest expense and
is primarily attributable to the Mergers.
Net interest income of $13.7 million for the fourth quarter of 1996 increased
$6.1 million or 79.7% compared to $7.6 million for the fourth quarter of 1995,
reflecting the increased volume of earning assets. Average earning assets of
$1.1 billion for the fourth quarter of 1996 increased $524.9 million or 91.4%
compared to $574.0 million for the fourth quarter of 1995. The fourth quarter of
1996 interest margin was 4.96% compared to 5.28% for the fourth quarter of 1995
and 5.12% in the third quarter of 1996.
The provision for loan losses charged against earnings in the fourth quarter of
1996 was $794,000 compared to $625,000 for the fourth quarter of 1995,
reflecting an increase of $169,000 or 27.0%. The provision for loan losses in
the fourth quarter of 1996 was primarily attributable to loan growth and net
charge-offs.
Noninterest income of $2.8 million for the fourth quarter of 1996 increased $1.1
million or 62.6% compared to $1.7 million for the fourth quarter of 1995,
primarily due to an increased volume of business and as a result of the Mergers.
All components of noninterest income, except Other Operating Income, reflect
increases for fourth quarter of 1996 compared to fourth quarter of 1995.
Investment Securities Gains of $244,000 for the fourth quarter of 1996 reflect a
net increase of $342,000 compared to Investment Securities Losses of $98,000 for
the fourth quarter of 1995.
Noninterest expense of $8.0 million for the fourth quarter of 1996 increased
$2.9 million or 58.3% compared to $5.0 million for the fourth quarter of 1995.
The increase in noninterest expense is primarily attributable to the Mergers.
<PAGE>
The fourth quarter net income for 1996 of $5.0 million or $0.56 per share
reflected a decrease of $162,000 or 3.1% compared to $5.2 million or $0.58 per
share for the third quarter of 1996. Earnings performance for the fourth quarter
of 1996 as compared to the third quarter of 1996 reflects decreases in net
interest income and noninterest expense with increases in provision for loan
losses, noninterest income and income tax expense.
During the fourth quarter of 1996, three cross-border credits totaling $3.4
million classified as nonaccrual and the carrying value of various cross-border
credits were reduced, resulting in an additional adjustment of approximately
$2.0 million to goodwill in connection with the Mergers. These steps penalized
earnings in the fourth quarter and the year as a result of reducing net interest
income (due to the reversal of accrued unpaid interest on these cross-border
credits), recording amortization from May to year-end on the approximate $2.0
million adjustment to Goodwill and the additional provision for loan losses
recorded to establish specific reserves on the effected cross-border credits.
All categories of noninterest income for the fourth quarter of 1996 reflect
increases when compared to each respective category for the third quarter of
1996.
The nonaccrual and renegotiated loans at December 31, 1996 of $6.4 million
increased $2.6 million or 69.5% compared to $3.8 million of September 30, 1996.
The increase was primarily attributable to the cross-border adjustments.
The following table presents a summary of operations for the last five quarters:
<TABLE>
<CAPTION>
Condensed Quarterly Income Statements 1996 1995
------------------------------------------------------------------ ----------
Taxable-Equivalent Basis
(Dollars in Thousands, FOURTH THIRD SECOND FIRST Fourth
Except Per Share Data) QUARTER QUARTER QUARTER QUARTER Quarter
---------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Interest Income ........................... $ 23,973 $ 24,086 $ 18,621 $ 13,176 $ 12,804
Interest Expense .......................... 10,260 10,067 7,640 5,281 5,171
---------- ---------- ---------- -------------- ----------
Net Interest Income ....................... 13,713 14,019 10,981 7,895 7,633
Provision for Loan Losses ................. 794 549 316 461 625
Noninterest Income ........................ 2,811 2,493 2,145 1,946 1,729
Noninterest Expense ....................... 7,968 7,973 6,707 5,314 5,035
---------- ---------- ---------- -------------- ----------
Income Before Taxable-Equivalent
Adjustment and Income Tax ............... 7,762 7,990 6,103 4,066 3,702
Taxable-Equivalent Adjustment ............. 392 630 402 206 105
Applicable Income Tax Expense ............. 2,377 2,205 2,024 1,306 1,177
---------- ---------- ---------- -------------- ----------
Net Income ................................ $ 4,993 $ 5,155 $ 3,677 $ 2,554 $ 2,420
========== ========== ========== ============== ===========
Net Income Per Common Share
Primary ................................ $ 0.56 $ 0.58 $ 0.49 $ 0.41 $ 0.39
Fully Diluted .......................... 0.56 0.58 0.49 0.41 0.39
========== ========== ========== ============== ===========
Average Balances
Total Assets ........................... $1,218,434 $1,213,234 $ 945,193 $ 655,639 $ 634,912
Loans .................................. 727,308 702,720 590,902 457,394 412,841
Investment Securities .................. 340,948 355,012 216,775 120,445 144,577
Earning Assets ......................... 1,098,972 1,090,068 847,169 590,467 574,033
Deposits ............................... 1,079,220 1,079,496 843,295 586,421 567,462
Shareholders' Equity ................... 126,234 122,226 94,098 64,158 62,341
---------- ---------- ---------- -------------- ----------
Selected Financial Data
Return on Average Assets ............... 1.63% 1.69% 1.56% 1.57% 1.51%
Return on Average
Shareholders' Equity ................ 15.74 16.78 15.72 16.01 15.40
Net Interest Income to
Average Earning Assets * ............ 4.96 5.12 5.21 5.38 5.28
Efficiency Ratio * ..................... 49.11 48.74 51.33 54.11 53.70
Allowance for Loan Losses .............. $ 10,031 $ 9,921 $ 9,947 $ 4,890 $ 4,542
Net Charge-Offs (Recoveries) ........... 684 575 (94) 113 204
Nonaccrual and
Renegotiated Loans .................. 6,446 3,803 3,752 2,860 2,098
Foreclosed Assets ...................... 945 1,551 1,976 1,463 1,489
========== ========== ========== ============== ===========
</TABLE>
* Taxable-Equivalent basis assuming a 35% tax rate for 1996 and a 34% tax rate
for 1995.
<PAGE>
SELECTED FINANCIAL DATA
Texas Regional Bancshares, Inc. and Subsidiary
QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
CONDENSED QUARTERLY INCOME STATEMENTS
TAXABLE-EQUIVALENT BASIS Fourth Third Second First
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
1996
<S> <C> <C> <C> <C>
INTEREST INCOME ............................................ $23,973 $24,086 $18,621 $13,176
INTEREST EXPENSE ........................................... 10,260 10,067 7,640 5,281
------- ------- ------- -------
NET INTEREST INCOME ........................................ 13,713 14,019 10,981 7,895
PROVISION FOR LOAN LOSSES .................................. 794 549 316 461
NONINTEREST INCOME ......................................... 2,811 2,493 2,145 1,946
NONINTEREST EXPENSE ........................................ 7,968 7,973 6,707 5,314
------- ------- ------- -------
INCOME BEFORE TAXABLE-EQUIVALENT
ADJUSTMENT AND INCOME TAX EXPENSE ..................... 7,762 7,990 6,103 4,066
TAXABLE-EQUIVALENT ADJUSTMENT .............................. 392 630 402 206
APPLICABLE INCOME TAX EXPENSE .............................. 2,377 2,205 2,024 1,306
------- ------- ------- -------
NET INCOME ................................................. $ 4,993 $ 5,155 $ 3,677 $ 2,554
------- ------- ------- -------
NET INCOME PER COMMON SHARE
PRIMARY ................................................... $ 0.56 $ 0.58 $ 0.49 $ 0.41
FULLY DILUTED ............................................. 0.56 0.58 0.49 0.41
------- ------- ------- -------
1995
------- ------- ------- -------
Interest Income ............................................ $12,804 $11,904 $10,880 $10,218
Interest Expense ........................................... 5,171 4,857 4,295 3,729
------- ------- ------- -------
Net Interest Income ........................................ 7,633 7,047 6,585 6,489
Provision for Loan Losses .................................. 625 372 322 366
Noninterest Income ......................................... 1,729 1,623 1,576 1,590
Noninterest Expense ........................................ 5,035 4,694 4,654 4,594
------- ------- ------- -------
Income Before Taxable-Equivalent
Adjustment and Income Tax Expense ..................... 3,702 3,604 3,185 3,119
Taxable-Equivalent Adjustment .............................. 105 35 35 39
Applicable Income Tax Expense .............................. 1,177 1,292 1,109 1,093
------- ------- ------- -------
Net Income ................................................. $ 2,420 $ 2,277 $ 2,041 $ 1,987
------- ------- ------- -------
Net Income Per Common Share
Primary ............................................... $ 0.39 $ 0.37 $ 0.33 $ 0.32
Fully Diluted ......................................... 0.39 0.36 0.33 0.32
------- ------- ------- -------
</TABLE>
<PAGE>
COMMON STOCK DATA --
The Company's Class A Voting Common Stock trades on the Nasdaq National Market
tier of The Nasdaq Stock Market under the trading Symbol: TRBS. The information
included in the following chart was derived from the Summary of Activity and
other information provided to the Company by The NASDAQ Stock Market.
Fourth Third Second First
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1996 - HIGH $34.50 $29.25 $26.00 $23.50
LOW 28.25 23.50 20.00 17.00
CLOSE 34.00 28.75 25.00 22.00
1995 - High 18.25 16.50 14.50 12.75
Low 15.50 13.50 11.75 11.25
Close 17.25 16.50 14.00 12.50
--------- --------- --------- ---------
On December 31, 1996, there were 620 holders of record of the Company's Class A
Voting Common Stock.
Cash dividends of $0.40 per share were declared during the years ended December
31, 1996 and 1995, respectively.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
FIVE-YEAR FINANCIAL SUMMARY -- CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
(Taxable-Equivalent Basis)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest Income
Loans, Including Fees ........................ $61,635 $ 37,199 $28,005 $23,674 $ 21,198
Federal Funds Sold ........................... 1,554 1,172 519 623 452
Investment Securities
Taxable ................................. 14,240 7,004 5,863 5,119 5,805
Tax-Exempt .............................. 2,427 431 368 415 422
------- -------- ------- ------- --------
Total Interest Income ................... 79,856 45,806 34,755 29,831 27,877
------- -------- ------- ------- --------
Interest Expense
Deposits ..................................... 33,228 17,990 11,619 10,321 10,593
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements ........ 20 46 23 1 23
Short-Term Borrowings ........................ -- 16 32 60 52
Note Payable ................................. -- -- 16 112 208
------- -------- ------- ------- --------
Total Interest Expense .................. 33,248 18,052 11,690 10,494 10,876
------- -------- ------- ------- --------
Net Interest Income ............................... 46,608 27,754 23,065 19,337 17,001
Provision for Loan Losses ......................... 2,120 1,685 1,085 392 220
------- -------- ------- ------- --------
Net Interest Income After Provision
for Loan Losses .................... 44,488 26,069 21,980 18,945 16,781
------- -------- ------- ------- --------
Noninterest Income
Services Charges on Deposit Accounts ......... 4,982 3,472 3,035 2,718 2,141
Other Service Charges ........................ 1,003 859 904 575 417
Net Investment Securities Gains (Losses) ..... 401 (111) 8 33 (226)
Other Operating Income ....................... 3,009 2,298 1,825 1,706 1,485
------- -------- ------- ------- --------
Total Noninterest Income ................ 9,395 6,518 5,772 5,032 3,817
------- -------- ------- ------- --------
Noninterest Expense
Salaries and Employee Benefits ............... 13,914 9,563 8,015 7,798 6,745
Occupancy Expense ............................ 1,951 1,069 961 820 828
Equipment Expense ............................ 3,165 2,028 1,648 1,366 1,166
Other ........................................ 8,932 6,317 5,883 4,529 5,171
------- -------- ------- ------- --------
Total Noninterest Expense ............... 27,962 18,977 16,507 14,513 13,910
------- -------- ------- ------- --------
Income Before Taxable-Equivalent Adjustment,
Income Expense Tax and Extraordinary Item 25,921 13,610 11,245 9,464 6,688
Taxable-Equivalent Adjustment ................ 1,630 214 124 140 140
Applicable Income Tax Expense ................ 7,912 4,671 3,936 3,345 2,029
------- -------- ------- ------- --------
Income Before Extraordinary Item .................. 16,379 8,725 7,185 5,979 4,519
Cumulative Effect of Change
in Accounting Principle ...................... -- -- -- 32 --
------- -------- ------- ------- --------
Net Income ........................................ $16,379 $ 8,725 $ 7,185 $ 6,011 $ 4,519
------- -------- ------- ------- --------
Primary Earnings Per Common Share
Income Per Share Before Cumulative Effect
of Change in Accounting Principle ....... $ 2.08 $ 1.40 $ 1.19 $ 1.30 $ 1.04
Cumulative Effect of Change in Accounting
Principle ............................... -- -- -- 0.01 --
------- -------- ------- ------- --------
Net Income ................................... $ 2.08 $ 1.40 $ 1.19 $ 1.31 $ 1.04
------- -------- ------- ------- --------
Weighted Average Number of Common
Shares Outstanding (in Thousands) ....... 7,887 6,218 5,791 4,186 4,045
------- -------- ------- ------- --------
Fully Diluted Earnings Per Common Share
Income Per Share Before Cumulative Effect
of Change in Accounting Principle ....... $ 2.08 $ 1.40 $ 1.16 $ 1.15 $ 0.92
Cumulative Effect of Change in Accounting
Principle ............................... -- -- -- 0.01 --
------- -------- ------- ------- --------
Net Income ................................... $ 2.08 $ 1.40 $ 1.16 $ 1.16 $ 0.92
------- -------- ------- ------- --------
Weighted Average Number of Common
Shares Outstanding (in Thousands) ....... 7,893 6,227 6,035 5,170 4,890
------- -------- ------- ------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiary
SELECTED STATISTICAL INFORMATION
Years Ended December 31, 1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Return on Average Shareholders' Equity .................. 16.11% 14.69% 14.11% 16.15% 15.23%
Return on Average Assets ................................ 1.62 1.51 1.43 1.34 1.23
Loan to Deposit Ratio ................................... 69.40 77.77 72.00 67.63 67.23
Demand Deposit to Total Deposit Ratio ................... 15.46 20.77 21.11 20.81 21.61
Net Yield (Taxable-Equivalent Net Interest
Income/Average Interest-Earning Assets) ............ 5.14 5.33 5.12 4.84 5.21
Efficiency Ratio ........................................ 50.41 54.88 57.00 60.98 65.35
CAPITAL RATIOS
Equity to Assets Ratio .................................. 10.41% 9.70% 10.48% 8.45% 8.28%
Tier I Capital Ratio .................................... 13.17 11.70 14.71 12.05 11.85
Total Capital Ratio ..................................... 14.44 12.64 15.67 13.21 12.91
Leverage Capital Ratio .................................. 8.45 8.96 10.37 7.88 8.15
PREFERRED STOCK DATA PER SHARE
Cash Dividends Paid ..................................... N/A N/A $3.50 $7.00 $7.00
Cash Dividend Rate at Year-End .......................... N/A N/A N/A 7.00% 7.00%
Book Value Per Share .................................... N/A N/A N/A $100.00 $100.00
COMMON STOCK DATA PER SHARE
Cash Dividends Declared ................................. $0.40 $0.40 $0.24 $-- $--
Dividend Rate at Year-End ............................... 1.18% 2.32% 2.56% N/A N/A
Book Value Per Share, as Restated ....................... $14.71 $10.12 $9.00 $7.73 $6.42
Dividend Payout Ratio ................................... 19.23% 28.57% 20.69% N/A N/A
OTHER STATISTICS
Number of Common Shareholders of Record ................. 620 642 710 714 724
Number of Full-Time Equivalent Employees ................ 534 332 280 272 240
------- ------- ------- ------- -------
</TABLE>
<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, 1996, 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 firm's report
appears below.
Glen E. Roney George R. Carruthers
Chairman of the Board, President Executive Vice President
& Chief Executive Officer & Chief Financial Officer
January 31, 1997
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, 1996 and 1995, 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, 1996.
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 at December 31, 1996 and 1995, and the results
of their operations and their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996 in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
January 31, 1997
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in Thousands) 1996 1995
----------- ---------
<S> <C> <C>
Assets
Cash and Due From Banks (Note 2) ......................................... $ 56,100 $ 30,933
Federal Funds Sold ....................................................... 10,515 3,600
----------- ---------
Total Cash and Cash Equivalents ..................................... 66,615 34,533
Securities Available for Sale (Note 3) ................................... 192,301 63,150
Securities Held to Maturity (Estimated Market Value of $126,896
and $68,962 for 1996 and 1995, Respectively) (Note 3) ............... 125,835 68,491
Loans, Net of Unearned Discount of $1,607 in 1996 and $1,272 in 1995 ..... 757,656 450,854
Less: Allowance for Loan Losses .......................................... (10,031) (4,542)
----------- ---------
Net Loans (Note 4) .................................................. 747,625 446,312
Premises and Equipment, Net (Note 5) ..................................... 37,054 18,374
Accrued Interest Receivable .............................................. 13,743 6,319
Other Real Estate ........................................................ 742 1,273
Intangibles .............................................................. 26,318 5,711
Other Assets ............................................................. 20,344 2,606
----------- ---------
Total Assets ........................................................ $ 1,230,577 $ 646,769
=========== =========
Liabilities
Deposits
Demand .............................................................. $ 168,728 $ 120,414
Savings ............................................................. 94,852 36,133
Money Market Checking and Savings ................................... 234,927 127,687
Time Deposits (Note 6) .............................................. 593,228 295,497
----------- ---------
Total Deposits ...................................................... 1,091,735 579,731
Federal Funds Purchased and Securities
Sold Under Repurchase Agreements (Note 7) ........................... 632 757
Accounts Payable and Accrued Liabilities ................................. 10,062 3,561
----------- ---------
Total Liabilities ................................................... 1,102,429 584,049
----------- ---------
Commitments and Contingencies (Notes 11 and 12)
Shareholders' Equity
Preferred Stock; $1.00 Par Value, 10,000,000 Shares
Authorized; None Issued and Outstanding (Note 9) .................... -- --
Common Stock - Class A; $1.00 Par Value, 20,000,000 Shares Authorized;
Issued and Outstanding 8,708,898 Shares for 1996 and 6,196,791 for
1995 (Note 10) ...................................................... 8,708 6,196
Paid-In Capital .......................................................... 78,605 29,239
Retained Earnings (Notes 9 and 12) ....................................... 40,315 27,168
Unrealized Gain (Loss) on Securities Available for Sale (Note 3) ......... 520 117
----------- ---------
Total Shareholders' Equity .......................................... 128,148 62,720
----------- ---------
Total Liabilities and Shareholders' Equity .......................... $ 1,230,577 $ 646,769
=========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Loans, Including Fees ............................. $ 60,844 $ 37,131 $28,005
Investment Securities
Taxable ........................................ 14,240 7,004 5,863
Tax-Exempt ..................................... 1,588 285 244
Federal Funds Sold ................................ 1,554 1,172 519
-------- -------- -------
Total Interest Income .......................... 78,226 45,592 34,631
-------- -------- -------
Interest Expense
Deposits .......................................... 33,228 17,990 11,619
Federal Funds Purchased and Securities Sold
Under Repurchase Agreements .................... 20 46 23
Short-Term Borrowings ............................. -- 16 32
Note Payable ...................................... -- -- 16
-------- -------- -------
Total Interest Expense ......................... 33,248 18,052 11,690
-------- -------- -------
Net Interest Income .................................. 44,978 27,540 22,941
Provision for Loan Losses (Note 4) ................... 2,120 1,685 1,085
-------- -------- -------
Net Interest Income After Provision for Loan Losses 42,858 25,855 21,856
-------- -------- -------
Noninterest Income
Service Charges on Deposit Accounts ............... 4,982 3,472 3,035
Other Service Charges ............................. 1,003 859 904
Trust Service Fees ................................ 1,505 1,256 1,161
Net Investment Securities Gains (Losses) .......... 401 (111) 8
Data Processing Service Fees ...................... 910 441 255
Other Operating Income ............................ 594 601 409
-------- -------- -------
Total Noninterest Income ....................... 9,395 6,518 5,772
-------- -------- -------
Noninterest Expense
Salaries and Employee Benefits (Note 11) .......... 13,914 9,563 8,015
Net Occupancy Expense ............................. 1,951 1,069 961
Equipment Expense ................................. 3,165 2,028 1,648
Other Real Estate (Income) Expense, Net ........... (67) 107 75
Other Noninterest Expense (Note 13) ............... 8,999 6,210 5,808
-------- -------- -------
Total Noninterest Expense ...................... 27,962 18,977 16,507
-------- -------- -------
Income Before Income Tax Expense ..................... 24,291 13,396 11,121
Income Tax Expense (Note 8) .......................... 7,912 4,671 3,936
-------- -------- -------
Net Income ........................................... $ 16,379 $ 8,725 $ 7,185
-------- -------- -------
Primary Earnings Per Common Share
Net Income ........................................ $ 2.08 $ 1.40 $ 1.19
-------- -------- -------
Weighted Average Number of Common Shares
Outstanding (in Thousands) ..................... 7,887 6,218 5,791
-------- -------- -------
Fully Diluted Earnings Per Common Share
Net Income ........................................ $ 2.08 $ 1.40 $ 1.16
-------- -------- -------
Weighted Average Number of Common Shares
Outstanding (in Thousands) ..................... 7,893 6,227 6,035
-------- -------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Class A Gain (Loss) Total
Convertible Voting on Securities Share-
Preferred Common Paid-In Retained Available holders'
(Dollars in Thousands) Stock Stock Capital Earnings for Sale Equity
---- ------ -------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
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
EXERCISE OF STOCK OPTIONS,
2,107 SHARES OF CLASS A
VOTING COMMON STOCK ................. -- 2 23 -- -- 25
CHANGE IN UNREALIZED GAIN
(LOSS) ON SECURITIES
AVAILABLE FOR SALE .................. -- -- -- -- 403 403
CLASS A VOTING COMMON
STOCK CASH DIVIDENDS ................ -- -- -- (3,232) -- (3,232)
SALE OF 2,510,000 SHARES OF
CLASS A VOTING COMMON STOCK ......... -- 2,510 49,343 -- -- 51,853
NET INCOME ............................... -- -- -- 16,379 -- 16,379
------ ------ -------- -------- ----- ---------
BALANCE, DECEMBER 31, 1996 ............... $ -- $8,708 $ 78,605 $ 40,315 $ 520 $ 128,148
====== ====== ======== ======== ===== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net Income ......................................................................... $ 16,379 $ 8,725 $ 7,185
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation, Amortization and Accretion, Net ................................. 2,794 2,013 2,089
Provision for Loan Losses ..................................................... 2,120 1,685 1,085
Provision for Estimated Losses on Other Real Estate and Other Assets .......... 43 119 112
(Gain) Loss on Sale of Securities Available for Sale .......................... (401) 111 (8)
(Gain) Loss on Sale of Other Assets ........................................... 11 (3) 4
(Gain) Loss on Sale of Other Real Estate ...................................... (202) 3 2
(Gain) Loss on Sale of Fixed Assets ........................................... (2) 14 8
(Increase) Decrease in Deferred Income Taxes .................................. (1,138) (336) 60
Increase in Accrued Interest Receivable and Other Assets ...................... (15,164) (159) (1,304)
Increase (Decrease) in Accounts Payable and Accrued Liabilities ............... (1,185) 613 135
--------- -------- --------
Net Cash Provided by Operating Activities ............................................... 3,255 12,785 9,368
--------- -------- --------
Cash Flows from Investing Activities
Proceeds from Sales of Securities Available for Sale ............................... 159,350 12,610 12,404
Proceeds from Maturing Securities Available for Sale ............................... 73,339 45,000 51,600
Purchases of Securities Available for Sale ......................................... (183,626) (64,961) (34,728)
Proceeds from Maturing Securities Held to Maturity ................................. 44,965 17,460 952
Purchases of Securities Held to Maturity ........................................... (89,086) (14,390) (31,442)
Proceeds from Sale of Loans ........................................................ 6,142 5,731 1,119
Purchases of Loans ................................................................. (2,012) (1,159) (2,151)
Loan Originations and Advances ..................................................... (73,330) (74,068) (50,619)
Recoveries of Charged-Off Loans .................................................... 504 536 226
Proceeds from Sale of Fixed Assets ................................................. 45 2 --
Proceeds from Sale of Other Assets ................................................. 508 25 116
Proceeds from Sale of Other Real Estate ............................................ 2,815 1,409 970
Purchases of Premises and Equipment ................................................ (5,766) (3,597) (1,862)
Proceeds from the Acquisition of Two Branch Bank Locations,
Net of Cash Acquired .......................................................... -- 30,606 --
Net Cash Used in Mergers ........................................................... (15,404) -- --
--------- -------- --------
Net Cash Used in Investing Activities ................................................... (81,556) (44,796) (53,415)
--------- -------- --------
Cash Flows from Financing Activities
Net Increase (Decrease) in Demand Deposits, Money Market Checking
and Savings Accounts .......................................................... (6,437) (24,518) 17,600
Net Increase in Time Deposits ...................................................... 68,048 52,421 24,987
Net Increase (Decrease) in Federal Funds Purchased
and Securities Sold Under Repurchase Agreements ............................... (125) (392) 1,149
Net Decrease in Short-Term Borrowings .............................................. -- (429) (60)
Repayment of Note Payable .......................................................... -- -- (1,150)
Cash Dividends Paid on Preferred Stock ............................................. -- -- (258)
Redemption of Preferred Stock ...................................................... -- -- (37)
Proceeds from Sale of Class A Voting Common Stock .................................. 51,878 38 11,110
Cash Dividends Paid on Class A Voting Common Stock ................................. (2,981) (2,353) (991)
--------- -------- --------
Net Cash Provided by Financing Activities ............................................... 110,383 24,767 52,350
--------- -------- --------
Increase (Decrease) in Cash and Cash Equivalents ........................................ 32,082 (7,244) 8,303
Cash and Cash Equivalents at Beginning of Year .......................................... 34,533 41,777 33,474
--------- -------- --------
Cash and Cash Equivalents at End of Year ................................................ $ 66,615 $ 34,533 $ 41,777
========= ======== ========
</TABLE>
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
Texas Regional Bancshares, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
Supplemental Disclosures of Cash Flow Information
Interest Paid ............................................................... $ 31,950 $ 17,248 $11,518
Income Taxes Paid ........................................................... 7,727 4,752 3,799
Supplemental Schedule of Noncash Investing and Financing Activities
Cost of Securities Transferred to Available for Sale ........................ N/A 1,455 N/A
Foreclosure and Repossession in Partial Satisfaction of Loans
Receivable ............................................................... 2,395 679 977
Loans Originated to Facilitate Sale of Other Real Estate .................... N/A N/A N/A
The Company Acquired First State Bank & Trust Co., Mission, Texas and The Border
Bank, Hidalgo, Texas on May 14, 1996. The Company also Acquired two Branch
Bank Locations, one in Rio Grande City, Texas and the other in Roma, Texas
during August 1995. Assets Acquired and Liabilities Assumed are as follows:
Fair Value of Assets Acquired ............................................ 554,240 75,850 N/A
Cash Paid ................................................................ (99,500) (4,250) N/A
Liabilities Assumed ...................................................... 458,740 80,100 N/A
--------- --------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Texas Regional Bancshares, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(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. and its wholly owned subsidiary, Texas State Bank (the "Bank").
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 --
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 statement of financial position 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 statement of
financial position 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 statement of
financial position with unrealized holding gains and losses reported in a
separate component of shareholders' equity until realized.
Gains and losses on the sale of Trading and Available for Sale securities are
determined using the specific-identification method.
Declines in the fair value of individual Held to Maturity and Available for Sale
securities below their cost that are other than temporary have resulted in write
downs of the individual securities to their fair value.
The related write downs have been included in earnings as realized losses.
Premiums and discounts are recognized in interest income using the interest
method over the period from acquisition to the earlier of maturity or call date.
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
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.
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 as an adjustment of the yields of the related loans.
<PAGE>
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 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. 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 experiences,
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 assessment 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.
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
<PAGE>
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.
GOODWILL --
Goodwill, which represents the excess of purchase price over fair value of net
assets acquired, is amortized on a straight-line basis over the expected periods
to be benefited, generally 15 years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
INCOME TAX --
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. The Company files a consolidated federal income tax
return.
STOCK OPTION PLAN --
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. In
October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, ("Statement 123") "Accounting for
Stock-Based Compensation," which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, Statement 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in Statement 123
had been applied. The Company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of Statement
123.
EARNINGS PER COMMON SHARE COMPUTATIONS --
Primary earnings per common 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 year, 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.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF --
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, ("Statement 121") "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1,
1996. Statement 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES -
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, ("Statement 125") "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
Statement 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and is to be
applied prospectively. Statement 125 provides accounting and reporting standards
for transfers and
<PAGE>
servicing of financial assets and extinguishment of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not expect
that adoption of Statement 125 will have a material impact on the Company's
financial position, results of operations, or liquidity.
(2) RESERVE REQUIREMENTS
Cash of approximately $22.9 million and $16.2 million at December 31, 1996 and
1995, 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, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
U.S. TREASURY .......................................... $ 8,965 $ 15 $ 7 $ 8,973
U.S. GOVERNMENT AGENCY ................................. 157,951 436 682 157,705
MORTGAGE-BACKED ........................................ 91 1 -- 92
STATES AND POLITICAL SUBDIVISIONS ...................... 21,770 1,042 1 22,811
OTHER .................................................. 2,718 4 2 2,720
-------- -------- -------- --------
TOTAL ............................................... $191,495 $ 1,498 $ 692 $192,301
======== ======== ======== ========
1995
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
------- ------- ------- -------
U.S. Treasury ........................................... $ 6,000 $ 19 $ 7 $ 6,012
U.S. Government Agency .................................. 55,502 205 39 55,668
Other ................................................... 1,471 2 3 1,470
------- ------- ------- -------
Total ................................................ $62,973 $ 226 $ 49 $63,150
======= ======= ======= =======
</TABLE>
<PAGE>
The amortized cost and estimated market value of investments in Securities Held
to Maturity at December 31, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
1996
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
(DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. TREASURY ......................... $ 38,160 $ 284 $ 14 $ 38,430
U.S. GOVERNMENT AGENCY ................ 81,003 601 16 81,588
STATES AND POLITICAL SUBDIVISIONS ..... 6,672 206 -- 6,878
---------- ---------- ---------- ----------
TOTAL .............................. $ 125,835 $ 1,091 $ 30 $ 126,896
========== ========== ========== ==========
1995
-------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in Thousands) Cost Gains Losses Value
---------- ---------- ---------- ----------
U.S. Treasury ......................... $ 28,787 $ 104 $ 115 $ 28,776
U.S. Government Agency ................ 34,230 245 50 34,425
States and Political Subdivisions ..... 5,474 287 -- 5,761
---------- ---------- ---------- ----------
Total .............................. $ 68,491 $ 636 $ 165 $ 68,962
========== ========== ========== ==========
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996, 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.
SECURITIES
-----------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
------------------- -------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
(DOLLARS IN THOUSANDS) COST VALUE COST VALUE
-------- -------- -------- --------
DUE IN ONE YEAR OR LESS .............. $ 59,705 $ 59,811 $ 28,025 $ 28,066
DUE AFTER ONE YEAR THROUGH FIVE YEARS 115,705 115,776 96,612 97,538
DUE AFTER FIVE YEARS THROUGH TEN YEARS 12,541 12,114 1,095 1,183
DUE AFTER TEN YEARS .................. 3,544 4,600 103 109
-------- -------- -------- --------
TOTAL ............................. $191,495 $192,301 $125,835 $126,896
======== ======== ======== ========
Proceeds from sales of Securities Available for Sale for the year ended December
31, 1996 were $159.3 million. Gross gains of $705,000 and gross losses of
$304,000 were realized on sales for the year ended December 31, 1996. 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 gains were realized on sales
for the year ended December 31, 1995.
Net unrealized holding gains of $520,000 and $117,000 at December 31, 1996 and
1995, 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 1996 and 1995.
Investment securities having a carrying value of $224.2 million at December 31,
1996 and $99.6 million at December 31, 1995 were pledged to secure public funds
and trust assets on deposit and for other purposes required or permitted by law.
<PAGE>
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
An analysis of loans at December 31, 1996 and December 31, 1995 follows:
(Dollars in Thousands) 1996 1995
-------- --------
Commercial ................................. $198,752 $112,042
Commercial Tax-Exempt ...................... 34,777 34,419
Agricultural ............................... 32,639 25,097
Real Estate
Construction ............................ 47,400 29,967
Commercial Mortgage ..................... 243,198 129,953
Agricultural Mortgage ................... 28,803 17,057
1-4 Family Mortgage ..................... 100,301 59,052
Consumer ................................... 71,786 43,267
-------- --------
Total ................................... $757,656 $450,854
======== ========
In the ordinary course of business, the Company's subsidiary bank makes 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, 1996 and
December 31, 1995 follows:
(Dollars in Thousands) 1996 1995
---------- ----------
Balance at Beginning of Year .............. $ 3,974 $ 8,174
Additions ................................. 2,765 1,613
Reductions
Collections ............................ 2,368 3,083
Changes to Unrelated Status ............ -- 2,730
Charge-Offs ............................ -- --
---------- ----------
Balance at End of Year .................... $ 4,371 $ 3,974
========== ==========
A summary of the transactions in the allowance for loan losses for years ended
December 31, 1996, 1995 and 1994 follows:
(Dollars in Thousands) 1996 1995 1994
-------- ------- -------
Balance at Beginning of Year .............. $ 4,542 $ 3,511 $ 3,435
Balance from Acquisitions ................. 4,647 450 --
Provision Charged to Expense .............. 2,120 1,685 1,085
Recovery of Amounts Previously Charged
to Allowance ........................... 504 536 226
Losses Charged to Allowance ............... (1,782) (1,640) (1,235)
-------- ------- -------
Balance at End of Year .................... $ 10,031 $ 4,542 $ 3,511
======== ======= =======
Nonaccrual loans and renegotiated loans were $6.4 million, $2.1 million and $2.4
million at December 31, 1996, 1995 and 1994, 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 $765,000,
$247,000 and $476,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Impairment of loans having recorded investments of $6.4 million at December 31,
1996 and $2.0 million at December 31, 1995 has been recognized in conformity
with Statement 114, as amended by Statement 118. The average recorded investment
in impaired loans during 1996 and 1995 was $4.8 million and $1.9 million,
respectively. The total allowance for loan losses related to these loans was
$506,000 and $172,000 on December 31, 1996 and 1995, respectively. Interest
income on impaired loans of $532,000 and $91,000 was recognized for cash
payments received in 1996 and 1995, respectively.
<PAGE>
(5) PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation and
amortization as of December 31, 1996 and December 31, 1995 follows:
Estimated
(Dollars in Thousands) Useful Lives 1996 1995
---------- ---------- ----------
Land .................................... $ 7,020 $ 4,526
Buildings and Leasehold Improvements .... 2-40 years 25,458 12,440
Construction in Progress ................ 1,100 --
Furniture and Equipment ................. 3-10 years 13,783 9,581
---------- ----------
Subtotal ................................ 47,361 26,547
Less Accumulated Depreciation
and Amortization ....................... (10,307) (8,173)
---------- ----------
Total ................................ $ 37,054 $ 18,374
========== ==========
Depreciation and amortization expense for the years ended December 31, 1996,
1995 and 1994 was approximately $2.6 million, $1.6 million and $1.3 million,
respectively.
(6) TIME DEPOSITS
Time deposits of $100,000 or more totaled $336.5 million and $126.4 million at
December 31, 1996 and 1995, respectively. Interest expense for the years ended
December 31, 1996, 1995 and 1994 on time deposits of $100,000 or more was
approximately $13.3 million, $5.7 million and $3.5 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, 1996, 1995 and 1994:
(Dollars in Thousands) 1996 1995 1994
-------- -------- --------
Balance at End of Year ................. $ 632 $ 757 $ 1,149
Rate on Balance at End of Year ......... 3.92% 3.60% 4.07%
Average Daily Balance .................. $ 502 $ 1,093 $ 652
Average Interest Rate .................. 3.74% 4.20% 3.57%
Maximum Month-End Balance .............. $ 700 $ 1,349 $ 2,550
======== ======== ========
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.
(8) INCOME TAX
The components of income tax expense for the years ended December 31, 1996, 1995
and 1994 consisted of the following:
(Dollars in Thousands) 1996 1995 1994
------- ------- ------
Current Income Tax Expense
Federal ...................................... $ 7,647 $ 4,790 $3,667
State ........................................ 168 217 207
------- ------- ------
Total Current Income Tax Expense .......... 7,815 5,007 3,874
------- ------- ------
Deferred Income Tax Expense (Benefit)
Federal ...................................... 125 (320) 57
State ........................................ (28) (16) 5
------- ------- ------
Total Deferred Income Tax Expense (Benefit) 97 (336) 62
------- ------- ------
Total Income Tax Expense .................. $ 7,912 $ 4,671 $3,936
======= ======= ======
<PAGE>
Following is a reconciliation between the amount of reported income tax expense
for the years ended December 31, 1996, 1995 and 1994 and the amount computed by
multiplying the income before tax by the federal statutory tax rate:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at Statutory Rate ............ $ 8,502 35% $ 4,689 35% $ 3,781 34%
(Reductions) Additions
Tax-Exempt Interest ........... (969) (4) (124) (1) (83) (1)
State Earned Surplus Tax, Net
of Federal Income Tax Effect 91 1 130 1 140 1
Goodwill Amortization ......... 223 1 21 -- 21 --
Other - Net ................... 65 -- (45) -- 77 1
------- --- ------- --- ------- ---
Total Income Tax Expense ... $ 7,912 33% $ 4,671 35% $ 3,936 35%
======= === ======= === ======= ===
</TABLE>
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, 1996 and
December 31, 1995.
(Dollars in Thousands) 1996 1995
------- -------
Deferred Tax Liability
Premises and Equipment .............................. $ 4,394 $ 1,071
Intangibles ......................................... 3,120 392
Unrealized Gain on Securities Available for Sale .... 286 60
Other ............................................... 290 135
------- -------
Total Deferred Tax Liability ..................... 8,090 1,658
======= =======
Deferred Tax Asset
Allowance for Loan Losses ........................... 2,291 1,034
Unrealized Losses on Loans .......................... 1,062 --
Other Real Estate ................................... 27 237
Other ............................................... 446 208
------- -------
Total Deferred Tax Assets Before Valuation Allowance ... 3,826 1,479
Valuation Allowance .................................... (36) (36)
------- -------
Total Deferred Tax Assets Less Valuation Allowance ..... 3,790 1,443
------- -------
Net Deferred Tax Liability .......................... $ 4,300 $ 215
======= =======
For the years ended December 31, 1996 and December 31, 1995, 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 statement 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, 1996 and 1995,
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.
<PAGE>
(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, 1996, 1995 and 1994 were
as follows:
First Series Series Total
(Dollars in Thousands) Series 1990 1991 Preferred
---- --- ---- ---------
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 ................ $ -- $-- $ -- $ --
---- --- ---- ----
BALANCE DECEMBER 31, 1996 ................ $ -- $-- $ -- $ --
==== === ==== ====
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.
(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 (priced at $12.00), 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's 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 14, 1996, Texas Regional Bancshares, Inc. completed its secondary public
offering of 2.5 million shares of the Corporation's Class A Voting Common Stock
(priced at $22.25). On May 14, 1996 Texas Regional Bancshares, Inc. also
completed the acquisition of First State Bank & Trust Co., Mission, Texas, and
the Border Bank, Hidalgo, Texas, (the "Mergers"), through merger with Texas
State Bank, the principal operating subsidiary of Texas Regional Bancshares,
Inc. The purchase price of the Mergers was financed with a combination of
proceeds from the 2.5 million share common equity offering and cash on the
balance sheet of the Company.
<PAGE>
(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,
1996, 1995 and 1994 was $814,000, $526,000, and $462,000, 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 Internal Revenue 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 bonus plan was terminated effective January 9, 1996.
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 Nonstatutory 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, except with respect to awards outstanding. Any options
outstanding under this Plan, at the time of its termination, remain in effect
until the options shall have been exercised or the expiration date of the
option, whichever is earlier. The options to acquire 52,595 Class A Voting
Common Stock were awarded May 10, 1994, and expire on May 10, 2000. During 1996
and 1995, options to acquire 2,107 and 3,162 Class A Voting Common Stock,
respectively, were exercised at a price of $12.00 per share.
In May 1996, the shareholders of the Company approved 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. 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 July 1,
1996, and 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.
<PAGE>
At December 31, 1996, the Company has three stock-based compensation plans,
which are described above. The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost for
the Company's three stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans consistent with the
method of FASB Statement 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below:
(Dollars in Thousands, Except Per Share Data)
1996 1995
-------- ------
Net Income ....................... As reported $ 16,379 $8,725
Pro forma 16,301 8,649
Primary earnings per share ....... As reported 2.08 1.40
Pro forma 2.07 1.39
Fully diluted earnings per share.. As reported 2.08 1.40
Pro forma 2.07 1.39
The fair value of options at date of grant was estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions:
1996 1995
---- ----
Expected life (years) ................................ N/A 3.5
Interest rate ........................................ N/A 5.52%
Volatility .......................................... N/A 27.30
Dividend yield ...................................... N/A 1.17
No options were granted during year ended December 31, 1996. Pro forma net
income reflects only options granted in 1995. Therefore, the full impact of
calculating compensation cost for stock options under Statement 123 is not
reflected in the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period of four years
and compensation cost for options granted prior to January 1, 1995 is not
considered.
A summary of the status of the Company's three fixed option plans as of December
31, 1996, 1995 and 1994, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ---------------------- ----------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE Shares Exercise Shares Exercise
Fixed Options (000) PRICE (000) Price (000) Price
- ------------- ------- --------- ------- --------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year ......... 263 $13.80 176 $12.00 -- $ --
Granted .................................. -- -- 90 17.25 179 12.00
Exercised ................................ 2 12.00 3 12.00 -- --
Forfeited ................................ -- -- -- -- 3 12.00
------- --------- ------- --------- ------ --------
Outstanding at end of year ............... 261 $13.81 263 $13.80 176 $12.00
======= ========= ======= ========= ====== --------
Options exercisable at
year-end ............................ 193 173 176
Options available for grant
at year-end ......................... None None 77
Weighted-average fair
value of options granted
during the year ..................... $ -- $17.25 $12.00
======= ======= ======
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$12.00 170,881 3.3 years $ 12.00 170,881 $ 12.00
$17.25 90,000 5.5 17.25 22,500 17.25
----------- ----------- -------- ----------- ---------
$12.00 to 17.25 260,881 193,381
=========== ===========
</TABLE>
<PAGE>
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 at 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.
With the consummation of the Mergers the Company acquired four existing separate
deferred compensation plans for the benefit of certain Texas State Bank
employees. The plans provide for retirement benefits to be paid to the specific
employee (or a designated beneficiary or estate if death occurs prior to payment
of the full amount of deferred compensation) on reaching age 65. One plan
entered into on December 10, 1963, commenced payments of approximately $13,000
each year on January 4, 1988, continuing annually thereafter through June 2003.
A second plan, entered into on September 1, 1979, provides for payments of
approximately $13,000 each year which was scheduled to commence on April 1,
1990, continuing annually thereafter through June 2005; however, the employee
elected to receive an amount less than that provided for in the plan over a
longer period of time. The third plan provides for a retirement benefit payable
of $50,000 per year commencing in March 1999 and continuing annually thereafter
for 20 years. The fourth plan provides for a retirement benefit payable of
$13,350 each year beginning March 15, 1995 and continuing annually thereafter
for fourteen years.
The Company has incurred deferred compensation expense of $130,000, $87,000 and
$87,000 for the years ended December 31, 1996, 1995 and 1994, respectively,
related to the five deferred compensation plans previously discussed.
The Bank owns and is the beneficiary of five life insurance policies on the
employees or former employees covered by the deferred compensation plans. The
life insurance policies' face values are amounts equal to the total benefits
paid under the plan.
(12) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company enters into various transactions
which, in accordance with generally accepted accounting principles, are not
included on the consolidated balance sheets. These transactions are referred to
as "off-balance sheet commitments." The Company enters into these transactions
to meet the financing needs of its customers. These transactions include
commitments to extend credit and letters of credit which involve elements of
credit risk in excess of the amounts recognized in the consolidated balance
sheets. The Company attempts to minimize its exposure to loss under these
commitments by subjecting them to the same credit approval and monitoring
procedures as its other credit facilities.
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, 1996, the Company had outstanding commitments to extend credit
of approximately $96.5 million which included standby letters of credit of
approximately $6.3 million. Management does not anticipate any losses as a
result of these commitments.
<PAGE>
Future minimum lease payments on operating leases as of December 31, 1996 are as
follows:
OFFICE OFFICE
(DOLLARS IN THOUSANDS) SPACE EQUIPMENT TOTAL
------ --------- -----
1997 .................... $108 $ 98 $206
1998 .................... 75 102 177
1999 .................... -- 118 118
2000 .................... -- 118 118
2001 .................... -- 118 118
---- ---- ----
Total ................... $183 $554 $737
==== ==== ====
The Company is a defendant in various legal proceedings arising in connection
with its ordinary course of business. In the opinion of management, the
financial position of the Company will not be materially affected by the final
outcome of these legal proceedings.
(13) OTHER NONINTEREST EXPENSE
Other noninterest expense for the years ended December 31, 1996 1995 and 1994
consisted of the following:
(Dollars in Thousands) 1996 1995 1994
------ ------ ------
Advertising and Public Relations ........ $1,197 $ 772 $ 693
Amortization of Intangibles ............. 1,593 323 224
Data Processing and Check Clearing ...... 942 491 360
Director Fees ........................... 343 284 267
Franchise Tax ........................... 245 198 159
Insurance ............................... 195 228 314
FDIC Insurance .......................... 3 540 973
Legal and Professional .................. 1,279 870 1,006
Postage, Delivery and Freight ........... 463 323 265
Stationery and Supplies ................. 907 658 538
Telephone ............................... 346 250 202
Other Losses ............................ 627 624 177
Miscellaneous Expense ................... 859 649 630
------ ------ ------
Total .............................. $8,999 $6,210 $5,808
====== ====== ======
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS
December 31, 1996 and 1995
(Dollars in Thousands) 1996 1995
-------- -------
Assets
Cash in Subsidiary Bank .......................... $ 10,605 $ 99
Time Deposits in Subsidiary Bank ................. 3,059 4,979
-------- -------
Total Cash and Cash Equivalents ............. 13,664 5,078
Investments in Consolidated Subsidiary ........... 114,935 58,114
Furniture and Equipment .......................... 68 80
Other Assets ..................................... 406 103
-------- -------
Total Assets ................................ $129,073 $63,375
======== =======
Liabilities
Accounts Payable and Accrued Liabilities ......... $ 54 $ 35
Dividends Payable ................................ 871 620
-------- -------
Total Liabilities ........................... 925 655
Shareholders' Equity .................................. 128,148 62,720
-------- -------
Total Liabilities and Shareholders' Equity .. $129,073 $63,375
======== =======
<PAGE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
-------- ------- --------
<S> <C> <C> <C>
Income
Interest Income ........................................ $ 417 $ 338 $ 330
Dividends Received from Subsidiary Bank ................ -- -- 456
-------- ------- --------
Total Income ...................................... 417 338 786
-------- ------- --------
Expense
Interest on Note Payable ............................... -- -- 16
Salaries and Employee Benefits ......................... 1 -- 7
Occupancy Expense ...................................... 4 4 4
Equipment Expense ...................................... 14 3 3
Director Fees .......................................... 125 119 83
Franchise Tax .......................................... 78 80 57
Legal and Professional ................................. 40 24 30
Shareholder Services ................................... 126 -- --
Other .................................................. 53 77 90
-------- ------- --------
Total Expense ..................................... 441 307 290
-------- ------- --------
Income (Loss) Before Income Tax Expense and Equity
in Undistributed Net Income of Subsidiary .............. (24) 31 496
Income Tax Expense .......................................... 2 15 7
-------- ------- --------
Income (Loss) Before Equity in Undistributed
Income of Subsidiary ................................... (22) 16 489
Equity in Undistributed Net Income of Subsidiary ............ 16,401 8,709 6,696
-------- ------- --------
Net Income ........................................ $ 16,379 $ 8,725 $ 7,185
======== ======= ========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(Dollars in Thousands) 1996 1995 1994
-------- ------- --------
Cash Flows from Operating Activities
Net Income ............................................. $ 16,379 $ 8,725 $ 7,185
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization ..................... 15 5 4
Undistributed Net Income of Subsidiary ............ (16,401) (8,709) (6,697)
(Increase) Decrease in Other Assets ............... (323) 52 (85)
Increase (Decrease) in Income Taxes Payable ....... 6 (1) (3)
Decrease in Deferred Income Taxes ................. -- -- (1)
Increase (Decrease) in Accounts Payable and Accrued
Liabilities .................................. 13 2 (6)
-------- ------- --------
Net Cash Provided by (Used in) Operating Activities (311) 74 397
-------- ------- --------
Cash Flows from Investing Activities
Purchase of Equipment .................................. -- (78) (3)
Investment in Subsidiary ............................... (40,000) (2,000) --
-------- ------- --------
Net Cash Used In Investing Activities ............. (40,000) (2,078) (3)
-------- ------- --------
Cash Flows from Financing Activities
Repayment of Note Payable .............................. -- -- (1,150)
Cash Dividends Paid on Preferred Stock ................. -- -- (258)
Redemption of Preferred Stock .......................... -- -- (37)
Cash Dividends Paid on Common Stock .................... (2,981) (2,353) (991)
Proceeds from Issuance of Class A Voting
Common Stock ...................................... 51,878 38 11,110
-------- ------- --------
Net Cash Provided by (Used in) Financing Activities 48,897 (2,315) 8,674
-------- ------- --------
Net Increase (Decrease) in Cash and Cash Equivalents ........ 8,586 (4,319) 9,068
Cash and Cash Equivalents at Beginning of Year .............. 5,078 9,397 329
-------- ------- --------
Cash and Cash Equivalents at End of Year .................... $ 13,664 $ 5,078 $ 9,397
======== ======= ========
Supplemental Disclosures of Cash Flow Information
Interest Paid .......................................... $ -- $ -- $ 25
Income Taxes Paid ...................................... 7,727 4,752 3,799
======== ======= ========
</TABLE>
<PAGE>
(15) RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval The amount of retained earnings in
the Bank at December 31, 1996 was $28.4 million. On December 31, 1996, the
aggregate amount of dividends which legally could be paid to the Corporation
without prior approval of various regulatory agencies was approximately $16.2
million.
(16) REGULATORY MATTERS
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory- and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgements by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of Total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes that the Company meets all capital
adequacy requirements to which it is subject at December 31, 1996.
At December 31, 1996, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Company as adequately capitalized under
the regulatory framework for prompt corrective action. To be categorized as
adequately capitalized the Company must maintain minimum total risk-based, Tier
I risk-based, and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category. The Company's actual capital amounts and
ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
(Dollars in Thousands) ----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
DECEMBER 31, 1996
TOTAL CAPITAL
<S> <C> <C> <C> <C> <C> <C>
(TO RISK WEIGHTED ASSETS) ........ $ 111,109 14.44% *$61,565 *8.0% *$76,957 *10.0%
TIER I CAPITAL
(TO RISK WEIGHTED ASSETS) ........ 101,377 13.17 * 30,783 *4.0 * 46,174 * 6.0
TIER I CAPITAL
(TO AVERAGE ASSETS) .............. 101,377 8.45 * 47,968 *4.0 * 59,960 * 5.0
December 31, 1995
Total Capital
(to Risk Weighted Assets) ........ $ 61,434 12.64% *$38,889 *8.0% *$48,611 *10.0%
Tier I Capital
(to Risk Weighted Assets) ........ 56,892 11.70 * 19,444 *4.0 * 29,167 * 6.0
Tier I Capital
(to Average Assets) .............. 56,892 8.96 * 25,396 *4.0 * 31,746 * 5.0
</TABLE>
- ------------
* is greater than or equal to.
(17) 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 of Financial 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.
<PAGE>
The following table presents the amortized cost and estimated fair value of
securities classified as Available for Sale at December 31, 1996 and December
31, 1995:
1996 1995
-------------------- --------------------
AMORTIZED ESTIMATED Amortized Estimated
(Dollars in Thousands) COST FAIR VALUE Cost Fair Value
-------- -------- ------- -------
U.S. Treasury .................... $ 8,965 $ 8,973 $ 6,000 $ 6,012
U.S. Government Agency ........... 157,951 157,705 55,502 55,668
Mortgage-Backed .................. 91 92 -- --
States and Political Subdivisions 21,770 22,811 -- --
Other ............................ 2,718 2,720 1,471 1,470
-------- -------- ------- -------
Total ....................... $191,495 $192,301 $62,973 $63,150
======== ======== ======= =======
The following table presents the carrying value and estimated fair value of
securities classified as Held to Maturity at December 31, 1996 and December 31,
1995:
1996 1995
--------------------- --------------------
CARRYING ESTIMATED Carrying Estimated
(Dollars in Thousands) AMOUNT FAIR VALUE Amount Fair Value
--------- ---------- -------- ----------
U.S. Treasury .................... $ 38,160 $ 38,430 $28,787 $28,776
U.S. Government Agency ........... 81,003 81,588 34,230 34,425
States and Political Subdivisions 6,672 6,878 5,474 5,761
-------- -------- ------- -------
Total ....................... $125,835 $126,896 $68,491 $68,962
======== ======== ======= =======
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.
The following table presents information for loans at or for the year ended
December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- -------------------------------------------
CARRYING AVERAGE CALCULATED Carrying Average Calculated
(Dollars in Thousands) AMOUNT YIELD FAIR VALUE Amount Yield Fair Value
-------- ------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and Agriculture
Adjustable ..................... $149,986 9.26% $ 149,686 $136,213 9.50% $137,308
Fixed .......................... 116,182 10.08 116,864 35,298 9.33 34,083
Real Estate
Adjustable ..................... 195,284 9.67 193,095 128,406 10.13 127,039
Fixed .......................... 224,418 10.40 225,147 106,791 9.89 106,483
Consumer ............................ 71,786 10.56 71,482 44,146 10.61 43,929
-------- ------- --------- -------- ------- --------
Total Loans, Net of Unearned Discount 757,656 9.95% 756,274 450,854 9.87% 44,842
-------- ------- --------- -------- ------- --------
Allowance for Loan Losses ........... 10,031 -- (4,542) --
-------- --------- -------- --------
Total Loans, Net .................... $747,625 $756,274 $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,
1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------- ------------------------
CARRYING ESTIMATED Carrying Estimated
(Dollars in Thousands) AMOUNT FAIR VALUE Amount Fair Value
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Noninterest-Bearing Demand Deposits ............ $ 168,728 $ 168,728 $120,414 $120,414
Savings ........................................ 94,852 94,852 36,133 36,133
Money Market Checking and Savings Accounts ..... 234,927 234,927 127,687 127,687
Time Deposits .................................. 593,228 594,187 295,497 297,200
---------- ---------- -------- --------
Total Deposits ............................ $1,091,735 $1,092,694 $579,731 $581,434
========== ========== ======== ========
</TABLE>
<PAGE>
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.
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, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
CONTRACT CARRYING ESTIMATED Contract Carrying Estimated
(Dollars in Thousands) AMOUNT AMOUNT FAIR VALUE Amount Amount Fair Value
------- ----- ----- ------- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Commitments to Extend Credit ........... $88,646 $(604) $(606) $75,930 $(157) $(157)
Standby Letters of Credit .............. 6,309 4 4 2,611 10 10
Financial Guarantees Written ........... 1,541 -- -- 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.
(18) Acquisition Activity
On May 14, 1996, Texas Regional
Bancshares, Inc. completed its secondary public offering of 2.5 million shares
of the Corporation's Class A Voting Common Stock (priced at $22.25 per share).
On May 14, 1996, Texas Regional Bancshares, Inc. completed the Mergers. The
purchase price of the Mergers was financed with a combination of proceeds from
the 2.5 million share common equity offering and cash on the balance sheet of
the Company. The Mergers were accounted for as a purchase.
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 following Unaudited Pro Forma Combined Condensed Statements of Income for
the years ended December 31, 1996 and 1995, assumes the Mergers and the RGC/Roma
Branch Acquisitions occurred January 1, 1995. The proforma results do not
necessarily represent the actual results that would have occurred and should not
be considered indicative of future results of operations.
<PAGE>
In preparing the Unaudited Pro Forma Combined Condensed Statements of Income,
the following adjustments were made:
(A) To record a reduction in interest income on the $47.6 million net purchase
price ($99.5 million less $51.9 million) of the Mergers at an interest
rate of 5.43% for the year ended December 31, 1996.
To record a reduction in interest income on the $51.9 million net purchase
price ($99.5 million less $51.9 million) of the Mergers and $4.25 million
purchase price of the RGC/Roma Branch Acquisitions at an interest rate of
5.92% for the year ended December 31, 1995.
(B) To record depreciation on fair market value increases of depreciable fixed
assets acquired in the Mergers.
(C) To record amortization of the goodwill and core deposit premium recorded
in connection with the Mergers (for 1996 and 1995) and the RGC/Roma Branch
Acquisitions (for 1995 only).
(D) To record the effect of the pro forma adjustments using an effective tax
rate of 35% and 34% for the years ended December 31, 1996 and 1995,
respectively.
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED TEXAS FIRST
DECEMBER 31, 1996 (UNAUDITED) REGIONAL STATE THE
(DOLLARS IN THOUSANDS, BANCSHARES BANK & BORDER PRO FORMA PRO FORMA
EXCEPT PER SHARE DATA) INC. TRUST BANK ADJUSTMENTS BALANCE
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME ........................................ $55,564 $29,754 $ 8,370 $ (947)A $92,741
INTEREST EXPENSE ....................................... 22,422 12,764 4,649 -- 39,835
------- ------- ------- ------- -------
NET INTEREST INCOME .................................... 33,142 16,990 3,721 (947) 52,906
PROVISION FOR LOAN LOSSES .............................. 1,547 1,451 487 -- 3,485
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES .................... 31,595 15,539 3,234 (947) 49,421
------- ------- ------- ------- -------
NONINTEREST INCOME
SERVICE CHARGES ON DEPOSIT ACCOUNTS ............... 4,058 1,074 303 -- 5,435
OTHER SERVICE CHARGES ............................. 893 137 54 -- 1,084
TRUST SERVICE FEES ................................ 1,464 66 -- -- 1,530
OTHER OPERATING INCOME ............................ 1,807 106 37 -- 1,950
------- ------- ------- ------- -------
TOTAL NONINTEREST INCOME ..................... 8,222 1,383 394 -- 9,999
------- ------- ------- ------- -------
NONINTEREST EXPENSE
SALARIES AND EMPLOYEE BENEFITS .................... 11,583 2,773 981 -- 15,337
NET OCCUPANCY EXPENSE ............................. 1,408 697 268 79 B 2,452
EQUIPMENT EXPENSE ................................. 2,716 492 142 -- 3,350
OTHER NONINTEREST EXPENSE ......................... 5,500 4,082 1,455 660 C 11,697
------- ------- ------- ------- -------
TOTAL NONINTEREST EXPENSE .................... 21,207 8,044 2,846 739 32,836
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE ....................... 18,610 8,878 782 (1,686) 26,584
INCOME TAX EXPENSE ..................................... 5,901 2,862 182 (469)D 8,476
------- ------- ------- ------- -------
NET INCOME ............................................. $12,709 $ 6,016 $ 600 $(1,217) $18,108
------- ------- ------- ------- -------
PRIMARY EARNINGS PER COMMON SHARE
NET INCOME $1.61 $2.04
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (IN THOUSANDS) 7,887 8,859
------- -------
FULLY DILUTED EARNINGS PER COMMON SHARE
NET INCOME $1.61 $2.04
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (IN THOUSANDS) 7,893 8,864
======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
For the Year Ended Texas First
December 31, 1995 (Unaudited) Regional RGC/ State The
(Dollars in Thousands, Bancshares Roma Bank & Border Pro Forma Pro Forma
Except Per Share Data) Inc. Branches Trust Bank Adjustments Balance
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income ..................................... $43,505 $ 6,337 $32,472 $ 9,016 $(3,072)A $88,258
Interest Expense .................................... 17,041 2,817 13,103 4,415 -- 37,376
------- ------- ------- ------- ------- -------
Net Interest Income ................................. 26,464 3,520 19,369 4,601 (3,072) 50,882
Provision for Loan Losses ........................... 1,666 19 2,425 485 -- 4,595
------- ------- ------- ------- ------- -------
Net Interest Income After
Provision for Loan Losses ................. 24,798 3,501 16,944 4,116 (3,072) 46,287
------- ------- ------- ------- ------- -------
Noninterest Income
Service Charges on Deposit Accounts ............ 3,312 469 1,146 255 -- 5,182
Other Service Charges .......................... 825 97 151 33 -- 1,106
Trust Service Fees ............................. 1,256 -- 24 -- -- 1,280
Other Operating Income ......................... 926 24 81 28 -- 1,059
------- ------- ------- ------- ------- -------
Total Noninterest Income ....................... 6,319 590 1,402 316 -- 8,627
------- ------- ------- ------- ------- -------
Noninterest Expense
Salaries and Employee Benefits ................. 9,247 1,334 2,824 1,056 -- 14,461
Net Occupancy Expense .......................... 1,010 176 568 234 211 B 2,199
Equipment Expense .............................. 1,959 217 341 148 -- 2,665
Other Noninterest Expense ...................... 5,631 1,281 2,531 729 1,928 C 12,100
------- ------- ------- ------- ------- -------
Total Noninterest Expense ...................... 17,847 3,008 6,264 2,167 2,139 31,425
------- ------- ------- ------- ------- -------
Income Before Income Tax Expense .................... 13,270 1,083 12,082 2,265 (5,211) 23,489
Income Tax Expense .................................. 4,630 367 3,436 381 (1,458)D 7,356
------- ------- ------- ------- ------- -------
Net Income .......................................... $ 8,640 $ 716 $ 8,646 $ 1,884 $(3,753) $16,133
------- ------- ------- ------- ------- -------
Primary Earnings Per Common Share
Net Income $1.39 $1.85
Weighted Average Number of Common
Shares Outstanding (in Thousands) 6,218 8,728
------- --------
Fully Diluted Earnings Per Common Share
Net Income $1.39 $1.85
Weighted Average Number of Common
Shares Outstanding (in Thousands) 6,227 8,737
======= ========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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 April 14, 1997 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 Proxy Statement for the Annual Meeting
of Shareholders to be held on April 14, 1997 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 April 14, 1997 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 April 14, 1997 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, 1996 and 1995
Consolidated Statements of Income-Years Ended
December 31, 1996, 1995, and 1994
Consolidated Statements of Changes in Shareholders' Equity-
Years Ended December 31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows-Years Ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements - December 31,
1996, 1995 and 1994
(2) Financial Statement Schedules are omitted because the required
information is not applicable.
(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).
<PAGE>
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 from Form S-1,
Commission File No. 333-1467).
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).
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).
<PAGE>
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 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees Stock
Ownership Plan (with 401(k) provisions), adopted May 21, 1996.
10.12 Glen E. Roney Amended and Restated Deferred Compensation Plan
dated as of March 11, 1997.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule
<PAGE>
(b) Reports on Form 8-K
No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during
the the three months ended December 31, 1996.
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
Date: March 11, 1997
<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 11, 1997
Morris Atlas
/s/ FRANK N. BOGGUS Director March 11, 1997
Frank N. Boggus
/s/ GEORGE R. CARRUTHERS Executive Vice President
George R. Carruthers & Chief Financial Officer March 11, 1997
/s/ ROBERT G. FARRIS Director March 11, 1997
Robert G. Farris
__________________________ Director
Joe M. Kilgore
/s/ C. KENNETH LANDRUM, M.D. Director March 11, 1997
C. Kenneth Landrum, M.D.
/s/ GLEN E. RONEY Chairman of the Board,
Glen E. Roney President, Chief Executive March 11, 1997
Officer & Director
/s/ NANCY SCHULTZ Senior Vice President &
Nancy Schultz Secretary/Treasurer March 11, 1997
/s/ ANN SEFCIK Controller & Assistant
Ann Sefcik Secretary March 11, 1997
/s/ JULIE G. UHLHORN Director March 11, 1997
Julie G. Uhlhorn
/s/ PAUL G. VEALE Director March 11, 1997
Paul G. Veale
/s/ JACK WHETSEL Director March 11, 1997
Jack Whetsel
<PAGE>
INDEX TO EXHIBITS FILED HEREWITH
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT
- -------- ------------
10.11 Amendment No. 7 to Texas Regional Bancshares, Inc.
Employee Stock Ownership Plan (with 401(k) provisions),
adopted May 21, 1996.
10.12 Glen E. Roney Amended and Restated Deferred
Compensation Plan as of March 11, 1997.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
EXHIBIT 10.11
AMENDMENT NUMBER 7 TO THE
TEXAS REGIONAL BANCSHARES, INC.
EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS)
Texas Regional Bancshares, Inc., a corporation organized and operating
under the laws of the state of Texas, and registered as a bank holding company
under the Bank Holding Company Act of 1956, as amended, hereby adopts the
following amendments to the Texas Regional Bancshares, Inc. Employee Stock
Ownership Plan (with 401(k) provisions) (the "Plan"), effective as of May 21,
1996:
1. The definition of "Service" in Section 2 of the Plan (as originally stated
in the Plan and as the same may have been previously amended) is hereby
deleted and substituted therefor is the following language:
"SERVICE.
Employment with (I) the Company, (ii) an Affiliated Company,
(iii) Mid Valley Bank, as predecessor to the Company's
subsidiary, Texas State Bank (with respect to those Employee
participants that were formerly participants in the Mid Valley
Bank Employees' Pension Plan), (iv) First National Bank of
South Texas (with respect to those Employees who were employed
by First National Bank of South Texas as employees of the Rio
Grande City and Roma branch bank facilities of First National
Bank of South Texas as of the time of acquisition of such
branch bank facilities by Texas State Bank), (v) First State
Bank & Trust Co. (with respect to those Employees who were
employed by First State Bank & Trust Co. as employees of such
bank as of the time of the merger of such bank with and into
Texas State Bank), and (vi) The Border Bank (with respect to
those Employees who were employed by The Border Bank as
employees of such bank as of the time of the merger of such
bank with and into Texas State Bank."
2. Section 13(a) of the Plan (as originally stated in the Plan and as the
same may have been previously amended) is hereby amended in its entirely
to read as follows:
"(a) GENERAL RULE. For purposes for vesting, an Employee's Credited
Service includes the number of Plan Years after January 1, 1984 in
which he is credited with at least 1,000 Hours of Service. Credited
Service shall include such Service with (I) the Company, (ii) any
other Employer, (iii) any Affiliated Company, (iv) Mid Valley Bank
(with respect to those Employee participants that were formerly
participants in the Mid Valley Bank Employees' Pension Plan), (v)
First National Bank of South Texas (with respect to those Employees
who were employed by First National Bank of South Texas as employees
of the Rio Grande City and Roma branch bank facilities of First
National Bank of South Texas as of the time of acquisition of such
branch facilities by Texas State Bank), (vi) First State Bank &
Trust Co.,(with respect to those Employees who were employed by
First State Bank & Trust Co. as employees of such bank as of the
time of merger of First State Bank & Trust Co. with and into Texas
State Bank), and (vii) The Border Bank (with respect to those
Employees who were employed by The Border Bank as employees of such
bank as of the time of merger of The Border Bank with and into Texas
State Bank)."
3. As a result of the amendments to the Plan pursuant to sections 1 and 2 of
this Amendment Number 7, persons who are employees of First State Bank &
Trust Co. or Border Bank as of the date of merger of each such bank with
and into Texas State Bank, will become Participants (as that term is
defined in the Plan) as of the date that such persons become employees of
Texas State Bank upon merger of such banks with and into Texas State Bank,
without regard to the requirement of entry on January 1st or July 1st
<PAGE>
subsequent to his or her initial date of service, provided that they are
otherwise qualified to be Participants as set forth in section 3 of the
Plan. The Plan is hereby further amended to provide that such persons thus
become Participants immediately upon commencement of employment by Texas
State Bank as of the date of merger, without regard to the requirement of
entry on January 1st or July 1st subsequent to his or her initial date of
service, provided that they are otherwise qualified under section 3 of the
Plan. Notwithstanding the foregoing, each such employee shall only be
credited (pursuant to and in accordance with the rules set forth in the
Plan) with the amount
of compensation paid by Texas State Bank following the effective date of
the mergers, and shall not be credited with any part of such employee's
compensation paid by First State Bank & Trust Co. or The Border Bank prior
to the effective date of the mergers for purposes of determining
allocations of Employer Contributions and Forfeitures and for all other
purposes.
4. Defined terms used herein and not otherwise defined herein shall have the
meanings assigned to them in the Plan.
IN WITNESS WHEREOF, the undersigned, a duly authorized officer of Texas
Regional Bancshares, Inc., hereby adopts this Amendment Number 7 to the Texas
Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions)
effective as of May 21, 1996.
Texas Regional Bancshares, Inc.
By: /s/ G. E. RONEY
Glen E. Roney
Chairman of the Board and
Chief Executive Officer
EXHIBIT 10.12
GLEN E. RONEY
DEFERRED COMPENSATION PLAN
effective March 11, 1997
This Deferred Compensation Plan, made and entered into as of March 11,
1997 between Texas State Bank of McAllen, a Texas banking corporation, having
its principal office in McAllen, Texas (said Bank being hereinafter referred to
as the "Company") and Glen E. Roney of McAllen, Texas (hereinafter referred to
as the "Employee"), amends and restates the Glen E. Roney Deferred Compensation
Plan originally executed as of December 31, 1993, as the same was heretofore
amended by the Glen E. Roney Amended and Restated Deferred Compensation Plan
dated January 9, 1996, and restates the Plan, as amended, in its entirety.
WHEREAS, the Employee serves as the Chief Executive Officer of the Company
and in that capacity his services are valued by the Company, and it is the
desire of the Company to have the benefit of the Employee's continued loyalty,
service and counsel and also to assist him in providing for the contingencies of
death and old age dependence; and
WHEREAS, the Company has made a determination to provide the Employee
certain retirement and death benefits as more particularly hereinafter
described:
NOW, THEREFORE, it is hereby agreed by and between the Employee and the
Company that:
1. RETIREMENT BENEFIT. Provided that the Employee complies with the terms
and provisions hereof (including the requirement of continued employment,
subject to the exceptions provided in paragraph 6 hereof) the Company will pay
to Employee $100,000 per year, beginning October 29, 2002, and continuing
regularly on the same calendar day of each year thereafter, until the Employee
has been paid the aggregate sum of $1,500,000. In the event that the Employee
should die after said payments have commenced but before the aggregate amount
herein provided is fully paid, the unpaid balance of payments due will continue
to be paid by the Company to those beneficiaries designated in paragraph 2
below.
2. DEATH BENEFIT. Should the Employee die before October 29, 2002, while
in the employ of the Company (subject to the exceptions provided in paragraph
3(a) hereof), the Company beginning at a date to be determined by the Company
but within 30 days from the date of death, will pay $100,000 per year until the
aggregate sum of $1,500,000 has been paid, to the following beneficiary or
beneficiaries:
Rita K. Roney, provided that if Rita K. Roney does not survive the
Employee for a period of at least thirty (30) days, such sum shall
be payable to the Employee's estate.
The beneficiary or beneficiaries named herein may be changed (without the
consent of any prior beneficiary) at any time by the Employee by written
notification to the Company.
3. CONDITIONS. The obligations of the Company under the terms hereof are
subject to the following conditions and requirements:
a. The obligation of the Company to make payments as herein provided
is conditioned upon, the employment of the Employee by the Company or one or
more of its subsidiaries continuously until the earlier of the date of
Employee's death or October 29, 2002, except that such requirement and
limitation shall not be applicable (and the Employee shall not be required to be
continuously employed by the Company) if, prior to such date, (i) the Employee's
annual cash compensation paid by the Company is substantially reduced from the
cash compensation paid by the Company to the Employee during 1993, or (ii)
Employee's duties on behalf of the Company are modified such that Employee is no
longer performing the function of Chief Executive Officer of the Company, or
(iii) Employee ceases his employment as a result of a disability that makes it
impossible for Employee to carry on his duties as Chief Executive Officer of the
Company, or (iv) Employee is discharged by the Company without cause.
b. The obligation of the Company to make payments as herein provided
is further conditioned upon the requirement that, during the period that
retirement payments are being, made, the Employee shall not engage in business
activities which are in competition with the Company without first obtaining the
written consent of the Company.
<PAGE>
4. LEAVE OF ABSENCE. The Company may, in its sole discretion, permit the
Employee to take a leave of absence for a period not to exceed one year. During
this time, the Employee shall still be considered an employee of the Company for
purposes of this Agreement.
5. ASSIGNABILITY. The Employee's rights to benefit payments under this
Agreement are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors of the Employee or the Employee's beneficiaries.
6. EMPLOYMENT RIGHTS. This Agreement creates no right in the Employee to
continue in the Company's employ for any specified length of time, nor does it
create any obligations on the part of the Company, except as expressly set forth
in this Agreement.
7. TRUST. The Employee acknowledges that he has the status of a general
unsecured creditor of the Company, and the Plan constitutes a mere promise by
the Company to make benefit payments in the future. Any trust created by the
Company and any assets held by the trust to assist the Company in meeting its
obligations under the Plan will conform to the terms of the model trust
described in Revenue Procedure 92-64. It is the intention of the parties that
this deferred compensation plan be unfunded for tax purposes and for purposes of
Title I of ERISA. The Company has executed and partially funded a trust in the
form of that certain Trust Under Glen E. Roney Deferred Compensation Plan
effective March 11, 1997, attached hereto as Annex A, which is intended to
conform to the terms of the model trust described in Revenue Procedure 92-64.
The amount of the funding has been determined by the Company in its sole
discretion. The purpose of the Trust is to receive contributions from the
Company and make disbursements to the Employee pursuant to this Agreement. To
the extent that the Company has funded the Trust, the payments to be made to
Employee pursuant to this Agreement shall be paid out of assets of the Trust,
provided that Employee acknowledges and agrees that notwithstanding the funding
of such Trust, the Employee shall nonetheless have only an unsecured claim
against the general assets of the Company. Employee acknowledges that any assets
held by the Trust will be subject to the claims of the Company's general
creditors under federal and state law in the event the Company becomes
Insolvent, as described or defined in Section 3(a) of the Trust. In the event of
a shortfall in funds available in the Trust, the deficit shall be paid by the
Company. Notwithstanding anything herein to the contrary, upon a Change of
Control (as defined in the Trust), the Company shall fully fund the Trust with
funds adequate to fully discharge any then remaining obligation of the Company
under the terms of this Agreement.
8. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Texas.
9. AMENDMENTS. This Agreement may be amended, but only by an instrument in
writing executed by both the Company and the Employee. As soon as reasonably
practicable, the Company will initiate a private letter ruling request with the
Internal Revenue Service, on terms and provisions reasonably acceptable to the
Company and the Employee to the effect that the benefits payable to the Employee
under the terms of this Plan will not be taxable to the Employee until actual
receipt thereof by the Employee. Notwithstanding the foregoing or anything
herein to the contrary, the Company and the Employee covenant to mutually agree
to amend this Plan, as and to the extent reasonably necessary to obtain such a
favorable private letter ruling. Except as otherwise provided in this paragraph,
Employee and the Company agree that the agreements and obligations herein set
forth shall be binding upon the Company and the Employee and their respective
successors, assigns, beneficiaries, heirs, executors and administrators.
EXECUTED as of the date first written above.
TEXAS STATE BANK OF McALLEN
By: /s/ PAUL S. MOXLEY
Name: Paul S. Moxley
Title:President
/s/ G. E. RONEY
Glen E. Roney
<PAGE>
ANNEX A
TRUST UNDER
GLEN E. RONEY DEFERRED COMPENSATION PLAN
effective March 11, 1997
(a) This Trust Agreement is made this 11th day of March, 1997, by and
between Texas State Bank of McAllen (Company) and Norwest Bank Texas, Waco, N.A.
(Trustee), amends the Trust Under Glen E. Roney Deferred Compensation Plan
originally executed December 31, 1993, to reflect the resignation of Texas State
Bank of McAllen as Trustee, the appointment of Norwest Bank Texas, Waco, N.A. as
Successor Trustee, and the description of the investment powers of the Trustee,
and restates the Trust, as amended, in its entirety.
(b) WHEREAS, Company has adopted the nonqualified deferred compensation
Plan(s) as listed in Appendix A.
(c) WHEREAS, Company has incurred or expects to incur liability under the
terms of such Plan(s) with respect to the individuals participating, in such
Plan(s);
(d) WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plan(s);
(e) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Plan(s) as an unfunded plan maintained for the purpose of providing deferred
compensation for a select group of management or highly compensated employees
for purposes of Title I of the Employee Retirement Income Security Act of 1974;
(f) WHEREAS, it is the intention of Company to make contributions to the
Trust to provide itself with a source of funds to assist it in the meeting of
its liabilities under the Plan(s);
NOW, THEREFORE, the parties do hereby establish the Trust and agree that
the Trust shall be comprised, held and disposed of as follows:
Section 1. ESTABLISHMENT OF TRUST.
(a) Company has deposited with Trustee in trust $290,539.62, which has
become the principal of the Trust to be held, administered and disposed of by
Trustee as provided in this Trust Agreement.
(b) The Trust shall become irrevocable sixty (60) days following the
issuance of a favorable private letter ruling regarding the Trust from the
Internal Revenue Service.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part 1, subchapter J, Chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used exclusively for
the uses and purposes of Plan participants and general creditors as herein set
forth. Plan participants and their beneficiaries shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the Trust. Any rights
created under the Plan(s) and this Trust Agreement shall be mere unsecured
contractual rights of Plan participants and their beneficiaries against Company.
Any assets held by the Trust will be subject to the claims of Company's general
creditors under federal and state law in the event of Insolvency, as defined in
Section 3(a) herein.
(e) Company, in its sole discretion, may at any time, or from time to
time, make additional deposits of cash or other property in trust with Trustee
to augment the principal to be held, administered and disposed of by Trustee as
provided in this Trust
<PAGE>
Agreement. Neither Trustee nor any Plan participant or beneficiary shall have
any right to compel such additional deposits.
(f) Upon a Change of Control, Company shall, as soon as possible, but in
no event longer than sixty (60) days following the Change of Control, as defined
herein, make an irrevocable contribution to the Trust in an amount that is
sufficient to pay each Plan participant or beneficiary the benefits to which
Plan participants or their beneficiaries would be entitled pursuant to the terms
of the Plan(s) as of the date on which the Change of Control occurred.
Section 2. PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES.
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and his
or her beneficiaries), that provides a formula or other instructions acceptable
to Trustee for determining the amounts so payable, the form in which such amount
is to be paid (as provided for or available under the Plan(s)), and the time of
commencement for payment of such amounts. Except as otherwise provided herein,
Trustee shall make payments to the Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall make provision for the
reporting and withholding of any federal, state or local taxes that may be
required to be withheld with respect to the payment of benefits pursuant to the
terms of the Plan(s) and shall pay amounts withheld to the appropriate taxing
authorities or determine that such amounts have been reported, withheld and paid
by Company.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan(s) shall be determined by Company or such party as it
shall designate under the Plan(s), and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan(s).
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan(s). Company
shall notify Trustee of its decision to make payment of benefits directly prior
to the time amounts are payable to participants or their beneficiaries. In
addition, if the principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the terms of the
Plan(s), Company shall make the balance of each such payment as it falls due.
Trustee shall notify Company where principal and earnings are not sufficient.
Section 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO TRUST BENEFICIARY
WHEN COMPANY IS INSOLVENT.
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company is insolvent. Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay
its debts as they become due, or (ii) Company is subject to a pending proceeding
as a debtor under the United States Bankruptcy Code, or (iii) the Company is
determined to be insolvent by the Federal Deposit Insurance Corporation or the
Texas Banking Department.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject to
claims of general creditors of Company under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of
Company shall have the duty to inform Trustee in writing of Company's
Insolvency. If a person claiming to be a creditor of Company alleges in writing
to Trustee that Company has become Insolvent, Trustee shall determine whether
Company is Insolvent and, pending such determination, Trustee shall discontinue
payment of benefits to Plan participants or their beneficiaries.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or
has received notice from Company or a person claiming to be a creditor alleging
that Company is Insolvent, Trustee shall have no duty to inquire whether Company
is Insolvent. Trustee may in all events rely on such evidence concerning
Company's solvency as may be furnished to Trustee and that provides Trustee with
a reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent,
Trustee shall discontinue payments to Plan participants or their beneficiaries
and shall hold the assets of the Trust for the benefit of Company's general
creditors. Nothing in this Trust Agreement shall in any way diminish any rights
of Plan
<PAGE>
participants or their beneficiaries to pursue their rights as general creditors
of Company with respect to benefits due under the Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Company is not Insolvent (or is
no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, less the aggregate amount of any payments made to
Plan participants or their beneficiaries by Company in lieu of the payments
provided for hereunder during any such period of discontinuance.
Section 4. PAYMENTS TO COMPANY.
Except as provided in Section 3 hereof, after the Trust has become
irrevocable, Company shall have no right or power to direct Trustee to return to
Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Plan participants and their beneficiaries pursuant to
the terms of the Plan(s).
Section 5. INVESTMENT AUTHORITY.
(a) Except as expressly limited by this Trust document, the Trustee shall
have the investment powers stated in the Texas Trust Code as currently in effect
and as the powers may be broadened by subsequent amendment. In no event may
Trustee invest in securities (including stock or rights to acquire stock) or
obligations issued by Company, other than a de minimis amount held in common
investment vehicles in which Trustee invests. All rights associated with assets
of the Trust shall be exercised by Trustee or the person designated by Trustee,
and shall in no event be exercisable by or rest with Plan participants.
Company shall have the right at anytime, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any assets held
by the Trust. This right is exercisable by Company in a nonfiduciary capacity
without the approval or consent of any person in a fiduciary capacity.
Section 6. DISPOSITION OF INCOME.
(a) During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
Section 7. ACCOUNTING BY TRUSTEE.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each calendar
year and within sixty (60) days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation, setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be.
Section 8. RESPONSIBILITY OF TRUSTEE.
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like capacity
and familiar with such matters would use in the conduct of an enterprise of a
like character and with like aims, provided, however, that Trustee shall incur
no liability to any person for any action taken pursuant to a direction, request
or approval given by Company which is contemplated by, and in conformity with,
the terms of the Plan(s) or this Trust and is given in writing by Company. In
the event of a dispute between
<PAGE>
Company and a party, Trustee may apply to a court of competent jurisdiction to
resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, Company agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys' fees and
expenses) relating thereto and to be primarily liable for such payments. If
Company does not pay such costs, expenses and liabilities in a reasonably timely
manner, Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations hereunder.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing any of
its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the Trust,
Trustee shall have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(f) However, notwithstanding the provisions of Section 8(e) above, Trustee
may loan to Company the proceeds of any borrowing against an insurance policy
held as an asset of the Trust.
(g) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could give
this Trust the objective of carrying on a business and dividing the gains
therefrom, within the meaning of section 301.7701-2 of the Procedure and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
Section 9. COMPENSATION AND EXPENSES OF TRUSTEE.
Company shall pay all administrative and Trustee's fees and expenses. If
not so paid, the fees and expenses shall be paid from the Trust.
Section 10. RESIGNATION AND REMOVAL OF TRUSTEE.
(a) Trustee may resign at any time by written notice to Company, which
shall be effective sixty (60) days after receipt of such notice unless Company
and Trustee agree otherwise.
(b) Trustee may be removed by Company on sixty (60) days notice or upon
shorter notice accepted by Trustee.
(c) Upon a Change of Control, as defined herein, Trustee may not be
removed by Company for fifteen (15) year(s).
(d) [Intentionally omitted.]
(e) If Trustee resigns or is removed within fifteen (15) year(s) of a
Change of Control, as defined herein, Trustee shall select a successor Trustee
in accordance with the provisions of Section 11(b) hereof prior to the effective
date of Trustee's resignation or removal.
(f) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor Trustee.
The transfer shall be completed within thirty (30) days after receipt of notice
of resignation, removal or transfer, unless Company extends the time limit.
(g) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation or
removal under paragraph(s) (a) or (b) of this section. If no such appointment
has been made, Trustee may apply to a court of competent jurisdiction for
appointment of a successor or for instructions. All expenses of Trustee in
connection with the proceeding shall be allowed as administrative expenses of
the Trust.
Section 11. APPOINTMENT OF SUCCESSOR.
<PAGE>
(a) If Trustee resigns (or is removed) in accordance with Section 10(a) or
(b) hereof, Company may appoint any third party, such as a bank trust department
or other party that may be granted corporate trustee powers under state law, as
a successor to replace Trustee upon resignation or removal. The appointment
shall be effective when accepted in writing by the new Trustee, who shall have
all of the rights and powers of the former Trustee, including ownership rights
in the Trust assets. The former Trustee shall execute any instrument necessary
or reasonably requested by Company or the successor Trustee to evidence the
transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of Section
10(e) hereof and selects a successor Trustee, Trustee may appoint any third
party such as a bank trust department or any other party that may be granted
corporate trustee powers under state law. The appointment of a successor Trustee
shall be effective when accepted in writing by the new Trustee. The new Trustee
shall have all the rights and powers of the former Trustee, including ownership
rights in Trust assets. The former Trustee shall execute any instrument
necessary or reasonably requested by the successor Trustee to evidence the
transfer.
(c) The successor Trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
Section 12. AMENDMENT OR TERMINATION.
(a) This Trust Agreement may be amended by a written instrument executed
by Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan(s) or shall make the Trust revocable after
it has become irrevocable in accordance with Section 1(b) hereof.
(b) The Trust shall not terminate until the date on which Plan
participants and their beneficiaries are no longer entitled to benefits pursuant
to the terms of the Plan(s). Upon termination of the Trust any assets remaining
in the Trust shall be returned to Company.
(c) Upon written approval of participants or beneficiaries entitled to
payment of benefits pursuant to the terms of the Plan(s), Company may terminate
this Trust prior to the time all benefit payments under the Plan(s) have been
made. All assets in the Trust at termination shall be returned to Company.
(d) Section(s) 1 through 11 of this Trust Agreement may not be amended by
Company for fifteen (15) year(s) following a Change of Control, as defined
herein.
Section 13. MISCELLANEOUS.
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under
this Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(c) This Trust Agreement shall be governed by and constructed in
accordance with the laws of the state of Texas.
(d) For purposes of this Trust, Change of Control shall mean: the purchase
or other acquisition by any person, entity or group of persons, within the
meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934
("Act"), or any comparable successor provisions, of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of
either the outstanding shares of common stock or the combined voting power of
Company's then outstanding voting securities entitled to vote generally, or the
approval by the stockholders of Company of a reorganization, merger, or
consolidation, in each case, with respect to which persons who were stockholders
of Company immediately prior to such reorganization, merger or consolidation do
not, immediately thereafter, own more than 50 percent of the combined voting
power entitled to vote generally in the election of directors of the
reorganized, merged or consolidated Company's then outstanding securities, or a
<PAGE>
liquidation or dissolution of Company or of the sale of all or substantially all
of Company's assets.
Section 14. EFFECTIVE DATE.
The effective date of this Trust Agreement shall be March 11, 1997.
SUCCESSOR TRUSTEE:
Norwest Bank Texas, Waco, N.A.
By: /s/ FRED M. WORLEY, JR.
Name: Fred M. Worley, Jr.
Title: Vice President and Trust Officer
COMPANY:
Texas State Bank of McAllen
By: /s/ PAUL S. MOXLEY
Name: Paul S. Moxley
Title: President
EXHIBIT 21
TEXAS REGIONAL BANCSHARES, INC.
List of Subsidiaries
March 10, 1997
JURISDICTION OF PERCENTAGE
INCORPORATION/ OF VOTING
NAME ORGANIZATION SECURITIES OWNED
- ----- --------------- ----------------
Texas State Bank Texas 100%
Domicile: McAllen, TX
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENTS OF INCOME, INCLUDED HEREIN
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000787648
<NAME> TEXAS REGIONAL BANCSHARES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 56,100
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,515
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 192,301
<INVESTMENTS-CARRYING> 125,835
<INVESTMENTS-MARKET> 126,896
<LOANS> 757,656
<ALLOWANCE> (10,031)
<TOTAL-ASSETS> 1,230,577
<DEPOSITS> 1,091,735
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,062
<LONG-TERM> 0
0
0
<COMMON> 8,708
<OTHER-SE> 119,440
<TOTAL-LIABILITIES-AND-EQUITY> 1,230,577
<INTEREST-LOAN> 60,844
<INTEREST-INVEST> 15,828
<INTEREST-OTHER> 1,554
<INTEREST-TOTAL> 78,226
<INTEREST-DEPOSIT> 33,228
<INTEREST-EXPENSE> 33,248
<INTEREST-INCOME-NET> 44,978
<LOAN-LOSSES> 2,120
<SECURITIES-GAINS> 401
<EXPENSE-OTHER> 27,962
<INCOME-PRETAX> 24,291
<INCOME-PRE-EXTRAORDINARY> 24,291
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,379
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 2.08
<YIELD-ACTUAL> 5.14
<LOANS-NON> 6,445
<LOANS-PAST> 4,089
<LOANS-TROUBLED> 1
<LOANS-PROBLEM> 0
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<CHARGE-OFFS> 1,782
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<ALLOWANCE-CLOSE> 10,031
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<ALLOWANCE-UNALLOCATED> 1,443
</TABLE>
