AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1998.
REGISTRATION NO. 333-41959
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TEXAS REGIONAL BANCSHARES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C> <C>
TEXAS 6022 74-2294235
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
TEXAS REGIONAL BANCSHARES, INC.
KERRIA PLAZA, SUITE 301
3700 NORTH 10TH STREET
MCALLEN, TEXAS 78501
(956) 631-5400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
WILLIAM A. ROGERS, JR., ESQ.
MCGINNIS, LOCHRIDGE & KILGORE, L.L.P.
1300 CAPITOL CENTER
919 CONGRESS AVENUE
AUSTIN, TEXAS 78701
(512) 495-6033
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Approximate date of commencement of proposed sale of the securities to the
public: Upon consummation of the merger described in this registration
statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]________________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]________________
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS AMOUNT PROPOSED PROPOSED AGGREGATE AMOUNT OF
OF SECURITIES TO BE MAXIMUM OFFERING MAXIMUM REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER UNIT(1) OFFERING PRICE(1) FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Voting Common
Stock, par value $1.00/Share.......... 985,000 $29.125 $28,688,125 $8,693.37
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated in accordance with Rule 457. Price per unit represents the average
of the high and low prices reported on the NASDAQ consolidated trading
system on December 5, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
TEXAS REGIONAL BANCSHARES, INC.
CROSS-REFERENCE SHEET
ITEM
NO. CAPTION LOCATION IN PROSPECTUS
- ------------------------------------------------- ---------------------------
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.. Cover Page;
Cross-reference Sheet
2. Inside Front and Outside Back Cover
Pages of Prospectus..................... Table of Contents;
Cover Page;
Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information........... Summary; Risk Factors;
Selected Financial Data
4. Terms of the Transaction................ Information About the
Transaction
5. Pro Forma Financial Information......... Not Applicable
6. Material Contacts with the Company Being
Acquired................................ Not Applicable
7. Additional Information Required For
Reoffering by Persons and Parties Deemed
To Be Underwriters...................... Not Applicable
8. Interests of Named Experts and
Counsel................................. Information About Texas
Regional -- Interests of
Certain Named Persons;
Experts; Legal Opinions
9. Disclosure of Commission Position On
Indemnification for Securities Act
Liabilities............................. Not Applicable
10. Information with Respect to S-3
Registrants............................. Available Information;
Incorporation of Certain
Documents by Reference,
Information About Texas
Regional
11. Incorporation of Certain Information by
Reference............................... Available Information;
Incorporation of Certain
Documents by Reference;
Information About Texas
Regional
12. Information with Respect to S-2 or S-3
Registrants............................. Not Applicable
13. Incorporation of Certain Information by
Reference............................... Not Applicable
14. Information with Respect to Registrant
Other Than S-3 or S-2 Registrants....... Not Applicable
15. Information with Respect to S-3
Companies............................... Not Applicable
16. Information with Respect to S-2 or S-3
Companies............................... Not Applicable
17. Information with Respect to Companies
Other than S-3 or S-2 Companies......... Information About
Brownsville Bancshares;
Annex D
18. Information if Proxies, Consents or
Authorizations are to be Solicited...... Summary -- The Meeting;
Summary -- Voting
19. Information if Proxies, Consents or
Authorizations are not to be Solicited
or in an Exchange Offer................. Not Applicable
<PAGE>
PROSPECTUS/PROXY STATEMENT
SPECIAL MEETING OF THE SHAREHOLDERS OF
BROWNSVILLE BANCSHARES, INC.
RELATED TO THE PROPOSED MERGER OF
BROWNSVILLE BANCSHARES, INC.
WITH AND INTO TRD, INC., A WHOLLY-OWNED SUBSIDIARY OF
TEXAS REGIONAL BANCSHARES, INC.
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Brownsville Bancshares,
Inc., Brownsville, Texas ("Brownsville Bancshares"), a Texas corporation, for
use at a special meeting of the shareholders of Brownsville Bancshares to be
held at 12:00 noon, local time, on February 11, 1998, at the Four Points
Sheraton Hotel, 3777 North Expressway, Brownsville, Texas.
The special meeting has been called to permit the shareholders of
Brownsville Bancshares to consider and take action on a proposal to merge
Brownsville Bancshares with and into Texas Regional Delaware, Inc. (herein
called "TRD"), a Delaware corporation wholly owned by Texas Regional Bancshares,
Inc. (herein called "Texas Regional"). The merger of Brownsville Bancshares and
its subsidiary BNB Bancshares, Inc. ("BNB Bancshares") with and into TRD (herein
sometimes called the "Merger") is to be effected in accordance with the
Agreement and Plan of Reorganization dated October 20, 1997 (herein referred to
as the "Agreement"), by and between Brownsville Bancshares and Texas Regional.
The Agreement is attached to this Prospectus/Proxy Statement as Annex A. As part
of the proposal, Brownsville Bancshares' shareholders will also consider and
take action on the proposed merger of BNB Bancshares' wholly-owned subsidiary,
Brownsville National Bank, with and into TRD's wholly-owned subsidiary, Texas
State Bank. Texas Regional, as the sole shareholder of TRD, has already approved
the Agreement and the merger transaction contemplated thereby.
Texas Regional has filed this Prospectus/Proxy Statement with the
Securities and Exchange Commission (the "Commission") pursuant to the Securities
Act of 1933, as amended, with respect to the shares of Texas Regional Class A
Voting Common stock (the "Texas Regional Common Stock") to be issued in
connection with the Merger. As more fully described in this Prospectus/Proxy
Statement, the Agreement provides for the holders of Brownsville Bancshares
capital stock, par value $4.00 per share, at the effective time of the merger,
to receive aggregate merger consideration of 947,164 shares of Texas Regional
Common Stock, less any shares attributable to cash paid in lieu of fractional
shares and less any shares attributable to shareholders exercising dissenters'
rights of appraisal. Based upon an aggregate of 308,917 shares of Brownsville
Bancshares capital stock outstanding at the effective time of the Merger, each
shareholder of Brownsville Bancshares (other than any shareholder exercising
dissenters' rights) will receive 3.06608 shares of Texas Regional Common Stock
for each share of Brownsville Bancshares held. In addition, employees of
Brownsville Bancshares holding options to acquire shares of Brownsville
Bancshares (the "Brownsville Bancshares Options") will receive 1.77634 shares of
Texas Regional Common
(TEXT CONTINUED NEXT PAGE)
------------------------
THE SECURITIES OF TEXAS REGIONAL BANCSHARES, INC. OFFERED IN CONNECTION WITH
THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BROWNSVILLE BANCSHARES SHAREHOLDERS ARE URGED TO REVIEW AND CAREFULLY
CONSIDER THE RISKS DESCRIBED UNDER "RISK FACTORS" IN THIS
PROSPECTUS/PROXY STATEMENT.
The date of this Prospectus/Proxy Statement is January 12, 1998. This
Prospectus/Proxy Statement is first being mailed or delivered to Brownsville
Bancshares shareholders on or about January 12, 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Stock for each share of Brownsville Bancshares subject to such option holder's
option, in consideration of and in exchange for the cancellation of such
holder's Brownsville Bancshares Options. The aggregate number of shares of Texas
Regional Common Stock to be issued to the holders of Brownsville Bancshares
Options is 37,836, less any shares attributable to cash paid in lieu of
fractional shares. See "Summary -- The Agreement," "Information About the
Transaction -- Terms of The Agreement," and "Information About the Transaction
- -- Joinder by Certain Shareholders and Option Holders."
Consummation of the Merger is subject to the receipt of required
governmental approvals, the approval of the holders of two-thirds of the
outstanding Brownsville Bancshares capital stock and certain other conditions,
all as more particularly described in the Agreement and summarized in this
Prospectus/Proxy Statement. See "Summary -- The Agreement," "Information About
the Transaction -- Terms of the Agreement," "Information About the Transaction
- -- Other Terms and Conditions," and Annex A. This Prospectus/Proxy Statement
also constitutes the prospectus of Texas Regional with respect to the shares of
Texas Regional Common Stock to be issued to the holders of shares of Brownsville
Bancshares capital stock in the Merger and the shares of Texas Regional Common
Stock to be issued to the holders of Brownsville Bancshares Options in
consideration of and exchange for the cancellation of the Brownsville Bancshares
Options.
Texas Regional is a bank holding company based in McAllen, Texas, whose
principal operating subsidiary, Texas State Bank, operates sixteen banking
locations in the Rio Grande Valley of Texas, including its newest location in
Edinburg, Texas, expected to open for business in December 1997. The principal
office of Texas Regional is located at Kerria Plaza, Suite 301, 3700 North 10th
Street, McAllen, Texas 78501, and the company's telephone number is (956)
631-5400. Brownsville Bancshares is a bank holding company based in Brownsville,
Texas, whose principal operating subsidiary, Brownsville National Bank, operates
two banking locations in Brownsville, Texas. The principal office of Brownsville
Bancshares is located at 629 E. Elizabeth, Brownsville, Texas 78520, and the
company's telephone number is (956) 546-4503.
Texas Regional Common Stock is publicly traded in the over-the-counter
market and is quoted on the NASDAQ National Market System. On January 7, 1998,
the last reported sale price per share of Texas Regional Common Stock was
$31.50. See "Market Prices." No public trading market exists for the Brownsville
Bancshares capital stock.
All information contained herein concerning Texas Regional, TRD and Texas
State Bank has been furnished by Texas Regional, and all information contained
herein concerning Brownsville Bancshares, BNB Bancshares and Brownsville
National Bank has been furnished by Brownsville Bancshares.
2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Available Information................... 3
Incorporation of Certain Documents by
Reference............................. 4
Summary................................. 5
The Meeting........................... 5
Voting................................ 6
Dissenters' Rights.................... 6
The Agreement......................... 7
Reasons for the Merger................ 8
Conditions............................ 9
Texas Regional........................ 9
Brownsville Bancshares................ 11
Federal Income Tax Consequences....... 11
Accounting Treatment.................. 12
Risk Factors............................ 13
Selected Financial Data................. 15
Market Prices........................... 17
Information About the Transaction....... 17
Terms of the Agreement................ 18
Stock Certificates and Fractional
Shares.............................. 19
Reasons for the Merger................ 20
Opinion of Financial Advisor.......... 21
Operations Following the Merger....... 23
Other Terms and Conditions............ 23
Joinder by Certain Shareholders and
Option Holders...................... 24
Business Pending Consummation of the
Merger.............................. 25
PAGE
----
Amendment or Termination of the
Agreement........................... 25
Dissenters' Rights.................... 25
Federal Income Tax Consequences....... 27
Governmental Approvals................ 28
Accounting Treatment.................. 28
Description of Texas Regional's
Securities............................ 29
Comparative Rights of Shareholders...... 30
Resales of Texas Regional Common
Stock................................. 31
Information About Texas Regional........ 31
Incorporation of Certain Information
by Reference........................ 31
Interests of Certain Named Persons.... 31
Option Plans.......................... 32
Pending Transactions.................. 32
Information About Brownsville
Bancshares............................ 33
Description and Development of
Business............................ 33
Market Prices of and Dividends Paid On
Brownsville Bancshares Capital
Stock............................... 34
Brownsville Bancshares Stock
Ownership........................... 35
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 36
Experts................................. 50
Legal Opinion........................... 50
Indemnification......................... 50
Other Matters........................... 50
AVAILABLE INFORMATION
Texas Regional has filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement") under the Securities Act of 1933, as
amended, for the registration of the Texas Regional Common Stock proposed to be
issued and exchanged in the Merger transaction described in this
Prospectus/Proxy Statement, including the shares to be delivered to Brownsville
Bancshares shareholders and shares to be delivered in exchange for the
cancellation of the Brownsville Bancshares Options. This Prospectus/Proxy
Statement was filed as part of the Registration Statement.
This Prospectus/Proxy Statement does not contain all of the information set
forth in the Registration Statement, as certain parts are permitted to be
omitted by the rules and regulations of the Commission. For further information
pertaining to Texas Regional, the Texas Regional Common Stock, and related
matters, reference is made to the Registration Statement, including the exhibits
filed as a part thereof, which may be inspected at, and copies of which may be
obtained by mail from, the Public Reference Branch of the Commission referred to
below.
Texas Regional is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and, accordingly, files reports, proxy
statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the Commission's
public reference rooms located at 450 Fifth Street, N.W., Washington, D.C.
20549, and the public reference facilities in the New York Regional Office, 7
World Trade Center, Suite 1300, New York, New York 10048, and the Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such materials can be obtained at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Branch, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may be accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE
WITHOUT CHARGE UPON REQUEST. ANY REQUEST SHOULD BE DIRECTED TO ANN M. SEFCIK,
CONTROLLER, TEXAS REGIONAL BANCSHARES, INC., KERRIA PLAZA, SUITE 301, 3700 NORTH
10th STREET, McALLEN, TEXAS 78501 (TELEPHONE (956) 632-7609). IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY FEBRUARY 4,
1998.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by Texas Regional with the
Commission are incorporated herein by reference:
(1) Texas Regional's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission File No. 0-14517);
(2) Texas Regional's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997, June 30, 1997, and September 30, 1997 (Commission
File No. 0-14517);
(3) Texas Regional's Proxy Statement dated March 10, 1997, relating to
its annual meeting of shareholders held on April 14, 1997 (Commission File
No. 0-14517); and
(4) The description of the Texas Regional Common Stock contained in
Form 10, as amended by Form 10-K for the year ended December 31, 1996 and
as amended by Form 10-Q for the quarter ended September 30, 1997
(Commission File No. 0-14517).
All documents filed by Texas Regional pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date hereof and prior to the date of the meeting of the shareholders of
Brownsville Bancshares herein described, are incorporated herein by reference,
and shall be deemed a part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed incorporated
herein by reference, or contained in this Prospectus/Proxy Statement, shall be
deemed to be modified or superseded for purposes of this Prospectus/Proxy
Statement to the extent that a statement contained herein or in any subsequently
filed document which also is deemed to be incorporated herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed to constitute a part of this Prospectus/Proxy Statement, except as so
modified or superseded.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus/Proxy Statement,
and, if given or made, such information or representations must not be relied
upon as having been authorized by Texas Regional, TRD, Texas State Bank,
Brownsville Bancshares, BNB Bancshares, Brownsville National Bank, or their
respective affiliates. This Prospectus/Proxy Statement does not constitute an
offer to sell or exchange, or solicitation of an offer to sell or exchange, any
securities other than the Texas Regional Common Stock offered hereby, nor does
it constitute an offer to exchange or sell, or solicitation of an offer to
exchange or sell, such securities in any state or other jurisdiction to any
person to whom such an offer or solicitation would be unlawful.
Neither the delivery of this Prospectus/Proxy Statement nor any
distribution of securities made hereunder shall under any circumstances create
any implication that there has been no change in the affairs of Texas Regional,
TRD, Texas State Bank, Brownsville Bancshares, BNB Bancshares, Brownsville
National Bank, or their respective affiliates since the date of this
Prospectus/Proxy Statement.
4
<PAGE>
SUMMARY
THE MEETING
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies by the Board of Directors of Brownsville Bancshares, for
use at a special meeting of the shareholders of Brownsville Bancshares to be
held at the time and place set forth in the foregoing notice and at any
adjournments thereof. This Prospectus/Proxy Statement is also a prospectus for
the issuance and distribution of shares of Texas Regional Common Stock to be
issued in connection with the Merger of Brownsville Bancshares and its
subsidiary BNB Bancshares with and into TRD, a subsidiary of Texas Regional, and
for the issuance and distribution of shares of Texas Regional Common Stock in
connection with the cancellation of the outstanding options to acquire
Brownsville Bancshares capital stock.
The following proposals will be considered and voted upon at the special
meeting of Brownsville Bancshares shareholders:
(1) To approve, ratify, confirm and adopt the Agreement and Plan of
Reorganization dated as of October 20, 1997, by and between Texas Regional
and Brownsville Bancshares (the "Agreement"), pursuant to which Brownsville
Bancshares and its subsidiary BNB Bancshares will be merged with and into
TRD, and to approve the merger of BNB Bancshares' wholly-owned subsidiary,
Brownsville National Bank, with and into Texas Regional's wholly-owned
subsidiary, Texas State Bank; and
(2) To consider and transact such other business as may properly come
before the meeting and any adjournment thereof.
The Board of Directors of Brownsville Bancshares has fixed January 12,
1998, as the record date for the determination of shareholders entitled to
notice of and to vote at the meeting and any adjournment thereof. As of such
date, Brownsville Bancshares had 308,917 shares of capital stock issued and
outstanding. There is no other class of Brownsville Bancshares stock authorized,
issued or outstanding. As of the date hereof, the Brownsville Bancshares capital
stock was held of record by approximately 314 persons. Each share entitles the
holder of record on the record date to one vote as to the merger and one vote as
to any other proposal to be voted on at the special meeting of Brownsville
Bancshares shareholders. The presence, in person or by proxy, of the holders of
a majority of the shares of Brownsville Bancshares is necessary to constitute a
quorum at the meeting, and the affirmative vote of at least two-thirds of the
total outstanding shares of Brownsville Bancshares capital stock is required for
approval of the merger.
The Brownsville Bancshares Board of Directors has unanimously approved the
merger and all of the members of the Board of Directors and certain parties
related to members of the Board of Directors have agreed to vote their shares of
Brownsville Bancshares in favor of the Merger at the special meeting of the
shareholders. The only shareholder of Brownsville Bancshares holding in excess
of 5% of the outstanding capital stock of Brownsville Bancshares who is not also
a member of the Board of Directors, and certain parties related to that
shareholder, have also agreed to vote their shares of Brownsville Bancshares in
favor of the Merger at the special meeting of the shareholders. See "Information
about Brownsville Bancshares -- Brownsville Bancshares Stock Ownership." Because
shareholders holding an aggregate of 210,493 shares, amounting to 68% of the
total outstanding Brownsville Bancshares shares, have agreed in the Agreement to
vote their shares in favor of the merger transaction, the transaction is
expected to be approved at the special meeting of the shareholders.
All of the holders of the Brownsville Bancshares Options have also joined
into the Agreement for the purpose of agreeing to accept Texas Regional Common
Stock, as herein described, in exchange for and in consideration of the
cancellation of their options. See "Information About the Transaction -- Terms
of the Agreement" and "Information About the Transaction -- Joinder by Certain
Shareholders and Option Holders."
5
<PAGE>
VOTING
Proxies in the form enclosed are solicited by the Brownsville Bancshares
Board of Directors. Any such proxy, if received in time for voting and not
revoked, will be voted at the meeting in accordance with the shareholder's
instructions. If no instructions are given on the proxy, the proxy will be voted
in favor of the Merger transaction. At present, Brownsville Bancshares' Board of
Directors knows of no other matter to be presented at the meeting, but if other
matters are properly presented, the persons named in the proxy will vote or
refrain from voting in accordance with the recommendation of the Brownsville
Bancshares Board of Directors pursuant to the discretionary authority conferred
by the proxy.
Proxies will be solicited initially by mail, and may also be solicited
personally, by telephone, facsimile transmission or other means by the
directors, officers and employees of Brownsville Bancshares, who shall not be
specially compensated therefor. However, Brownsville Bancshares will reimburse
such directors, officers and employees for any reasonable out-of-pocket expenses
in connection with the solicitation. Arrangements will be made with custodians,
nominees and fiduciaries for the forwarding of solicitation materials to the
beneficial owners of Brownsville Bancshares capital stock held of record by such
persons. Expenses incurred in connection with the Merger, including those
attributable to the solicitation of proxies, will be paid by the party to the
Merger incurring the expense.
Any Brownsville Bancshares shareholder has the right to revoke his, her or
its proxy at any time before it is voted by giving written notice of such
revocation to the Secretary of Brownsville Bancshares at the address of
Brownsville Bancshares set forth herein.
The close of business on January 12, 1998, has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote at
the special meeting of the shareholders of Brownsville Bancshares. At that date,
there were 308,917 shares of capital stock, par value $4.00 per share, of
Brownsville Bancshares issued and outstanding, each of which is entitled to one
vote at the special meeting. At that date there were approximately 314 holders
of record of Brownsville Bancshares capital stock.
Under applicable provisions of Texas law, not less than two-thirds of the
issued and outstanding shares of capital stock of Brownsville Bancshares present
in person or by proxy at a meeting of the shareholders is required for approval
of the Agreement and the transactions contemplated thereby, and such approval is
also solicited by this Prospectus/Proxy Statement and the accompanying proxy.
Execution of the proxy card by a Brownsville Bancshares shareholder, if voted
for the merger and voted in accordance with those instructions, and will
constitute the approval required by Texas law. Shareholders dissenting from the
merger of Brownsville Bancshares with and into TRD may be entitled to exercise
dissenters' rights of appraisal. See "Information About the Transaction --
Dissenters' Rights."
As indicated above, shareholders holding a total of 68% of the outstanding
shares of Brownsville Bancshares capital stock have agreed to vote their
Brownsville Bancshares shares in favor of the Agreement at the Brownsville
Bancshares shareholders meeting. See "Summary -- The Agreement" and "Information
About the Transaction -- Joinder by Certain Shareholders and Option Holders."
Texas Regional is the sole shareholder of TRD. Texas Regional, as the sole
shareholder of TRD, has already approved the transaction, subject to the
approval of applicable regulatory authorities. Brownsville Bancshares is the
sole shareholder of BNB Bancshares. Brownsville Bancshares, as the sole
shareholder of BNB Bancshares has already approved the transaction, subject to
approval of the Brownsville Bancshares shareholders and applicable regulatory
authorities.
DISSENTERS' RIGHTS
Holders of Brownsville Bancshares capital stock who timely object to the
Merger, and who otherwise comply with the provisions of the Texas Business
Corporation Act (the "TBCA") will be entitled to exercise dissenters' rights.
Each step required to exercise dissenters' rights must be taken in the precise
order prescribed by the statutes set forth in Annex B for a shareholder to
perfect his, her or its dissenters'
6
<PAGE>
rights of appraisal. Shareholders of Brownsville Bancshares who exercise their
dissenters' rights of appraisal will only be entitled to receive cash for their
shares of Brownsville Bancshares stock; they will not be entitled to receive
shares of Texas Regional stock. See "Information About the Transaction
- --Dissenters' Rights" and Annex B attached hereto.
If shareholders of Brownsville Bancshares holding an aggregate of greater
than 5% of the issued and outstanding Brownsville Bancshares shares exercise
dissenters' rights, Texas Regional is entitled to refuse to consummate the
Merger and terminate the transaction. See "Information About the Transaction --
Other Terms and Conditions."
THE AGREEMENT
The Agreement, which has been approved by the respective boards of
directors of Brownsville Bancshares and Texas Regional, provides that
Brownsville Bancshares and its subsidiary, BNB Bancshares, will both be merged
with and into TRD. The summary of information relating to the Agreement
contained in this Prospectus/Proxy Statement is qualified in its entirety by
reference to the Agreement attached to this Prospectus/Proxy Statement as Annex
A, and the Agreement is hereby incorporated into this Prospectus/Proxy Statement
by this reference. Shareholders of Brownsville Bancshares are urged to read
carefully the entire Prospectus/Proxy Statement and all attachments.
The Agreement provides that each outstanding share of capital stock of
Brownsville Bancshares will be converted into and exchanged for the right to
receive 3.06608 shares of Texas Regional Class A Voting Common stock (the "Texas
Regional Common Stock"). See "Information About the Transaction -- The
Agreement" and "Information About the Transaction -- Federal Income Tax
Consequences." Upon consummation of the merger, Brownsville Bancshares will be
merged with and into TRD, and the current shareholders of Brownsville Bancshares
will cease to be shareholders of Brownsville Bancshares and will be entitled to
receive Texas Regional Common Stock in consideration of their shares of
Brownsville Bancshares capital stock.
In addition, the transaction described in the Agreement is conditioned upon
the holders of the Brownsville Bancshares Options accepting Texas Regional
Common Stock in exchange for, and in consideration of, the cancellation of their
options to acquire Brownsville Bancshares capital stock. The Agreement provides
that each option holder will receive 1.77634 shares of Texas Regional Common
Stock for each share of Brownsville Bancshares stock subject to such option
holder's option. See "Information about the Transaction -- The Agreement." The
holders of options to acquire Brownsville Bancshares capital stock, all of whom
are presently employees of Brownsville Bancshares and all such persons are
expected to become employees of Texas Regional upon the closing of the merger
transactions, have agreed to accept Texas Regional Common Stock in exchange for
and in cancellation of their Brownsville Bancshares Options. The actual
cancellation of such options, which is a condition to each party's obligations
under the Agreement, is to occur contemporaneously with the closing of the
merger transaction.
Texas Regional anticipates that, simultaneously with the merger of
Brownsville Bancshares with and into TRD, Brownsville Bancshares' wholly owned
subsidiary, BNB Bancshares, a Delaware corporation, will also be merged with and
into TRD. In addition, Texas Regional anticipates that, immediately following
the merger of Brownsville Bancshares and BNB Bancshares, with and into TRD, BNB
Bancshares' wholly owned subsidiary, Brownsville National Bank, will be merged
with and into TRD's wholly owned subsidiary, Texas State Bank. As part of the
resolution to approve the merger of Brownsville Bancshares and BNB Bancshares
with and into TRD, the Brownsville Bancshares shareholders will also be asked to
consider the approval of the merger of Brownsville National Bank with and into
TRD's subsidiary, Texas State Bank. As a result of the mergers, Texas Regional
will wholly own TRD, the resulting entity in the merger with Brownsville
Bancshares and BNB Bancshares, and TRD will in turn wholly own Texas State Bank,
the resulting entity in the merger with Brownsville National Bank.
7
<PAGE>
All of the directors of Brownsville Bancshares and all of the directors of
Texas Regional have voted in favor of the Agreement. Members of the Brownsville
Bancshares Board of Directors and executive officers of Brownsville Bancshares,
and their respective affiliates own an aggregate of 36.4% of the outstanding
shares of Brownsville Bancshares capital stock. No present director or member of
management of Brownsville Bancshares has notified Texas Regional of his or her
intention to oppose any action to be taken at the special meeting of the
shareholders of Brownsville Bancshares. As of the date of this Prospectus/Proxy
Statement, a total of 308,917 shares of capital stock of Brownsville Bancshares
were issued and outstanding. The Agreement and the Merger Agreement must be
approved and adopted by the holders of at least two-thirds of the outstanding
capital stock of Brownsville Bancshares. Directors and certain shareholders of
Brownsville Bancshares, holding in the aggregate 210,493 shares of Brownsville
Bancshares (amounting to an aggregate of 68.1% of the issued and outstanding
capital stock of Brownsville Bancshares), have agreed, pursuant to the
Agreement, to vote their shares of Brownsville Bancshares capital stock in favor
of the Merger at the special meeting of the shareholders of Brownsville
Bancshares.
REASONS FOR THE MERGER
The Agreement is the result of arm's-length negotiations between
representatives of Texas Regional and Brownsville Bancshares. Upon receipt of a
proposal from Texas Regional, the Brownsville Bancshares Board of Directors
carefully evaluated the proposal and concluded that the proposed Merger with
Texas Regional was in the best interests of Brownsville Bancshares and its
shareholders for a number of reasons. The Board of Directors of Brownsville
Bancshares perceived that over the last several years, the direction of the
banking industry has been towards deregulation and consolidation, particularly
in the state of Texas. The Board of Directors of Brownsville Bancshares and
certain of its major shareholders felt that the organization needed to expand
the boundaries of its franchise. Several options were discussed over a two or
three year period. Acquisition of another institution or branching in additional
communities in the Rio Grande Valley were considered. The Board of Directors'
review of alternatives continued into 1997.
In the summer of 1997, the Board of Directors of Brownsville Bancshares
received a merger proposal from Texas Regional. The Board reviewed the proposal
and concluded that such a merger would be in the best interests of the
Brownsville Bancshares shareholders. The merger will permit Brownsville
Bancshares to expand services, such as providing trust services, on-line
banking, cash management, in-house data processing and a Rio Grande Valley-wide
network of branches and automated teller machines.
For the reasons set forth above, the Brownsville Bancshares Board of
Directors believes the Merger to be in the best interests of Brownsville
Bancshares'shareholders. In fact, all of the members of the Brownsville
Bancshares Board of Directors have agreed in the Agreement to vote their shares
of Brownsville Bancshares stock in favor of the Merger at the special meeting of
the Brownsville Bancshares shareholders. THE BROWNSVILLE BANCSHARES BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE BROWNSVILLE BANCSHARES SHAREHOLDERS
VOTE FOR APPROVAL OF THE MERGER and has authorized the consummation of the
Merger subject to approval of the Brownsville Bancshares shareholders and the
satisfaction of certain other conditions. See "Information About the Transaction
- -- Reasons for the Merger."
Service Asset Management Company has delivered an opinion to the Board of
Directors of Brownsville Bancshares to the effect that, based upon and subject
to the qualifications described in such opinion, the terms of the Merger,
including the consideration to be received by the holders of Brownsville
Bancshares common stock, are fair, from a financial point of view, to the
Brownsville Bancshares shareholders. The fairness opinion is attached to this
Prospectus/Proxy Statement as Annex C. For further information concerning the
matters considered by Service Asset Management Company in rendering its opinion,
the limitations upon its review, and the fees received or to be received by it,
see "Information About the Transaction -- Opinion of Financial Advisor" and
Annex C. The receipt of the fairness opinion satisfies one of Brownsville
Bancshares' conditions to the closing of the transaction.
8
<PAGE>
CONDITIONS
The Agreement contains numerous conditions, including the receipt of
shareholder approval as described in this Prospectus/Proxy Statement, receipt of
certain governmental approvals, and certain other conditions which must be
satisfied or waived before the merger can be consummated. See "Information About
the Transaction -- Terms of the Agreement" and "Information About the
Transaction -- Other Terms and Conditions."
Texas Regional is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended, and, as a result, the transaction is
subject to the approval of the Federal Reserve Board. Texas Regional has applied
to the Federal Reserve Board for approval of the merger of Brownsville
Bancshares and BNB Bancshares, Inc., with and into TRD and has applied to the
Texas Banking Department for approval of the merger of Brownsville National Bank
with and into Texas State Bank.
Each party's obligations under the Agreement is contingent upon the other
not having a material adverse change, prior to closing, in its condition,
financial position or business prospects. In addition, Texas Regional's
obligation to close the Merger is further contingent upon Brownsville Bancshares
having a net worth at the time of closing, calculated in accordance with
applicable regulatory requirements, of not less than $11,685,000, increased by
$75,000 per month for each month elapsed during the period from September 30,
1997, until the date of Closing. The Agreement also provides a number of other
conditions to each party's respective obligations to close the Merger
transaction. For example, Texas Regional may terminate the transaction and
refuse to consummate the Merger if shareholders holding in excess of 5% of the
outstanding Brownsville Bancshares shares exercise dissenters' rights of
appraisal. In addition, either Texas Regional or Brownsville Bancshares may
terminate the transaction if the closing of the Merger has not been accomplished
on or before March 1, 1998. See "Information About the Transaction -- Other
Terms and Conditions."
TEXAS REGIONAL
Texas Regional is a Texas business corporation registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended. Texas Regional
was incorporated in Texas in 1983, and commenced active operations as a bank
holding company in 1984. The address of Texas Regional's principal executive
office is Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501,
and its telephone number is (956) 631-5400. The main banking office of Texas
State Bank is at 3900 North 10th Street, McAllen, Texas 78501.
Texas Regional presently has 20,000,000 shares of Texas Regional Common
Stock authorized, of which a total of 13,110,639 shares are issued and
outstanding. In addition, there are options outstanding to acquire an aggregate
of 343,924 shares of Texas Regional Common Stock, and Texas Regional has
committed to issue up to an aggregate maximum of 308,076 shares of Texas
Regional Common Stock in connection with the pending acquisition of TB&T
Bancshares, Inc. See "Information About Texas Regional -- Pending Transactions."
Texas Regional has authorized 10,000,000 shares of preferred stock, but no
shares of preferred stock are presently outstanding, and Texas Regional has no
present commitment to issue any shares of preferred stock. The shares to be
exchanged for shares of Brownsville Bancshares capital stock as described in the
Agreement are authorized but unissued shares of Texas Regional Common Stock.
Texas Regional Common Stock is registered with the Securities and Exchange
Commission as required by section 12 of the Securities Exchange Act of 1934 (the
"Act"). As required by the Act and regulations promulgated under the Act, Texas
Regional makes certain periodic reports to the SEC, and files financial
9
<PAGE>
and other information concerning the Corporation with the SEC. Shares of Texas
Regional Common Stock are traded on the NASDAQ National Market System.
In May 1996, Texas Regional acquired, for cash, First State Bank & Trust
Co. of Mission, Texas, and its affiliate The Border Bank in Hidalgo, Texas.
These two acquisitions were funded in part by the public offering of 2,510,000
shares of Texas Regional Class A Voting Common stock, also completed in May
1996. First State Bank & Trust Co. had total assets of $353.4 million at the
time of the acquisition, and The Border Bank had total assets of $105.3 million
at that time.
At September 30, 1997, Texas Regional and its subsidiaries had consolidated
total assets of $1.3 billion, loans (net of allowance for loan losses)
outstanding of $831.4 million, and total deposits of $1.2 billion. Texas
Regional's primary activity is the commercial banking business of its
wholly-owned subsidiary, Texas State Bank, in McAllen, Harlingen, Weslaco,
Mission, Rio Grande City, Hidalgo, and surrounding areas of the Rio Grande
Valley, Texas. At the present time, the only non-banking subsidiary of Texas
Regional is TSB Securities, Inc., which expects to begin providing securities
transaction services in early 1998. Texas Regional may in the future establish
other non-banking subsidiaries to provide, or may itself provide, other services
permitted of bank holding companies which cannot be provided by banks.
In October 1997, Texas Regional formed TRD, a Delaware corporation wholly
owned by Texas Regional. As of December 9, 1997, Texas Regional contributed all
of the capital stock of Texas State Bank, all of the capital stock of TSB
Securities, Inc., and certain other assets to TRD. TRD will, upon closing of the
Merger transaction, be the surviving corporation in the Merger with Brownsville
Bancshares.
In October 1997, Texas Regional entered into an Agreement and Plan of
Reorganization for the acquisition by merger of TB&T Bancshares, Inc. ("TB&T
Bancshares"). As of September 30, 1997, TB&T Bancshares had total assets of
$43.8 million, total loans (net of allowance for loan losses) of $21.6 million,
and total deposits of $39.4 million. TB&T Bancshares is expected to be merged
with and into TRD as soon as applicable conditions, including receipt of
regulatory approval, are satisfied. Texas Regional currently expects the TB&T
Bancshares transaction to be closed contemporaneously with the closing of the
Brownsville Bancshares transaction, although neither transaction is contingent
upon the closing of the other. The shareholders of TB&T Bancshares will receive
an aggregate of approximately 308,076 shares of Texas Regional Common Stock in
exchange for their TB&T Bancshares shares in connection with the merger
transaction (less shares returned to Texas Regional from a holdback escrow), and
TB&T Bancshares' wholly owned subsidiary, Texas Bank and Trust of Brownsville,
will be merged with and into Texas State Bank. Texas Bank and Trust operates
from one banking location, at 3201 Central Boulevard in Brownsville, Texas.
In November 1997, Texas Regional entered into an agreement in principle for
the acquisition by merger of Raymondville Bancorp, Inc. ("Raymondville
Bancorp"). As of September 30, 1997, Raymondville Bancorp had total assets of
$60.4 million, total loans (net of allowance for loan losses) of $25.4 million,
and total deposits of $53.5 million. If the parties successfully negotiate a
mutually acceptable definitive agreement, Raymondville Bancorp will be merged
with a newly formed subsidiary of TRD as soon as applicable conditions,
including receipt of regulatory approval, are satisfied. As part of the
agreement in principle with Raymondville, the sole shareholder of Raymondville
has agreed to bear a portion of losses related to stolen or forged money orders
deposited into certain accounts held by Raymondville's wholly owned subsidiary,
Bank of Texas; however, there can be no assurance that the losses incurred on
those accounts and related return items will not exceed the limited amount of
the shareholder's reimbursement obligation and collateral provided by the
account holder. Texas Regional currently expects the Raymondville Bancorp
transaction to be closed contemporaneously with or as soon as practicable
following the closing of the Brownsville Bancshares transaction, although
neither transaction is contingent upon the closing of the other. Under the
agreement in principle, which is not binding on either Texas Regional or
Raymondville, upon closing, the sole shareholder of Raymondville Bancorp would
receive an aggregate of $9,600,000 cash in exchange for his Raymondville Bancorp
shares, an affiliate of
10
<PAGE>
Raymondville Bancorp would receive $100,000 in consideration of a covenant not
to compete, and Raymondville Bancorp's wholly owned subsidiary, Bank of Texas of
Raymondville, would be merged with and into Texas State Bank. Bank of Texas
operates from two banking locations, one each in Raymondville, Texas, and at
2000 F.M. 802 in Brownsville, Texas.
If the Merger with Brownsville Bancshares, the merger with TB&T Bancshares
and the merger with Raymondville are all consummated, as planned, Texas State
Bank will have a total of twenty-one full service banking locations in the Rio
Grande Valley of Texas.
Texas Regional's wholly owned subsidiary, TRD, will be the surviving
corporation in the Merger with Brownsville Bancshares and in the merger with
TB&T Bancshares. The officers and directors of Texas Regional and TRD are
expected to be the officers and directors of Texas Regional and TRD,
respectively, following consummation of the merger transactions. Texas Regional
intends that Brownsville National will be merged with and into Texas State Bank
following the completion of the merger of Brownsville Bancshares with and into
TRD, subject to receipt of necessary regulatory approvals. As a result, the
separate existence of Brownsville National will cease and the main office and
the former branch office of Brownsville National will become branch offices of
Texas State Bank. Texas Regional expects that substantially all of the personnel
of Brownsville Bancshares and Brownsville National will become employees of
Texas State Bank following the closing of the Merger.
BROWNSVILLE BANCSHARES
Brownsville Bancshares' operating subsidiary, Brownsville National Bank,
was chartered as a national bank in 1974, and opened for business in 1974.
Brownsville Bancshares, through its ownership of Brownsville National Bank,
provides banking services for customers in Brownsville, Texas and adjacent areas
of the Rio Grande Valley. At September 30, 1997 Brownsville Bancshares had total
assets of $97.4 million, loans outstanding of $41.6 million (net of allowance
for loan losses), deposits of $84.4 million, and stockholders equity totaling
$11.7 million. Brownsville Bancshares is located at 629 E. Elizabeth,
Brownsville, Texas, and its telephone number is (956) 546-4503. In addition to
its main banking office at 629 E. Elizabeth Street, Brownsville National has a
full-service branch banking facility at 3255 Boca Chica Boulevard in
Brownsville.
FEDERAL INCOME TAX CONSEQUENCES
Neither Texas Regional, Brownsville Bancshares, nor TRD has requested a
ruling from the Internal Revenue Service ("IRS") with regard to the proposed
transaction nor do they anticipate requesting such a ruling, nor has Texas
Regional or Brownsville Bancshares requested an opinion of counsel concerning
the anticipated Federal income tax consequences of the proposed transaction.
However, management of Texas Regional has consulted with the company's
independent accountants concerning the tax consequences of the transaction. As a
result, management of Texas Regional believes that if the transaction is
consummated in accordance with the terms of the Agreement and if certain
technical requirements of Federal income tax law are met, as hereinafter
described, the Federal income tax consequences related to this transaction
should be as follows:
(a) the merger of Brownsville Bancshares with and into TRD should
constitute a reorganization within the meaning of Section 368(a)(1) by
application of Section 368(a)(2)(D) of the Internal Revenue Code of 1986,
as amended (the "Code") and the merger of BNB Bancshares with and into TRD
should constitute a reorganization within the meaning of Section 368(a)(1)
of the Code;
(b) no gain or loss should be recognized to Brownsville Bancshares or
TRD upon consummation of the merger;
(c) no gain or loss should be recognized by the shareholders of
Brownsville Bancshares as a result of the receipt of Texas Regional Common
Stock in respect of their Brownsville Bancshares shares;
11
<PAGE>
(d) the holding period of Texas Regional Common Stock received by the
Brownsville Bancshares shareholders should include the period during which
the stock of Brownsville Bancshares surrendered in exchange therefor has
been held by them, provided the surrendered stock of Brownsville Bancshares
has been held as a capital asset in their hands.
In addition to the above described consequences, any shareholder of
Brownsville Bancshares who exercises his or her dissenter's rights of appraisal
should be treated for Federal income tax purposes as having received the
resulting cash proceeds as a distribution in redemption of his, her or its
shares of Brownsville Bancshares stock, subject to the provisions and
limitations of Section 302 of the Code. In general, if such shareholder has all
of his, her or its shares of Brownsville Bancshares stock so redeemed, and such
shares of Brownsville Bancshares stock have been held as a capital asset by the
dissenting shareholder, such shareholder should recognize a capital gain or loss
for Federal income tax purposes upon receipt of the cash proceeds for the value
of his, her or its shares.
The fair market value of the Texas Regional Common Stock received in
exchange for the cancellation of Brownsville Bancshares Options will be taxed as
compensation income to the recepient subject to applicable Federal income and
Social Security tax withholdings.
No information is provided with respect to the tax consequences, if any, to
the Brownsville Bancshares shareholders under any local, state or foreign tax
laws.
Individual Brownsville Bancshares shareholders are strongly urged to
consult with their respective tax advisers in regard to the foregoing summary
and the potential Federal income tax consequences of the proposed transaction to
them. In addition, any shareholder who is not a resident of Texas should consult
with such shareholder's own tax adviser for information concerning applicable
state and local tax consequences.
For additional discussion of the Federal income tax consequences of the
transaction, see "Information About the Transaction -- Federal Income Tax
Consequences."
ACCOUNTING TREATMENT
Texas Regional anticipates accounting for the Merger under the
pooling-of-interests method of accounting for financial reporting and for all
other purposes, and the Company has received such assurances as its deems
appropriate that the Merger will qualify for pooling-of-interests accounting
treatment, including the receipt of a letter from KPMG Peat Marwick LLP, which
will be updated as of the effective time of the Merger, to the effect that the
Merger will qualify for pooling-of-interests accounting treatment. Nonetheless,
because the requirements for pooling-of-interests accounting are complex and
include matters outside of the control of the Company, there can be no certainty
that accounting for the transaction under that method of accounting will be
permitted. The pro forma information contained herein assumes that the
transaction will be accounted for under the pooling-of-interests method. See
"Information About the Transaction -- Accounting Treatment."
12
<PAGE>
RISK FACTORS
CONTROL. Brownsville Bancshares shareholders currently control Brownsville
Bancshares through their ability to elect the Board of Directors of Brownsville
Bancshares and vote on various matters affecting Brownsville Bancshares. The
Merger will transfer control of Brownsville Bancshares from Brownsville
Bancshares'shareholders to Texas Regional. As of the effective time of the
Merger, the shareholders of Brownsville Bancshares will become shareholders of
Texas Regional, a much larger organization, and the former shareholders of
Brownsville Bancshares will no longer have the ability to control or influence
the management policies or Brownsville Bancshares' operations. As shareholders
of Texas Regional, their ability to influence the management policies of Texas
Regional will be limited due to the fact that they will hold a relatively small
percentage of the voting stock of Texas Regional.
Following consummation of the Merger, (i) all lending at the facilities
formerly operated by Brownsville National will be conducted pursuant to Texas
State Bank's policies and under the supervision of Texas State Bank's chief
lending officer; (ii) investments in securities will be managed by the
investment division of Texas State Bank in accordance with Texas State Bank's
investment policies; and (iii) all data processing will be performed by Texas
State Bank's data processing center. In general, the policies and procedures for
all banking locations, including the banking locations formerly operated as the
main bank and the branch banking facility of Brownsville National Bank, will be
Texas State Bank's policies and procedures.
PROFITABILITY LINKED TO BANKING ACTIVITIES. Because Texas Regional's
non-banking activities represent a very small portion of its business, the
profitability of Texas Regional will be directly attributable to the success of
its subsidiary, Texas State Bank. Texas Regional's banking activities compete
with other banking institutions on the basis of service, convenience and, to
some extent, price. Due in part to both regulatory changes and consumer demands,
banks have experienced increased competition from other financial entities
offering similar products. Competition from both bank and non-bank organizations
is expected to continue.
Texas Regional will rely on the profitability of Texas State Bank and
dividends received from Texas State Bank for payment of its operating expenses
and satisfaction of its obligations. As is the case with other similarly
situated financial institutions, the profitability of Texas State Bank, and
therefore of Texas Regional, will be subject to the fluctuating cost and
availability of money, changes in the prime lending rate, changes in economic
conditions in general and, because of the location of all of the branch
facilities, changes in economic conditions in the Texas Rio Grande Valley in
particular. In addition, Texas State Bank is subject to capital adequacy
guidelines promulgated from time to time by applicable regulatory authorities.
GEOGRAPHIC CONCENTRATION. Texas Regional's profitability is dependent on
the profitability of its subsidiary bank, Texas State Bank, which operates only
in the Rio Grande Valley of Texas. In addition to adverse changes in general
conditions in the United States, unfavorable changes in economic conditions
affecting the Rio Grande Valley, such as adverse effects of weather on
agricultural production, adverse changes in United States-Mexico relations, and
substantial Mexican peso devaluations, may have a significant adverse impact on
operations of the Company.
COMPETITION. The banking industry in the Rio Grande Valley is highly
competitive. Texas State Bank and Brownsville National compete as financial
intermediaries with other commercial banks, savings and loan associations,
credit unions, mortgage banking companies, securities brokerage companies,
consumer and commercial finance companies, insurance companies and money market
mutual funds operating in Texas and elsewhere. Many of the competitors have
substantially greater resources and lending limits than Texas State Bank has or
will have following the Merger, and in some cases these competitors offer
services that Texas State Bank does not currently provide. In addition,
non-depository institution competitors are generally not subject to the
extensive regulation applicable to Texas State Bank.
REGULATORY RESTRICTIONS AND REQUIREMENTS. Texas Regional and Texas State
Bank are subject to extensive government regulation and supervision under
various state and federal laws, rules and regulations, including rules and
regulations promulgated by the Federal Reserve Board (the "FRB") and the Texas
Banking Department (the "Banking Department"). These laws and regulations are
designed primarily to protect the Bank Insurance Fund of the Federal Deposit
Insurance Corporation (the "FDIC"), depositors
13
<PAGE>
and borrowers, and to further certain social policies and, consequently, may
impose limitations on Texas Regional that may not be in the best interests of
the Company and its shareholders.
Texas State Bank is subject to regulation by the Texas Department of
Banking, and is subject to regulation by its "primary federal regulator," the
Federal Reserve Board, since Texas State Bank is a Federal Reserve member bank.
For Brownsville National Bank, the primary federal regulator is the Office of
the Comptroller of the Currency, since Brownsville National Bank is a national
bank. If the transaction is consummated, the effect will be that Brownsville
National Bank's business as merged into Texas State Bank will be subject to
regulation by the Texas Department of Banking and the Federal Reserve Board, to
which it is not presently subject.
RELIANCE ON CHIEF EXECUTIVE OFFICER. Texas Regional has experienced
substantial growth in assets and deposits during the past, particularly since
Glen E. Roney became Chairman of the Board and Chief Executive Officer of the
company in 1985. Although Mr. Roney is a substantial shareholder of the Company
and is the beneficiary of a deferred compensation arrangement with the Company
that generally requires continued service for vesting, the Company does not have
an employment agreement with Mr. Roney and the loss of the services of Mr. Roney
could have a material adverse effect on Texas Regional's business and prospects.
14
<PAGE>
SELECTED FINANCIAL DATA
The following table, except for the lines designated as pro forma,
summarizes certain consolidated historical financial data of Texas Regional, and
certain consolidated historical financial data of Brownsville Bancshares. The
table also summarizes, where indicated, certain pro forma financial data for
Texas Regional, giving effect to the acquisition of Brownsville Bancshares
assuming that the Merger had been effective at the beginning of 1992.
The historical data of Brownsville Bancshares as of and for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992 is derived from the audited
financial statements of Brownsville Bancshares. The historical data of Texas
Regional as of and for the years ended December 31, 1996, 1995, 1994, 1993 and
1992 (i) is derived from the audited financial statements of Texas Regional, and
(ii) has been adjusted to reflect stock splits and stock dividends effected
during the period. The information presented as of and for the nine months ended
September 30, 1997 and 1996, except for lines designated as pro forma, has been
derived from unaudited historical data, and has been adjusted to reflect stock
splits and stock dividends effected during the period. The pro forma income
statement information is not necessarily indicative of the results of operations
had the proposed transaction occurred at the beginning of 1992, nor is it
necessarily indicative of the results of future operations. This information
should be read in conjunction with the historical consolidated financial
statements and the related notes included elsewhere or incorporated by reference
in this Prospectus / Proxy Statement.
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL ASSETS
Texas Regional............ $1,337,767 $1,213,120 $1,230,577 $ 646,769 $ 531,834 $ 473,263 $ 414,331
Brownsville Bancshares.... 97,421 96,537 97,480 90,489 90,019 89,132 82,865
TOTAL DEPOSITS
Texas Regional............ 1,184,768 1,066,230 1,091,735 579,731 472,108 429,521 375,016
Brownsville Bancshares.... 84,436 84,260 85,388 79,007 80,078 79,480 73,792
LONG-TERM DEBT
Texas Regional............ -- -- -- -- -- 1,150 2,600
Brownsville Bancshares.... -- -- -- -- -- -- --
TOTAL SHAREHOLDERS' EQUITY....
Texas Regional............ 141,483 123,531 128,148 62,720 55,731 39,983 34,318
Brownsville Bancshares.... 11,709 11,578 11,413 10,881 9,643 9,075 8,303
NET INTEREST INCOME
Texas Regional............ 41,915 31,657 44,978 27,540 22,941 19,197 16,861
Brownsville Bancshares.... 2,855 2,822 3,753 3,768 3,842 3,625 3,568
NET INCOME
Texas Regional............ 15,814 11,386 16,379 8,725 7,185 6,011 4,519
Brownsville Bancshares.... 1,068 964 1,214 1,263 1,325 1,167 1,190
NET INCOME PER COMMON SHARE(1)
Texas Regional(3)
Historical............ 1.19 1.00 1.38 0.93 0.77 0.87 0.69
Pro Forma............. 1.18 1.00 1.37 0.97 0.82 0.92 0.76
Brownsville Bancshares
Historical............ 3.46 3.12 3.93 4.09 4.29 3.78 3.85
Equivalent Pro
Forma(2)............ 3.62 3.07 4.20 2.97 2.51 2.82 2.33
CASH DIVIDENDS PER COMMON
SHARE
Texas Regional(3)
Historical............ 0.25 0.20 0.27 0.27 0.16 -- --
Pro Forma............. 0.29 0.24 0.31 0.30 0.15 0.05 --
Brownsville Bancshares
Historical............ 2.60 1.00 2.60 2.00 -- 1.28 --
Equivalent Pro
Forma(2)............ 0.89 0.74 0.95 0.92 0.46 0.15 --
</TABLE>
(TABLE CONTINUED ON FOLLOWING PAGE)
15
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTHS ENDED AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY (BOOK
VALUE) PER COMMON SHARE
Texas Regional(3)
Historical............ 10.80 9.46 9.81 6.75 6.00 5.15 4.28
Pro Forma............. 10.87 9.62 9.93 7.16 6.36 5.73 4.85
Brownsville Bancshares
Historical............ 37.89 37.47 36.95 35.22 31.21 29.38 26.88
Equivalent Pro
Forma(2)............ 33.33 29.50 30.45 21.95 19.50 17.57 14.87
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Texas Regional(3)
Historical............ 13,308 11,345 11,840 9,341 9,052 6,279 6,068
Pro Forma............. 14,293 12,330 12,825 10,326 10,037 7,264 7,053
Brownsville Bancshares
Historical............ 309 309 309 309 309 309 309
NUMBER OF COMMON SHARES
OUTSTANDING AT END OF PERIOD
Texas Regional(3)
Historical............ 13,106 13,062 13,063 9,295 9,290 6,279 6,279
Pro Forma............. 14,091 14,047 14,048 10,280 10,275 7,264 7,264
Brownsville Bancshares
Historical............ 309 309 309 309 309 309 309
</TABLE>
- ------------
(1) Net income per common share represents primary earnings per share (i.e., the
amount of earnings attributable to each share of common stock outstanding,
including common stock equivalents).
(2) Brownsville Bancshares' Equivalent Pro Forma per share amounts are computed
by multiplying Texas Regional's Pro Forma amounts by the exchange ratio of
3.06608.
(3) Amounts are adjusted to reflect a three-for-two stock split of the Texas
Regional Common Stock declared in July 1997, distributed in August 1997.
16
<PAGE>
MARKET PRICES
Texas Regional Common Stock is traded in the national-over-the-counter
securities market. Since 1994, it has been quoted under the symbol "TRBS" on the
NASDAQ National Market System.
The following table sets forth for the periods indicated the high and low
sales prices for Texas Regional Common Stock reported through the NASDAQ
National Market System as published in The Wall Street Journal. The prices shown
do not include retail mark-ups, mark-downs or commissions. All share values have
been rounded to the nearest 1/8th of one dollar and have been adjusted to
reflect a three-for-two stock split of the Texas Regional Common Stock declared
in July 1997, distributed in August 1997.
TEXAS REGIONAL
COMMON STOCK
--------------------
HIGH LOW
--------- ---------
1995
- -------------------------------------
First Quarter........................ 8.50 7.50
Second Quarter....................... 9.67 7.83
Third Quarter........................ 11.00 9.00
Fourth Quarter....................... 12.17 10.33
1996
- -------------------------------------
First Quarter........................ 15.67 11.33
Second Quarter....................... 17.33 13.33
Third Quarter........................ 19.50 15.67
Fourth Quarter....................... 23.00 18.83
1997
- -------------------------------------
First Quarter........................ 24.50 21.17
Second Quarter....................... 30.25 19.00
Third Quarter........................ 31.50 24.50
Fourth Quarter ...................... 31.50 26.00
On September 5, 1997, the business day immediately preceding the
announcement of the execution of the agreement in principle related to the
Merger, the last reported sale price for Texas Regional Common Stock was $26.25.
On October 21, 1997, the business day immediately preceding the announcement of
the execution of the definitive Agreement, the last reported sale price for
Texas Regional Common Stock was $28.25. On January 7, 1998, the last reported
sale price for Texas Regional Common Stock was $31.50. There is no assurance
that these transactions, or those reflected in the table above, represent all or
a representative sample of the actual transactions which occurred or that the
high and low prices shown reflect the full ranges at which transactions occurred
during the periods indicated.
There is no active public trading market for Brownsville Bancshares Common
Stock, although it is traded infrequently in private transactions. See
"Information About Brownsville Bancshares -- Market Prices of and Dividends
Paid On Brownsville Bancshares Capital Stock."
INFORMATION ABOUT THE TRANSACTION
The following information relating to the Merger is not intended to be a
complete description of all information relating to the Merger and is qualified
in its entirety by reference to more detailed information contained elsewhere in
this Prospectus/Proxy Statement, including the annexes hereto and the documents
referred to herein or incorporated herein by reference. A copy of the Agreement
is included herein as Annex A, and is incorporated herein by this reference for
all purposes. All shareholders of Brownsville Bancshares are urged to read the
Agreement in its entirety.
17
<PAGE>
TERMS OF THE AGREEMENT.
The Agreement provides that both Brownsville Bancshares and its wholly
owned subsidiary, BNB Bancshares, will be merged with and into TRD, and the
outstanding capital stock of Brownsville Bancshares will be converted into and
exchanged for the right to receive shares of Texas Regional Class A Voting
Common stock as herein described. Each Brownsville Bancshares share shall be
converted into and exchanged for 3.06608 shares of Texas Regional Common Stock.
Holders of options to acquire shares of Brownsville Bancshares shall receive
1.77634 shares of Texas Regional Common Stock for each share subject to such
option holder's options. No fractional shares shall be issued, and any
individual shareholder or option holder who would otherwise be entitled to a
fractional share of Texas Regional Common Stock shall receive cash in lieu of
such fractional share, equal to the product of $30.00 multiplied by such
fractional share.
On the effective date of the Merger, Brownsville Bancshares and BNB
Bancshares will be merged with and into TRD, and all of the capital stock of
Brownsville National Bank will then be owned by Texas Regional. Immediately
following consummation of the Merger, Brownsville National will be merged with
and into Texas State Bank, and all banking locations of Brownsville National
will become branch facilities of Texas State Bank.
In the event the merger is approved and no holders of Brownsville
Bancshares capital stock elect to exercise dissenter's rights of appraisal, the
Brownsville Bancshares shares will be exchanged for an aggregate of
approximately 947,164 shares of Texas Regional Common Stock and the Brownsville
Bancshares options will be exchanged for an aggregate of approximately 37,836
shares of Texas Regional Common Stock. As a result, present Brownsville
Bancshares shareholders will, immediately following consummation of the merger
(and without regard to any shares which may be issued in connection with the
TB&T Bancshares, Inc., merger), own approximately 6.72% of the total outstanding
Texas Regional Common Stock as a result of their exchange of Brownsville
Bancshares stock, and present holders of Brownsville Bancshares Options will own
approximately 0.27% of the total outstanding Texas Regional Common Stock as a
result of the cancellation of their options.
The terms of the Agreement, including the exchange ratio, are the result of
negotiations between the Board of Directors and principal executive officers of
Texas Regional and the Board of Directors and principal executive officers of
Brownsville Bancshares, each of whom considered many factors, including the
earnings and dividends and related trends of Texas Regional and Brownsville
Bancshares, their book and estimated market values of assets, their deposits and
other liabilities, the nature and capabilities of management, their earnings and
growth capacities based on the nature of the markets in which they operate and
their projected future values and prospects as separate companies.
Brownsville Bancshares has engaged Service Asset Management Company
("SAMC"), a firm specializing in bank analysis and appraisal, to evaluate the
transaction from the perspective of Brownsville Bancshares and its shareholders.
As part of its analysis, SAMC analyzed the historical performance of Texas
Regional and Brownsville Bancshares and information and data provided by the
management of each organization. SAMC also had discussions with management of
Texas Regional and Brownsville Bancshares concerning their respective financial
results and considered such other information as SAMC deemed relevant. After
reviewing this data, SAMC has rendered its opinion that the exchange ratio is
fair, from a financial point of view, to the Brownsville Bancshares
shareholders. See "Information About The Transaction -- Opinion of Financial
Advisor" and Annex C.
The Brownsville Bancshares Board of Directors has reviewed and approved the
Merger, has authorized the preparation of this Prospectus/Proxy Statement and
has recommended approval by the shareholders. The Merger must be approved by the
affirmative vote of the holders of two-thirds of the outstanding capital stock
of Brownsville Bancshares. Each member of the Board of Directors of Brownsville
Bancshares, and certain related parties, have joined into the execution of the
Agreement, to evidence their agreement to vote for the transaction at the
special meeting of the Brownsville Bancshares shareholders. The only other
shareholder known by Brownsville Bancshares to own in excess of 5% of the
outstanding capital stock of Brownsville Bancshares, and certain related or
affiliated parties, has also joined into the execution of the
18
<PAGE>
Agreement to evidence his agreement to vote for the Merger at the special
meeting. The aggregate number of Brownsville Bancshares shares held by all such
shareholders is 210,493, representing 68% of the issued and outstanding capital
stock of Brownsville Bancshares. Since the aggregate number of shares held by
shareholders joining into this Agreement and committing to vote their shares in
favor of the Merger at the special meeting of the Brownsville Bancshares
shareholders is in excess of two-thirds of the outstanding capital stock of
Brownsville Bancshares, the transaction is expected to be approved by the
shareholders. No shareholder has notified Brownsville Bancshares or Texas
Regional that such shareholder intends to oppose the motion to approve the
Merger at the Meeting.
Texas Regional, as the sole shareholder of TRD, has already approved the
Merger and authorized consummation of the transactions herein described, subject
to receipt of regulatory approvals and satisfaction of other conditions
described in the Agreement.
It is anticipated that the Merger will be effective as soon as practicable
following the receipt of all necessary regulatory approvals and the satisfaction
of all conditions to the consummation of the Merger. At the effective time of
the Merger, by operation of law, holders of Brownsville Bancshares Common Stock
(other than those shareholders who perfect their dissenters' rights of
appraisal) will become owners of Texas Regional Common Stock and will no longer
be owners of Brownsville Bancshares capital stock. After the effective time of
the Merger, all certificates for Brownsville Bancshares capital stock will
represent the right to receive Texas Regional Common Stock pursuant to the
Agreement, but otherwise will be null and void after such date.
STOCK CERTIFICATES AND FRACTIONAL SHARES.
It is anticipated by Texas Regional that, promptly after the approval of
the Merger by the Brownsville Bancshares shareholders and by applicable
regulatory authorities, transmittal forms will be sent to each shareholder of
Brownsville Bancshares for use in forwarding his, her or its certificates for
shares of capital stock of Brownsville Bancshares to Texas Regional. For each
share surrendered Texas Regional will deliver to the former Brownsville
Bancshares shareholder 3.06608 shares of Texas Regional Common Stock. No
fractional shares shall be issued in respect of a shareholder's shares, and any
shareholder who would otherwise be entitled to a fractional share of Texas
Regional Common Stock shall receive cash in lieu of such fractional shares,
equal to the product of $30.00 multiplied by such fractional share.
Texas Regional share certificates shall be delivered at the time of closing
to shareholders who have surrendered their Brownsville Bancshares share
certificates at or prior to the effective time of the Merger, either (i) by
mailing the same to the shareholder at the shareholder's address as stated in
the stock transfer records of Brownsville Bancshares, or (ii) by such other
arrangements as may be mutually agreed by and between such former Brownsville
Bancshares shareholder and Texas Regional.
Any delivery of Texas Regional share certificates to shareholders who
surrender their Brownsville Bancshares certificates following the effective time
of the Merger shall be mailed to the former Brownsville Bancshares shareholder
within a reasonable period of time following receipt of the shareholder's
Brownsville Bancshares share certificate. The stock transfer records of
Brownsville Bancshares shall for all purposes be closed as of the effective time
of the Merger and no transfer of record of any of the shares of Brownsville
Bancshares capital stock shall take place thereafter.
Until certificates representing capital stock of Brownsville Bancshares are
surrendered, Texas Regional will set aside shares for making the deliveries, but
any dividends or other amounts payable to shareholders who surrender their share
certificates after the effective time of the Merger will not be payable until
surrender of the shareholder's share certificate, nor shall any amounts bear
interest attributable to periods either before or after the effective time of
the Merger.
After the effective date of the Merger, the Brownsville Bancshares share
certificates that theretofore represented ownership of the capital stock of
Brownsville Bancshares shall be converted automatically into the right to
receive 3.06608 shares of Texas Regional Common Stock. No dividends on
Brownsville Bancshares capital stock shall accrue with respect to such shares as
are held by any shareholder, after the effective date of the merger.
19
<PAGE>
In addition, upon consummation of the Merger, holders of options to acquire
shares of Brownsville Bancshares will receive 1.77634 shares of Texas Regional
Common Stock for each share subject to such option holder's options in exchange
for, and in consideration of the termination of, such option holder's options.
No fractional shares shall be issued in respect of an option holder's options,
and any option holder who would otherwise be entitled to a fractional share of
Texas Regional Common Stock shall receive cash in lieu of such fractional share,
equal to the product of $30.00 multiplied by such fractional share. As a
condition to the issuance of Texas Regional share certificates, each option
holder shall be required to execute a termination agreement in form reasonably
acceptable to Texas Regional.
SHAREHOLDERS OF BROWNSVILLE BANCSHARES SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL TRANSMITTAL MATERIALS ARE RECEIVED.
REASONS FOR THE MERGER.
The Board of Directors of Brownsville Bancshares has approved the Agreement
as being in the best interests of Brownsville Bancshares and its shareholders,
and the Board of Directors of Texas Regional has also approved the Agreement as
being in the best interests of Texas Regional and its shareholders. If the
transactions contemplated by the Agreement are consummated, Brownsville
Bancshares will be merged with and into TRD, its separate existence will cease,
and present Brownsville Bancshares shareholders will become shareholders of
Texas Regional. The Boards of Directors of Brownsville Bancshares and Texas
Regional believe that the merger of Brownsville Bancshares with a subsidiary of
Texas Regional will offer these advantages:
The Board of Directors of Brownsville Bancshares perceived that over the
last several years, the direction of the banking industry has been towards
deregulation and consolidation, particularly in the state of Texas. The Board of
Directors of Brownsville Bancshares and certain of its major shareholders felt
that the organization needed to expand the boundaries of its franchise. Several
options were discussed over a two or three year period. Acquisition of another
institution or branching in additional communities in the Rio Grande Valley were
considered. The Board of Directors' review of alternatives continued into 1997.
In the summer of 1997, the Board of Directors of Brownsville Bancshares received
a merger proposal from Texas Regional. The Board reviewed the proposal and
concluded that such a merger would be in the best interests of the Brownsville
Bancshares shareholders. The merger will permit Brownsville Bancshares to expand
services, such as providing trust services, on-line banking, cash management,
in-house data processing and a Rio Grande Valley-wide network of branches and
automated teller machines.
For the reasons set forth above, the Brownsville Bancshares Board of
Directors unanimously approved the Merger and recommends approval of the
transaction by the Brownsville Bancshares shareholders.
Texas Regional has long considered expansion opportunities in its market
area, and in Brownsville in particular, in order to expand to a more economical
size, to provide more effective customer service for its existing customers and
to expand the customer base for the company's services. Acquiring Brownsville
Bancshares will result in economies of scale and increase the markets served by
Texas Regional's subsidiary, Texas State Bank. It will also assist Texas State
Bank in providing the management and organizational flexibility needed to expand
in the Brownsville market.
Following arm's length negotiations between representatives of Texas
Regional and Brownsville Bancshares, Texas Regional and Brownsville Bancshares
entered into the Agreement on October 20, 1997. The aggregate amount to be paid
to holders of Brownsville Bancshares shares and to be paid to the Brownsville
Bancshares option holders resulted from negotiations which considered the
historical earnings and dividends of Texas Regional and Brownsville Bancshares,
the earnings potential and deposit base of Brownsville Bancshares, potential
growth in the Brownsville market, Brownsville Bancshares' asset quality and the
effect of the Merger on the shareholders, customers and employees of Texas
Regional and Brownsville Bancshares.
Subject to satisfaction of certain conditions contained in the Agreement,
Brownsville Bancshares Board of Directors believes the Merger to be fair and in
the best interests of Brownsville Bancshares and its shareholders. In addition,
a fairness opinion has been received from Service Asset Management Company
20
<PAGE>
with respect to the fairness, from a financial point of view, of the Merger to
the Brownsville Bancshares shareholders. See "Information About the Transaction
- -- Opinion of Financial Advisor." BROWNSVILLE BANCSHARES BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT THE BROWNSVILLE BANCSHARES SHAREHOLDERS VOTE FOR
APPROVAL OF THE MERGER. The Brownsville Bancshares has authorized consummation
of the Merger, subject to approval of the Brownsville Bancshares shareholders,
federal and state bank regulators and the satisfaction of certain other
conditions. See "Information About the Transaction -- Terms of the Agreement"
and "Information About the Transaction -- Other Terms and Conditions."
OPINION OF FINANCIAL ADVISOR.
Service Asset Management Company (defined herein as "SAMC") is regularly
engaged in the business of evaluating financial institutions and their
securities in connection with mergers and acquisitions, and in evaluations for
other purposes. In October 1997, Brownsville Bancshares engaged SAMC to act as
an independent financial advisor to Brownsville Bancshares Board of Directors
and shareholders in connection with the Merger. Specifically, based on SAMC's
reputation and qualifications in evaluating financial institutions, the Board of
Directors of Brownsville Bancshares requested that SAMC render advice and
analysis in connection with the Merger, and to provide an opinion with regard to
the fairness, from the perspective of the shareholders of Brownsville
Bancshares, of the financial terms of the Merger.
SAMC has rendered a written opinion to the Board of Directors of
Brownsville Bancshares to the effect that the terms of the Merger are fair, from
a financial point of view, to the shareholders of Brownsville Bancshares as of
the date of the opinion letter. A copy of the opinion letter is attached as
Annex C to this Prospectus/Proxy Statement and should be read in its entirety by
the Brownsville Bancshares shareholders.
SAMC based its opinion on, among other things, a review of: (i) certain
publicly available financial statements and other information of Brownsville
Bancshares and Texas Regional, (ii) certain internal financial statements and
other financial and operating data concerning Brownsville Bancshares and Texas
Regional prepared by the management of Brownsville Bancshares and Texas
Regional, (iii) certain summary financial projections concerning Brownsville
Bancshares and Texas Regional prepared by the management of Brownsville
Bancshares and Texas Regional, respectively, (iv) discussions with senior
executives of Brownsville Bancshares concerning past and current operations and
prospects of Brownsville Bancshares, (v) discussions with senior executives of
Texas Regional concerning the past and current operations and financial
condition and the prospects of Texas Regional and analysis of the estimated pro
forma impact of the Merger, including on the combined company's earnings per
share, consolidated capitalization and financial ratios, (vi) discussions with
senior executives of Brownsville Bancshares and Texas Regional concerning the
strategic objectives of the Merger and the long term benefits expected to result
from the merger, including without limitation, certain estimates and timing of
synergies and other cost savings for the continued company, (vii) reported
prices and trading activity for transactions in Brownsville Bancshares stock and
Texas Regional stock, (viii) the financial performance of Brownsville Bancshares
and Texas Regional and the prices and trading activity of Brownsville Bancshares
and Texas Regional with that of certain other comparable publicly traded
companies and their securities, (ix) the financial terms, to the extent publicly
available, of certain comparable transactions, and (x) the Agreement and certain
related documents.
SAMC also reviewed such other information, including financial studies,
analyses, investigations and economic and market criteria, that SAMC deemed
relevant to its engagement. SAMC maintains a database of information pertaining
to prices paid for banks in the United States. The database includes
transactions involving banking organizations in Texas and the Southwest Region
of the United States, and provides comparable pricing of financial performance
data for banking organizations. SAMC has the capability of sorting such records
to yield transactions involving similar banks. Similarities might include banks
within a specified asset size range, banks that generate a return on average
assets within a specified range, banks that have an equity-to-assets ratio
within a certain range, or banks that sold for a specific form of consideration
21
<PAGE>
(such as cash or stock). The ability to produce specific groups of comparable
banks facilitates making a valid comparative analysis.
SAMC considered twelve transaction values for Texas banks with assets below
$250 million and greater than $75 million announced between January 1, 1995 and
October 28, 1997 for which publicly available pricing information is available.
The average price/book was 2.099 times, price/earnings 17.99 times, price/assets
17.25%, price/deposits 19.35%, and tangible book premium/core deposits 12.38%.
Based on comparability pricing to these transactions, a range of $50 to $75 a
share for control of Brownsville Bancshares was calculated.
SAMC compared transaction values, and the corresponding characteristics for
the relevant banks, in relation to the transaction value in the context of the
merger of Brownsville Bancshares with and into TRD. The comparative pricing
analysis revealed that the merger of Brownsville Bancshares with and into TRD
yields a higher price than the comparative transactions pricing range.
Generally, higher performing banks command higher prices than lower performing
ones. The average performance ratios for these transactions were a 1.18% return
on assets and a 13.55% return on equity, for which Brownsville Bancshares
comparatively had a higher 1.43% return on assets and a lower 12.03% return on
equity.
Since the form of consideration in the Merger involves the exchange of
Texas Regional Common Stock for the shares of Brownsville Bancshares Common
Stock, SAMC evaluated the financial condition and performance of Texas Regional.
SAMC conducted its own independent financial analysis of Texas Regional based
upon the above-mentioned information provided to or obtained by SAMC. SAMC also
reviewed and considered financial analyses and earnings forecasts produced by
financial analysts affiliated with various brokerage and investment banking
firms that cover the financial institutions industry in general, and Texas
Regional in particular. The intent of this financial analysis is to ascertain
the current financial condition and future earnings prospects of Texas Regional
given that the current shareholders of Brownsville Bancshares will have an
ownership stake in Texas Regional following the transaction. SAMC is satisfied
with the findings obtained from its financial analyses regarding the financial
condition and earnings prospects of Texas Regional, and believes that sufficient
foundation exists in this regard to support SAMC's conclusion regarding the
financial fairness of the proposed transaction.
SAMC is of the belief that its review of, among other things, the
aforementioned items, provides a reasonable basis for the issuance of its
opinion, recognizing that SAMC is issuing an informed professional opinion, not
a certification of value. No limitations were imposed on the scope of SAMC's
investigation by either Texas Regional or Brownsville Bancshares.
SAMC, as part of its professional services, specializes in rendering
valuation opinions of banks and bank holding companies in connection with
mergers and acquisitions nationwide. For SAMC's services as an independent
financial analyst and advisor to Brownsville Bancshares in connection with the
Merger, Brownsville Bancshares paid SAMC a professional fee of $10,000. In
addition, Brownsville Bancshares has also agreed to reimburse SAMC for
reasonable out-of-pocket expenses. The professional fees billed by SAMC for
services provided to Brownsville Bancshares (including both the fees for
services provided in the past and fees for SAMC's evaluation of the Merger) are
insignificant as compared to SAMC's total annual billings. SAMC has in the past
provided bond advisory services to Texas Regional's subsidiary, Texas State
Bank, and has received commissions on securities sold to Texas State Bank. This
compensation is insignificant as compared to SAMC's total annual billings.
SAMC relied upon the information provided by the management of Brownsville
Bancshares and Texas Regional, or otherwise reviewed by SAMC, as being complete
and accurate in all material respects. SAMC has not verified through independent
inspection or examination the specific assets or liabilities of Brownsville
Bancshares, Texas Regional or their subsidiary banks. SAMC has assumed that
there has been no material change in the assets, financial condition, results of
operation or business prospects of Brownsville Bancshares and Texas Regional
since the date of the last financial statements made available to SAMC. SAMC met
with the management of Brownsville Bancshares and Texas Regional for the purpose
of discussing the relevant information that has been provided to SAMC.
22
<PAGE>
Based on all factors that SAMC deemed relevant and assuming the accuracy
and completeness of the information and data provided, SAMC concluded that, in
SAMC's opinion, as of the date of SAMC's letter, the exchange ratio is fair and
equitable to all holders of Brownsville Bancshares common stock, from a
financial point of view.
OPERATIONS FOLLOWING THE MERGER.
Texas Regional and Brownsville Bancshares intend that following the Merger
of Brownsville Bancshares and its wholly owned subsidiary, BNB Bancshares, with
and into TRD, Brownsville National Bank will be merged with and into Texas State
Bank. Following the subsequent merger of Brownsville National with and into
Texas State Bank, the separate existence of Brownsville National will cease, and
Texas State Bank will continue as the surviving entity.
OTHER TERMS AND CONDITIONS.
The Agreement contains a number of terms, conditions, representations and
covenants which must be satisfied as of the effective time of the Merger
including, but not limited to, the following:
(1) If the closing shall not have been accomplished on or before March
1, 1998, the Agreement shall, at the election of either Brownsville
Bancshares or Texas Regional by written notice, be terminated and be of no
further force or affect.
(2) The transaction shall have been approved by the requisite vote of
the shareholders of Brownsville Bancshares at a duly called meeting of the
shareholders.
(3) The representations and warranties of Brownsville Bancshares in
the Agreement shall have been true when made, and except for changes
contemplated by the Agreement, shall be true at the effective time of the
Merger.
(4) Shareholders holding an aggregate of not greater than five percent
of the issued and outstanding shares of Brownsville Bancshares shall have
exercised dissenters' rights of appraisal with respect to the transaction.
(5) Texas Regional shall have received approval of the transactions
contemplated by the Agreement including both the merger of Brownsville
Bancshares and BNB Bancshares with and into TRD, and the merger of
Brownsville National with and into Texas State Bank, from all necessary
governmental agencies and authorities, including the Texas Banking
Department and the Federal Reserve Board, and such approvals and
transactions shall not have been contested by any Federal or State
governmental authority nor by any third party.
(6) There shall not be any litigation, investigation, inquiry or
proceeding pending or threatened in or by any court or governmental agency
or authority which might result in an action to restrain, enjoin or
prohibit consummation of the transaction or which might result in
divestiture, rescission or damages in connection with such transaction or
involving any of the assets, properties, business or operations of
Brownsville Bancshares, BNB Bancshares or Brownsville National which might
result in any material adverse change in the financial condition, results
of operation, business or prospects of Brownsville Bancshares or its
subsidiaries.
(7) Texas Regional shall have been delivered an opinion of Brownsville
Bancshares' counsel as required by the Agreement.
(8) Texas Regional shall be entitled to terminate the transaction if
the results of its due diligence review are not satisfactory in all
respects to Texas Regional and no material adverse change shall have
occurred in the condition, financial position or business prospects of
Brownsville Bancshares or any of its subsidiaries.
(9) Texas Regional shall have received all consents, approvals and
estoppel certificates and other assurances as it may deem reasonably
necessary.
23
<PAGE>
(10) The net worth of Brownsville Bancshares, calculated in accordance
with applicable regulatory requirements, shall be not less than the sum of
$11,685,000 increased by $75,000 per month for each month elapsed during
the period from September 30, 1997 until the date of closing.
(11) Contemporaneously with the closing of the Merger, the option
holders shall have entered into termination agreements as a result of which
all Brownsville Bancshares Options shall have been fully and finally
terminated.
(12) Brownsville Bancshares shall be satisfied that no material
adverse change shall have occurred in the condition, financial position or
business prospects of Texas Regional or Texas State Bank.
Some of the foregoing are conditions to the obligation of Texas Regional to
close the Merger transaction, some are conditions to the obligation of
Brownsville Bancshares to close and others are conditions to both parties'
obligation to close. Any condition to the consummation of the Merger may be
waived by the party to the Agreement entitled to the benefit of such condition.
JOINDER BY CERTAIN SHAREHOLDERS AND OPTION HOLDERS.
Certain shareholders of Brownsville Bancshares have joined into the
execution of the Agreement to evidence their consent to and approval of the
transaction described in the Agreement. Each of those shareholders, who in the
aggregate hold 210,493 shares, or 68.1% of the total outstanding shares of
Brownsville Bancshares, have represented to Texas Regional that the Brownsville
Bancshares common shareholders are the only persons entitled to consent to and
vote on the Merger transaction, that such shareholder owns the number of shares
of Brownsville Bancshares indicated below is his, her or its name in the
Agreement, and that the shareholder has full power and authority to enter into
and perform the Agreement. Each shareholder further agreed to recommend the
transaction to other shareholders and to vote to approve the transaction at the
special meeting of the Brownsville Bancshares shareholders called to consider
the Merger transaction.
In addition, a specified group of shareholders, consisting of officers,
directors or shareholders owning in excess of 5% of the outstanding capital
stock of Brownsville Bancshares, have agreed not to sell, pledge, transfer or
otherwise dispose of any shares of Brownsville Bancshares stock within 30 days
prior to the effective time of the Merger, and have agreed that, until
publication of financial results covering at least 30 days of post-merger
combined operations of Brownsville Bancshares and Texas Regional, such
shareholders will not sell, pledge, transfer or otherwise dispose of any shares
of Texas Regional Common Stock acquired in the Merger, without first obtaining
the consent of Texas Regional. This group of shareholders has further agreed not
to sell, pledge, transfer or otherwise dispose of any shares of Texas Regional
stock acquired in the Merger except in a manner that is consistent with any
additional requirements imposed upon Texas Regional to permit Texas Regional to
account for the Merger as a pooling of interests. Each shareholder who is a
director or executive officer of Brownsville Bancshares has further acknowledged
and agreed that such shareholder will be subject to Rule 145 promulgated by the
Securities and Exchange Commission and has agreed not to transfer any Texas
Regional stock received by such shareholder in the Merger, except in compliance
with applicable provisions of the Securities Act of 1933, the Securities and
Exchange Act of 1934 and applicable rules and regulations promulgated by the
Securities and Exchange Commission thereunder.
The holders of outstanding options to acquire Brownsville Bancshares
capital stock have also joined into the execution of the Agreement to evidence
their consent to and approval of the transaction and to evidence their agreement
to exchange their options for Texas Regional Common Stock as provided in the
Agreement. The option holders have further agreed to terminate and cancel all of
their Brownsville Bancshares Options and have represented to Texas Regional that
the option holders named in the Agreement constitute the holders of all of the
outstanding options to acquire shares of common stock of Brownsville Bancshares,
that each such option holder holds the option to purchase the number of shares
of Brownsville Bancshares as indicated below his, her or its name in the
Agreement, that such option is unexercised and shall not be exercised unless the
Agreement is terminated, and that the option holder has
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full power and authority to enter into and perform the Agreement. The option
holders have also agreed to recommend approval of the Agreement to the
Brownsville Bancshares shareholders.
BUSINESS PENDING CONSUMMATION OF THE MERGER.
The Agreement imposes certain limitations on the conduct of Brownsville
Bancshares' business pending consummation of the Merger. Among other things,
Brownsville Bancshares must conduct its business consistent with prudent banking
practices in the same manner as conducted prior to the execution of the
Agreement. Brownsville Bancshares has also agreed not to make loans in amounts
in excess of certain thresholds without the approval of Texas Regional and has
agreed not to acquire investment securities unless they meet certain parameters.
The Agreement also requires that employment agreements and certain kinds of
employee benefit plans, including the outstanding Brownsville Bancshares Options
held by employees, be terminated at or prior to the effective time of the
Merger. See Annex A.
AMENDMENT OR TERMINATION OF THE AGREEMENT.
The Agreement may be amended at any time, before or after the meeting of
the Brownsville Bancshares shareholders, by an instrument in writing duly
executed by all parties to the Agreement. In addition, the Agreement may be
terminated, at the election of either Texas Regional or Brownsville Bancshares,
if the Merger has not become effective on or before March 1, 1998.
DISSENTERS' RIGHTS.
By following the specific procedures set forth in the Texas Business
Corporation Act, Brownsville Bancshares' shareholders have a statutory right to
dissent from the Merger. If the Merger is approved and consummated, any
Brownsville Bancshares shareholder who properly perfects his, her or its
dissenters' rights will be entitled, upon consummation of the Merger, to receive
an amount of cash equal to the fair value of his, her or its shares of
Brownsville Bancshares common stock rather than receiving the consideration set
forth in the Agreement. The following summary is not a complete statement of
statutory dissenters' rights of appraisal, and such summary is qualified by
reference to the applicable provisions of the Texas Business Corporation Act,
which is reproduced in full in Annex B to this Prospectus/Proxy Statement. A
shareholder must complete each step in the precise order prescribed by the
statute to perfect his, her or its dissenters' rights of appraisal.
Any shareholder who desires to dissent from the Merger shall file a written
objection to the Merger with Brownsville Bancshares prior to the meeting at
which the vote on the Merger shall be taken, stating that the shareholder will
exercise his, her or its right to dissent if the Merger is effective and giving
the shareholder's address to which notice thereof shall be sent. A vote against
the Merger is not sufficient to perfect a shareholder's dissenters' rights of
appraisal. If the Merger is effected, each shareholder who sent notice to
Brownsville Bancshares as described above and who did not vote in favor of the
Merger will be deemed to have dissented from the Merger (herein sometimes
referred to as a "Dissenting Shareholder"). Failure to vote against the Merger
will not constitute a waiver of the dissenters' rights of appraisal; on the
other hand, a vote in favor of the Merger will constitute such a waiver.
TRD, as the survivor in the Merger transaction, will be liable for
discharging the rights of Dissenting Shareholders and shall, within 10 days of
the effective time of the Merger, notify the Dissenting Shareholders in writing
that the Merger has been effected. Each Dissenting Shareholder so notified must,
within 10 days of the delivery of mailing of such notice, make a written demand
on TRD at Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501,
for payment of the fair value of the Dissenting Shareholder's shares as
estimated by the Dissenting Shareholder. Such demand shall state the number and
class of shares owned by the Dissenting Shareholder. The fair value of the
shares shall be the value thereof as of the date immediately preceding the date
of the shareholder meeting at which the Merger was approved, excluding any
appreciation or depreciation in anticipation of the Merger. Dissenting
Shareholders who failed to make a written demand within the 10 day period will
be bound by the Merger and lose their rights to dissent. Within 20 days after
making a demand, the Dissenting Shareholder shall submit certificates
representing his, her or its shares of Brownsville Bancshares common stock to
Texas Regional
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for notation thereon that such demand has been made. Dissenting Shareholders who
fail to submit their certificates within such 20 day period will be bound by the
Merger and lose their rights to dissent.
Within 20 days after receipt of a Dissenting Shareholder's demand letter as
described above, TRD shall deliver or mail to the Dissenting Shareholder written
notice (i) stating that TRD accepts the amount claimed in the demand letter and
agrees to pay that amount within 90 days after the effective time of the Merger
upon surrender of the relevant certificates of Brownsville Bancshares common
stock duly endorsed by the Dissenting Shareholder, or (ii) containing TRD's
written estimate of the fair value of the shares of Brownsville Bancshares
common stock together with an offer to pay such amount within 90 days after the
effective time of the Merger if TRD receives notice, within 60 days after the
effective time of the Merger, stating that the Dissenting Shareholder agrees to
accept that amount and surrenders the relevant certificates of Brownsville
Bancshares common stock duly endorsed by the Dissenting Shareholder. In either
case, the Dissenting Shareholder shall cease to have any ownership interest in
Brownsville Bancshares or Texas Regional following payment of the agreed value.
If the Dissenting Shareholder and Texas Regional cannot agree on the fair
value of the shares within 60 days after the effective time of the Merger, the
Dissenting Shareholder or TRD may, within 60 days of the expiration of the
initial 60 day period, file a petition in any court of competent jurisdiction
requesting a finding and determination of the fair value of the Dissenting
Shareholder's shares. If no petition is filed within the appropriate time
period, then all Dissenting Shareholders who have not reached an agreement with
TRD on the value of their shares shall be bound by the Merger and lose their
rights to dissent. After a hearing concerning the petition, the court shall
determine which Dissenting Shareholders have complied with the provisions of the
Texas Business Corporation Act and have become entitled to the valuation of, and
payment for, their Brownsville Bancshares shares, and shall appoint one or more
qualified appraisers to determine the value of the Brownsville Bancshares shares
in question. The appraiser shall determine such value and file a report with the
court. The court shall then in its judgment determine the fair value of the
shares of Brownsville Bancshares common stock, which judgment shall be binding
on TRD and on all Dissenting Shareholders receiving notice of the hearing. The
court shall direct TRD to pay such amount, together with interest thereon,
beginning 91 days after the effective time of the Merger to the date of
judgment, to the Dissenting Shareholders entitled thereto. The judgment shall be
payable upon the surrender to TRD of certificates representing shares of
Brownsville Bancshares common stock duly endorsed by the Dissenting
Shareholders. Upon payment of the judgment, the Dissenting Shareholders shall
cease to have any interest in Brownsville Bancshares, Texas Regional, TRD or the
Brownsville Bancshares common stock. All court costs and fees of the appraiser
shall be allotted between the parties in a manner that the court determines is
fair.
Any Dissenting Shareholder who has made a written demand on TRD for payment
of the fair value of his, her or its Brownsville Bancshares common stock shall
not thereafter be entitled to vote or exercise any other rights as a shareholder
except the statutory right of appraisal as described herein and the right to
maintain an appropriate action to obtain relief on the ground that the Merger
would be or was fraudulent. In the absence of fraud in the transaction, a
Dissenting Shareholder's statutory right to appraisal is the exclusive remedy
for the recovery of the value of his, her or its shares or money damages to the
shareholder with respect to the Merger.
Any Dissenting Shareholder who has made a written demand on TRD for payment
of the fair value of his, her or its Brownsville Bancshares common stock may
withdraw such demand at any time before payment for his, her or its shares or
before a petition has been filed with an appropriate court for determination of
the fair value of such shares. If a Dissenting Shareholder withdraws his, her or
its demand or if the Dissenting Shareholder is otherwise unsuccessful in
asserting his, her or its dissenters' rights of appraisal, such Dissenting
Shareholder shall be bound by the Merger and such shareholder's status as a
shareholder shall be restored without prejudice to any corporate proceedings,
dividends or distributions which may have occurred during the interim. See Annex
B.
It is a condition to Texas Regional's obligations under the Agreement that
not more than 5% of the outstanding shares of Brownsville Bancshares common
stock shall have demanded or be entitled to demand
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payment of the fair value of the shares as Dissenting Shareholders. If such
condition is not met, Texas Regional will be entitled to terminate the
Agreement. See "Information About the Transaction -- Other Terms and
Conditions." See also "Information About the Transaction -- Federal Income Tax
Consequences" for a description of the tax consequences of exercising
dissenters' rights.
FEDERAL INCOME TAX CONSEQUENCES.
In the opinion of KPMG Peat Marwick LLP ("KPMG"), if consummated in
accordance with the Agreement, the Merger will qualify as a
"reorganization"within the meaning of Section 368(a) of the Code. A copy of
KPMG's opinion is included with this Prospectus/Proxy Statement as Annex E. The
opinion of KPMG is not binding on the Internal Revenue Service or the courts.
KPMG has relied upon certain assumptions and representations in issuing its
opinion, including the following:
(1) The managements of Texas Regional and Brownsville Bancshares are
not aware of any plan or intention on the part of Brownsville Bancshares
shareholders to sell a number of shares of Texas Regional Common Stock that
will reduce such shareholders' ownership to a number of shares having, in
the aggregate, a value of less than 50% of the fair market value of
Brownsville Bancshares stock outstanding as of the Effective Date.
(2) TRD will acquire substantially all the assets of Brownsville
Bancshares.
(3) Following the transaction, TRD will not issue additional shares of
its stock that would result in Texas Regional losing control of TRD.
(4) Texas Regional, TRD and Texas State Bank have no plan or intention
to sell or otherwise dispose of any of the assets to be received from
Brownsville Bancshares, except for dispositions made in the ordinary course
of business.
In KPMG's opinion, the following federal income tax consequences to
Brownsville Bancshares shareholders will result from a qualification of the
Merger as a reorganization under Section 368(a) of the Code:
(1) A Brownsville Bancshares shareholder will not recognize any gain
or loss upon the exchange of his, her or its Brownsville Bancshares common
stock solely for Texas Regional Common Stock.
(2) The aggregate tax basis of Texas Regional Common Stock received by
a Brownsville Bancshares shareholder in the Merger will be same as the
aggregate basis of the Brownsville Bancshares common stock surrendered in
exchange therefor. For purposes of allocating this aggregate basis to
individual shares of Texas Regional Common Stock received, the IRS position
is that each separate block of stock surrendered shall be treated
separately. Under this rule, for example, if a Brownsville Bancshares
shareholder surrenders two blocks of Brownsville Bancshares common stock in
the Merger, having an adjusted basis of $1.00 per share for the first block
and $2.00 per share for the second block, the Texas Regional Common Stock
which he, she or it receives in exchange for each share of Brownsville
Bancshares common stock in the first block will have a basis of $1.00, and
the Texas Regional Common Stock which he, she or it receives in exchange
for each share of Brownsville Bancshares common stock in the second block
will have a basis of $2.00.
(3) The holding period of Texas Regional Common Stock to be received
by each Brownsville Bancshares shareholder will include the period during
which the shareholder held the Brownsville Bancshares common stock
surrendered in exchange therefor, provided that the Brownsville Bancshares
common stock is held as a capital asset on the date of the exchange.
(4) The payment of cash in lieu of fractional shares of Texas Regional
Common Stock will be treated as if the fractional shares were distributed
as part of the exchange and then redeemed by Texas Regional. Such cash
payment will be treated as having been received as a distribution in full
payment in exchange for the stock redeemed as provided in Section 302 of
the Code.
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(5) For a Brownsville Bancshares shareholder who dissents from the
Merger and receives solely cash in exchange for his, her or its Brownsville
Bancshares common stock, such cash will be treated as having been received
by such shareholder as a distribution in redemption of his, her or its
stock, subject to the provisions and limitations in Section 302 of the
Code.
In addition, the fair market value of the Texas Regional Common Stock
received in exchange for the cancellation of Brownsville Banchares Options will
be taxed as compensation income to the recipient. This compensation will be
subject to applicable Federal income and Social Security tax withholdings. The
tax base of the Texas Regional Common Stock received in exchange for the
cancellation of the Brownsville Bancshares Options will be the fair market value
of the Texas Regional Common Stock and the holding period will begin on
consummation of the transaction.
KPMG has audited the financial statements of Texas Regional since 1987, and
has provided other financial advisory services from time to time to Texas
Regional. Total fees paid to KPMG by Texas Regional are not material to the
total revenue of KPMG.
As indicated, neither Texas Regional, nor TRD, nor Brownsville Bancshares
has requested or anticipates requesting a ruling from the IRS with regard to the
Federal income tax consequences of the proposed merger transaction.
THIS SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IS NOT
INTENDED TO BE A SUBSTITUTE FOR CAREFUL TAX PLANNING ON AN INDIVIDUAL BASIS. IN
ADDITION TO THE FEDERAL INCOME TAX CONSEQUENCES DISCUSSED IN THIS
PROSPECTUS/PROXY STATEMENT, CONSUMMATION OF THE MERGER MAY HAVE SIGNIFICANT
FOREIGN, STATE OR LOCAL INCOME TAX CONSEQUENCES WHICH ARE NOT DISCUSSED HEREIN.
ACCORDINGLY, EACH PERSON CONSIDERING THE MERGER IS URGED TO CONSULT SUCH
SHAREHOLDER'S PERSONAL TAX ADVISERS WITH SPECIFIC REFERENCE TO THE EFFECT OF THE
TRANSACTION ON SUCH SHAREHOLDER'S OWN PARTICULAR FACTS AND CIRCUMSTANCES.
GOVERNMENTAL APPROVALS.
Consummation of the Merger is subject to approval by the shareholders of
Brownsville Bancshares, the receipt of required regulatory approvals from the
Federal Reserve Board under the Bank Holding Company Act of 1956, as amended,
and the satisfaction or waiver of other conditions as described in the
Agreement. In addition, the merger of Brownsville National Bank with and into
Texas State Bank is subject to the approval of the Texas Banking Department. It
is expected that the Federal Reserve Board and the Texas Banking Department will
approve the respective transactions.
A formal application under the Bank Holding Company Act of 1956 was filed
with the Federal Reserve Board on January 7, 1998. Upon receipt of Federal
Reserve Board approval, the Merger cannot be consummated until the expiration of
15 days following the date of approval, during which time the United States
Department of Justice, pursuant to the Bank Holding Company Act of 1956, may
bring an action to oppose the Merger. An application was filed with the Texas
Banking Department on January 8, 1998, for the merger of Brownsville National
Bank with and into Texas State Bank. Closing of the transaction is contingent
upon receipt of all such approvals.
ACCOUNTING TREATMENT.
Texas Regional anticipates accounting for the Merger under the
pooling-of-interests method of accounting for financial reporting and for all
other purposes, and the Company has received such assurances as its deems
appropriate that the Merger will qualify for pooling-of-interests accounting
treatment, including the receipt of a letter from KPMG, which will be updated as
of the effective time of the Merger, to the effect that the Merger will qualify
for pooling-of-interests accounting treatment. Under this accounting method, at
the effective time of the Merger, Brownsville Bancshares' assets and liabilities
will be added at their recorded book values to Texas Regional's consolidated
balance sheet, and Brownsville Bancshares' shareholders' equity will be added to
Texas Regional's consolidated balance sheet. Income and
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other financial statements of Texas Regional issued after consummation of the
Merger will be restated retroactively to reflect the consolidated operations of
Brownsville Bancshares and Texas Regional as if the Merger had taken place prior
to the periods covered by such financial statements.
Because the requirements for pooling-of-interests accounting are complex
and include matters outside of the control of the Company, there can be no
certainty that accounting for the transaction under that method of accounting
will be permitted. The pro forma information contained herein assumes that the
transaction will be accounted for under the pooling-of-interests method.
DESCRIPTION OF TEXAS REGIONAL'S SECURITIES
Texas Regional is authorized to issue Common Stock and preferred stock. A
total of 20,000,000 common shares and 10,000,000 preferred shares are
authorized. As of the date of this Prospectus/Proxy Statement, 13,110,639 shares
of Texas Regional Common Stock are issued and outstanding, and no preferred
shares are issued or outstanding. In addition to the shares proposed to be
issued to Brownsville Bancshares shareholders and option holders in connection
with the Merger, Texas Regional has agreed to issue up to an aggregate of
approximately 308,076 shares of Texas Regional Common Stock in connection with
Texas Regional's proposed acquisition of TB&T Bancshares, Inc. and 343,924
shares of Texas Regional Common Stock are reserved for issuance in connection
with options granted to employees under Texas Regional's employee stock option
plans. Further issuance of shares of Texas Regional Common Stock after the
effective time of the Merger would have the effect of reducing the former
Brownsville Bancshares shareholders' proportionate interest in Texas Regional.
Texas Regional shareholders do not have preemptive rights for the
acquisition of additional Texas Regional shares. Each holder of Texas Regional
Common Stock is entitled to one vote for each share held on all matters
submitted to common shareholders, including election of directors; however, the
holders of Texas Regional Common Stock do not have cumulative voting rights in
the election of directors. The Texas Regional share certificates issued to
Brownsville Bancshares shareholders in connection with the Merger will bear
legends describing the fact that the Texas Regional Articles of Incorporation
deny preemptive rights and do not allow cumulative voting in the election of
directors.
Texas Regional presently has three separate stock option plans, under the
terms of which Texas Regional has granted options to purchase a total of 343,924
shares of the Class A Voting Common stock to certain key employees for their
purchase. In 1990, Texas Regional adopted the Texas Regional Bancshares, Inc.
Employee Stock Ownership Plan (with 401(k) provisions) (the "KSOP Plan"). As of
September 30, 1997, a total of 505,078 shares of Texas Regional Common Stock
were held for the benefit of Texas Regional employees pursuant to the KSOP. Upon
consummation of the merger with Brownsville Bancshares, it is anticipated that
the existing Brownsville Bancshares employee stock options will be terminated
(as will any other employee benefit plan of Brownsville Bancshares). It is
anticipated that employees of Brownsville Bancshares who become employees of
Texas Regional and who otherwise qualify will become participants in the Texas
Regional KSOP.
Holders of Texas Regional common stock are entitled to dividends as and
when declared by the Board of Directors of Texas Regional out of legally
available funds. Texas Regional has declared the following dividends on its
common shares since January 1, 1994:
AGGREGATE DIVIDENDS
DIVIDENDS DECLARED
APPLICABLE TIME PERIOD DECLARED PER SHARE
- ---------------------------------------- ---------- ----------
January 1, 1994 to December 31, 1994.... $1,486 $ 0.16
January 1, 1995 to December 31, 1995.... 2,478 0.27
January 1, 1996 to December 31, 1996.... 3,232 0.27
January 1, 1997 to December 9, 1997..... 4,803 0.36
Texas Regional's Board of Directors intends to maintain its present policy of
paying regular quarterly cash dividends. However, the declaration and amount of
future dividends will depend on circumstances existing
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at the time, including Texas Regional's earnings, financial condition and
capital requirements, as well as regulatory limitations and such other factors
as Texas Regional's Board of Directors deems relevant.
The principal assets and sources of income for Texas Regional consists of
its investment in Texas State Bank, which is a separate legal entity. Federal
and state banking regulations applicable to Texas Regional and Texas State Bank
require minimum levels of capital which limits the amounts available for payment
of dividends by Texas State Bank.
Texas Regional declared a 3-for-2 stock split effected as a stock dividend
to holders of record of its common stock on July 31, 1997, and distributed that
dividend during August 1997. All shares of Texas Regional Common Stock now
outstanding are, and the shares of Texas Regional Common Stock to be issued in
the Merger will be, fully paid and nonassessable with no personal liability
attaching to the ownership thereof.
In the event of liquidation, after payment of all creditors and after
payment of the liquidation preference applicable to any then-outstanding series
of preferred shares, the holders of Texas Regional Common Stock will be entitled
to receive pro rata any assets remaining for distribution to shareholders.
Texas Regional has the authority to issue up to 10,000,000 preferred
shares, $1.00 par value per share, although no shares of preferred stock are
presently outstanding. Texas Regional's Board of Directors has the authority to
adopt resolutions establishing and designating one or more series of preferred
shares, and to issue the preferred shares with such rights, privileges and
limitations as the Board may deem appropriate, without approval of the holders
of Texas Regional Common Stock. Upon issuance, the preferred shares may have
dividend rights, liquidation preference or other rights superior to the holders
of shares of Texas Regional Common Stock.
COMPARATIVE RIGHTS OF SHAREHOLDERS
Upon consummation of the transactions contemplated by the Agreement, the
shareholders of Brownsville Bancshares will become shareholders of Texas
Regional. Both Texas Regional and Brownsville Bancshares are Texas business
corporations, organized under the Texas Business Corporation Act, and,
therefore, holders of capital stock of Brownsville Bancshares and holders of
Texas Regional Common Stock have similar rights in many respects. Each
shareholder is entitled to one vote for each share held by that shareholder;
each shareholder is entitled to such dividends as the Board of Directors may
declare from legally available funds; and each shareholder is, upon liquidation,
entitled to receive pro rata any assets distributed to common shareholders.
Unlike shareholders of Brownsville Bancshares, who have preemptive rights,
holders of Texas Regional Common Stock have no preemptive rights to subscribe
for the purchase of any shares of Texas Regional Common Stock which may be
issued by Texas Regional from time to time. Because the number of authorized
shares of Texas Regional Common Stock exceeds the number of issued and
outstanding shares, the Board of Directors of Texas Regional could authorize the
sale of up to 5,596,285 shares of Common Stock (less the shares to be issued to
Brownsville Bancshares shareholders and option holders in connection with the
Brownsville Bancshares Merger, and to TB&T Bancshares shareholders in connection
with the TB&T Bancshares, Inc., transaction) without further authorization or
approval from the Texas Regional shareholders. Presently, there are no preferred
shares of Texas Regional issued and outstanding, but 10,000,000 preferred shares
are authorized for issuance. The preferred shares may be issued in one or more
series, without further authorization or approval from the Texas Regional
shareholders. Upon liquidation of Texas Regional, the holders of Common Stock
would share in proceeds of liquidation only after the liquidation preference is
paid in respect of any outstanding preferred shares. See "Description of Texas
Regional Securities."
Like Brownsville Bancshares, Texas Regional is registered as a bank holding
company under the Bank Holding Company Act of 1956, as amended, and, therefore,
its activities are limited to banking, activities closely related to banking and
other activities permitted by that Act. Texas Regional in 1996 established a
subsidiary, TSB Securities, Inc., to engage in the securities brokerage
business. In addition, Texas Regional
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provides data processing services for other financial institutions and may in
the future provide other services in addition to the present commercial banking
business of its subsidiary, Texas State Bank.
RESALES OF TEXAS REGIONAL COMMON STOCK
For those Brownsville Bancshares shareholders who are not "affiliates" of
Brownsville Bancshares, the Texas Regional Common Stock received in the Merger
may be freely traded. However, although the shares of Texas Regional Common
Stock to be issued in the proposed merger will have been registered under the
Securities Act of 1933, as amended, any public reoffering or sale of such shares
by any person who is an "affiliate" of Brownsville Bancshares at the time such
merger is submitted to a vote of the shareholders of Brownsville Bancshares will
require either (i) the further registration under the Securities Act of the
shares of Texas Regional Common Stock to be sold; (ii) compliance with
applicable provisions of Rules 144 and 145 promulgated under the Securities Act
of 1933 (permitting sales under certain circumstances); or (iii) the
availability of an exemption from such registration. The foregoing restrictions
will apply to all "affiliates" of Brownsville Bancshares and Texas Regional and
stop transfer instructions will be given to Texas Regional's transfer agent with
respect to the shares of Texas Regional Common Stock received by them. An
"affiliate" is defined for these purposes to include a "controlling person,"
which in this case would mean, generally, a principal shareholder or an
executive officer or director of Brownsville Bancshares and may include certain
related parties.
Generally, Rules 144 and 145 would permit such an affiliate to sell within
any three-month period a number of shares that does not exceed the greater of
one percent (1%) of the then outstanding shares of Texas Regional Common Stock
or the average weekly trading volume of such stock reported through the NASDAQ
National Market System during the four calendar weeks preceding such sale,
provided that Texas Regional has filed required periodic reports with the
Securities and Exchange Commission and such sales are made in normal "brokers'
transactions" or in transactions directly with a "market maker" without the
solicitation of buy orders by the brokers or such affiliates. Texas Regional
Common Stock is not listed on an exchange but is traded in the NASDAQ National
Market System over-the-counter market. If a present affiliate of Brownsville
Bancshares ceases to be an affiliate for a period of at least three months, Rule
145 will permit that person to sell his or her Texas Regional securities,
without limitation as to amount of securities to be sold, after he or she has
been the beneficial owner of the Texas Regional securities for at least two
years as determined in accordance with paragraph (d) of Rule 144.
In addition, the executive officers, directors and certain shareholders of
Brownsville Bancshares have agreed not to sell, pledge, transfer or otherwise
dispose of their shares of Texas Regional Common Stock until the publication of
financial results covering at least 30 days of post-Merger combined operations
of Texas Regional and Brownsville Bancshares, except with the consent of Texas
Regional, to permit Texas Regional to comply with certain requirements imposed
by the Securities and Exchange Commission and the Financial Accounting Standards
Board for Texas Regional's accounting for the Merger as a pooling-of-interests.
See "Information About the Transaction -- Joinder by Certain Shareholders."
INFORMATION ABOUT TEXAS REGIONAL
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.
Texas Regional has a class of securities registered pursuant to Section 12
of the Securities Exchange Act of 1934 (the "1934 Act"), as amended, and is a
reporting company for purposes of the 1934 Act, and has been for a period of at
least thirty-six months. For this reason, and because Texas Regional meets other
requirements provided by applicable rules and regulations governing registration
of the transaction, as promulgated by the Securities and Exchange Commission,
Texas Regional has elected to incorporate by reference certain information with
respect to the Corporation.
INTERESTS OF CERTAIN NAMED PERSONS.
No director or executive officer of Texas Regional has any material direct
or indirect financial interest in Brownsville Bancshares, or the Merger, other
than as a director, executive officer or shareholder of Texas
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Regional. However, McGinnis, Lochridge & Kilgore, L.L.P., has rendered an
opinion concerning the validity of the securities being offered pursuant to this
Prospectus/Proxy Statement and certain other matters. Joe M. Kilgore, a partner
in the firm, is a Director of Texas Regional and is the beneficial owner, as of
September 30, 1997, of approximately 277,510 shares of Texas Regional Common
Stock.
OPTION PLANS.
At a meeting of the Texas Regional Board of Directors held on December 9,
1997, the Board adopted a new incentive stock option plan and a new nonstatutory
stock option plan for the benefit of employees of the company. The total number
of shares to be issued under the Texas Regional Bancshares, Inc., 1997 Incentive
Stock Option Plan is 100,000 shares of Texas Regional Common Stock, and the
total number of shares to be issued under the Texas Regional Bancshares, Inc.,
1997 Nonstatutory Stock Option Plan is 125,000 shares of Texas Regional Common
Stock. Both plans were adopted subject to receipt of shareholder approval. No
options have been granted pursuant to either the 1997 Incentive Stock Option
Plan or the 1997 Nonstatutory Stock Option Plan.
PENDING TRANSACTIONS.
On October 15, 1997, Texas Regional entered into an Agreement and Plan of
Reorganization for the acquisition by merger of TB&T Bancshares, Inc. ("TB&T
Bancshares"). As of September 30, 1997, TB&T Bancshares had total assets of
$43.8 million, total loans (net of allowance for loan losses) of $21.6 million,
and total deposits of $39.4 million. TB&T Bancshares is expected to be merged
with and into TRD as soon as applicable conditions, including receipt of
regulatory approval, are satisfied. Texas Regional currently expects the TB&T
Bancshares transaction to be closed contemporaneously with the closing of the
Brownsville Bancshares transaction, although neither transaction is contingent
upon the closing of the other. The shareholders of TB&T Bancshares will receive
an aggregate of approximately 308,076 shares of Texas Regional Common Stock in
exchange for their TB&T Bancshares shares in connection with the merger
transaction (less shares returned to Texas Regional from a holdback escrow), and
TB&T Bancshares' wholly-owned subsidiary, Texas Bank and Trust of Brownsville,
will be merged with and into Texas State Bank. Texas Bank and Trust operates
from one banking location, at 3201 Central Boulevard in Brownsville, Texas. The
Agreement and Plan of Reorganization with TB&T Bancshares provides that a total
of 49,958 of the shares of Texas Regional Common Stock will be delivered into
the holdback escrow, and held until resolution of certain claims pending against
TB&T Bancshares' subsidiary, Texas Bank & Trust, primarily related to alleged
actions of a former employee of the Bank and certain missing certificates of
deposit. Pursuant to the Holdback Escrow Agreement, TB&T Bancshares'
shareholders will share losses related to these matters; however, there can be
no assurance that the losses incurred will not exceed the value of the limited
number of escrowed shares.
In November 1997, Texas Regional entered into an agreement in principle for
the acquisition by merger of Raymondville Bancorp, Inc. ("Raymondville
Bancorp"). As of September 30, 1997, Raymondville Bancorp had total assets of
$60.4 million, total loans (net of allowance for loan losses) of $25.4 million,
and total deposits of $53.5 million. If the parties successfully negotiate a
mutually acceptable definitive agreement, Raymondville Bancorp will be merged
with a newly formed subsidiary of TRD as soon as applicable conditions,
including receipt of regulatory approval, are satisfied. As part of the
agreement in principle with Raymondville, the sole shareholder of Raymondville
has agreed to bear a portion of losses related to stolen or forged money orders
deposited into certain accounts held by Raymondville's wholly owned subsidiary,
Bank of Texas; however, there can be no assurance that the losses incurred on
those accounts and related return items will not exceed the limited amount of
the shareholder's reimbursement obligation and collateral provided by the
account holder. Texas Regional currently expects the Raymondville Bancorp
transaction to be closed contemporaneously with or as soon as practicable
following the closing of the Brownsville Bancshares transaction, although
neither transaction is contingent upon the closing of the other. Under the
agreement in principle, which is not binding on either Texas Regional or
Raymondville, upon closing, the sole shareholder of Raymondville Bancorp would
receive an aggregate of $9,600,000 cash in exchange for his Raymondville Bancorp
shares, an affiliate of
32
<PAGE>
Raymondville Bancorp would receive $100,000 in consideration of a covenant not
to compete, and Raymondville Bancorp's wholly owned subsidiary, Bank of Texas of
Raymondville, would be merged with and into Texas State Bank. Bank of Texas
operates from two banking locations, one each in Raymondville, Texas, and at
2000 F.M. 802 in Brownsville, Texas.
If the Merger with Brownsville Bancshares, the merger with TB&T Bancshares
and the merger with Raymondville Bancorp are all consummated, as planned, Texas
State Bank will have a total of twenty-one full service banking locations in the
Rio Grande Valley of Texas.
INFORMATION ABOUT BROWNSVILLE BANCSHARES
DESCRIPTION AND DEVELOPMENT OF BUSINESS.
Brownsville National Bank was chartered as a national bank, under the laws
of United States of America, in 1974, and opened for business in 1974.
Brownsville Bancshares was chartered in 1983, became a bank holding company upon
its acquisition of Brownsville National in 1983. In 1996, Brownsville Bancshares
formed BNB Bancshares, a Delaware corporation, and contributed all of the
capital stock of Brownsville National to BNB Bancshares, Inc. Substantially all
of the assets and earnings of Brownsville Bancshares is derived from the
ownership and operation of Brownsville National.
Since it opened for business, Brownsville Bancshares has provided retail
and commercial banking services for customers in Brownsville, Texas and adjacent
areas of the Rio Grande Valley. At September 30, 1997, Brownsville Bancshares
employed approximately 55 persons. Brownsville National's banking house is
located at 629 E. Elizabeth, Brownsville, Texas, and the bank has one branch
office, located at 3255 Boca Chica Boulevard, Brownsville, Texas. Brownsville
Bancshares' telephone number is (956) 546-4503.
Brownsville National provides its customers with a variety of banking
services. For businesses, Brownsville National offers checking facilities,
certificates of deposit, short term loans for working capital purposes, mortgage
loans, term loans for fixed assets and expansion needs and other commercial
loans to fit the needs of its business customers. Where the borrowing needs of
customers exceed the limits of Brownsville National for any one customer it may
participate with other banks in making such loans. The services provided for
individuals by Brownsville National include checking accounts, savings accounts,
certificates of deposit and mortgage and consumer loan programs, including
installment loans for home repairs and for the purchases of consumer goods,
including automobiles, trucks and boats. Brownsville National also provides
travelers checks and money orders. Brownsville National does not provide trust
services and does not operate a trust department.
Brownsville Bancshares has had transactions with its officers and directors
and affiliates of its officers and directors. Substantially all transactions
have in the recent past been in the ordinary course of business on substantially
the same terms as those prevailing for comparable transactions with others.
Brownsville Bancshares adopted a stock option plan for its key employees
effective June 10, 1997, and has granted options to acquire an aggregate of
21,300 shares of Brownsville Bancshares pursuant to that plan. The holders of
Brownsville Bancshares options have agreed to terminate their options in
consideration of and in exchange for 1.77634 shares of Texas Regional Common
Stock for each share subject to such holder's options. See "Information About
the Transaction -- Terms of the Agreement" and "Information About the
Transaction -- Joinder by Certain Shareholders and Option Holders." All employee
benefit plans of Brownsville Bancshares are expected to be terminated as of the
effective time of the Merger. Employees of Brownsville Bancshares who become
employees of Texas Regional will be entitled to participate in employee benefit
plans offered generally by Texas Regional to its employees, and, if they meet
eligibility requirements of the Texas Regional KSOP, will become participants in
the KSOP.
As of September 30, 1997, the ratio of stockholders' equity to total assets
of Brownsville Bancshares was 12.02%. This was in excess of the minimum ratio of
equity to total assets required by applicable
33
<PAGE>
regulatory authorities. See "Selected Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operation of Brownville
Bancshares" and the Brownsville Bancshares financial statements included as
Annex D to this Prospectus/Proxy Statement.
MARKET PRICES OF AND DIVIDENDS PAID ON BROWNSVILLE BANCSHARES CAPITAL STOCK.
There is no public market for Brownsville Bancshares' capital stock. The
following information is derived from the stock transfer records of Brownsville
Bancshares, and from management's discussions with purchasers or sellers or
others familiar with the transactions. The chart reflects all arms-length, third
party purchase and sale transactions known to Brownsville Bancshares management
which have occurred during the period of January 1, 1995 through September 30,
1997. The number of shares and range of prices have been adjusted for stock
splits and stock dividends since the date of the relevant transaction.
NUMBER OF RANGE OF PRICES
APPLICABLE TIME PERIOD SHARES PER SHARE
- ------------------------------------- --------- ---------------
January 1 -- March 31, 1995.......... 858 $ 28.00
April 1 -- June 30, 1995............. 585 30.00
July 1 -- September 30, 1995......... 430 30.00
October 1 -- December 31, 1995....... -- --
January 1 -- March 31, 1996.......... 308 30.00
April 1 -- June 30, 1996............. 854 -- (1)
July 1 -- September 30, 1996......... 1,143 -- (1)
October 1 -- December 31, 1996....... -- --
January 1 -- March 31, 1997.......... -- --
April 1 -- June 30, 1997............. 854 -- (1)
July 1 -- September 30, 1997......... 207 37.00
- ------------
(1) The price per share for these transactions is unknown to management of
Brownsville Bancshares.
Management of Brownsville Bancshares knows of no other arms-length
negotiated sale transactions. Among the latest transactions involving
Brownsville Bancshares capital stock, known to management of Brownsville
Bancshares, was the sale of 207 shares of Brownsville Bancshares capital stock
which occurred in July 1997, at a price of $37.00 per share. This transaction
was the most recent one known to management of Brownsville Bancshares.
Brownsville Bancshares last declared a cash dividend in September 1997, of
$1.60 per share, which dividend was paid in October 1997. The following chart
indicates the cash dividends declared since January 1, 1995.
AGGREGATE DIVIDENDS
APPLICABLE TIME PERIOD DIVIDENDS PER SHARE
- ------------------------------------- ---------- ----------
January 1 -- March 31, 1995.......... $ -- $--
April 1 -- June 30, 1995............. 308,917 1.00
July 1 -- September 30, 1995......... -- --
October 1 -- December 31, 1995....... 308,917 1.00
January 1 -- March 31, 1996.......... -- --
April 1 -- June 30, 1996............. 308,917 1.00
July 1 -- September 30, 1996......... -- --
October 1 -- December 31, 1996....... 494,267 1.60
January 1 -- March 31, 1997.......... -- --
April 1 -- June 30, 1997............. 308,917 1.00
July 1 -- September 30, 1997......... -- --
October 1 -- December 31, 1997....... 494,267 1.60
34
<PAGE>
BROWNSVILLE BANCSHARES STOCK OWNERSHIP.
At September 30, 1997, the amount and percentage of present holdings of
Brownsville Bancshares capital stock owned beneficially by persons known to
management of Brownsville Bancshares to be the beneficial owners of more than 5%
of the Brownsville Bancshares capital stock, and Brownsville Bancshares capital
stock owned beneficially by each director, each officer, and all directors and
officers as a group, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF TOTAL TEXAS
OUTSTANDING REGIONAL
OFFICE AT AMOUNT AND BROWNSVILLE SHARES
BROWNSVILLE NATURE OF BANCSHARES TO BE
BANCSHARES OWNERSHIP SHARES RECEIVED*
------------- ---------- ----------- ---------
<S> <C> <C> <C>
Horacio L. Barrera................... Director 4,835(1) 1.57% 14,824
Jesus M. Castellano.................. Chairman of 24,489(2) 7.93 75,085
the Board and
Director
Paul Cunningham...................... Secretary and 283 0.09 867
Director
Abraham Galonsky..................... 39,986(3) 12.94 122,600
Alfredo Gavito....................... Director 17,137(4) 5.55 52,543
Alter Holand......................... 25,585(5) 8.28 78,445
Lee Kirkpatrick...................... President and 415 0.13 1,272
Director
Israel Lizka......................... Director 37,329(6) 12.08 114,453
Manuel Lopez......................... Director 1,377 0.45 4,221
Blanca Vela.......................... Director 821 0.27 2,517
Isabel Vezzetti...................... Director 3,998 1.29 12,258
Mario Yzaguirre...................... Director 21,628(7) 7.00 66,313
All officers and directors as a group
(10 persons)....................... 112,312 36.36% 344,353
</TABLE>
- ------------
* Represents the approximate number of shares of Texas Regional Common Stock
to be issued in connection with the closing of the merger transaction
described in this Prospectus/Proxy Statement.
(1) Total includes shares held of record by Mr. Barrera and certain members of
Mr. Barrera's family.
(2) Total includes shares held of record by Mr. Castellano and certain members
of Mr. Castellano's family.
(3) Total includes shares held of record by Mr. Galonsky and certain members of
Mr. Galonsky's family.
(4) Total includes shares held of record by Mr. Gavito, by a business controlled
by Mr. Gavito and by certain members of Mr. Gavito's family.
(5) Total includes shares held of record by Mr. Holand, by Mr. Holand as
executor of the Estate of Szama Holand, by corporations owned or controlled
by Mr. Holand and by certain members of Mr. Holand's family.
(6) Total includes shares held of record by Mr. Lizka and certain members of Mr.
Lizka's family.
(7) Total includes shares held of record by Mr. Yzaguirre and by certain members
of Mr. Yzaguirre's family.
Officers, directors and shareholders owning in excess of 5% of the capital
stock of Brownsville Bancshares, and certain related parties, who hold in the
aggregate 68.1% of the outstanding Brownsville Bancshares shares, have joined
into the execution of the Agreement to evidence their consent to the transaction
and their agreement to vote their shares of Brownsville Bancshares in favor of
the Merger at the special meeting of the shareholders.
As of September 30, 1997 there were approximately 314 holders of record of
Brownsville Bancshares capital stock. Those holders of Brownsville Bancshares
capital stock who do not exercise dissenters' rights of appraisal will become
Texas Regional shareholders upon consummation of the transaction described in
this Prospectus/Proxy Statement, and will no longer be shareholders of
Brownsville Bancshares. See "Information About the Transaction -- Dissenters'
Rights."
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF BROWNSVILLE BANCSHARES, INC.
The following discussion and analysis presents some of the more pertinent
factors affecting Brownsville Bancshares at December 31, 1996 and 1995, and
September 30, 1997, and the results of operations of Brownsville Bancshares for
the three years ended December 31, 1996, and the nine months ended September 30,
1997 and 1996. This discussion should be read in conjunction with the financial
statements, notes thereto and other financial information appearing elsewhere in
this Prospectus/Proxy Statement.
RESULTS OF OPERATIONS
GENERAL.
The earnings of Brownsville Bancshares depend primarily on Brownsville
Bancshares' net interest income (i.e., the difference between the income earned
on Brownsville Bancshares' loans and investments and the interest paid on its
deposits and other borrowed funds). Among the factors affecting net interest
income are the type and volume of its deposits and other borrowed funds, and the
relative sensitivity of its interest-earning assets and its interest-bearing
liabilities to changes in market interest rates.
Brownsville Bancshares' income is also affected by fees it receives from
other banking services, by its provision for loan losses and by the level of its
operating expenses. All aspects of Brownsville Bancshares' operations are
affected by general market, economic, and competitive conditions.
Brownsville Bancshares reported net income of $1.1 million for the nine
month period ended September 30, 1997, an increase of $104 thousand over net
income of $964 thousand for the nine month period ended September 30, 1996.
Pretax income was $1.6 million for the nine months ended September 30, 1997, an
increase from the $1.4 million earned during the nine months ended September 30,
1996. Brownsville Bancshares had net income of $1.2 million for the year ended
December 31, 1996, $1.3 million for the year ended December 31, 1995, and $1.3
million for the year ended December 31, 1994.
Changes occurring in the major components of Brownsville Bancshares' income
statements for such periods are discussed below.
NET INTEREST INCOME.
Net interest income is the primary source of income for Brownsville
Bancshares and represents the amount by which interest generated by earning
assets exceeds the cost of funds, primarily interest paid to Brownsville
Bancshares' depositors on interest-bearing accounts. Taxable-equivalent net
interest income was $2.9 million for the nine months ended September 30, 1997, a
1.12% increase from taxable-equivalent net interest income of $2.8 million for
the nine months ended September 30, 1996. Average loans of $41.6 million for the
nine months ended September 30, 1997 increased 1.38% over average loans of $41.0
million for the same period in 1996. Average interest-bearing deposits for the
nine months ended September 30, 1997 were $72.4 million, an increase of 5.31%
over average interest-bearing deposits of $68.7 million for the same period in
1996.
Taxable-equivalent net interest income remained level at $3.8 million for
the years ended December 31, 1996 and 1995. Average loans of $41.1 million for
the year ended December 31, 1996 decreased 1.33% from average loans of $41.6
million for the same period in 1995. Average interest-bearing deposits for the
year ended December 31, 1996 were $69.5 million, an increase of 5.78% over
average interest-bearing deposits of $65.7 million for the same period in 1995.
Taxable-equivalent net interest income was $3.8 million for the year ended
December 31, 1995, a 1.71% decrease from taxable-equivalent net interest income
of $3.9 million for 1994. Average loans of $41.6 million for the year ended
December 31, 1995 increased 3.49% over average loans of $40.2 million for the
same period in 1994. Average interest-bearing deposits for the year ended
December 31, 1995 were $65.7 million, a decrease of 4.37% from average
interest-bearing deposits of $68.7 million for the same period in 1994.
36
<PAGE>
The net yield on interest-earning assets experienced a small decrease for
the nine months ended September 30, 1997 compared to September 30, 1996. The
reason the net yield decreased was a small decline in the overall yield on
interest-earning assets while rates on interest-bearing liabilities increased 17
basis points due to the competitive market for deposits.
The net yield on interest-earning assets decreased by 24 basis points for
the year ended December 31, 1996 compared to the year ended December 31, 1995.
During this period yields on interest-earning assets declined 22 basis points
while rates on interest-bearing liabilities remained level.
The following table sets forth for the periods indicated an analysis of net
interest income by each major category of interest-earning assets and
interest-bearing liabilities. The rates earned and paid on each major type of
asset and liability account are set forth beside the average level in the
account for the period.
37
<PAGE>
NINE MONTH FINANCIAL SUMMARY
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
AVERAGE YIELD/ AVERAGE YIELD/
Taxable-Equivalent Basis(1) BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- --------- ------- -------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial.......................... $ 13,767 $ 905 8.79% $ 13,185 $ 855 8.66%
Real Estate......................... 23,948 1,762 9.84 24,848 1,898 10.20
Consumer............................ 3,847 391 13.59 2,964 287 12.93
-------- --------- -------- ---------
Total Loans.................... 41,562 3,058 9.84 40,997 3,040 9.90
-------- --------- -------- ---------
Investment Securities
Taxable............................. 34,533 1,593 6.17 35,090 1,582 6.02
Tax-Exempt.......................... 1,297 76 7.83 1,305 77 7.88
-------- --------- -------- ---------
Total Investment Securities.... 35,830 1,669 6.23 36,395 1,659 6.09
Due from Time........................... 289 12 5.55 195 7 4.80
-------- --------- -------- ---------
Federal Funds Sold...................... 12,595 504 5.35 7,670 303 5.28
-------- --------- -------- ---------
Total Interest-Earnings
Assets....................... 90,276 5,243 7.76 85,257 5,009 7.85
-------- --------- -------- ---------
Cash and Due from Banks................. 4,993 4,619
Premises and Equipment, Net............. 1,806 1,947
Other Assets............................ 1,292 1,236
Allowance for Loan Losses............... (266) (293)
-------- --------
Total Assets................... $ 98,101 $ 92,766
======== ========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities
Savings............................. $ 8,393 183 2.92 $ 8,896 196 2.94
Money Market & NOW Accounts......... 10,121 185 2.44 10,198 186 2.44
Time................................ 52,590 1,944 4.94 48,333 1,728 4.78
Other Time-IRA's.................... 1,163 46 5.29 1,191 46 5.16
State & Other Public Funds.......... 98 4 5.46 98 4 5.45
-------- --------- -------- ---------
Total Interest-Bearing
Deposits..................... 72,365 2,362 4.36 68,716 2,160 4.20
-------- --------- -------- ---------
Federal Funds Purchased................. -- -- -- -- -- --
-------- --------- -------- ---------
Total Interest-Bearing
Liabilities.................. 72,365 2,362 4.36 68,716 2,160 4.20
-------- --------- -------- ---------
Demand Deposits......................... 13,131 12,183
Other Liabilities....................... 898 658
-------- --------
Total Liabilities.............. 86,394 81,557
-------- --------
Shareholders' Equity.................... 11,707 11,209
-------- --------
Total Liabilities and
Shareholders' Equity......... $ 98,101 $ 92,766
======== ========
Net Interest Income..................... $ 2,881 $ 2,849
========= =========
Net Yield on Interest-Earning Assets.... 4.27% 4.46%
======= =======
- ------------
</TABLE>
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 34% effective federal income tax rate).
38
<PAGE>
THREE YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------- ---------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
Taxable-Equivalent Basis(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
-------- --------- ------- --------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets
Interest-Earning Assets
Loans
Commercial.......................... $ 13,297 $ 1,155 8.69% $ 13,109 $ 1,167 8.90% $ 13,100
Real Estate......................... 24,726 2,508 10.14 25,423 2,553 10.04 23,727
Consumer............................ 3,064 391 12.76 3,107 381 12.26 3,406
-------- --------- --------- --------- ---------
Total Loans.................... 41,087 4,054 9.87 41,639 4,101 9.85 40,233
-------- --------- --------- --------- ---------
Investment Securities
Taxable............................. 35,035 2,102 6.00 33,991 2,077 6.11 36,324
Tax-Exempt.......................... 1,303 102 7.83 1,056 85 8.05 754
-------- --------- --------- --------- ---------
Total Investment Securities.... 36,338 2,204 6.07 35,047 2,162 6.17 37,078
-------- --------- --------- --------- ---------
Due From Time........................... 219 10 4.57 226 11 4.87 235
-------- --------- --------- --------- ---------
Federal Funds Sold...................... 8,559 451 5.27 4,989 287 5.75 6,714
-------- --------- --------- --------- ---------
Total Interest-Earnings
Assets....................... 86,203 6,719 7.79 81,901 6,561 8.01 84,260
-------- --------- --------- --------- ---------
Cash and Due from Banks................. 4,616 4,713 5,177
Premises and Equipment, Net............. 1,920 1,993 2,173
Other Assets............................ 1,246 1,161 1,028
Less Allownce for Loan Losses........... (290) (304) (284)
-------- --------- ---------
Total Assets................... $ 93,695 $ 89,464 $ 92,354
======== ========= =========
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities
Savings............................. $ 8,834 261 2.95 $ 9,910 315 3.18 $ 12,736
Money Market & NOW Accounts......... 10,225 249 2.44 10,526 288 2.74 13,677
Time................................ 49,119 2,359 4.80 43,928 2,104 4.79 40,770
Other Time-IRA's.................... 1,186 61 5.14 1,166 56 4.80 1,139
State & Other Public Funds.......... 98 5 5.10 136 6 4.41 343
-------- --------- --------- --------- ---------
Total Interest-Bearing
Deposits..................... 69,462 2,935 4.23 65,666 2,769 4.22 68,665
-------- --------- --------- --------- ---------
Federal Funds Purchased................. -- -- 3 -- -- --
-------- --------- --------- --------- ---------
Total Interest-Bearing
Liabilities.................. 69,462 2,935 4.23 65,669 2,769 4.22 68,665
-------- --------- --------- --------- ---------
Demand Deposits......................... 12,291 12,984 13,910
Other Liabilities....................... 679 489 437
-------- --------- ---------
Total Liabilities.............. 82,432 79,142 83,012
-------- --------- ---------
Shareholders' Equity.................... 11,263 10,322 9,342
-------- --------- ---------
Total Liabilities and
Shareholders' Equity......... $ 93,695 $ 89,464 $ 92,354
======== ========= =========
Net Interest Income..................... $ 3,784 $ 3,792
========= =========
Net Yield on Interest-Earning Assets.... 4.39% 4.63%
======= =======
YIELD/
Taxable-Equivalent Basis(1) INTEREST RATE
--------- -------
Assets
Interest-Earning Assets
Loans
Commercial.......................... $ 1,001 7.64%
Real Estate......................... 2,111 8.90
Consumer............................ 388 11.39
---------
Total Loans.................... 3,500 8.70
---------
Investment Securities
Taxable............................. 2,196 6.05
Tax-Exempt.......................... 62 8.22
---------
Total Investment Securities.... 2,258 6.09
---------
Due From Time........................... 8 3.40
---------
Federal Funds Sold...................... 276 4.11
---------
Total Interest-Earnings
Assets....................... 6,042 7.17
---------
Cash and Due from Banks.................
Premises and Equipment, Net.............
Other Assets............................
Less Allownce for Loan Losses...........
Total Assets...................
Liabilities and Shareholders' Equity
Interest-Bearing Liabilities
Savings............................. 377 2,96
Money Market & NOW Accounts......... 335 2.45
Time................................ 1,425 3.50
Other Time-IRA's.................... 43 3.78
State & Other Public Funds.......... 4 1.17
---------
Total Interest-Bearing
Deposits..................... 2,184 3.18
---------
Federal Funds Purchased................. -- --
---------
Total Interest-Bearing
Liabilities.................. 2,184 3.18
---------
Demand Deposits.........................
Other Liabilities.......................
Total Liabilities..............
Shareholders' Equity....................
Total Liabilities and
Shareholders' Equity.........
Net Interest Income..................... $ 3,858
=========
Net Yield on Interest-Earning Assets.... 4.58%
=======
</TABLE>
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily
securities issued by state and local governments or authorities, is
adjusted by an increment which equates tax-exempt income to interest from
taxable assets (assuming a 34% effective federal income tax rate).
39
<PAGE>
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and rate.
DUE TO CHANGE IN
Taxable-Equivalent Basis(1) ---------------------------
Nine Months ended September 30, NET RATE/
1997 Compared to 1996 CHANGE VOLUME RATE VOLUME
------ ------ ----- ------
(DOLLARS IN THOUSANDS)
Interest Income
Loans, including Fees........... $ 18 $ 42 $ (18) $ (6)
Investment Securities
Taxable.................... 11 (25) 39 (3)
Tax-Exempt................. (1) -- (1) --
Due From Time................... 5 3 1 1
Federal Funds Sold.............. 201 194 4 3
------ ------ ----- ------
Total Interest
Income............. 234 214 25 (5)
------ ------ ----- ------
Interest Expense
Deposits........................ 202 115 82 5
------ ------ ----- ------
Total Interest
Expense............ 202 115 82 5
------ ------ ----- ------
Net Interest Income Before Allocation
of Rate/Volume..................... 32 99 (57) (10)
Allocation of Rate/Volume............ -- (4) (6) 10
------ ------ ----- ------
Changes in Net Interest Income....... $ 32 $ 95 $ (63) $--
====== ====== ===== ======
DUE TO CHANGE IN
Taxable-Equivalent Basis(1) ---------------------------
Year Ended December 31, NET RATE/
1996 Compared to 1995 CHANGE VOLUME RATE VOLUME
------ ------ ----- ------
(DOLLARS IN THOUSANDS)
Interest Income
Loans, including Fees........... $ (47) $ (54) $ 8 $ (1)
Investment Securities
Taxable.................... 25 64 (37) (2)
Tax-Exempt................. 17 20 (2) (1)
Due From Time................... (1) -- -- (1)
Federal Funds Sold.............. 164 205 (24) (17)
------ ------ ----- ------
Total Interest
Income............. 158 235 (55) (22)
------ ------ ----- ------
Interest Expense
Deposits........................ 166 160 7 (1)
------ ------ ----- ------
Total Interest
Expense............ 166 160 7 (1)
------ ------ ----- ------
Net Interest Income Before Allocation
of Rate/Volume..................... (8) 75 (62) (21)
Allocation of Rate/Volume............ -- (17) (4) 21
------ ------ ----- ------
Changes in Net Interest Income....... $ (8) $ 58 $ (66) $--
====== ====== ===== ======
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 34% effective federal income tax rate).
40
<PAGE>
DUE TO CHANGE IN
Taxable-Equivalent Basis(1) -------------------------
Year Ended December 31, NET RATE/
1995 Compared to 1994 CHANGE VOLUME RATE VOLUME
------ ------ ----- ------
(DOLLARS IN THOUSANDS)
Interest Income
Loans, including Fees........... $ 601 $ 122 $ 463 $ 16
Investment Securities
Taxable.................... (119) (141) 22 --
Tax-Exempt................. 23 25 (2) --
Due From Time................... 3 -- 3 --
Federal Funds Sold.............. 11 (71) 111 (29)
------ ------ ----- ------
Total Interest
Income............. 519 (65) 597 (13)
------ ------ ----- ------
Interest Expense
Deposits........................ 585 (95) 714 (34)
------ ------ ----- ------
Total Interest
Expense............ 585 (95) (714) (34)
------ ------ ----- ------
Net Interest Income Before Allocation
of Rate/Volume..................... (66) 30 (117) 21
Allocation of Rate/Volume -- (4) 25 (21)
------ ------ ----- ------
Changes in Net Interest Income $ (66) $ 26 $ (92) $--
====== ====== ===== ======
- ------------
(1) For analytical purposes, income from tax-exempt assets, primarily securities
issued by state and local governments or authorities, is adjusted by an
increment which equates tax-exempt income to interest from taxable assets
(assuming a 34% effective federal income tax rate).
Changes in interest income and interest expense can result from variances
in both volume and rate. Brownsville Bancshares has an asset and liability
management strategy designed to provide a proper balance between rate sensitive
assets and rate sensitive liabilities to attempt to maximize interest margins,
and to provide adequate liquidity for anticipated needs.
PROVISION FOR LOAN LOSSES.
Brownsville Bancshares' allowance for loan losses is established through
charges to operating income in the form of the provision for loan losses. Actual
loan losses or recoveries of loan losses are charged or credited directly to the
allowance for loan losses.
Brownsville Bancshares recorded a $10 thousand provision for loan losses
for the nine months ended September 30, 1997 and a $33 thousand provision for
loan losses for the nine months ended September 30, 1996. The allowance for loan
losses expressed as a percentage of outstanding loans was 0.54% and 0.66% at
September 30, 1997 and September 30, 1996, respectively. Brownsville Bancshares
recorded a $53 thousand provision for loan losses for the year ended December
31, 1996, a $20 thousand provision for loan losses for the year ended December
31, 1995 and a $20 thousand provision for loan losses for the year ended
December 31, 1994. Brownsville Bancshares' allowance for loan losses as a
percentage of outstanding loans was 0.71% at December 31, 1996, 0.74% at
December 31, 1995, and 0.60% at December 31, 1994.
NONINTEREST INCOME.
Noninterest income, which includes all service charges and fees, increased
22.34% from $649 thousand for the nine months ended September 30, 1996 to $794
thousand for the nine months ended September 30, 1997. The change was primarily
due to the increase in regular service charges and overdraft charges.
Noninterest income increased to $871 thousand for the year ended December
31, 1996, a 4.81% increase from $831 thousand for the year ended December 31,
1995. The increase was mainly due to increased regular service charges, letter
of credit fees, and credit life income.
41
<PAGE>
Noninterest income decreased 15.29% to $831 thousand for the year ended
December 31, 1995 from $981 thousand for the year ended December 31, 1994. The
decrease was due primarily to a $100 thousand gain on securities recorded in
1994.
Noninterest income increased 20.52% to $981 thousand for the year ended
December 31, 1994 from $814 thousand for the year ended December 31, 1993. The
increase was due to the gain on securities recorded in 1994.
NONINTEREST EXPENSE.
Noninterest expense included expenses which Brownsville Bancshares incurs
in the course of operations such as employee compensation and benefits,
occupancy expense, data processing charges, communication expense, professional
fees, advertising, supplies, and depreciation and amortization of furniture and
equipment. These expenses increased $48 thousand, or 2.40%, for the nine months
ended September 30, 1997 compared to the nine months ended September 30, 1996.
The increase was mainly attributable to increases in occupancy expenses, repairs
and maintenance, and employee benefits. Noninterest expense was $2.8 million in
1996, $2.7 million in 1995 and $2.8 million in 1994.
FEDERAL INCOME TAXES.
Brownsville Bancshares' provision for income taxes was $527 thousand and
$478 thousand for the nine month periods ended September 30, 1997 and 1996,
respectively.
Brownsville Bancshares' provision for income taxes was $593 thousand for
year end 1996, $625 thousand for year end 1995 and $664 thousand for year end
1994.
CAPITAL RESOURCES, LIQUIDITY AND FINANCIAL CONDITION
CAPITAL RESOURCES.
The Federal Reserve and the Office of the Comptroller of Currency ("OCC")
have adopted risk-based and leverage capital measures to assist in the
assessment of the capital adequacy of the holding companies and banks they
regulate. The Federal Reserve regulations apply to Brownsville Bancshares and
the OCC regulations apply to Brownsville National Bank (for purposes of this
section, the "Bank"). Although there are differences between these regulations,
in general the Federal Reserve and the OCC regulations employ uniform capital
ratios and consistent capital frameworks. The principal objectives of the
risk-based measures are to: (i) make regulatory capital requirements more
sensitive to differences in risk profiles among financial institutions; (ii)
factor off-balance-sheet exposures into the assessment of capital adequacy;
(iii) minimize disincentives to holding liquid, low-risk assets; and (iv)
achieve greater consistency in the evaluation of the capital adequacy of
financial institutions.
The risk-based capital guidelines include both a definition of capital and
a framework for calculating risk-weighted assets by assigning assets and
off-balance-sheet items to broad risk categories. The financial institution's
risk-based capital ratio is calculated by dividing its qualifying capital (the
numerator of the ratio) by its risk-weighted assets (the denominator).
The risk-based capital ratio focuses principally on broad categories of
credit risk and, effective as of January 1997, market risk. The risk-based
ratios do not, however, incorporate other factors that can affect a bank's
financial condition. These factors include overall interest rate exposure,
liquidity, funding risks, the effectiveness of loan and investment policies, and
management's ability to monitor and control financial and operating risks.
The financial institution's qualifying total capital consists of two types
of capital components: "core capital elements" (comprising Tier 1 capital) and
"supplementary capital elements" (comprising Tier 2 capital). Certain assets are
deducted from a financial institution's capital for the purpose of calculating
the risk-based capital ratio.
Assets and credit equivalent amounts of off-balance-sheet items are
assigned to one of four risk categories, according to certain criteria. The
aggregate dollar value of the amount in each category is then
42
<PAGE>
multiplied by the risk weight associated with that category. The resulting
weighted values from each of the risk categories are added together, and this
sum is the financial institution's total risk-weighted assets that comprise the
denominator of the risk-based capital ratio. Assets deducted from a bank's
capital in determining the numerator of the risk-based capital ratio are not
included as part of the financial institution's risk-weighted assets.
Risk weights for off-balance-sheet items are determined by a two-step
process. First, the "credit equivalent amount" of off-balance-sheet items is
determined, in most cases, by multiplying the off-balance-sheet items by a
credit conversion factor. Second, in most cases, the credit equivalent amount is
assigned to the appropriate risk category according to designated criteria.
Financial institutions are required to maintain a minimum risk-based
capital ratio of total capital (after deductions) to risk-weighted assets of 8%.
In general, 50% of this ratio must consist of Tier 1 capital. Certain
restrictions and limitations also apply regarding the calculation of Tier 1
capital. Tier 2 capital elements that are not used as part of Tier 1 capital
generally will qualify for inclusion in a financial institution's capital base
up to a maximum of 100% of the financial institution's Tier 1 capital. At
September 30, 1997 Brownsville Bancshares' Tier 1 risk-based capital ratio was
23.0% with a total risk-based capital ratio of 23.4% and the Bank's Tier 1
risk-based capital ratio was 23.9% and its total risk-based capital ratio was
24.3%. At year end 1996, Brownsville Bancshares' Tier 1 capital ratio was 23.4%
and its total risk-based capital ratio was 24.0%, and the Bank's Tier 1 capital
ratio was 23.4% and its total risk-based capital ratio was 24.0%. At year end
1995, Brownsville Bancshares' Tier 1 capital ratio was 23.3% and its total
risk-based capital ratio was 24.0%, and the Bank's Tier 1 capital ratio was
23.3% and its total risk-based capital ratio was 24.0%.
In addition, the Federal Reserve and the OCC have promulgated capital
leverage guidelines designed to supplement the risk-based capital guidelines.
The principal objective of the leverage ratio is to address the extent to which
a financial institution could leverage its equity capital base. The Federal
Reserve and the OCC require their regulated institutions to meet a minimum
leverage capital requirement of Tier 1 capital to total assets of not less than
3% for an institution that is not anticipating or experiencing significant
growth and is highly rated (i.e., a composite examination rating of 1 on a scale
of 1 to 5). Institutions that the Federal Reserve and the OCC determine are
anticipating or experiencing significant growth or that are not highly rated
must meet a minimum leverage ratio of 3% plus an additional cushion of at least
100 to 200 basis points.
Brownsville Bancshares' leverage ratio was 11.9% at year end 1996 and 12.2%
at year end 1995. At September 30, 1997 the leverage ratio was 11.9%. The Bank's
leverage ratio was 11.9% at year end 1996 and 12.2% at year end 1995. At
September 30, 1997 the Bank's leverage ratio was 12.4%.
LIQUIDITY.
Brownsville Bancshares' asset and liability management policy is intended
to maintain adequate liquidity and thereby enhance its ability to raise funds to
support asset growth, meet deposit withdrawals and lending needs, maintain
reserve requirements, and otherwise sustain operations. Brownsville Bancshares
accomplishes this through management of the maturities of its interest-earning
assets and interest-bearing liabilities. Liquidity is monitored and overall
interest rate risk is assessed through reports showing both sensitivity ratios
and existing dollar "gap" data. Brownsville Bancshares believes its present
position to be adequate to meet its current and future liquidity needs.
The liquidity of Brownsville Bancshares is maintained in the form of
readily marketable investment securities, demand deposits with commercial banks,
vault cash and federal funds sold. While the minimum liquidity requirement for
banks is determined by federal bank regulatory agencies as a percentage of
deposit liabilities, Brownsville Bancshares' management monitors liquidity
requirements as warranted by interest rate trends, changes in the economy and
the scheduled maturity and interest rate sensitivity of the investment and loan
portfolio, deposits and anticipated loan fundings. In addition to the liquidity
provided by the foregoing, Brownsville Bancshares has correspondent
relationships with other institutions with available secured lines of credit to
purchase overnight funds should additional liquidity be needed. These
43
<PAGE>
lines are subject to restrictions such as the financial strength of Brownsville
Bancshares and the lender's ability to facilitate credit.
On January 1, 1994 Brownsville Bancshares adopted the provisions of FAS
115. At September 30, 1997 Brownsville Bancshares' investment portfolio totaled
$33.1 million of which $10.3 million are classified as available for sale.
Average noninterest-bearing demand deposits were $13.1 million for the nine
months ended September 30, 1997, an increase of $948 thousand over the average
balance for the same period in 1996. Average interest-bearing deposits were
$72.4 million for the nine months ended September 30, 1997 compared to $68.7
million for the same period in 1996.
Average noninterest-bearing demand deposits were $12.3 million, $13.0
million and $13.9 million for the years ended December 31, 1996, 1995 and 1994,
respectively. Average interest-bearing deposits for the same years were $69.5
million, $65.7 million and $68.7 million, respectively.
Net cash generated by operating activities was $1.7 million and $1.1
million for the nine months ended September 30, 1997 and 1996. Proceeds from
sales, principal paydowns, and maturities of investment securities were $11.0
million and $13.5 million for the same periods. Brownsville Bancshares utilized
these funds to originate loans and purchase investment securities. Brownsville
Bancshares purchased investment securities of $8.7 million and $17.8 million
during the nine months ended September 30, 1997 and 1996, respectively.
Net cash generated by operating activities was $1.4 million, $1.5 million
and $1.2 million for the years 1996, 1995, and 1994. Proceeds from sales,
principal paydowns, and maturities of investment securities were $17.5 million,
$10.7 million and $10.8 million for the same periods. Brownsville Bancshares
utilized these funds to originate loans and purchase investment securities.
Brownsville Bancshares purchased investment securities of $18.9 million, $6.3
million and $11.0 million in 1996, 1995, and 1994, respectively.
Loan originations and advances net of repayments amounted to $1.3 million
for the nine months ended September 30, 1997 compared to net repayments of $82
thousand for the same period of 1996. Net loans decreased $682 thousand and $390
thousand for the years ended December 31, 1996 and 1995 and increased $2.2
million for the year ended December 31, 1994.
Funds utilized for the purchase of bank premises and equipment were $96
thousand and $81 thousand for the nine months ended September 30, 1997 and 1996,
respectively. Funds utilized for the purchase of bank premises and equipment
were $83 thousand, $132 thousand and $58 thousand during 1996, 1995 and 1994,
respectively.
INTEREST RATE SENSITIVITY.
Interest rate sensitivity refers to the relationship between market
interest rates and net interest income resulting from the repricing of certain
assets and liabilities. Interest rate risk arises when an earning asset matures
or when its rate of interest changes in a time frame different from that of the
supporting interest-bearing liability. One way to reduce the risk of significant
adverse effects on net interest income of market rate fluctuations is to
minimize the difference between rate sensitive assets and liabilities, referred
to as "gap," by maintaining a similar interest rate sensitivity position of the
assets and liabilities within a particular time frame.
Maintaining an equilibrium between rate sensitive assets and liabilities
will reduce some of the risk associated with diverse changes in market rates,
but it will not guarantee a stable net interest spread because yields and rates
may change simultaneously and by different amounts. These changes in market
spreads could materially affect the overall net interest spread even if assets
and liabilities were perfectly matched. If more assets than liabilities reprice
within the given period, an asset sensitive position or "positive gap" is
created. During a positive gap, a decline in market rates will have a negative
impact on net interest income. Alternatively, where more liabilities than assets
reprice in a given period, a liability sensitive position or "negative gap" is
created (rate sensitivity ratio is less than 100%) and a decline in interest
rates will have a positive impact on net interest income.
44
<PAGE>
The following table shows interest sensitivity gaps for these different
intervals as of September 30, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------------------------
1-3 4-6 7-12 AFTER
INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS ONE YEAR TOTAL
-------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans................................ $ 11,972 $ 3,199 $ 3,155 $ 23,517 $ 41,843
Investment Securities
Available for Sale.............. 3,474 -- 5,220 1,651 10,345
Held to Maturity................ -- 200 1,814 20,779 22,793
Federal Funds Sold................... 14,795 -- -- -- 14,795
Time Deposits in Banks............... -- 200 -- -- 200
-------- -------- -------- -------- ---------
Total Interest-Earning Assets........ 30,241 3,599 10,189 45,947 89,976
-------- -------- -------- -------- ---------
Interest-Bearing Deposits
Savings Accounts................ 8,082 -- -- -- 8,082
Money Market & NOW.............. 9,640 -- -- -- 9,640
Certificates of Deposit......... 16,475 12,097 24,081 15 52,668
Public Funds.................... -- 98 -- -- 98
-------- -------- -------- -------- ---------
Total Interest-Bearing Liabilities... 34,197 12,195 24,081 15 70,488
-------- -------- -------- -------- ---------
Rate Sensitivity GAP(1).............. $ (3,956) $ (8,596) $(13,892) $ 45,932 $ 19,488
======== ======== ======== ======== =========
Cumulative Rate Sensitivity GAP(1)... $ (3,956) $(12,552) $(26,444) $ 19,488
======== ======== ======== ========
Ratio of Cumulative Rate Sensitivity
Gap to Total Assets................ -4.06% -12.88% -27.14%
======== ======== ========
Ratio of Cumulative Rate Sensitive
Interest-Earning Assets to
Cumulative Rate Sensitive
Interest-Bearing Liabilities....... 88.4:1 72.9:1 62.5:1
======== ======== ========
</TABLE>
- ------------
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing
liabilities.
INVESTMENT SECURITIES.
The following table represents the maturities, amortized cost, estimated
market value, and weighted average yields of securities at September 30, 1997:
<TABLE>
<CAPTION>
AFTER ONE AFTER FIVE
ONE YEAR YEAR THROUGH YEARS THROUGH
OR LESS FIVE YEARS TEN YEARS AMORTIZED COST ESTIMATED
---------------- ---------------- ---------------- ---------------- MARKET
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD VALUE
------- ----- ------- ----- ------- ----- ------- ----- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities-Available for Sale
U. S. Government Agencies........ $ 8,246 5.14 % $ 1,984 5.40 % $ -- -- % $10,230 5.19 % $10,189
Other............................ -- -- 25 7.50 125 7.05 150 7.33 156
Securities-Held to Maturity
U. S. Government Agencies........ 1,749 6.46 19,151 6.35 500 7.00 21,400 6.38 21,441
State and Political Subdivisions
Tax Exempt.................. 165 4.70 985 5.81 143 7.50 1,293 5.88 1,321
Taxable..................... 100 5.60 -- -- -- -- 100 5.60 100
------- ------- ------- ------- ---------
Total Investment Securities.......... $10,260 5.37 % $22,145 6.25 % $ 768 7.16% $33,173 6.00 % $33,207
======= ======= ======= ======= =========
</TABLE>
45
<PAGE>
LOANS.
The following table classifies the Bank's loans according to type as of the
dates shown:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
LOAN PORTFOLIO COMPOSITION 1997 1996 1995 1994
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial........................... $12,732 $ 12,985 $ 12,630 $ 13,643
------------- ------------ ------------ ------------
Agriculture.......................... 54 117 187 --
------------- ------------ ------------ ------------
Real Estate
Construction.................... 645 159 522 580
Commercial Mortgage............. 11,769 11,225 11,659 10,685
Agricultural Mortgage........... 829 786 844 --
1-4 Family Mortgage............. 11,828 11,942 12,653 13,403
------------- ------------ ------------ ------------
Total Real Estate.................... 25,071 24,112 25,678 24,668
------------- ------------ ------------ ------------
Consumer............................. 3,986 3,430 2,903 3,380
------------- ------------ ------------ ------------
Total Loans........... $41,843 $ 40,644 $ 41,398 $ 41,691
============= ============ ============ ============
</TABLE>
The contractual maturity schedule of the loan portfolio at September 30,
1997 is presented in the following table:
FIXED RATE FLOATING RATE TOTAL
---------- ------------- -------
(DOLLARS IN THOUSANDS)
Due in Three Months or Less.......... $ 4,285 $ 3,579 $ 7,864
Due in Over Three to Six Months...... 3,199 2,920 6,119
Due in Over Six to Twelve Months..... 3,155 1,287 4,442
Due in Over Twelve Months............ 14,024 9,394 23,418
---------- ------------- -------
Total................. $ 24,663 $17,180 $41,843
========== ============= =======
At September 30, 1997, total loans net of unearned income and allowance for
possible loan losses exceeded year end 1996 figures by $1.3 million or 3.13%.
Total loans net of unearned income and allowance for possible loan losses
decreased $735 thousand or 1.79% to $40.4 million for the year ended December
31, 1996 compared to $41.1 million at December 31, 1995.
Although total assets increased $7.0 million during 1996, loans remained
flat. The weak loan growth resulted primarily from the devaluation of the
Mexican Peso in late 1994. Growth in Brownsville Bancshares' assets has been
invested in federal funds sold.
A substantial portion of Brownsville Bancshares' loan portfolio consists of
loans secured by real estate because this type of lending is emphasized by
management.
Brownsville Bancshares has also made loans to individuals and companies
that are residents of, or domiciled in, Mexico. Substantially all such loans are
secured either by deposits at Brownsville Bancshares or other collateral such as
real estate located in the United States or accounts receivable of U.S. or
multinational firms. At September 30, 1997, $4.4 million or 11% of Brownsville
Bancshares' loans were to foreign, principally Mexican, customers.
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS.
The provision for loan losses represents a determination by Brownsville
Bancshares' management of the amount necessary to be charged to operating income
and transferred to the allowance for loan losses to maintain a level which it
considers adequate in relation to the risk of future losses inherent in the loan
portfolio. It is Brownsville Bancshares' policy to provide for exposure to
losses of specifically identified credits, and a general allowance for the
remainder of the loan portfolio, and, while it is also Brownsville
46
<PAGE>
Bancshares' policy to charge off in the current period those loans in which a
loss is deemed to exist, risks of future losses also exist which cannot be
quantified precisely or attributed to particular loans or classes of loans.
In assessing the adequacy of its allowance for loan losses, management
relies predominantly on its ongoing review of the loan portfolio, which is
undertaken both to ascertain whether there are probable losses which must be
charged off and to assess the risk characteristics of individually significant
loans and of the portfolio in aggregate. This review takes into consideration
the judgments of the responsible lending officers, the Chief Executive Officer,
and the Board of Directors, and also those of bank regulatory agencies that
review the loan portfolio as part of their regular examinations of Brownsville
Bancshares.
Management's estimate of loss in the loan portfolio is based, in part, on
Brownsville Bancshares' historical loss experience. Management also considers
the amount of past due and nonperforming loans, current and anticipated economic
conditions, changes in lending and collection procedures, changes in loan
volumes and quality of Brownsville Bancshares' loan review system.
The allowance for loan losses at September 30, 1997 was $224 thousand,
compared to $288 thousand at December 31, 1996, $307 thousand at December 31,
1995, and $252 thousand at December 31, 1994. Although additional losses may
occur, management believes the allowance for loan losses to be adequate as of
the dates presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
ALLOWANCE FOR LOAN LOSS ACTIVITY 1997 1996 1995 1994
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at Beginning of Year......... $ 288 $ 307 $ 252 $ 320
Provision for Loan Losses............ 10 53 20 20
Charge-Offs
Commercial...................... 14 35 12 26
Agricultural.................... -- -- -- --
Real Estate..................... -- -- -- 53
Consumer........................ 62 49 31 47
------------- ------------ ------------ ------------
Total Charge-Offs.................... 76 84 43 126
------------- ------------ ------------ ------------
Recoveries
Commercial...................... 1 10 19 15
Agricultural.................... -- -- -- --
Real Estate..................... -- 1 53 13
Consumer........................ 1 1 6 10
------------- ------------ ------------ ------------
Total Recoveries..................... 2 12 78 38
------------- ------------ ------------ ------------
Net Charge-Offs (Recoveries)......... 74 72 (35) 88
------------- ------------ ------------ ------------
Balance at End of Period............. $ 224 $ 288 $ 307 $ 252
============= ============ ============ ============
Ratio of Allowance for Loan Losses to
Loans Outstanding, Net of Unearned
Discount........................... 0.54% 0.71% 0.74% 0.60%
Ratio of Allowance for Loan Losses To
Nonperforming Assets............... 422.64 3,600.00 230.83 118.31
Ratio of Net Charge-Offs to Average
Total Loans Outstanding, Net of
Unearned Discount.................. 0.18 0.18 -0.08 0.22
</TABLE>
47
<PAGE>
NONACCRUAL, PAST DUE AND RENEGOTIATED LOANS.
The following is an analysis of nonperforming assets as of the dates shown:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994
------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonaccrual Loans..................... $ 23 $ 8 $ 23 $ 61
Renegotiated Loans................... -- -- -- --
------------- ------------ ------------ ------------
Nonperforming Loans............. 23 8 23 61
Foreclosed Assets.................... 30 -- 110 152
------------- ------------ ------------ ------------
Total Nonperforming Assets...... 53 8 133 213
Accruing Loans 90 Days or More Past
Due................................ 370 892 138 175
------------- ------------ ------------ ------------
Total Nonperforming Assets
andAccruing Loans 90 Days or More
Past Due........................... $ 423 $ 900 $ 271 $ 388
============= ============ ============ ============
Nonperforming Loans as a % of Total
Loans.............................. 0.05% 0.02% 0.06% 0.15%
Nonperforming Assets as a % of Total
Loans and Foreclosed Assets........ 0.13 0.02 0.32 0.51
Nonperforming Assets as a % of Total
Assets............................. 0.05 0.01 0.15 0.24
Nonperforming Assets Plus Accruing
Loans 90 Days or More Past Due as
a % of Total Loans and Foreclosed
Assets............................. 1.01 2.21 0.65 0.93
</TABLE>
The accrual of interest on a loan is discontinued when, in the opinion of
management (based upon such criteria as default in payment, asset deterioration,
decline in cash flow, recurring operating losses, declining sales, bankruptcy
and other financial conditions which could result in default), the borrower's
financial condition is such that the collection of interest is doubtful. As of
September 30, 1997 loans totaling $23 thousand, or 0.05% of the total net loans
outstanding, were on nonaccrual basis and, therefore, no income was being
recognized. As of year end 1996, loans totaling $8 thousand, or 0.02% of total
net loans outstanding, were on a nonaccrual basis. Management believes the risks
of collection of the principal amounts of these loans not to be significant.
Placing a loan on nonaccrual status has a two-fold impact on net interest
income. First, it causes an immediate charge against earnings with respect to
that particular loan. Second, it eliminates future interest earnings with
respect to that particular loan. Interest on such loans is not recognized until
all of the principal is collected or until the loan is returned to a performing
status.
Nonaccrual loans increased $15 thousand for the period ended September 30,
1997. This increase was primarily due to the addition of four consumer loans. At
December 31, 1996, 1995, and 1994, total nonaccrual, past due greater than 90
days and renegotiated loans were $900 thousand, $161 thousand and $236 thousand,
respectively. Loans past due greater than 90 days at December 31, 1996 included
four notes to the same borrower amounting to approximately $761 thousand which
were subsequently paid.
48
<PAGE>
DEPOSITS.
The average balances and average rates paid by category of deposit at the
dates shown below are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
--------------- --------------- ---------------
AVERAGE AVERAGE AVERAGE
TOTAL DEPOSITS BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Demand Deposits...................... $13,131 $12,291 $12,984
------- ------- -------
Savings.............................. 8,393 2.92% 8,834 2.95% 9,910 3.18%
Money Market & NOW................... 10,121 2.44 10,225 2.44 10,526 2.74
Time Deposits
Commercial & Individual......... 53,753 4.95 50,305 4.81 45,094 4.79
Public Funds.................... 98 5.46 98 5.10 136 4.41
------- ------- -------
Total Interest-Bearing Deposits...... 72,365 4.36 69,462 4.23 65,666 4.22
------- ------- -------
Total Deposits.................. $85,496 $81,753 $78,650
======= ======= =======
</TABLE>
The scheduled maturities of certificates of deposit in denominations of
$100,000 or more at September 30, 1997 and December 31, 1996 and 1995 including
public funds, are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Due in Three Months or Less.......... $13,578 $ 15,879 $ 13,628
Due in Over Three to Six Months...... 8,445 6,452 6,334
Due in Over Six to Twelve Months..... 4,376 4,099 3,306
------------- ------------ ------------
Total........................... $26,399 $ 26,430 $ 23,268
============= ============ ============
</TABLE>
Based upon the location of Brownsville Bancshares with regard to the
international boundary with Mexico, foreign deposits from Mexican sources
represent a major source of funding. The following table presents foreign
deposits, primarily from Mexican sources at September 30, 1997 and December 31,
1996:
SEPTEMBER 30, DECEMBER 31,
FOREIGN DEPOSITS 1997 1996
------------- ------------
Demand Deposits...................... $ 937 $ 756
------------- ------------
Interest Bearing Deposits
Savings......................... 1,630 1,581
Money Market and NOW............ 4,395 4,546
Time Deposits................... 27,649 27,008
------------- ------------
Total (Interest-Bearing
Deposits................. 33,674 33,135
------------- ------------
Total Foreign Deposits..... $34,611 $ 33,891
============= ============
Percentage of Total Deposits......... 41.0% 39.7%
============= ============
Weighted Average Rate on Foreign
Deposits........................... 4.61% 4.50%
============= ============
49
<PAGE>
RETURN ON EQUITY AND ASSETS.
The return on equity and return on assets for the periods shown below are
as follows:
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS FOR THE YEAR ENDED
ENDED ----------------------------
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Return on Average Assets............. 1.46% 1.30% 1.41%
Return on Average Equity............. 12.20 10.78 12.24
Average Equity to Average Assets
Ratio.............................. 11.93 12.02 11.54
</TABLE>
EXPERTS
The consolidated financial statements of Texas Regional as of December 31,
1996 and 1995 and for each of the years in the three-year period ended December
31, 1996 have been incorporated herein and in the Registration Statement in
reliance of the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein and in the Registration Statement,
and upon the authority of said firm as experts in accounting and auditing. KPMG
has served as Texas Regional's independent auditors continuously since 1987.
The consolidated financial statements of Brownsville Bancshares as of and
for the years ended December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 have been included herein and in the
Registration Statement in reliance upon the report by Garcia, Marren & Company,
P.C., independent certified public accountants, and upon the authority of said
firm as experts in accounting and auditing.
Service Asset Management Company has rendered an opinion as to the
fairness, from the perspective of the Brownsville Bancshares shareholders, of
the financial terms of the Merger. See "Information About the Transaction --
Opinion of Financial Advisor" and Annex C.
LEGAL OPINION
McGinnis, Lochridge & Kilgore, L.L.P., has rendered an opinion concerning
the validity of the securities being offered pursuant to this Prospectus/Proxy
Statement and certain other matters. Joe M. Kilgore, a partner in the firm, is a
Director of Texas Regional and is the beneficial owner, as of September 30,
1997, of approximately 277,510 shares of Texas Regional Common Stock. Ford &
Ferraro, L.L.P., counsel to Brownsville Bancshares, is expected to render a
legal opinion as to certain matters in connection with the closing of the
Merger.
INDEMNIFICATION
Texas Regional's Bylaws include provisions authorizing Texas Regional to
indemnify its officers, directors, employees and agents to the full extent
permitted by law. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers or persons
controlling Texas Regional, Texas Regional has been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
OTHER MATTERS
Brownsville Bancshares' Board of Directors does not know of any matter to
be presented at the Special Meeting of the Shareholders of Brownsville
Bancshares other than those set forth above. If any other matters are properly
brought before the meeting or any adjournment thereof, the enclosed proxy will
be voted in accordance with the recommendation of the Brownsville Bancshares
Board of Directors unless an appropriate indication is made on the proxy. See
"Summary -- The Meeting."
50
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ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (hereinafter called the
"Agreement"), dated as of October 20th, 1997, is executed by and between Texas
Regional Bancshares, Inc., McAllen, Texas, a Texas corporation ("Texas
Regional") and Brownsville Bancshares, Inc., a Texas corporation ("Brownsville
Bancshares").
Texas Regional operates a commercial banking business in Texas through its
wholly owned subsidiary, Texas State Bank, a Texas state banking association
("Texas State Bank"). Texas Regional has formed a new wholly-owned Delaware
subsidiary corporation, Texas Regional Delaware, Inc. ("TRD"), for purposes of
facilitating the transaction herein described. Brownsville Bancshares operates a
commercial banking business in Texas through its wholly owned subsidiary, BNB
Bancshares, Inc., a Delaware corporation (the "Delaware Company"), which
wholly owns all of the authorized, issued and outstanding capital stock of
Brownsville National Bank ("Brownsville National"). As used in this Agreement,
any reference to the subsidiaries of Brownsville Bancshares includes any and all
direct or indirect subsidiaries of Brownsville Bancshares, including
specifically but without limitation both the Delaware Company and Brownsville
National.
The undersigned shareholders of Brownsville Bancshares (the "Majority
Shareholders") join into the execution hereof for the limited purpose of
evidencing their consent to and approval of the transaction herein described and
to confirm that each has agreed to vote for the transaction at the Brownsville
Bancshares shareholders' meeting and each has agreed to support and recommend
the transaction to the other shareholders of Brownsville Bancshares. Certain
shareholders have also joined into the execution hereof for the purposes of
Section 9.12. In addition, the undersigned holders of options to acquire
Brownsville Bancshares shares (the "Option Holders") join into the execution
hereof for the limited purpose of evidencing their agreement to accept at (or
immediately prior to) Closing newly issued shares of Texas Regional Class A
Voting Common stock in exchange for, and in consideration of the cancellation
and termination of, their options to acquire Brownsville Bancshares shares.
WITNESSETH:
This Agreement provides for the merger of Brownsville Bancshares with and
into TRD, a newly formed wholly-owned subsidiary of Texas Regional, pursuant to
the terms of this Agreement and Plan of Reorganization. As a result of the
merger, the shareholders of Brownsville Bancshares (other than any shareholder
exercising dissenters' rights of appraisal) will receive shares of Texas
Regional Class A Voting Common stock in exchange for their shares of Brownsville
Bancshares common stock. Upon the closing of the transaction, it is anticipated
that (i) Brownsville Bancshares and the Delaware Company shall each be merged
with and into TRD, and each will cease its separate existence, and (ii)
Brownsville National will be merged with and into Texas State Bank and
Brownsville National will cease its separate existence. In addition,
contemporaneously with the closing of the merger transaction, all holders of
options to purchase Brownsville Bancshares capital stock shall receive Texas
Regional Class A Voting Common stock in exchange for, and in consideration of
the termination and cancellation of, their outstanding options.
As a result of the merger of Brownsville Bancshares and the Delaware
Company with and into TRD, all rights, privileges, immunities, powers and
franchises of each of TRD, Brownsville Bancshares and the Delaware Company shall
be merged into TRD as the surviving corporation. Without any other action, at
the Effective Time, TRD shall be vested with all property, real, personal and
mixed, of the merging corporations and shall thereafter possess all of the
interests, both public and private, of each of the merging corporations and all
claims of creditors of each of TRD, Brownsville Bancshares and the Delaware
Company shall survive and any liens shall be preserved unimpaired in TRD as the
surviving corporation. All of the foregoing shall be effected pursuant to and as
set forth in this Agreement and in Articles of Merger (the "Articles of
Merger") to be executed by and among TRD, Brownsville Bancshares and the
Delaware Company, in the form of required by the Secretary of State of Delaware.
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In addition, at or immediately following the Effective Time of the merger
of Brownsville Bancshares and the Delaware Company into TRD, Brownsville
National will be merged with and into Texas State Bank, and all rights,
privileges, immunities, powers and franchises of each of Texas State Bank and
Brownsville National shall be merged into Texas State Bank as the surviving
banking association. Without any other action, at the Effective Time, Texas
State Bank shall be vested with all property, real, personal and mixed, of
Brownsville National and Texas State Bank and shall thereafter possess all of
the interests, both public and private, of each of Brownsville National and
Texas State Bank, and all claims of creditors of each of Texas State Bank and
Brownsville National shall survive and any liens shall be preserved unimpaired
in Texas State Bank as the surviving banking association. All of the foregoing
shall be effected pursuant to and as set forth in an Agreement of Merger to be
executed by and among Texas State Bank and Brownsville National.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, the parties hereto agree as follows:
ARTICLE 1
PLAN OF MERGER
1.1 THE MERGER. Upon and subject to the terms and provisions hereof, at
the Effective Time, as hereafter defined, Brownsville Bancshares and the
Delaware Company shall be merged with and into TRD (the "Merger"). The effect
of the Merger is that the separate existence of Brownsville Bancshares and the
Delaware Company shall each cease. Following approval of such merger transaction
by applicable regulatory authorities and the shareholders of Brownsville
Bancshares, and the fulfillment of other conditions precedent to such merger
transaction as herein described, TRD, Brownsville Bancshares and the Delaware
Company shall each execute and deliver a Certificate of Merger (the
"Certificate of Merger") in the form required for filing with the Secretary of
State of Delaware. At the Effective Time of the Merger, the rights of the
shareholders of Brownsville Bancshares shall, without the requirement of further
action on the part of the shareholders, immediately be converted into the right
to receive shares of Texas Regional Class A Voting Common stock as herein
provided, and each such shareholder shall cease to be a shareholder of
Brownsville Bancshares and his, her or its share certificate shall for all
purposes be deemed only to represent a right to receive shares of Texas Regional
Class A Voting Common stock pursuant to this Agreement.
1.2 CONSIDERATION TO BROWNSVILLE BANCSHARES SHAREHOLDERS.
1.2.1 At the Effective Time (as hereinafter defined), all of the
outstanding shares of Brownsville Bancshares capital stock shall be converted
into the right to receive Texas Regional Class A Voting Common stock as
hereafter described. At the Effective Time, the shares of Brownsville Bancshares
capital stock held by each shareholder (other than any shareholder validly
exercising his or her dissenters' rights of appraisal) shall be automatically
converted without any further action on the part of the holder thereof, into
3.06608 shares of Texas Regional Class A Voting Common stock for each share of
Brownsville Bancshares held, to be distributed to the shareholders of
Brownsville Bancshares upon the Closing, as herein described. Fractional shares
shall not be issued, and any amount attributable to fractional shares shall be
paid in cash in an amount equal to the product of $30.00 multiplied by the
fraction of a Texas Regional share that would otherwise have been issued.
Amounts payable in respect of shareholders exercising dissenters' rights shall
be payable by the surviving corporation in the merger transaction in such
amounts and at such times as such payments are required pursuant to applicable
provisions of law respecting the exercise of dissenters' rights. The aggregate
number of shares of Texas Regional Class A Voting Common stock to be delivered
to the shareholders of Brownsville Bancshares in exchange for their shares of
Brownsville Bancshares shall in no event exceed 947,164 shares, less any shares
attributable to fractional shares, and less any shares attributable to
shareholders that have exercised dissenters' rights in connection with the
transactions.
1.2.2 Also at the Effective Time, each Brownsville Bancshares option
holder shall receive Texas Regional Class A Voting Common stock in exchange for,
and in consideration of the termination and cancellation of, his or her option
rights. The number of Texas Regional Class A Voting Common shares to
A-2
<PAGE>
be issued to an option holder shall be equal to 1.77634 shares of Texas Regional
Class A Voting Common stock for each share of Brownsville Bancshares subject to
such option holder's option. Fractional Texas Regional shares shall not be
issued, and any amount attributable to fractional shares shall be paid in cash
in an amount equal to the product of the Texas Regional fractional share that
would otherwise have been issued, multiplied by $30.00. All of the holders of
options to purchase Brownsville Bancshares shares have joined into the execution
hereof to evidence their consent and agreement to accept Texas Regional shares
in exchange for, and in consideration of the cancellation and termination of,
their options as herein provided. The aggregate number of shares of Texas
Regional Class A Voting Common stock to be delivered to Option Holders in
exchange for, and in consideration of, the cancellation and termination of their
options shall in no event exceed an aggregate of 37,836 shares.
1.2.3 Certificates evidencing the Texas Regional shares to which each
shareholder becomes entitled shall be delivered by Texas Regional to each
Brownsville Bancshares shareholder upon surrender of such shareholder's share
certificate or certificates evidencing shares of Brownsville Bancshares stock.
Texas Regional share certificates shall be delivered at the time of Closing to
shareholders who have surrendered their Brownsville Bancshares share
certificates at or prior to the date of Closing, either (i) by mailing the same
to the shareholder at the shareholder's address as stated on the stock transfer
records of Brownsville Bancshares, or (ii) by such other arrangements as may be
mutually agreed by and between such former Brownsville Bancshares shareholder
and Texas Regional. Any delivery of Texas Regional share certificates to
shareholders who surrender their Brownsville Bancshares share certificates
following the date of Closing shall be mailed to the former Brownsville
Bancshares shareholder within a reasonable period of time following receipt of
the shareholder's Brownsville Bancshares share certificate. The stock transfer
records of Brownsville Bancshares shall for all purposes be closed as of the
Effective Time, and no transfer of record of any of the shares of Brownsville
Bancshares capital stock shall take place thereafter.
1.2.4 Any Texas Regional share certificate that would otherwise have been
delivered pursuant to section 1.2.3 to any shareholder of Brownsville Bancshares
who has exercised his, her or its dissenters' rights of appraisal pursuant to
applicable provisions of law shall be retained by Texas Regional until the
earlier of (i) such time as the shareholder relinquishes his, her or its right
of dissent, at which time the provisions of section 1.2.3 shall apply, except
that the time for delivery of such Texas Regional share certificate shall be
extended to a reasonable period of time following the date of relinquishment of
such dissenters' rights; or (ii) the time of settlement or judicial or other
resolution of such shareholder's dissenters' rights action, at which time Texas
Regional's obligation to issue or deliver shares to such shareholder shall cease
and be of no further force or effect.
1.2.5 Any dividends or other amounts payable to shareholders who surrender
their share certificates after the date of Closing shall not be payable until
surrender of the shareholder's Brownsville Bancshares share certificate, nor
shall any such amounts bear interest attributable to periods either before or
after the date of Closing.
1.3 Closing. The closing ("Closing") of the transactions contemplated by
this Agreement shall be effected on the latest of the following dates, or as
promptly thereafter as reasonably practicable (the "Closing Date"):
1.3.1 January 10, 1998;
1.3.2 The thirtieth calendar day after the date of approval by the
Federal Reserve Board as required by Section 7.02 herein; or
1.3.3 Such date as may be prescribed by the Federal Reserve Board,
the Texas Banking Department or by any other federal or state agency or
authority pursuant to an applicable federal or state law, order, rule or
regulation, prior to which consummation of the transactions provided herein
may not be effected; or
1.3.4 If the transactions contemplated by this Agreement are being
contested in any legal proceeding and Texas Regional, pursuant to Section
7.02 hereof, has elected to contest the same, then
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the date that such legal proceeding has been brought to a conclusion
favorable, in the judgment of Texas Regional, to the consummation of the
transactions contemplated hereby; or
1.3.5 Such other date as Brownsville Bancshares and Texas Regional
may select by mutual agreement.
The Closing shall take place at the offices of Texas Regional, Kerria
Plaza, Suite 301, 3700 N. Tenth Street, McAllen, Texas, on the Closing Date, or
at such other place as shall be mutually agreeable. If such Closing shall not
have been accomplished on or before March 1, 1998, this Agreement shall, at the
election of either Brownsville Bancshares or Texas Regional by written notice,
terminate and be of no further force or effect. Any termination which occurs
through no fault of Brownsville Bancshares or Texas Regional shall be without
liability to any of the parties hereto. This Agreement may be terminated at any
time prior to the Effective Time by the mutual action of the respective Boards
of Directors of Brownsville Bancshares and Texas Regional.
1.4 EFFECTIVE TIME. The parties hereto agree to take, on or prior to the
Closing Date, all such action, and to execute and deliver all such instruments
and documents, as may be necessary or advisable, on the advice of counsel, to
cause the Articles of Merger, to become effective on the Closing Date. The
merger shall become effective (herein referred to as the "Effective Time")
upon issuance of a Certificate of Merger by the Office of Secretary of State of
Delaware, pursuant to which Brownsville Bancshares and the Delaware Company are
merged with and into TRD.
1.5 EFFECT OF MERGER. As a result of the merger, Brownsville Bancshares's
assets and business, and all of the assets and business of the Delaware Company,
including ownership of all of the capital stock of Brownsville National, shall
be acquired by TRD, free and clear of any and all liens, claims or encumbrances.
1.6 BANK MERGER. Brownsville Bancshares shall take, in advance of the
Effective Time, any action requested by Texas Regional to facilitate the merger
immediately following the Effective Time (or as soon thereafter as practicable)
of Brownsville National with and into Texas State Bank, including execution and
delivery of an Agreement of Merger, any requested certificates of officers, and
such other documents as may be required to cause such merger to become effective
in a timely manner.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BROWNSVILLE BANCSHARES
Brownsville Bancshares represents and warrants to, and covenants and agrees
with, Texas Regional as follows:
2.1 ORGANIZATION AND OPERATION OF BROWNSVILLE BANCSHARES. Brownsville
Bancshares is a Texas corporation, duly organized, validly existing and in good
standing under the laws of the state of Texas, and has full power and authority
(including all licenses, franchises, permits and other governmental
authorizations which are legally required) to own its properties and to engage
in the business and activities now conducted by it, including its direct
ownership of the Delaware Company and its indirect ownership of Brownsville
National. Brownsville Bancshares is duly registered as a bank holding company
with the Federal Reserve Board and is operated in compliance with applicable
Federal Reserve Board regulations. True and complete copies of the Articles of
Incorporation and Bylaws of Brownsville Bancshares as amended to date, have been
delivered to Texas Regional. Brownsville Bancshares is not a reporting company
under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The
only business of Brownsville Bancshares is its ownership and operation of its
subsidiary, the Delaware Company. Brownsville Bancshares has no liabilities,
liquidated or unliquidated, fixed or contingent, and has no assets other than
its ownership of all of the capital stock of the Delaware Company. Without
limiting the generality of the foregoing, Brownsville Bancshares is not a member
of any joint venture or partnership and Brownsville Bancshares does not own the
securities of any other entity other than as herein described.
2.2 ORGANIZATION AND OPERATION OF THE DELAWARE COMPANY. The Delaware
Company is a Delaware corporation, duly organized, validly existing and in good
standing under the laws of the state of Delaware,
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and has full power and authority (including all licenses, franchises, permits
and other governmental authorizations which are legally required) to own its
properties and to engage in the business and activities now conducted by it,
including its direct ownership of Brownsville National. The Delaware Company is
duly registered as a bank holding company with the Federal Reserve Board and is
operated in compliance with applicable Federal Reserve Board regulations. True
and complete copies of the Certificate of Incorporation and Bylaws of the
Delaware Company, as amended to date, have been delivered to Texas Regional. The
Delaware Company is not a reporting company under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The only business of the Delaware Company
is its ownership and operation of its wholly owned subsidiary, Brownsville
National. The Delaware Company has no liabilities, liquidated or unliquidated,
fixed or contingent, and has no assets other than its ownership of all of the
capital stock of Brownsville National. Without limiting the generality of the
foregoing, the Delaware Company is not a member of any joint venture or
partnership and the Delaware Company does not own the securities of any other
entity other than as herein described.
2.3 ORGANIZATION AND OPERATION OF BROWNSVILLE NATIONAL. Brownsville
National is a national banking association, duly organized and existing under
the laws of the United States of America, and has full power and authority
(including all licenses, franchises, permits and other governmental
authorizations which are legally required) to own its properties and to engage
in the business and activities now conducted by it, including specifically its
commercial banking business. Brownsville National is in good standing under the
laws of the state of Texas. Brownsville National has branch licenses and all
other authority necessary to own and operate branch bank facilities operated by
Brownsville National. A list of the branches presently operated by Brownsville
National, together with a list of licenses pending for operation of additional
branch facilities are included on SCHEDULE 2.3. True and complete copies of the
Articles of Association and Bylaws of Brownsville National, as amended to date,
have been delivered to Texas Regional. Brownsville National (i) is duly
authorized to conduct a general banking business, in accordance with its
charter, subject to the supervision of the Office of the Comptroller of the
Currency and other applicable regulatory authorities; (ii) is an insured bank as
defined in the Federal Deposit Insurance Act; and (iii) has full power and
authority (including all licenses, franchises, permits and other governmental
authorizations which are legally required) to engage in the business and
activities now conducted by it. All books and records related to the business of
Brownsville National are true, correct and complete. Brownsville National's
banking and other business activities are in full compliance with sound banking
practices and applicable provisions of law, including the National Bank Act and
the regulations of the Office of the Comptroller of the Currency. Except as
disclosed in SCHEDULE 2.3, Brownsville National has no subsidiaries or
affiliates, owns no voting securities of any other corporation, and is not a
member of any joint venture or partnership.
2.4 CAPITALIZATION AND OWNERSHIP. The authorized capital stock of
Brownsville Bancshares consists of 1,000,000 shares of common stock, par value
$4.00 per share, of which a total of 308,917 shares (the "Shares") are
outstanding, all of which have been validly issued and outstanding, are fully
paid, nonassessable, and are owned beneficially and of record by the persons
named in the shareholder list previously delivered by Brownsville Bancshares to
Texas Regional. The Shares have not been issued in violation of the preemptive
rights of any stockholder. The authorized capital stock of the Delaware Company
consists of 1,000 shares of common stock, par value $1.00 per share, all of
which are duly authorized, validly issued and outstanding, fully paid,
nonassessable, and are owned beneficially and of record by Brownsville
Bancshares. The authorized capital stock of Brownsville National consists of
236,241 shares of capital stock, par value $4.00 per share, all of which are
duly authorized, validly issued and outstanding, fully paid, nonassessable, and
are owned beneficially and of record by the Delaware Company. There are no
outstanding options, warrants, conversion rights, calls or commitments of any
kind obligating Brownsville Bancshares, the Delaware Company or Brownsville
National to issue, directly or indirectly, additional shares of capital stock,
and no authorization therefor has been given, except that there are outstanding
options to acquire an aggregate of 21,300 shares of common stock of Brownsville
Bancshares, which options are owned and held by the Option Holders. The list of
Option Holders in SCHEDULE 2.4 is true, correct and complete in all respects.
All of the Option Holders have agreed to terminate
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their options as set forth in Sections 1.2 and 5.6 of this Agreement. Neither
Brownsville Bancshares, the Delaware Company nor Brownsville National has any
outstanding commitment or obligation to repurchase, reacquire or redeem any of
its outstanding capital stock.
2.5 FINANCIAL STATEMENTS AND RECORDS.
2.5.1 Brownsville Bancshares has delivered to Texas Regional (i) the
audited consolidated balance sheet of Brownsville Bancshares and its
subsidiaries as of December 31, 1996, 1995 and 1994 (the "Balance Sheet"), and
the related audited consolidated statements of income, changes in stockholders'
equity and changes in financial position for the years then ended, together with
the notes thereto, accompanied by the report thereon of the independent
certified public accountant who examined such statements. Except to the extent
qualified by the report of the independent accountant thereon, these financial
statements fairly present the financial position of Brownsville Bancshares and
its subsidiaries as of the dates thereof and the results of its operations for
the periods indicated in conformity with generally accepted accounting
principles applied on a consistent basis. To the best knowledge of Brownsville
Bancshares, audits of Brownsville Bancshares and its subsidiaries have been
conducted in accordance with generally accepted auditing standards. In addition,
Brownsville Bancshares has delivered to Texas Regional its unaudited parent
company only balance sheets and regulatory reports of condition of Brownsville
Bancshares as of June 30, 1997, and unaudited bank only balance sheets and
regulatory reports of condition of Brownsville National as of June 30, 1997
(collectively, such balance sheets are hereafter sometimes called the
"Brownsville Bancshares Balance Sheet" and the Brownsville National Balance
Sheet, respectively) and the related unaudited statements of income for the
six-month period then ended. In the opinion of the management of Brownsville
Bancshares, these financial statements also fairly present the financial
position of Brownsville Bancshares and Brownsville National as of the date
thereof and the results of their respective operations for the period indicated
in conformity with generally accepted accounting principles applied on a
consistent basis. All of the financial statements described in this paragraph
are collectively referred to hereinafter as the "Brownsville Bancshares
Financial Statements." Except as described in the accountant's reports thereon,
the Brownsville Bancshares Financial Statements do not, as of the dates thereof,
include any material assets or omit to state any material liability, absolute or
contingent, or other fact, the inclusion or omission of which renders such
financial statements, in light of the circumstances under which they were made,
materially misleading. Without limiting the generality of the foregoing,
Brownsville Bancshares specifically represents to Texas Regional that
Brownsville Bancshares and its subsidiaries have no liabilities, either accrued,
contingent or otherwise, which, individually or in the aggregate, are material,
which have not been reflected in the Brownsville Bancshares Financial Statements
(including the Brownsville Bancshares Balance Sheet and the Brownsville National
Balance Sheet) or which have been incurred in the ordinary course of business
since the date of the Brownsville Bancshares Balance Sheet and the Brownsville
National Balance Sheet. As of the time of Closing, any material liabilities,
accrued, contingent or otherwise, which have been incurred since June 30, 1997,
will have been fully disclosed to Texas Regional.
2.5.2 Within the past five (5) years there have not been any material
changes in the financial condition, results of operations, business or prospects
of Brownsville Bancshares and its subsidiaries, other than changes in the
ordinary course of business, none of which individually or in the aggregate has
been materially adverse, nor have there been any other events or conditions of
any character which have individually or in the aggregate materially and
adversely affected the financial condition, results of operations, business or
prospects of Brownsville Bancshares or its subsidiaries.
2.5.3 The books and records of Brownsville Bancshares and its subsidiaries
reflect the transactions to which they are or were a party or by which their
properties are or were bound, and, to the extent applicable, such books and
records are and have been properly kept and maintained in accordance with the
law and with generally accepted accounting principles consistently applied. As
of the date hereof and as of the Closing, all of the minute books of Brownsville
Bancshares and its subsidiaries are and will be complete, accurate and current.
2.5.4 Brownsville National has no trust business.
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2.6 LOANS.
2.6.1 All loans included in the assets of Brownsville Bancshares and its
subsidiaries, including specifically Brownsville National, and all commitments
to make loans (which includes leasing transactions and off balance sheet lending
transactions such as letters of credit and which constitutes all of the lending
business of Brownsville Bancshares), have been made in the ordinary course of
business of Brownsville Bancshares and do not present more than the normal risk
of uncollectibility or other unfavorable features.
2.6.2 All loans to directors, officers and beneficial owners of 5% or more
of the outstanding capital stock of Brownsville Bancshares and loans to any
person or company related to or affiliated with any such person, are listed on
the related party transaction list provided to Texas Regional by Brownsville
Bancshares (and marked for identification by Texas Regional and Brownsville
Bancshares), which listing is herein called the "Related Party Transaction
List". The loans listed on the Related Party Transaction List do not present
more than the normal risk of uncollectibility or other unfavorable features.
2.6.3 The reserves for loan losses of Brownsville National (which
constitute the total reserves of Brownsville Bancshares) have been calculated in
accordance with all applicable rules and regulations. In the reasonable opinion
of the management, officers and directors of Brownsville Bancshares, the reserve
for loan losses shown on the Brownsville Bancshares Balance Sheet is adequate in
all respects to provide for all losses on loans outstanding as of the date of
Brownsville Bancshares Balance Sheet.
2.7 PROPERTIES. Except as set forth on SCHEDULE 2.7, Brownsville
Bancshares and its subsidiaries, including Brownsville National, have good and
marketable title to all assets and properties, whether real or personal,
tangible or intangible, which they purports to own, including without
limitation, all assets and properties reflected on the Brownsville Bancshares
Balance Sheet or acquired subsequent thereto (except to the extent such assets
and properties have been disposed of for fair value in the ordinary course of
business since the date of the Brownsville Bancshares Balance Sheet), subject to
no liens, mortgages, security interests, encumbrances, easements, title
imperfections, or charges of any kind except (i) as noted in the Brownsville
Bancshares Balance Sheet or the notes to the Brownsville Bancshares Financial
Statements, (ii) statutory liens not yet delinquent, (iii) security interests
granted incident to borrowings by Brownsville National from Federal Reserve
Banks or to secure deposits of funds by federal, state or other governmental
agencies, and (iv) minor defects and irregularities in title and encumbrances
which do not materially impair the use thereof for the purposes for which they
are held and such liens, mortgages, security interests, encumbrances and charges
as are not, in the aggregate, material to the assets and properties of
Brownsville Bancshares. All improvements, buildings and structures located on
real estate owned by Brownsville Bancshares and its subsidiaries, and the use by
Brownsville Bancshares and its subsidiaries of such real estate, together with
such improvements, buildings and structures, in the manner heretofore and
currently used by Brownsville Bancshares and its subsidiaries, conform in all
material respects to applicable federal, state and local laws and regulations
(including applicable environmental laws and regulations), zoning and building
ordinances and health and safety ordinances, and such real estate is zoned for
the various purposes for which such real estate is currently being used. All
such improvements, buildings and structures located on real estate owned by
Brownsville Bancshares and its subsidiaries, and all of the material, tangible
personal property owned by Brownsville Bancshares and its subsidiaries, are in
good operating condition and repair, reasonable wear and tear excepted. Listed
on SCHEDULE 2.7 are all policies of title insurance covering such properties.
2.8 ENVIRONMENTAL MATTERS. Neither any Environmental Hazards nor any
Hazardous Materials Contamination exist on any real property owned by
Brownsville Bancshares and its subsidiaries, including Brownsville National
(including any owned by and used in connection with the business of Brownsville
National and any foreclosed properties owned by Brownsville National), or on any
real property used by Brownsville National in connection with the business of
Brownsville National or on any adjacent property, as a result of any
Environmental Hazards on or emanating from the Real Property. The real
properties described in the preceding sentence are sometimes collectively
referred to as the "Real Property." Included on SCHEDULE 2.8 is a list of any
environmental survey or report related to any of the Real Property, true,
correct and complete copies of which have been provided to Texas Regional. As
used in this Agreement, the
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term "Environmental Hazards" shall mean (i) any "hazardous waste" as defined
by the Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et
seq.), as amended from time to time, and regulations promulgated thereunder;
(ii) any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et
seq.) ("CERCLA"), as amended from time to time, and regulations promulgated
thereunder; (iii) any toxic substance regulated by the Toxic Substances Control
Act (15 U.S.C. Section 2601 et seq.), as amended from time to time, and
regulations promulgated thereunder; (iv) gasoline, diesel fuel or other
petroleum hydrocarbons; (v) asbestos and asbestos containing materials, in any
form, whether friable or non-friable; (vi) polychlorinated biphenyls; (vii)
radon gas; (viii) any solid waste or petroleum waste; and (ix) any other
substance which any governmental authority requires special handling or
notification of any federal, state or local governmental entity in its
collection, storage, treatment, or disposal or which is identified or classified
to be hazardous or toxic under applicable state or federal law or regulation or
the common law, or any other applicable laws. As used in this Agreement, the
term "Hazardous Materials Contamination" shall mean the contamination of the
improvements, facilities, soil, groundwater, air or other elements on or of the
Real Property by Hazardous Materials, or the contamination of the buildings,
facilities, soil, groundwater, air or other elements on or of any other property
as a result of Hazardous Materials at any time before the date of this Agreement
emanating from the Real Property.
2.9 LITIGATION. No claims have been asserted and no relief has been
sought against Brownsville Bancshares or any of its subsidiaries, including
Brownsville National, in any pending litigation or governmental proceedings or
otherwise which might result in a judgment, decree or order having a material
adverse effect on the financial condition, results of operations, business or
prospects of Brownsville Bancshares or any of its subsidiaries. Brownsville
Bancshares and its subsidiaries have complied with, and are presently in
compliance with, all laws and regulations pertaining to consumer credit and
truth in lending. The management of Brownsville Bancshares and its subsidiaries
is not aware of any material violation by Brownsville Bancshares or any
subsidiary of Brownsville Bancshares of any of the foregoing. Brownsville
Bancshares and its subsidiaries are in substantial compliance with all other
laws, all rules and regulations of governmental agencies and authorities and any
judgments, orders or decrees which by their terms apply to any of them. All
permits, concessions, grants, franchises, licenses and other governmental
authorizations and approvals necessary for the conduct of the business of
Brownsville Bancshares and its subsidiaries have been duly obtained and are in
full force and effect, and there are no proceedings pending or, to Brownsville
Bancshares' and its subsidiaries' knowledge, threatened which may result in the
revocation, cancellation, suspension or adverse modification of any thereof. The
consummation of the transactions contemplated hereby will not result in any such
revocation, cancellation, suspension or modification.
2.10 TAXES. Brownsville Bancshares and its subsidiaries have filed with
the appropriate governmental agencies all federal, state and local income,
franchise, excise, real and personal property and other tax returns and reports
which are required to be filed, and neither Brownsville Bancshares nor any
subsidiary of Brownsville Bancshares is delinquent in the payment of any taxes
shown on such returns or reports. Brownsville Bancshares has no examination
pending by the Internal Revenue Service, the Texas Comptroller of Public
Accounts, or any other taxing authority, nor has Brownsville Bancshares been
notified of any proposed examination. There are included in the Brownsville
Bancshares Balance Sheet, or reflected in the Notes to the Brownsville
Bancshares Financial Statements, reserves adequate in the reasonable opinion of
management for the payment of all accrued but unpaid federal, state and local
taxes of Brownsville Bancshares and its subsidiaries, including all income,
franchise, ad valorem and other taxes, and all interest and penalties, whether
or not disputed, for the six-month period ended June 30, 1997, for the year
ended December 31, 1996, and for all fiscal years prior thereto. Neither
Brownsville Bancshares nor any subsidiary of Brownsville Bancshares has executed
or filed with the Internal Revenue Service, the Comptroller of Public Accounts
of the State of Texas or any other taxing authority any agreement extending the
period for assessment and collection of any tax, nor is Brownsville Bancshares
nor any subsidiary a party to any action or proceeding by any governmental
authority for assessment or collection of taxes, nor has any claim for
assessment or collection of taxes been asserted against any of them. Neither
Brownsville
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Bancshares nor any of its subsidiaries has filed a consent pursuant to Section
341(f) of the Internal Revenue Code or otherwise.
2.11 CONTRACTS. Except as set forth in SCHEDULE 2.11, neither Brownsville
Bancshares nor any subsidiary thereof is a party to or bound by any written or
oral (i) employment contracts (including without limitation any collective
bargaining contracts or union agreements); (ii) commission, bonus, deferred
compensation, profit-sharing, life insurance, health insurance, salary
continuation, severance pay, pension or retirement plans or arrangements whether
or not legally binding and whether or not funded; (iii) material leases or
licenses with respect to any property, real or personal, whether as landlord,
tenant, licensor or licensee; (iv) contracts or commitments for capital
expenditures in excess of $50,000 for any one project; (v) contracts or options
to purchase or sell any real or personal property otherwise than in the ordinary
course of business or pursuant to this Agreement; (vi) agreements or instruments
relating to any commitments to loan money or to extend credit, except for
commitments to extend credit in the ordinary course of business in amounts of
less than $250,000 in any one transaction and $500,000 in the aggregate; (vii)
agreements to which any director, officer or holder of 5% or more of the
outstanding capital stock of Brownsville Bancshares, or any person or company
related to or affiliated with any such person, is a party; (viii) contracts
relating to the purchase or sale of financial or other futures, or put or call
options relating to cash, securities or any commodities whatsoever; or (ix)
material contracts, other than the foregoing, not made in the ordinary course of
business. Brownsville Bancshares and its subsidiaries have in all material
respects performed all obligations required to be performed by them to date.
Neither Brownsville Bancshares nor any of its subsidiaries is in default, and no
event has occurred which, with notice or the lapse of time or action by a third
party, could result in a default by Brownsville Bancshares or any of its
subsidiaries, (a) under any outstanding indenture, mortgage, contract, lease or
other agreement to which it is a party or by which it is bound; (b) under any
provision of its Articles of Incorporation or Bylaws or other organizational
documents which might result in a material adverse effect on the financial
condition, results of operations, business or prospects of Brownsville
Bancshares and its subsidiaries; or (c) under any agreement with federal or
state regulatory authorities. Brownsville Bancshares and its subsidiaries do not
have outstanding any power of attorney, except routine powers of attorney
relating to representation before governmental agencies or given in connection
with qualification to conduct business in another jurisdiction.
2.12 APPROVALS; VALIDITY OF AGREEMENT. The Board of Directors of
Brownsville Bancshares has approved the form, terms and provisions of this
Agreement and the transactions contemplated hereby. Shareholders holding voting
common stock of Brownsville Bancshares are the only shareholders with the power
to consider and vote upon the transactions herein described, including the right
to vote on the proposed merger of Brownsville Bancshares with and into TRD. The
undersigned common shareholders of Brownsville Bancshares (as defined above, the
"Majority Shareholders") have joined into the execution hereof to evidence
their consent to and written approval of the transaction herein described, and
to evidence their agreement to vote for and support the approval of the
transaction at the special shareholders' meeting to be called to consider the
merger. The Majority Shareholders own beneficially and of record not less than
67% of the outstanding common stock of Brownsville Bancshares. Provided required
approval is obtained as and to the extent required from applicable regulatory
authorities, including the Federal Reserve Board and the Texas Banking
Department, the execution, delivery and performance of this Agreement and the
consummation of the merger contemplated herein, and the merger of Brownsville
National with and into Texas State Bank, will not conflict with, result in the
breach of, constitute a default under or accelerate the performance provided by,
(i) the terms of any law, order, rule or regulation of any governmental agency
or authority or any judgment, order or decree of any court or other governmental
agency to which Brownsville Bancshares or any subsidiary thereof may be subject;
(ii) any contract, agreement or instrument to which Brownsville Bancshares or
any subsidiary thereof is a party or pursuant to which Brownsville Bancshares or
any subsidiary is bound; or (iii) the Articles of Incorporation or Bylaws of
Brownsville Bancshares or the Certificate of Incorporation or Bylaws of the
Delaware Company, or the Articles of Association or Bylaws of Brownsville
National. Provided required approval is obtained (as and to the extent required)
from applicable regulatory authorities, including the Federal Reserve Board and
the Texas Banking Department, and provided that the shareholders of Brownsville
Bancshares vote to approve the merger of Brownsville
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Bancshares with and into TRD, no consent or approval or other action by any
party (including specifically but without limitation any party to a contract to
which Brownsville Bancshares, the Delaware Company or Brownsville National is
subject) is required for the execution, delivery and performance of this
Agreement and consummation of the transaction herein described or for the merger
of Brownsville National with and into Texas State Bank, as herein contemplated.
The execution, delivery and performance of this Agreement and the consummation
of the transactions herein described, and the merger of Brownsville National
with and into Texas State Bank, will not constitute an event which with the
lapse of time or action by a third party could result in a default under any of
the foregoing or result in the creation of any lien, charge or encumbrance upon
any of the assets or properties of Brownsville Bancshares or its subsidiaries or
upon any of the stock of Brownsville Bancshares or its subsidiaries. This
Agreement constitutes the legal, valid and binding obligation of Brownsville
Bancshares, enforceable against Brownsville Bancshares in accordance with its
terms, except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
2.13 INSURANCE. Brownsville Bancshares and its subsidiaries have
insurance coverage with reputable insurers in amounts, types and risks insured
as set forth in SCHEDULE 2.13. Brownsville National's accounts are insured by
the Federal Deposit Insurance Corporation ("FDIC") to the extent permitted by
law, and Brownsville National has paid all premiums required to be paid and is
in compliance with the applicable regulations of the FDIC.
2.14 ABSENCE OF ADVERSE AGREEMENTS. Except as set forth in SCHEDULE 2.14,
neither Brownsville Bancshares nor any subsidiary thereof is a party to any
agreement or instrument, nor is Brownsville Bancshares or any subsidiary subject
to any judgment, order, decree, rule or regulation of any court or other
governmental agency or authority which materially and adversely affects or in
the future may materially and adversely affect the financial condition, results
of operations, business or prospects of Brownsville Bancshares or any subsidiary
of Brownsville Bancshares.
2.15 ABSENCE OF CERTAIN CHANGES. Except as set forth in SCHEDULE 2.15,
since December 31, 1995, Brownsville Bancshares and its subsidiaries have not
(i) issued or sold any capital stock of Brownsville Bancshares or any of its
subsidiaries, or any corporate debt obligations (except certificates of deposit,
letters of credit, cashier's checks, acknowledgments of indebtedness incident to
borrowings from the Federal Reserve Bank and other documents and instruments
issued in the ordinary course of banking business of Brownsville National); (ii)
granted any options for the purchase of its capital stock; (iii) declared or set
aside or paid any dividend or other distribution in respect of its capital
stock, or directly or indirectly, purchased, redeemed or otherwise acquired any
shares of such stock; (iv) incurred or assumed any obligations or liabilities
(absolute or contingent), except obligations or liabilities incurred in the
ordinary course of business, or mortgaged, pledged or subjected to lien or
encumbrances (other than statutory liens not yet delinquent) any of its assets
or properties; (v) discharged or satisfied any lien or encumbrance or paid any
obligation or liability (absolute or contingent), other than current liabilities
included in the Brownsville Bancshares Balance Sheet, current liabilities
incurred since the date thereof in the ordinary course of business and
liabilities incurred in carrying out the transactions contemplated by this
Agreement; (vi) sold, exchanged or otherwise disposed of any of its capital
assets other than in the ordinary course of business; (vii) forgiven or canceled
any debts or claims, or waived any rights; (viii) made any general wage or
salary increase, entered into any employment contract with any officer or
salaried employee or instituted any employee welfare, bonus, stock option,
profit-sharing, retirement or similar plan or arrangement; (ix) suffered any
damage, destruction or loss, whether or not covered by insurance, materially and
adversely affecting its business, property of assets or waived any rights of
value which in the aggregate are material; (x) except in the ordinary course of
business, entered into or agreed to enter into any agreement or arrangement
granting any preferential rights to purchase any of its assets, properties or
rights or requiring the consent of any party to the transfer and assignment of
any such assets, properties or rights; (xi) made any material change in the
conduct of its business, whether entered into or made in the ordinary course of
business or otherwise; (xii) granted to any director or officer, or any
employee, any increase in compensation in any form in excess of the amount
thereof in effect as of December 31, 1995 or any severance or
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termination pay, or entered into any written employment agreement, trust, fund
or other arrangement for the benefit of any such director, officer or employee,
whether or not legally binding; (xiii) suffered any loss of officers, employees,
suppliers or customers that materially and adversely affects the business,
operations or prospects of Brownsville Bancshares or any of its subsidiaries; or
(xiv) entered into any transaction outside the ordinary course of business
except as expressly contemplated by this Agreement. Since June 30, 1997, there
has been no material adverse change in Brownsville Bancshares, the Delaware
Company or Brownsville National.
2.16 AGREEMENTS WITH DIRECTORS, OFFICERS AND STOCKHOLDERS. The name of
each director and executive officer of Brownsville Bancshares and each of its
subsidiaries, and the name of each holder of five percent (5%) or more of the
outstanding capital stock of Brownsville Bancshares, together with the name of
each "affiliate" of each of such persons, as such term is defined in the rules
and regulations under the Securities Act of 1933, as amended (the "1933 Act"),
is listed in SCHEDULE 2.16. Except as set forth in the Related Party Transaction
List, no such director, executive officer, stockholder or associate has during
the period from January 1, 1994 to the date of this Agreement been a party to
any transaction with Brownsville Bancshares or any subsidiary (including
Brownsville National). All transactions with directors, executive officers, 5%
stockholders and affiliates are fully and appropriately summarized on the
Related Party Transaction list. None of the transactions have been outside of
the ordinary course of business, and, except as set forth on the Related Party
Transaction List, neither Brownsville Bancshares nor any subsidiary thereof has
any commitments, written or oral, to lend any funds to any such person.
2.17 AFFILIATED CORPORATIONS. Except as described in SCHEDULE 2.3,
Brownsville Bancshares knows of no arrangement whereby the stock of any
corporation is or has been held in trust (whether express, constructive,
resulting or otherwise) for the benefit of Brownsville Bancshares or for the
shareholders of Brownsville Bancshares.
2.18 REGULATORY MATTERS AND EXAMINATION REPORTS. Neither Brownsville
Bancshares nor any of its subsidiaries has any formal or informal agreements,
arrangements or understandings with the Federal Reserve Board, the Federal
Deposit Insurance Corporation, the Office of the Comptroller of the Currency, or
any other regulatory authority (collectively, the "Regulatory Authorities"),
nor does Brownsville Bancshares or any subsidiary have any examination pending
by any applicable Regulatory Authorities nor has Brownsville Bancshares or any
subsidiary been notified of any proposed examination by any Regulatory
Authorities. To the extent permitted by law, Brownsville Bancshares has provided
to Texas Regional complete and correct copies of (i) all examination reports by
Regulatory Authorities forwarded to Brownsville Bancshares or any subsidiary
thereof during the calendar years 1994, 1995, 1996 and to date 1997; (ii) any
correspondence between Brownsville Bancshares (or any subsidiary of Brownsville
Bancshares) and such agencies during such periods, and (iii) any agreements,
arrangements or understandings between Brownsville Bancshares (or any subsidiary
of Brownsville Bancshares) and such agencies, including any agreements,
arrangements or understandings arising out of or related to any such
examinations.
2.19 COMPLIANCE WITH APPLICABLE LAW. Brownsville Bancshares and its
subsidiaries and the conduct of their respective business are not in violation
of any applicable law, statute, order, rule or regulation promulgated by, or
judgment entered by, any federal, state, or local court or governmental
authority relating to the operation, conduct or ownership of the business and
property of Brownsville Bancshares or any subsidiary, which violation might
result in any material adverse change in the condition, business, prospects,
properties or assets of Brownsville Bancshares or its subsidiaries.
2.20 DISCLOSURE. Neither the financial statements nor any representation
or warranty contained herein, nor any information delivered or to be delivered
by Brownsville Bancshares pursuant to this Agreement, contains or shall contain
an untrue statement of a material fact, nor do the financial statements,
representations, warranties and other information omit to state, nor will they
omit to state, any material fact necessary in order to make the statements made
not misleading.
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2.21 FINDERS. Neither Brownsville Bancshares nor any subsidiary has
engaged or directly or indirectly obligated itself to anyone acting as a broker,
finder, or in any other similar capacity in connection with the transactions
contemplated by this Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TEXAS REGIONAL
Texas Regional represents and warrants to, and covenants and agrees with,
Brownsville Bancshares as follows:
3.1 ORGANIZATION. Texas Regional is a business corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas with all necessary power to carry on its business as it is now being
conducted. Texas Regional is duly registered with the Federal Reserve Board as a
bank holding company under the Bank Holding Company Act of 1956, as amended. TRD
is a business corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware with all necessary power to carry on its
business as it is now being conducted.
3.2 APPROVALS. The Board of Directors of Texas Regional has approved this
Agreement and the transactions contemplated hereby. Texas Regional is a
reporting company under the Securities and Exchange Act of 1934, as amended (the
"1934 Act"), and the rules and regulations promulgated thereunder.
3.3 ORDERS AND DECREES. Provided required approval is obtained from
applicable regulatory authorities, including the Federal Reserve Board and the
Texas Banking Department, the execution, delivery and performance by Texas
Regional of this Agreement and of the obligations imposed upon it hereunder will
not violate any provision of, or result in any breach of, (i) any law, order,
rule or regulation of any governmental agency or authority or any judgment,
order or decree of any court or governmental agency to which Texas Regional may
be subject, (ii) the Articles of Incorporation or Bylaws of Texas Regional, or
(iii) any contract or agreement to which Texas Regional is a party or by which
it is bound.
3.4 FINDERS. Texas Regional has not engaged and is not directly or
indirectly obligated to anyone acting as a broker, finder, or in any other
similar capacity in connection with the transactions contemplated by this
Agreement.
3.5 COMMON STOCK.
(a) The issued and outstanding capital stock of Texas Regional consists of
an aggregate of 13,105,896 shares of Class A Voting Common stock, par value
$1.00 per share. All of the issued and outstanding shares of Texas Regional's
Class A Voting Common stock are duly and validly issued and outstanding and are
fully paid and non-assessable. None of the outstanding shares of Texas
Regional's Class A Voting Common stock has been issued in violation of any
preemptive rights of the current or past stockholders of Texas Regional.
(b) The shares of Texas Regional's Class A Voting Common stock that are to
be issued to the stockholders of Brownsville Bancshares pursuant to the Merger
have been duly authorized and, when so issued in accordance with the terms of
this Agreement, will be validly issued and outstanding, fully paid and
nonassessable, with no personal liability attaching to the ownership thereof.
3.6 FINANCIAL INFORMATION. The audited consolidated balance sheets of
Texas Regional and its subsidiaries as of December 31, 1995 and 1996 and related
consolidated statements of income, changes in stockholders' equity and cash
flows for the three years ended December 31, 1996, together with the notes
thereto, included in Texas Regional's Form 10-K for the year ended December 31,
1996, as filed by Texas Regional with the Securities and Exchange Commission
(the "SEC"), and the unaudited consolidated balance sheet of Texas Regional
and its subsidiaries as of June 30, 1997 and the related unaudited consolidated
income statements and statements of changes in shareholders' equity and cash
flows for the six months then ended included in Texas Regional's Quarterly
Report on Form 10-Q for the quarter then ended, as filed by Texas Regional with
the SEC (together, the "Texas Regional Financial Statements"), have been
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prepared in accordance with generally accepted accounting principles applied on
a consistent basis (except as may be disclosed therein) and fairly presents in
all material respects the consolidated financial position and the consolidated
results of operations, changes in stockholders' equity and cash flows of Texas
Regional and its consolidated subsidiaries as of the dates and for the periods
indicated (subject, in the case of interim financial statements, to normal
recurring year-end adjustments, none of which will be material).
3.7 ABSENCE OF CHANGES. Since December 31, 1996, there has not been any
material adverse change in the financial condition, results of operations or
business of Texas Regional and its subsidiaries taken as a whole, nor have there
been any events or transactions having such a material adverse effect which
should be disclosed in order to make the Texas Regional Financial Statements not
misleading.
3.8 LITIGATION. There is no litigation, claim or other proceeding pending
or, to the knowledge of Texas Regional, threatened, against Texas Regional or
any of its subsidiaries, or of which the property of Texas Regional or any of
its subsidiaries is or would be subject which is material to Texas Regional and
its subsidiaries taken as a whole.
3.9 REPORTS. Texas Regional and each of its significant subsidiaries has
filed all material reports and statements, together with any amendments required
to be made with respect thereto, that it was required to file with (i) the SEC,
(ii) the Federal Reserve Board, (iii) the Federal Deposit Insurance Corporation,
and (iv) the Texas Department of Banking. To the best of Texas Regional's
knowledge, as of their respective dates, each of such reports and documents, as
amended, including the financial statements, exhibits and schedules thereto,
complied in all material respects with the relevant statutes, rules and
regulations enforced or promulgated by the regulatory authority with which they
were filed, and did not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
3.10 COMPLIANCE WITH THE LAW. Texas Regional and its significant
subsidiaries have all licenses, franchises, permits and other governmental
authorizations that are legally required to enable them to conduct their
respective businesses in all material respects and are in compliance in all
material respects with all applicable laws and regulations.
3.11 STATEMENTS TRUE AND CORRECT. None of the information supplied or to
be supplied by Texas Regional for inclusion in (i) the registration statement
and the proxy statement referred in to Section 5.2 hereof and (iii) any other
documents to be filed with the SEC, NASDAQ, or any banking, blue sky or other
regulatory authority in connection with the transactions contemplated hereby,
will, at the respective times such documents are filed, and, in the case of such
registration statement, when it becomes effective, and with respect to such
proxy statement, when first mailed to the stockholders of Brownsville
Bancshares, contain any untrue statement of a material fact, or omit to state
any material fact necessary in order to make the statements made therein, in
light of the circumstances under which they are made, not misleading. All
documents that Texas Regional is responsible for filing with the SEC, NASDAQ or
any other regulatory authority in connection with the transactions contemplated
hereby will, to the best of Texas Regional's knowledge, comply as to form in all
material respects with the provisions of applicable law and any rules and
regulations thereunder.
ARTICLE 4
INDEMNIFICATION
4.1 BROWNSVILLE AGREEMENT TO INDEMNIFY. Brownsville Bancshares hereby
agrees to indemnify, defend and hold harmless Texas Regional and Texas State
Bank, and their respective officers, directors, employees, agents and attorneys
from and against any and all losses, claims, damages, expenses or liabilities to
which Texas Regional or Texas State Bank may become subject (including any
arising as a result of the consummation of the transaction described in this
Agreement and any arising under the
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Securities Act of 1933 or the Securities Exchange Act of 1934, or any rule,
order or regulation pursuant thereto), arising out of or based upon:
(i) breach of a representation, warranty, covenant or agreement of
Brownsville Bancshares in this Agreement or any breach in the performance
hereof;
(ii) any misleading or untrue statement of a material fact by or on
behalf of Brownsville Bancshares or any subsidiary thereof, or any omission
of a material fact necessary in order to make any statements made by or on
behalf of Brownsville Bancshares, in light of the circumstances under which
they were made, not misleading, including any such statement or omission in
the context of solicitation by Brownsville Bancshares of proxies for
approval of the transactions described in this Agreement by the
shareholders of Brownsville Bancshares;
(iii) any irregularity or improper procedure in connection with the
solicitation of proxies and obtaining shareholder approval for the
transaction described in this Agreement; and
(iv) any disclosure by any officer, director, shareholder or present
or former employee of Brownsville Bancshares or any subsidiary thereof of
any confidential information related to Brownsville Bancshares or any
subsidiary or their respective business (including confidential customer
information).
4.2 INDEMNIFICATION BY TEXAS REGIONAL. Texas Regional hereby agrees to
indemnify, defend and hold harmless Brownsville Bancshares and its officers,
directors, employees, agents and attorneys from and against any and all losses,
claims, damages, expenses or liabilities to which Brownsville Bancshares may
become subject (including any arising as a result of the consummation of the
transaction described in this Agreement and any arising under the Securities Act
of 1933 or the Securities Exchange Act of 1934, or any rule, order or regulation
pursuant thereto), arising out of or based upon:
(i) breach of a representation, warranty, covenant or agreement of
Texas Regional in this Agreement or in the performance hereof; and
(ii) any misleading or untrue statement of a material fact by or on
behalf of Texas Regional, or any omission of a material fact necessary in
order to make any statements made by or on behalf of Texas Regional, in
light of the circumstances under which they were made, not misleading.
4.3 EXTENSION TO OTHER PARTIES. Each of Texas Regional and Brownsville
Bancshares (to the extent of an indemnification obligation hereunder, herein
referred to as the "Indemnifying Party") will indemnify the other and each of
such other party's directors, officers and each person who "controls" such
other party within the meaning of such term as used in Section 15 of the 1933
Act (such persons being herein called the "Indemnified Parties") and will
defend and hold the Indemnified Parties harmless from and against any and all
losses, claims, damages, expenses, or liabilities to which the Indemnified
Parties may become subject under the common law or otherwise insofar as:
4.3.1 such losses, claims, damages, expenses, liabilities or actions
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in any communications to
shareholders, or any application or statement filed pursuant to this
Agreement or arising out of or based upon the omission or alleged omission
to state therein a material fact necessary in order to make the statement
therein, in the light of the circumstances in which they were made, not
misleading, but only insofar as any such statement or omission was made in
reliance upon and in conformity with information furnished by the party
against whom indemnification is sought hereunder for use therein; and
4.3.2 such losses, claims, damages, expenses, or liabilities are
incurred by the Indemnified Parties (or are losses, claims, damages,
expenses or liabilities with respect to which the Indemnified Parties
become subject), under the common law or otherwise, arising out of or in
any way attributable to the breach of any warranty or representation made
by such party herein or pursuant to the terms hereof, or the failure of
such party to perform any covenant or obligation contained in this
Agreement.
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4.4 LEGAL AND OTHER COSTS. The indemnification obligations contained
herein shall expressly include the obligation of the Indemnifying Party to
reimburse the Indemnified Party for any legal or other expenses (including
counsel fees) reasonably incurred by them in connection with investigating or
defending against any and all such losses, claims, damages, expenses,
liabilities or actions whether or not resulting in any liability.
4.5 NOTICES AND PARTICIPATION RIGHTS. The Indemnified Parties shall,
within twenty (20) days after the receipt by them of any notice of any claim or
of the commencement of any litigation in respect of which indemnity may be
sought hereunder, notify the Indemnifying Party thereof. The omission to notify
the Indemnifying Party of any such claim or litigation shall relieve the
Indemnifying Party from any liability which it may have under the indemnity
agreement contained herein, but shall not relieve the Indemnifying Party from
any other liability which it may have to the Indemnified Parties, other than
that raised in any such claim or litigation explicitly or by reasonable
implication or that which may estop the Indemnifying Party from raising and
effecting some defense it might otherwise have raised had such notice been
properly given. If any such litigation shall be brought against the Indemnified
Parties and if the Indemnified Parties shall notify the Indemnifying Party of
the commencement thereof, the Indemnifying Party shall be entitled, unless in
the opinion of counsel to the Indemnified Party there exist issues as to which
the interests of the Indemnified and Indemnifying Parties are adverse, to
participate in (and, to the extent that it shall wish, to direct) the defense
thereof at its own expense, but such defense shall be conducted by counsel
satisfactory to the Indemnified Parties.
4.6 SURVIVAL. The indemnity agreement contained in this Article shall
survive any investigation made by or on behalf of any Indemnified Party and
shall survive the closing of the transactions described in this Agreement.
ARTICLE 5
SPECIAL COVENANTS
5.1 STOCKHOLDER APPROVAL BY BROWNSVILLE BANCSHARES. Subsequent to the
execution and delivery of this Agreement, the Board of Directors of Brownsville
Bancshares agrees to cause Brownsville Bancshares to submit this Agreement and
the merger transaction herein described to the stockholders of Brownsville
Bancshares, for their authorization and approval, in accordance with applicable
provisions of law. The Board of Directors of Brownsville Bancshares agrees to
recommend this Agreement and the transactions contemplated thereby to the
Brownsville Bancshares stockholders. This Agreement and the proposed merger of
Brownsville National with and into Texas State Bank have already been approved
by the Board of Directors of Brownsville National and by the Delaware Company as
the sole shareholder of Brownsville National. This Agreement and the proposed
merger of the Delaware Company with and into Texas Regional have already been
approved by the Board of Directors of the Delaware Company and by the
Brownsville Bancshares as the sole shareholder of the Delaware Company.
5.2 PERIODIC REPORTS AND PROXY STATEMENT INFORMATION. Brownsville
Bancshares agrees to provide any and all information as may be required by Texas
Regional for purposes of (i) preparation of any periodic report, including
reports on Forms 8-K, 10-Q and 10-K required by applicable Securities and
Exchange Commission ("SEC") regulations to be filed with the SEC, (ii)
preparation of a registration statement for the registration of the Texas
Regional Class A Voting Common stock to be issued in the connection with the
transaction herein described, (iii) communications with shareholders of Texas
Regional pending the Closing, and (iv) preparation of the proxy statement
related to obtaining the approval by Brownsville Bancshares shareholders of the
transaction herein described (collectively, the "Brownsville Information").
Brownsville Bancshares hereby represents and warrants that the Brownsville
Information shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading.
5.3 ACCESS. From and after the date of this Agreement, Brownsville
Bancshares shall afford to the officers, attorneys, accountants and other
authorized representatives of Texas Regional full and free access
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to the properties, books, contracts, commitments and records of Brownsville
Bancshares and its subsidiaries, including the Delaware Company and Brownsville
National, at all reasonable times during business hours, and such
representatives of Texas Regional shall be furnished with true and complete
copies of the same and with all other information concerning the affairs of
Brownsville Bancshares and its subsidiaries as such representatives may
reasonably request.
5.4 ENVIRONMENTAL INSPECTION. Brownsville Bancshares expressly agrees to
supply Texas Regional with historical and operational information regarding the
real properties owned or operated by, or used in connection with the operation
of the business of, Brownsville Bancshares and its subsidiaries, including
Brownsville National, and any premises heretofore used in connection with the
operation of such business, and any other properties included in the Real
Property, including (but not limited to) any environmental tests or surveys made
of such properties. Brownsville Bancshares agrees to cooperate (and to cause its
subsidiaries to cooperate) with any reasonable request of Texas Regional related
to site assessment or site review related to any environmental matter or
investigation, including making available such personnel of Brownsville
Bancshares and Brownsville National as Texas Regional may reasonably request. At
Texas Regional's discretion, Texas Regional may arrange for one or more
independent contractors to conduct tests of the Real Property and any other
premises now or heretofore used in connection with the business of Brownsville
Bancshares and its subsidiaries in order to identify any presence of, or present
or past release or threatened release of, any waste materials or any chemical
substances, including, without limitation, any Environmental Hazards. Any such
test may be done at any time, or from time to time, upon reasonable notice and
under reasonable conditions, which do not impede the performance of the tests.
Such tests may include both above and below ground testing for environmental
damages or the presence of Environmental Hazards or Hazardous Material
Contamination or such other tests as Texas Regional may deem reasonably
necessary. Any and all costs of third parties associated with obtaining such
information shall be borne equally by Texas Regional and Brownsville Bancshares.
In the event such tests indicate the presence of Hazardous Material
Contamination, the cost of removing such Hazardous Material Contamination shall
be paid by Brownsville Bancshares prior to Closing. Brownsville Bancshares shall
have effected the clean up of any such Hazardous Material Contamination to the
satisfaction of Texas Regional prior to the Closing.
5.5 ACTION BY BROWNSVILLE BANCSHARES PRIOR TO CLOSING.
5.5.1 From and after the date of this Agreement until the Closing Date,
Brownsville Bancshares will (and Brownsville Bancshares will cause its
subsidiaries, including Brownsville National, to):
(i) carry on its business in accordance with prudent banking
practices and in substantially the same manner as it is presently
conducted;
(ii) maintain and keep its properties in as good repair and condition
as at present, except for depreciation due to ordinary wear and tear and
damage due to casualty, and not make or commit to make any capital
expenditure outside of the ordinary course of business and not make or
commit to make any capital expenditure (whether or not in the ordinary
course of business) in excess of $50,000 in any single transaction and
$100,000 in the aggregate;
(iii) maintain in full force and effect insurance comparable in
amount and in scope of coverage to that now maintained by it;
(iv) perform all of its obligations under contracts, leases and
documents relating to or affecting its assets, properties and business;
(v) use its best efforts to maintain and preserve its business
organization intact, to retain its present officers and employees and to
maintain its relationships with customers;
(vi) use its best efforts to fully comply with and perform all
obligations and duties imposed upon it by all federal and state laws and
all rules, regulations and orders imposed by federal or state governmental
authorities;
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(vii) maintain its books of account and records in the usual, regular
and orderly manner consistent with generally accepted accounting principles
and practices, consistently applied, and prudent banking practices;
(viii) not issue or sell any additional shares of its stock or
securities convertible into shares of such stock or options or other
commitments for the issuance of shares of such stock or securities;
(ix) not increase in any manner the compensation of any of its
directors, officers or employees, or pay or agree to pay any pension or
retirement allowance not required by an existing plan or agreement, to any
such persons, or commit itself to any pension, retirement or profit-sharing
plan or arrangement or employment agreement for the benefit of any officer,
employee or other person, except that Brownsville National shall be
entitled to pay to its employees normal year-end bonuses in amounts not in
excess of $98,000;
(x) not declare or pay any dividend or make any stock split or
purchase or otherwise acquire for value any of its shares, except that
Texas Regional has consented to the payment by Brownsville Bancshares of
cash dividends to its shareholders of $1.60 per common share paid October
6, 1997;
(xi) not issue commitments for the future funding of loans at a fixed
rate other than the then prevailing market at the date of funding; and
(xii) not engage in any business practice which deviates in any
material respect from its customary practices during the last eighteen
months immediately preceding the date hereof.
5.5.2 Without limiting the foregoing, between the date hereof and the date
of Closing, Brownsville Bancshares specifically covenants and agrees that
Brownsville Bancshares will not incur (and will not permit its subsidiaries to
incur) any indebtedness other than deposit liabilities owed to deposit customers
in the ordinary course of business and trade accounts payable incurred in the
ordinary course of business, or significant expenses outside of the ordinary
course of business. In addition, neither Brownsville Bancshares nor any
subsidiary of Brownsville Bancshares will increase expenses in any material way
(either individually or in the aggregate), nor will Brownsville Bancshares nor
any subsidiary of Brownsville Bancshares make any changes in its capital
structure.
5.5.3 Provided that seeking such approvals is in accordance with
applicable banking law and regulations, Brownsville Bancshares covenants that
neither it nor any of its subsidiaries will make a fully collateralized loan,
nor commit to make a fully collateralized loan, in excess of $500,000 to any one
borrower or in any one transaction without the prior approval of Texas Regional,
and neither it nor any of its subsidiaries will make any other loan, nor commit
to make any other loan, in excess of $250,000 to any one borrower or in any one
transaction without the prior consent of Texas Regional.
5.5.4 Without limiting the generality of the foregoing, from and after the
date of this Agreement until the Closing Date, Brownsville Bancshares covenants
that neither it nor any of its subsidiaries will sell or otherwise dispose of
any of their real or personal property without the prior written consent of
Texas Regional.
5.5.5 Without limiting the generality of the foregoing, from and after the
date of this Agreement until the Closing Date, Brownsville Bancshares
specifically covenants and agrees neither it nor any of its subsidiaries will
acquire any United States Treasury or government agency bonds, or municipal
securities, or make other investments in securities, with fixed rates or with
maturities of greater than three years from the date of investment. In addition,
Brownsville Bancshares covenants and agrees that neither it nor any of its
subsidiaries will enter into any forward commitment to acquire any such
securities.
5.5.6 From and after the date of this Agreement until the Closing Date,
Brownsville Bancshares will not, and will not permit any of its subsidiaries to,
(i) permit any change to be made in the Articles of Incorporation or Bylaws of
Brownsville Bancshares or any subsidiary thereof, or (ii) take any action
described in Section 2.11 herein, without the prior written consent of Texas
Regional.
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5.6 TERMINATION OF EMPLOYMENT ARRANGEMENTS. At or prior to Closing,
Brownsville Bancshares will terminate (without liability or penalty to
Brownsville Bancshares, any subsidiary of Brownsville Bancshares, Texas
Regional, any subsidiary of Texas Regional, or any other person or entity) any
existing employee severance, deferred compensation and incentive compensation
agreements or arrangements, and any other contracts with employees, and shall
terminate, in a manner acceptable to Texas Regional, any other employee benefit
plans, including any employee stock ownership plan.
5.7 TERMINATION OF OPTIONS. As part of the consideration to Texas
Regional, to induce Texas Regional to enter into this Agreement, each of the
undersigned Option Holders hereby agrees with Texas Regional (i) not to exercise
any option that he or she may hold to acquire shares of Brownsville Bancshares
until such time, if any, as this Agreement is terminated and of no further force
or effect; and (ii) at or immediately prior to the Effective Time of the Closing
of the transaction described in this Agreement, he or she will execute a
termination agreement whereby his or her option to acquire shares of Brownsville
Bancshares is terminated (without liability or penalty to Brownsville
Bancshares, any subsidiary of Brownsville Bancshares, Texas Regional, any
subsidiary of Texas Regional, or any other person or entity), in consideration
of the delivery at that time of shares of Texas Regional Class A Voting Common
stock, as herein described. The undersigned Option Holders specifically covenant
and agree that they have the full power and authority to enter into this
Agreement and the termination agreement contemplated hereby, and that he or she
now owns (and will at Closing own) beneficially and of record the options to
purchase the number of shares of Brownsville Bancshares indicated opposite his
or her name on SCHEDULE 2.4.
5.8 CONTEMPORANEOUS TRANSACTION. The parties hereto acknowledge that,
contemporaneously with the transaction herein described, Texas Regional is
acquiring additional banking organizations, including specifically but without
limitation TB&T Bancshares, Inc. and its subsidiary, Texas Bank & Trust Company
of Brownsville, and the parties acknowledge and agree that any filings with
regulatory authorities, filings with the Securities and Exchange Commission,
proxy statements, financial information and other business activities in
connection with the transaction herein described may include information related
to such other pending acquisition(s). Notwithstanding that such other pending
acquisition(s) may be proceeding on the same timetable as the transaction herein
described, Texas Regional's obligations hereunder are not contingent upon the
closing of such other pending acquisition(s).
5.9 REGULATORY APPROVALS AND REGISTRATION STATEMENT. Texas Regional shall
file all regulatory applications required in order to consummate the Merger,
including but not limited to the necessary applications for the prior approval
of the Federal Reserve Board. Texas Regional shall keep Brownsville Bancshares
reasonably informed as to the status of such applications and make available to
Brownsville Bancshares, upon reasonable request by Brownsville Bancshares from
time to time, copies of such applications and any supplementary filed materials.
Texas Regional shall file with the Securities and Exchange Commission a
registration statement (the "Registration Statement") relating to the shares
of Texas Regional Class A Voting Common stock to be issued to the shareholders
of Brownsville Bancshares pursuant to this Agreement, and shall use its best
efforts to cause the Registration Statement to become effective. At the time the
Registration Statement becomes effective, the Registration Statement shall
comply in all material respects with applicable provisions of the Securities Act
of 1933, as amended, and the published rules and regulations thereunder, and
shall not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not false or misleading, and, at the time of mailing thereof to the
shareholders of Brownsville Bancshares, at the time of the shareholders' meeting
of Brownsville Bancshares and at the Effective Time, the proxy
statement/prospectus included as part of the Registration Statement, as amended
or supplemented by any amendment or supplement, shall not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not false or misleading. Texas Regional shall timely
file all documents required to obtain all necessary blue sky permits and
approvals, if any, required to carry out the transactions contemplated by this
Agreement, shall pay all expenses incident thereto and shall use its best
efforts to obtain such permits and approvals on a timely basis. Texas Regional
shall promptly and properly prepare and file (i) any application or notification
required by The NASDAQ Stock Market ("NASDAQ") to notify NASDAQ of the
issuance of shares of Texas Regional Class A Voting Common
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stock pursuant to this Agreement, and (ii) any filings required under the
Securities Exchange Act of 1934 (the "Exchange Act") relating to the
transactions contemplated herein.
5.10 CONSUMMATION OF AGREEMENT. Texas Regional shall use its best efforts
to perform and fulfill all conditions and obligations on its part to be
performed or fulfilled under this Agreement and to effect the Merger in
accordance with the terms and conditions of this Agreement.
5.11 DIRECTORS AND OFFICERS' LIABILITY INSURANCE. Following the Effective
Time, to the extent that such insurance coverage is available at commercially
reasonable premium rates, Texas Regional will use its best efforts to provide,
for a period of three (3) years following the date of Closing, the directors and
officers of Brownsville Bancshares and Brownsville National Bank with either (i)
extended reporting period coverage (sometimes referred to as "tail coverage")
with respect to the directors' and officers' liability insurance policy provided
by Brownsville Bancshares to such directors and officers immediately prior to
the date hereof; or (ii) coverage with respect to actions occurring prior to the
Effective Time comparable to the directors' and officers' liability insurance
coverage that Texas Regional provides to directors and officers of Texas State
Bank generally. In each case, such coverage shall only be provided if and to the
extent that such coverage is obtainable for an aggregate annual premium not to
exceed the annual premium presently being paid by Brownsville Bancshares. If the
aggregate annual premium of such insurance would exceed such maximum amount,
Texas Regional shall us its best efforts to procure such level of insurance
having the coverage described above as can be obtained for an aggregate premium
equal to such maximum amount.
5.12 EMPLOYEE BENEFITS. Each former Brownsville Bancshares (or
Brownsville National) employee who becomes an employee of Texas Regional or
Texas State Bank at the time of Closing (each a "Continued Employee") will be
given credit for any period of service with Brownsville National for purposes of
the Texas Regional Employee Stock Ownership Plan (with 401(k) provisions) and
therefore will be eligible to participate in such Plan on the same basis as
similarly situated employees of other Texas Regional subsidiaries, provided,
however, that any compensation base for purposes of determining contributions on
such Continued Employee's behalf will only include compensation paid by Texas
State Bank following the date of Closing. All such participation shall be
subject to the terms of such plans as may be in effect from time to time and
this Section 5.12 is not intended to give Continued Employees any rights or
privileges superior to those of other employees of Texas Regional subsidiaries.
Texas Regional may terminate or modify the Plan or any other employee benefit
plan, in its discretion (subject to applicable limitations provided by law), and
Texas Regional's obligation under this Section 5.12 shall not be deemed or
construed to provide duplication of similar benefits.
5.13 ACCESS TO INFORMATION. Texas Regional shall disclose and make
available to Brownsville Bancshares all information regarding Texas Regional and
its subsidiaries and their business activities or prospects in which Brownsville
Bancshares may have a reasonable legitimate interest in furtherance of the
transactions contemplated by this Agreement. Brownsville Bancshares will hold
any such information which is nonpublic in confidence in accordance with the
provisions of the Confidentiality Agreement by and among Texas Regional and
Brownsville Bancshares, dated September 5, 1997, accepted by Brownsville
Bancshares on September 9, 1997 (the "Confidentiality Agreement").
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF TEXAS REGIONAL
In addition to any other condition herein described as a condition to the
obligations of Texas Regional under this Agreement, the obligations of Texas
Regional under this Agreement are subject, in the discretion of Texas Regional,
to the satisfaction at or prior to the Closing Date of each of the following
conditions:
6.1 COMPLIANCE WITH REPRESENTATIONS. The representations and warranties
made by Brownsville Bancshares in this Agreement shall have been true when made
and, except for changes as contemplated herein, shall be true at the Closing
Date with the same force and effect as if such representations and warranties
were made at and as of the Closing Date, and Brownsville Bancshares shall have
performed or complied with all covenants and conditions required by this
Agreement to be performed or complied with
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by it prior to or at the Closing. Texas Regional shall have been furnished with
a certificate, signed by the President of Brownsville Bancshares in his capacity
as such and dated the Closing Date, a certificate, signed by the President of
the Delaware Company, and a certificate, signed by the President of Brownsville
Bancshares in his capacity as such and dated the Closing Date, in each case to
the foregoing effect.
6.2 STOCKHOLDER APPROVAL. The shareholders of Brownsville Bancshares
shall have approved the transaction at a duly called meeting of the shareholders
and Brownsville Bancshares shall have delivered to Texas Regional a certificate
signed by the President and Secretary of Brownsville Bancshares in his or her
capacity as such, confirming the approval of this transaction by the requisite
vote of the shareholders of Brownsville Bancshares.
6.3 DISSENTERS. Shareholders holding an aggregate of not greater than
five percent (5%) of the issued and outstanding shares of Brownsville Bancshares
shall have exercised dissenters' rights of appraisal with respect to the
transaction, excluding for these purposes shareholders who have subsequently
abandoned (including abandonment as a result of a failure to comply with
applicable procedures) their dissenters' rights of appraisal.
6.4 REGULATORY APPROVALS. Texas Regional shall have received approval of
the transactions contemplated by this Agreement including the merger of
Brownsville Bancshares and the Delaware Company with and into TRD, and the
merger of Brownsville National with and into Texas State Bank, from all
necessary governmental agencies and authorities, including the Texas Banking
Department and the Federal Reserve Board, and such approvals and transactions
contemplated hereby shall not have been contested by any federal or state
governmental authority nor by any other third party by formal proceeding. It is
understood that, if any contest as aforesaid is brought by formal proceedings,
Texas Regional may, but shall not be obligated to, answer and defend such
contest.
6.5 LITIGATION. On the Closing Date, there shall not be any litigation,
investigation, inquiry or proceeding pending or threatened in or by any court or
governmental agency or authority which might result in action to restrain,
enjoin or prohibit consummation of the transaction contemplated by this
Agreement or which might result in divestiture, rescission or damages in
connection with such transactions or involving any of the assets, properties,
business or operations of Brownsville Bancshares or any of its subsidiaries
which might result in any material adverse change in the financial condition,
results of operations, business or prospects of Brownsville Bancshares or any of
its subsidiaries. Texas Regional shall have been furnished with a certificate,
dated the Closing Date and signed by the President of Brownsville Bancshares and
each of its subsidiaries, to the effect that no such litigation, investigation,
inquiry or proceeding is pending, or, to the best of his or her knowledge,
threatened.
6.6 OPINION OF COUNSEL. Prior to closing, Brownsville Bancshares shall
deliver to Texas Regional the opinion of Brownsville Bancshares's counsel, in
form and content satisfactory to Texas Regional, to the effect that
(i) Brownsville Bancshares is a duly organized, validly existing and
in good standing as a corporation under the laws of the state of Texas, is
registered as a bank holding company under applicable regulations and
requirements of the Federal Reserve Board, and has full power and authority
to carry on its business as presently conducted;
(ii) the authorized capital stock of Brownsville Bancshares consists
of 1,000,000 shares of capital stock, par value of $4.00 per share, of
which a total of 308,917 shares are issued and outstanding, and that those
shares which are issued and outstanding have been validly issued, are fully
paid and nonassessable, and there are no options, warrants, conversion or
other rights, agreements or commitments of any kind obligating Brownsville
Bancshares to issue or sell any shares of its capital stock of any class,
or securities convertible into or exchangeable for any such shares, are
outstanding (other than options held by Option Holders who have agreed to
terminate their options as provided in section 5.6 of this Agreement), and
no authorization therefor has been given;
(iii) The Delaware Company is a duly organized, validly existing and
in good standing as a corporation under the laws of the state of Delaware,
is registered as a bank holding company under
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applicable regulations and requirements of the Federal Reserve Board, and
has full power and authority to carry on its business as presently
conducted;
(iv) the authorized capital stock of the Delaware Company consists of
1,000 shares of capital stock, par value of $1.00 per share, of which all
1,000 shares are validly issued, fully paid, nonassessable, and owned
beneficially and of record by Brownsville Bancshares, and no options,
warrants, conversion or other rights, agreements or commitments of any kind
obligating the Delaware Company to issue or sell any shares of its capital
stock of any class, or securities convertible into or exchangeable for any
such shares, are outstanding and no authorization therefor has been given;
(v) Brownsville National is a duly organized, validly existing and in
good standing as a banking association under the laws of the United States
of America, and has full power and authority to carry on its business as
presently conducted;
(vi) the authorized capital stock of Brownsville National consists of
236,241 shares of capital stock, par value of $4.00 per share, of which all
236,241 shares are validly issued, fully paid, nonassessable, and owned
beneficially and of record by the Delaware Company, and no options,
warrants, conversion or other rights, agreements or commitments of any kind
obligating Brownsville National to issue or sell any shares of its capital
stock of any class, or securities convertible into or exchangeable for any
such shares, are outstanding, and no authorization therefor has been given;
(vii) this Agreement has been duly authorized by all necessary
corporate action on the part of Brownsville Bancshares, its directors and
shareholders, and by the Delaware Company, its directors and shareholders,
and this Agreement constitutes the valid and binding obligation of
Brownsville Bancshares enforceable in accordance with its terms except as
the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or other similar laws affecting the rights of
creditors generally;
(viii) this Agreement and the consummation of the transaction herein
described do not and will not violate, conflict with or constitute a breach
of any term, condition, or provision of the Articles of Incorporation or
Bylaws of Brownsville Bancshares, the Certificate of Incorporation or
Bylaws of the Delaware Company, the Articles of Association or Bylaws of
Brownsville National, or, to the best knowledge and belief of such counsel,
any agreement or instrument to which Brownsville Bancshares, the Delaware
Company or Brownsville National is a party or is bound, or any law,
regulation, judgment or order binding on any of them; and
(ix) the merger of Brownsville National with and into Texas State
bank has been duly authorized by all necessary corporate action on the part
of Brownsville National, its directors and shareholders, and the
consummation of the merger of Brownsville National with and into Texas
State Bank will not violate, conflict with or constitute a breach of any
term, condition, or provision of the Articles of Association or Bylaws
Brownsville National, or, to the best knowledge and belief of such counsel,
any agreement or instrument to which Brownsville Bancshares, the Delaware
Company or Brownsville National is a party or is bound, or any law,
regulation, judgment or order binding on any of them.
6.7 DUE DILIGENCE REVIEW; NO MATERIAL ADVERSE CHANGE. Texas Regional and
its employees, agents, attorneys, accountants and other representatives shall be
entitled to review and monitor the assets, liabilities, business and prospects
of Brownsville Bancshares and its subsidiaries during the period from the date
hereof to the time of Closing. Texas Regional shall be entitled to terminate
this transaction at its sole option and at any time prior to Closing if the
results of such review are not satisfactory in all respects to Texas Regional.
No material adverse change shall have occurred in the condition, financial
position or business prospects of Brownsville Bancshares or any of its
subsidiaries.
6.8 CONSENTS, APPROVALS AND ESTOPPEL CERTIFICATES. Texas Regional shall
have received all such consents, approvals, estoppel certificates and other
assurances, in each case in form and content reasonably satisfactory to Texas
Regional, from any party to an agreement with Brownsville Bancshares or any of
its subsidiaries, or by which Brownsville Bancshares or any of its subsidiaries
is bound as a result of an order
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of any authority, or pursuant to any other legal requirement. Without limiting
the generality of the foregoing, Texas Regional shall have received consents and
estoppel certificates from each landlord of Brownsville Bancshares or any
subsidiary of Brownsville Bancshares and from each tenant of any of them,
consenting (if Texas Regional deems such consent necessary) to the transfer by
operation of law of any outstanding lease or rental agreement, attesting to the
validity of each lease to which Brownsville Bancshares or any subsidiary is a
party, the fact that no default exists (or which could with the passage of time
or notice could exist) under the lease, and providing for such other matters as
may be deemed advisable to Texas Regional.
6.9 NET WORTH OF BROWNSVILLE BANCSHARES AND BROWNSVILLE NATIONAL. The net
worth of Brownsville Bancshares, calculated in accordance with applicable
regulatory requirements, shall be not less than the sum of $11,685,000,
increased by $75,000 per month for each month elapsed during the period from
September 30, 1997, until the date of Closing. The net worth of Brownsville
National, calculated in accordance with applicable regulatory requirements,
shall be not less than the sum of $11,685,000, increased by $75,000 per month
for each month elapsed during the period from September 30, 1997, until the date
of Closing.
6.10 TERMINATION OF OPTIONS. Contemporaneously with the closing of the
transaction herein described, the Option Holders shall have entered into
termination agreements as a result of which all options to acquire Brownsville
Bancshares stock shall have been fully and finally terminated.
6.11 FAIRNESS OPINION. Texas Regional shall have received a fairness
opinion, in form and content acceptable to Texas Regional in its sole
discretion, and rendered by a firm acceptable to Texas Regional in its sole
discretion, as to the fairness of the transaction to Texas Regional and the
shareholders of Texas Regional.
6.12 TERMINATION OF DATA PROCESSING ARRANGEMENTS. Brownsville Bancshares
and its subsidiaries shall have exercised its right to terminate its data
processing services contract with Electronic Data Systems, Inc., on terms and
upon conditions reasonably acceptable to Texas Regional.
6.13 DECLARATION OF EFFECTIVENESS OF REGISTRATION STATEMENT. The SEC
shall have declared effective the registration statement for registration of the
transaction pursuant to which shares of Texas Regional Class A Voting Common
stock are to be issued to shareholders of Brownsville Bancshares and the Option
Holders as herein described, and there shall be no order or action pending or
threatened to withdraw such declaration or to prohibit or otherwise restrict the
issuance of such shares, and any and all such actions as Texas Regional may deem
necessary or advisable shall have been taken to cause the qualification or
registration, by notification or otherwise, of the transaction or the shares in
any state in which such qualification or registration is deemed necessary by
Texas Regional.
6.14 POOLING OF INTERESTS. Texas Regional shall have received such
assurances as it deems necessary, proper or advisable that the transactions
herein described (including specifically but without limitation the merger of
Brownsville Bancshares with and into TRD, and the merger of Brownsville National
with and into Texas State Bank) will be accounted for as pooling of interests
under generally accepted accounting principles. Texas Regional shall be deemed
to have waived the condition described in this section 6.14 if Texas Regional
fails to notify Brownsville Bancshares of the failure of the condition described
herein (and Texas Regional's election to terminate this Agreement as a result of
the failure of such condition) within thirty (30) days following the effective
date of this Agreement.
ARTICLE 7
CONDITIONS TO OBLIGATIONS OF BROWNSVILLE BANCSHARES
The obligations of Brownsville Bancshares under this Agreement are subject,
in the discretion of Brownsville Bancshares, to the satisfaction at or prior to
the Closing Date, of each of the following conditions:
7.1 COMPLIANCE WITH REPRESENTATIONS. The representations and warranties
made by Texas Regional in this Agreement shall have been true when made and,
except as may otherwise be contemplated or
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permitted herein, shall be true as of the Closing Date with the same force and
effect as if such representations and warranties were made at and as of the
Closing Date, and Texas Regional shall have performed or complied with all
covenants and conditions required by this Agreement to be performed or complied
with by it prior to or at the Closing. Brownsville Bancshares shall have been
furnished with a certificate dated the Closing Date, signed by the President of
Texas Regional, in his capacity as such, to the foregoing effect.
7.2 STOCKHOLDER APPROVAL. The shareholders of Brownsville Bancshares
shall have approved the transaction at a duly called meeting of the
shareholders.
7.3 REGULATORY APPROVALS. Texas Regional shall have received approval of
the transactions contemplated by this Agreement, including the merger of
Brownsville Bancshares and the Delaware Company with and into TRD, and the
merger of Brownsville National with and into Texas State Bank, from all
necessary governmental agencies and authorities, including the Texas Banking
Department and the Federal Reserve Board, and such approvals and transactions
contemplated hereby shall not have been contested by any federal or state
governmental authority nor by any other third party by formal proceeding. It is
understood that, if any contest as aforesaid is brought by formal proceedings,
Brownsville Bancshares may, but shall not be obligated to, answer and defend
such contest.
7.4 LITIGATION. On the Closing Date, there shall not be any litigation,
investigation, inquiry or proceeding pending or threatened in or by any court or
governmental agency or authority which might result in action to restrain,
enjoin or prohibit consummation of the transactions contemplated by this
Agreement or which might result in divestiture, rescission or damages in
connection with such transactions and Brownsville Bancshares shall have been
furnished with a certificate, dated the Closing Date and signed by the President
of Texas Regional, in his capacity as such, to the effect that no litigation,
investigation, inquiry or proceeding is pending, or, to the best of his
knowledge, threatened.
7.5 DECLARATION OF EFFECTIVENESS OF REGISTRATION STATEMENT. The SEC shall
have declared effective the registration statement for registration of the
transaction pursuant to which shares of Texas Regional Class A Voting Common
stock are to be issued to shareholders of Brownsville Bancshares and the Option
Holders as herein described, and there shall be no order or action pending or
threatened to withdraw such declaration or to prohibit or otherwise restrict the
issuance of such shares, and any and all such actions as Texas Regional may deem
necessary or advisable shall have been taken to cause the qualification or
registration, by notification or otherwise, of the transaction or the shares in
any state in which such qualification or registration is deemed necessary by
Texas Regional.
7.6 NO MATERIAL ADVERSE CHANGE. No material adverse change shall have
occurred in the condition, financial position or business prospects of Texas
Regional or Texas State Bank.
7.7 FAIRNESS OPINION. Brownsville Bancshares shall have received a
fairness opinion, in form and content acceptable to Brownsville Bancshares in
its sole discretion, and rendered by a firm acceptable to Brownsville Bancshares
in its sole discretion, as to the fairness of the transaction to Brownsville
Bancshares and the shareholders of Brownsville Bancshares.
ARTICLE 8
CLOSING OBLIGATIONS
8.1 TEXAS REGIONAL OBLIGATIONS. At the Closing, Texas Regional shall
deliver the following:
8.1.1 Certificate of Merger, in the form required to be delivered for
filing with the Secretary of State of Delaware, pursuant to applicable
provisions of the Delaware General Corporation Law, providing for the
merger of Brownsville Bancshares and the Delaware Company with and into
TRD.
8.1.2 Officer's Certificate, including an incumbency certification
and further certifying as to the existence and good standing of the Texas
Regional, the accuracy of all representations and warranties of Texas
Regional, the approval by the Board of Directors of the Texas Regional, and
Texas Regional as the sole shareholder of TRD, of resolutions authorizing
and approving the merger transaction.
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8.1.3 Delivery of share certificates to shareholders of Brownsville
Bancshares who have tendered their Brownsville Bancshares share
certificates, as required by section 1.2.
8.1.4 Such other documents, certificates, and other items as may be
required to be delivered by Texas Regional pursuant to the terms of this
Agreement or as may be reasonably requested by Brownsville Bancshares to
effectuate the transaction herein described.
8.2 BROWNSVILLE BANCSHARES OBLIGATIONS. At the Closing, Brownsville
Bancshares shall deliver the following to Texas Regional:
8.2.1 Certificate of Merger, in the form required to be delivered for
filing with the Secretary of State of Delaware, pursuant to applicable
provisions of the Delaware General Corporation Law, providing for the
merger of Brownsville Bancshares and the Delaware Company with and into
TRD.
8.2.2 Officer's Certificates of Brownsville Bancshares, the Delaware
Company and Brownsville National, including an incumbency certification in
each case, and further certifying as to the existence and good standing of
each entity, the accuracy of all representations and warranties of
Brownsville Bancshares, the approval by the Board of Directors of each of
Brownsville Bancshares, the Delaware Company and Brownsville National, and
by the shareholders of Brownsville Bancshares, by Brownsville Bancshares as
the sole shareholder of the Delaware Company, and by the Delaware Company
as the sole shareholder of Brownsville National, in each case authorizing
and approving the transaction.
8.2.3 Certificates of Existence and Good Standing of each of
Brownsville Bancshares (issued by the Secretary of State of Texas), the
Delaware Company (issued by the Secretary of State of Delaware) and
Brownsville National (issued by the Office of Comptroller of the Currency)
in each case dated as of a date not more than three days prior to the
Closing;
8.2.4 Certificate of Good Standing of each of Brownsville Bancshares
(issued by the Texas Comptroller of Public Accounts), the Delaware Company
(issued by the Secretary of State of Delaware) and Brownsville National
(issued by the Texas Comptroller of Public Accounts), in each case dated as
of a date not more than three days prior to the Closing;
8.2.5 Certificates of adoption of appropriate resolutions,
Certificates of Merger, Articles of Merger and other documents as may be
required by Texas Regional to effect the merger of the Delaware Company
with and into TRD, and to effect the merger of Brownsville National with
and into Texas State Bank;
8.2.6 An opinion of Brownsville Bancshares's counsel in form and
substance required by this Agreement and otherwise acceptable to Texas
Regional; and
8.2.7 Such other documents, certificates, and other items as may be
required to be delivered by Brownsville Bancshares pursuant to the terms of
this Agreement or as may be reasonably requested by Texas Regional to
effectuate the transaction herein described.
ARTICLE 9
MISCELLANEOUS
9.1 SURVIVAL OF REPRESENTATION AND WARRANTIES. All representations,
warranties and covenants in this Agreement shall survive any investigation of
the parties hereto and shall survive the Closing of the transaction contemplated
hereby.
9.2 BROKERS. Texas Regional and Brownsville Bancshares agree that no
third party has in any way brought the parties together or been instrumental in
the making of this Agreement. Each of Texas Regional and Brownsville Bancshares
agrees to indemnify the other against any claim by any third person for any
commission, brokerage or finder's fee, or other payment with respect to this
Agreement, the merger of Brownsville National with and into Texas State Bank, or
the transactions contemplated hereby and thereby based on any alleged agreement
or understanding between such party and any third person, whether express or
implied from the actions of such party.
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9.3 EXPENSES. Whether or not the transactions provided for herein are
consummated, each party to this Agreement will pay its respective expenses
incurred in connection with the preparation and performance of this Agreement.
9.4 NOTICES. Any notice given hereunder shall be in writing and shall be
deemed delivered on the earlier of actual receipt or the time of deposit in the
United States mail, by registered or certified mail, return receipt requested,
postage prepaid, addressed to the party to whom such notice is to be sent at the
following addresses:
If to Texas Regional or to Texas State Bank, then to:
Texas Regional Bancshares, Inc.
3700 N. 10th Street, Suite 301
McAllen, Texas 78501
Attention: Mr. Glen E. Roney
Chairman of the Board
with a copy to:
William A. Rogers, Jr.
McGinnis, Lochridge & Kilgore, L.L.P.
1300 Capitol Center
919 Congress Avenue
Austin, Texas 78701
If to Brownsville Bancshares, the Delaware Company, Brownsville National,
the Majority Shareholders or the Option Holders, then to:
Brownsville Bancshares, Inc.
629 E. Elizabeth
P.O. Box 2159
Brownsville, Texas 78520
Attention: Jesus M. Castellano
Chairman of the Board
with a copy to:
Joseph Ford
Ford & Ferraro, L.L.P.
2000 San Jacinto Center
98 San Jacinto Boulevard
Austin, Texas 78701
9.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective successors and assigns, and, to
the extent required by Section 4.03, the directors, officers, Majority
Shareholders and Option Holders, but shall not be assigned by any party without
the prior written consent of the other party.
9.6 ARTICLE AND OTHER HEADINGS. Article and other headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
9.7 ENTIRE AGREEMENT. This Agreement, together with the Confidentiality
Agreement, embodies the entire agreement between the parties with respect to the
subject matter hereof, and supersedes all prior arrangements, understandings,
agreements or covenants between the parties. This Agreement may only be modified
by an instrument in writing executed by both Texas Regional and Brownsville
Bancshares.
9.8 WAIVERS. Texas Regional or Brownsville Bancshares may, by an
instrument in writing, extend the time for or waive the performance of any of
the obligations of the other or waive compliance with any of the covenants or
conditions contained in this Agreement.
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9.9 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Texas applicable to contracts made and to be performed therein.
9.10 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which when so executed shall be deemed to be an original,
and such counterparts shall together constitute but one and the same instrument.
9.11 JOINDER BY SHAREHOLDERS OF BROWNSVILLE BANCSHARES. Each of the
undersigned who executes this Agreement as a shareholder of Brownsville
Bancshares (defined herein as Majority Shareholders) hereby join into the
execution of this Agreement to evidence their consent to and approval of the
transaction herein described. Each of the undersigned Majority Shareholders
further represents to Texas Regional individually and not jointly and severally
(i) that the Majority Shareholders in the aggregate constitute the holders of
not less than 67% of the shares of the outstanding common stock of Brownsville
Bancshares, Inc.; (ii) that the shareholders of Brownsville Bancshares common
stock are the only persons entitled to consider and vote on the transaction
described in this Agreement and Plan of Reorganization; (iii) that he, she or it
owns the number of shares of Brownsville Bancshares as indicated below his, her
or its name below; (iv) that the undersigned Majority Shareholder has the full
power and authority to enter into and perform this Agreement; and (v) that Texas
Regional is relying upon the covenants and agreements contained in this
paragraph in executing and entering into the Agreement and Plan of
Reorganization. The undersigned Majority Shareholders specifically hereby agree
to recommend this transaction to other shareholders of Brownsville Bancshares
and to vote to approve of the transaction at the shareholder meeting called to
consider and vote upon the merger transaction herein described.
9.12 JOINDER BY CERTAIN SHAREHOLDERS. In addition, the following
shareholders of Brownsville Bancshares:
Horacio Barrera, Jesus M. Castellano, Paul Y. Cunningham, Jr.,
Alfredo Gavito, Lee Kirkpatrick, Israel Lizka, Manuel Lopez, Jr.,
Blanca Sanchez Vela, Isabel G. Vezzetti, Mario Yzaguirre and Abraham
Galonsky
(collectively, the "Affiliate Shareholders"), all of whom are officers,
directors or shareholders owning in excess of 10% of the outstanding capital
stock of Brownsville Bancshares, have joined into the execution of this
Agreement to acknowledge and agree to the following:
a. The undersigned Affiliate Shareholders acknowledge that Texas
Regional's offer to acquire Brownsville Bancshares on the terms and
conditions described in this Agreement is predicated upon the transactions
being accounted for as pooling of interests for generally accepted
accounting purposes.
b. It is a requirement of pooling of interests accounting that the
affiliates of the companies being merged agree to certain restrictions on
their stock. Each of the undersigned Affiliate Shareholders is an affiliate
of Brownsville Bancshares for purposes of these rules.
c. Each of the undersigned Affiliate Shareholders agrees that he will
not sell, pledge, transfer or otherwise dispose of any shares of the
Brownsville Bancshares stock within thirty (30) days prior to the Effective
Time. Each Affiliate Shareholder further agrees that until publication of
financial results covering at least 30 days of post-merger combined
operations of Brownsville Bancshares and Texas Regional, he will not sell,
pledge, transfer or otherwise dispose of any shares of Texas Regional stock
to be acquired by him in the merger transaction, unless such Affiliate
Shareholder first obtains the consent of Texas Regional. The undersigned
further agrees that he will not sell, pledge, transfer or otherwise dispose
of any shares of Texas Regional stock acquired by him in the merger
transaction except in a manner that is consistent with any additional
requirements for Texas Regional accounting for the merger as a pooling of
interests, including without limitation any requirements imposed by
applicable provisions of the Securities Act of 1933, the Securities
Exchange Act of 1934 and rules and regulations promulgated thereunder. Each
Affiliate Shareholder agrees that a restrictive legend to the foregoing
effect may be placed on any certificate evidencing shares of Texas Regional
stock to be issued in connection with the merger transaction. Texas
Regional will remove the restrictive legend
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from any certificates evidencing shares subject hereto promptly following
the expiration of the transfer restrictions described in this paragraph.
d. Each Affiliate Shareholder that is a director or executive officer
of Brownsville Bancshares further acknowledges and agrees that he will be
subject to Rule 145 promulgated by the SEC under the Securities Act of
1933, and he agrees not to transfer any Texas Regional stock received by
him in the Merger except in compliance with applicable provisions of the
Securities Act, the Securities Exchange Act and applicable rules and
regulations promulgated thereunder.
The obligations of the Affiliate Shareholders described in this paragraph
shall survive the closing of the transactions described in this Agreement.
9.13. JOINDER BY OPTION HOLDERS. Each of the undersigned who executes
this Agreement as a holder of one or more options to purchase shares of the
common stock of Brownsville Bancshares (defined herein as the Option Holders)
hereby join into the execution of this Agreement to evidence their consent to
and approval of the transaction herein described, and to evidence their
agreement to exchange their options for Texas Regional Class A Voting Common
stock as herein provided, and their agreement to terminate and cancel all of
their options, as a result of which all such options to purchase Brownsville
Bancshares shares shall be terminated and canceled. Each of the undersigned
Option Holders represents to Texas Regional (i) that the undersigned Option
Holders constitute the holders of all of the outstanding options to acquire
shares of common stock of Brownsville Bancshares, Inc.; (ii) that he, she or it
owns the option to purchase the number of shares of Brownsville Bancshares as
indicated below his, her or its name below; (iii) that such option is
unexercised and shall not be exercised unless this Agreement is terminated; (iv)
that the undersigned has the full power and authority to enter into and perform
this Agreement; and (v) that Texas Regional is relying upon the agreements
herein contained in executing and entering into the Agreement and Plan of
Reorganization. The undersigned Option Holders further agree to recommend the
merger transaction to shareholders of Brownsville Bancshares.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above.
TEXAS REGIONAL BANCSHARES, INC.
ATTEST: By: /s/G E Roney
/s/Nancy Schultz Glen E. Roney,
Secretary Chairman of the Board
BROWNSVILLE BANCSHARES, INC.
ATTEST: By: /s/Jesus M. Castellano
/s/Paul Y. Cunningham, Jr. Name: Jesus M. Castellano
Secretary Title: Chairman of the Board
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JOINDER BY SHAREHOLDERS OF BROWNSVILLE BANCSHARES
/s/Horacio L. Barrera /s/Blanca S. Vela
Number of shares: 2,435 Number of shares: 333
/s/Jesus M. Castellano /s/Isabel G. Vezzetti
Number of shares: 5,972 Number of shares: 3,382
/s/Manuel Lopez, Jr. /s/Alfredo Gavito
Number of shares: 1,377 Number of shares: 4,233
/s/Mario Yzaguirre /s/Lee Kirkpatrick
Number of shares: 17,076 Number of shares: 415
/s/Israel Lizka /s/Paul Y. Cunningham, Jr.
Number of shares: 20,083 Number of shares: 283
/s/Abraham Galonsky /s/Alter Holand
Number of shares: 31,582 Number of shares: 3,665
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<PAGE>
JOINDER BY SHAREHOLDERS OF BROWNSVILLE BANCSHARES
/s/Eloisa B. Barrera /s/Tally Galonsky by A. Galonsky
Number of shares: 8,675 Number of shares: 4,201
/s/ Eli Lizka
/s/Jose M. Castellano by Israel Lizka
Number of shares: 4,565 Number of shares: 4,661
/s/ Monica Lizka
/s/Delores C. Castellano by Israel Lizka
Number of shares: -- Number of shares: 6,058
/s/ Ester Lizka
/s/Gloria C. Moore by Israel Lizka
Number of shares: 3,272 Number of shares: 283
/s/ Linda Lizka
/s/Edward G. Moore by Israel Lizka
Number of shares: 283 Number of shares: 5,311
/s/ Josefa T. Castellano
/s/Nurith Galonsky by A. Galonsky
Number of shares: 4,203 Number of shares:
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<PAGE>
JOINDER BY OPTION HOLDERS OF BROWNSVILLE BANCSHARES
/s/ Tomas & Maria Lucila, C. Cuellar /s/ Mario Max Yzaguirre
by:J. M. Castellano by:Mrs. Mario Yzaguirre
Number of option shares: 2,979 Number of option shares: 571
/s/ Fred J. & Josefa C. Cappadona /s/ Maria E. Yzaguirre
by:J. M. Castellano by:Mrs. Mario Yzaguirre
Number of option shares: 3,551 Number of option shares: 858
/s/ Enrique J. & Sara C. Saldana
by:J. M. Castellano /s/Maria Enriqueta B. Yzaguirre
Number of option shares: 3,551 Number of option shares: 1,981
/s/ Manuel A. Yzaguirre
/s/Gabriela Galvan Martinez by:Mrs. Mario Yzaguirre
Number of option shares: 10,000 Number of option shares: 571
/s/ Mark R. Yzaguirre
/s/Rosalee Longoria Galvan by:Mrs. Mario Yzaguirre
Number of option shares: 10,000 Number of option shares: 571
/s/Mark A. Galvan /s/Vidal Longoria
Number of option shares: 10,000 Number of option shares: 3,300
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JOINDER BY SHAREHOLDERS OF BROWNSVILLE BANCSHARES
/s/ Liverpool of McAllen, Inc.
/s/Carmen Gavito by Alter Holand
Number of shares: 4,046 Number of shares: 283
/s/ PDP INC.
/s/Blanca I. Gavito by Alter Holand
Number of shares: 4,046 Number of shares: 1,436
/s/Lourdes Gavito-Galonsky
Number of shares: 4,246 Number of shares:
/s/ Estate of Szama Holand by
Alter Holand
Number of shares: 2,586 Number of shares:
/s/ Anna Lisa Holand by
Alter Holand
Number of shares: 2,586 Number of shares:
/s/ Joseph William Holand by
Alter Holand
Number of shares: 2,337 Number of shares:
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JOINDER BY OPTION HOLDERS OF BROWNSVILLE BANCSHARES
/s/Lee Kirkpatrick /s/Mary Alice Nava
Number of option shares: 10,000 Number of option shares: 500
/s/Daniel C. Alaniz /s/Eduardo Melendez
Number of option shares: 2,500 Number of option shares: 300
/s/Robert L. Walker /s/Yvonne A. Guerra
Number of option shares: 2,500 Number of option shares: 500
/s/Beverly D. Speer /s/Berta S. Maza
Number of option shares: 1,500 Number of option shares: 500
/s/Julian Pena /s/Carolyn Kizer
Number of option shares: 1,500 Number of option shares: 500
/s/Adolph R. Marroquin
Number of option shares: 1,000 Number of option shares:
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<PAGE>
SCHEDULE 2.3
ORGANIZATION AND OPERATION OF BROWNSVILLE NATIONAL.
BRANCH FACILITY
3255 Boca Chica Blvd.
Brownsville, Texas
Copies of Articles of Association and Bylaws furnished to Texas Regional
Bancshares, Inc. (TRBS) during due diligence.
Brownsville National Bank owns Certificate No. 3 for 100,000 shares, $1.00
par value, of the Greater Brownsville Community Development Corporation.
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SCHEDULE 2.4
CAPITALIZATION AND OWNERSHIP.
LIST OF OPTION HOLDERS
Lee Kirkpatrick...................... 10,000
Daniel C. Alaniz..................... 2,500
Robert L. Walker..................... 2,500
Beverly Speer........................ 1,500
Julian Pena.......................... 1,500
Adolph Marroquin..................... 1,000
Mary Alice Nava...................... 500
Carolyn Kizer........................ 500
Yvonne A Guerra...................... 500
Berta S. Maza........................ 500
Eduardo Melendez..................... 300
---------
21,300
=========
Copies of documents furnished to TRBS during due diligence.
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SCHEDULE 2.6.2
LOANS TO DIRECTORS, OFFICERS, AND BENEFICIAL OWNERS.
Detailed information furnished to TRBS during due diligence.
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SCHEDULE 2.7
PROPERTIES.
POLICIES OF TITLE INSURANCE ON BANK PROPERTY
NONE
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SCHEDULE 2.8
ENVIRONMENTAL MATTERS.
ENVIRONMENTAL SURVEY REPORT
NONE
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SCHEDULE 2.11
CONTRACTS.
Customary annual bonuses to be paid to officers and employees for 1997
performance, not to exceed $98,000.00.
EDS data processing contract which terminated 9/30/97. Written notice of
non-renewal was faxed 9/10/97, copies of which have been furnished to TRBS
during due diligence.
Life insurance policy and Health insurance policy -- Furnished to TRBS
during due diligence.
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SCHEDULE 2.13
INSURANCE.
Detailed information furnished to TRBS during due diligence.
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SCHEDULE 2.14
ABSENCE OF ADVERSE AGREEMENTS.
NONE
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SCHEDULE 2.15
ABSENCE OF CERTAIN CHANGES.
(i) Established BNB Bancshares, a
Delaware Corporation
(ii) Employee stock option plan as stated
on Schedule 2.4
(iii) $2.60 per share of Brownsville
Bancshares, Inc. cash dividends paid
in 1996, $1.00 per share of
Brownsville Bancshares, Inc. cash
dividend paid May 9, 1997, $1.60 per
share of Brownsville Bancshares, Inc.
cash dividend paid Oct. 6, 1997.
(iv) None
(v) None
(vi) None
(vii) None
(viii) Wage increases as set forth on item (xii)
Stock option plan as stated on
Schedule 2.4
Customary bonuses paid annually in
the normal course of business.
(ix) None
(x) None
(xi) None
(xii) Wage increases for Officers and
employees and bonuses for 1996 and
1997. Furnished to TRBS during due
diligence.
(xiii) None
(xiv) None
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SCHEDULE 2.16
AGREEMENTS WITH DIRECTORS, OFFICERS AND STOCKHOLDERS.
DIRECTORS & EXECUTIVE OFFICERS:
BROWNSVILLE BANCSHARES. INC.
Jesus M. Castellano, Chairman
Lee Kirkpatrick, President
Paul Y. Cunningham, Jr., Secretary/Treas. - SPI Management Co.
Horacio L. Barrera
Isabel Vezzetti
Alfredo Gavito
Israel Lizka - La Casa Del Nylon
Manuel Lopez - Lopez Wholesale Meats
Blanca Vela
Mario Yzaguirre
OVER 5% SHAREHOLDERS
Abraham Galonsky - La Casa Del Nylon
BNB BANCSHARES, INC.
Jesus M. Castellano, Chairman
Lee Kirkpatrick President
Horacio L. Barrera, Secretary/Treasurer
BROWNSVILLE NATIONAL BANK
Horacio L. Barrera, Chairman
Isabel Vezzetti Vice-Chairman
Alfredo Gavito, Secretary
Lee Kirkpatrick President & Chief Executive Officer
Jesus M. Castellano
Paul Y. Cunningham, Jr. - SPI Management Co.
Israel Lizka - La Casa Del Nylon
Manuel Lopez - Lopez Wholesale Meats
Blanca Vela
Mario Yzaguirre
There have been no commitments made, written or oral, to lend funds to the
above.
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ANNEX B
PROVISIONS OF TEXAS BUSINESS CORPORATION ACT
RELATING TO RIGHTS OF DISSENTING SHAREHOLDERS
ART. 5.12. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO SAID CORPORATE ACTIONS
A. Any shareholder of any domestic corporation who has the right to
dissent from any of the corporate actions referred to in Article 5.11 of this
Act may exercise that right to dissent only by complying with the following
procedures:
(l)(a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a cow
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting shareholder in accordance
with Subsection (1) of this Section, the corporation (foreign or domestic)
or other entity shall deliver or mail to the shareholder a written notice
that shall either set out that the corporation (foreign or domestic) or
other entity accepts the amount claimed in the demand and agrees to pay
that amount within ninety (90) days after the date on which the action was
effected, and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed, or shall contain an estimate
by the corporation (foreign or domestic) or other entity of the fair value
of the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was effected,
upon receipt of notice within sixty (60) days after that date from the
B-1
<PAGE>
shareholder that the shareholder agrees to accept that amount and, in the
case of shares represented by certificates, upon the surrender of the
certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the corporate
action was effected, the value of the shares is agreed upon between the
shareholder and the existing, surviving, or new corporation (foreign or
domestic) or other entity, as the case may be, payment for the shares shall
be made within ninety (90) days after the date on which the action was
effected and, in the case of shares represented by certificates, upon
surrender of the certificates duly endorsed. Upon payment of the agreed
value, the shareholder shall cease to have any interest in the shares or in
the corporation.
B. If, within the period of sixty (60) days after the, date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of that value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, (foreign or
domestic) or other entity, as the case may be, of duly endorsed certificates for
those shares. Upon payment of the judgment, the dissenting shareholders shall
cease to have any interest in those shares or in the corpora-tion. The court
shall allow the appraisers a reasonable fee as court costs, and all court costs
shall be allotted between the parties in the manner that the court determines to
be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment
B-2
<PAGE>
of the judgment entered for the value of the shares, as in this Article
provided, shall, in the case of a merger, be treated as provided in the plan of
merger and, in all other cases, may be held and disposed of by the corporation
as in the case of other treasury shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
ART. 5.13. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder,
the corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 or 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair value of such shares by a court shall
have been filed within the time provided in Article 5.12 or 5.16 of this Act, as
the case may be, or if after the hearing of a petition filed pursuant to Article
5.12 or 5.16, the court shall determine that such shareholder is not entitled to
the relief provided by those articles, then, in any such case, such shareholder
and all persons claiming under him shall be conclusively presumed to have
approved and ratified the corporate action from which he dissented and shall be
bound thereby, the right of such shareholder to be paid the fair value of his
shares shall cease, and his status as a shareholder shall be restored without
prejudice to any corporate proceedings which may have been taken during the
interim, and such shareholder shall be entitled to receive any dividends or
other distributions made to shareholders in the interim.
B-3
<PAGE>
ANNEX C
SERVICE ASSET
MANAGEMENT COMPANY
December 8, 1997
The Board of Directors
Brownsville Bancshares, Inc.
629 E. Elizabeth Street
Brownsville, Texas 78520
Members of the Board:
We understand that Brownsville Bancshares, Inc. ("BBI"), Texas Regional
Bancshares, Inc. ("Texas Regional"), and certain shareholders of BBI have
entered into an Agreement and Plan of Reorganization (the "Merger Agreement")
dated October 20, 1997, which provides for the merger (the "Merger") of BBI
and its subsidiary, BNB Bancshares, Inc., with and into a new wholly owned
Delaware subsidiary corporation of Texas Regional ("TRD"). Pursuant to the
terms of the Merger Agreement each issued and outstanding share of common stock,
par value $4.00, of BBI, as of the date the Merger becomes effective, will be
converted into the right to receive 3.06608 (the "Exchange Ratio") shares of
Texas Regional Class A voting common stock not to exceed in the aggregate
947,164 shares, as described in the Merger Agreement with certain provisions for
fractional shares. In addition, contemporaneously with the closing of the merger
transaction, all holders of options to purchase BBI capital stock shall receive
1.77634 shares of Texas Regional Class A Voting Common Stock in exchange for,
and in consideration of the termination and cancellation of their options, not
to exceed in the aggregate 37,836 shares. The terms and conditions of the Merger
are more fully set forth in the Merger Agreement. We understand that as a result
of the Merger, (i) BBI and the Delaware Company shall each be merged with and
into TRD and each will cease to exist and that (ii) Brownsville National Bank
("Brownsville National" or the "Bank") will be merged with and into Texas
State Bank and will cease its separate existence.
You have asked for our opinion as to whether the Exchange Ratio pursuant to
the Merger Agreement is fair from a financial point of view to holders of the
BBI Common Stock.
Our opinion is based on information furnished to us by BBI and Texas
Regional, their attorneys, accountants, or obtained by us from published and
verbal sources we consider relevant. We have relied upon and assumed the
accuracy and completeness of all information submitted to us or that was
publicly available and have made no independent verfication of this information.
We have not conducted any valuation or appraisal of any assets or liabilities,
nor have any such valuations or appraisals been provided to us. In relying upon
financial analyses and forecasts provided to us, we have assumed that they have
been reasonably prepared based on assumptions reflecting the best currently
available estimates and judgments by management of BBI and Texas Regional as to
the expected future results of operations and financial condition of BBI and
Texas Regional to which such analyses or forecasts relate. We have relied as to
all legal matters relevant to rendering our opinion upon the advice of counsel.
BBI and Texas Regional's management have informed us that they know of no
additional information which would have a material effect upon our valuation.
In arriving at our opinion, we have followed generally accepted industry
practices for the valuation of commercial banks and have used such valuation
methodologies as we have deemed necessary or appropriate for the purposes of
this opinion. In giving our opinion, we have given consideration to all
available financial data and other relevant factors effecting fair market value
including, but not limited to the following, (i) reviewed certain publicly
available financial statements and other information of BBI and Texas Regional,
(ii) reviewed certain internal financial statements and other financial and
operating data concerning BBI and Texas Regional prepared by the management of
BBI and Texas Regional, (iii) analyzed
C-1
<PAGE>
certain summary financial projections concerning BBI and Texas Regional prepared
by the management of BBI and Texas Regional, respectively; (iv) reviewed and
discussed with senior executives of BBI and past and current operations and
prospects of BBI, (v) reviewed and discussed with senior executives of Texas
Regional the past and current operations and financial condition and the
prospects of Texas Regional and analyzed the estimated pro forma impact of the
Merger, including on the combined company's earnings per share, consolidated
capitalization and financial ratios, (vi) reviewed and discussed with senior
executives of BBI and Texas Regional the strategic objectives of the Merger and
the long term benefits expected to result from the Merger, including without
limitation, certain estimates and timing of synergies and other cost savings for
the continued company, (vii) reviewed reported prices and and trading activity
for transactions in BBI stock and Texas Regional Stock, (viii) compared the
financial performance of BBI and Texas Regional and the prices and trading
activity of BBI and Texas Regional with that of certain other comparable
publicly traded companies and their securities, (ix) reviewed the financial
terms, to the extent publicly available, of certain comparable transactions, (x)
reviewed the Merger Agreement and certain related documents, and (xi) considered
other such factors as we have deemed appropriate.
Neither Service Asset Management Company ("SAMC") nor the individuals
involved in this valuation have any present or contemplated future financial
interest in BBI or Texas Regional which might prevent them from rendering a fair
and unbiased opinion. Service Asset Management Company in the past has provided
bond advisory services to Texas State Bank and has received commissions on
securities sold to Texas State Bank. This compensation is insignificant as
compared to SAMC's total annual billings. Our opinion is necessarily based upon
the business, market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter, and does not address BBI's underlying
business decision to enter into the Merger Agreement or constitute any
recommendations to any holder of common stock of BBI as to how such holder
should vote with respect to the Merger Agreement. We were not requested to, and
did not, solicit third party offers to acquire all or any part of BBI. In
addition, we understand that the Merger may render in effect a taxable
transaction and our opinion may be used for purposes of the shareholders in
determining their tax liability they may have upon conversion.
In reaching our opinion, we have assumed that the Merger will be
consummated in accordance with the terms described in the Merger Agreement. We
consent to the reference to our firm and the inclusion of our opinion in its
entirety in any filing with the Securities and Exchange Commission related to
the Merger. Based on the foregoing and in consideration of all relevant factors,
it is our opinion, as of the date of this letter, that the Exchange Ratio, is
fair and equitable to all holders of Brownsville Bancshares, Inc. common stock,
from a financial point of view.
Service Asset Management Company appreciates the opportunity to be of
service to you in this matter.
Very truly yours,
SERVICE ASSET MANAGEMENT COMPANY
By: /s/ DORY A. WILEY
Dory A. Wiley
C-2
<PAGE>
ANNEX D
BROWNSVILLE BANCSHARES, INC., FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE
----
YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994
Independent Auditor's Report............ D-2
Consolidated Balance Sheets............. D-3
Consolidated Statements Of Income....... D-4
Consolidated Statements Of Changes In
Shareholders' Equity.................. D-5
Consolidated Statements Of Cash Flows... D-6
Notes To Consolidated Financial
Statements............................ D-7
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996
Consolidated Balance Sheets
(Unaudited)........................... D-16
Consolidated Statements of Income
(Unaudited)........................... D-17
Consolidated Statements of Shareholders'
Equity (Unaudited).................... D-18
Consolidated Statements of Cash Flows
(Unaudited)........................... D-19
Notes to Unaudited Consolidated
Financial Statements.................. D-20
D-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Brownsville Bancshares, Inc. & Subsidiaries
P. O. Box 2159
Brownsville, Texas 78523
We have audited the accompanying consolidated balance sheets of Brownsville
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and 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
Brownsville Bancshares, Inc. and Subsidiaries' management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all material respects, the consolidated financial position of Brownsville
Bancshares, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of 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.
/s/ GARCIA, MARREN & COMPANY, P.C.
GARCIA, MARREN & COMPANY, P.C.
Certified Public Accountants
Brownsville, Texas
January 26, 1997
D-2
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and due from banks.............. $ 6,037 $ 4,522
Federal funds sold................... 12,560 7,765
Investment Securities:
Securities available for sale... 13,788 21,977
Securities held to maturity..... 21,585 11,901
--------- ---------
35,373 33,878
--------- ---------
Loans, excluding unearned discount of
$261,000 in 1996, and $219,000 in
1995............................... 40,644 41,398
Less allowance for loan
losses.......................... (288) (307)
--------- ---------
40,356 41,091
--------- ---------
Office building and
equipment -- net................... 1,820 1,857
--------- ---------
Other real estate owned.............. -- 110
Other Assets
Accrued income.................. 1,083 1,017
Other assets.................... 251 249
--------- ---------
1,334 1,266
--------- ---------
TOTAL ASSETS.................. $ 97,480 $ 90,489
========= =========
LIABILITIES
Deposits
Noninterest-bearing
Individuals, partnerships and
corporations................... $ 12,850 $ 12,073
U.S. Government................. 26 31
Certified and official checks... 637 414
--------- ---------
13,513 12,518
--------- ---------
Interest-bearing
NOW accounts.................... 10,444 10,539
Savings......................... 8,436 9,043
Time, $100,000 and over......... 26,430 23,268
Other time...................... 26,467 23,541
States and political
subdivisions................... 98 98
--------- ---------
71,875 66,489
--------- ---------
Total Deposits........ 85,388 79,007
--------- ---------
Other Liabilities
Accrued interest payable on
interest-bearing accounts...... 365 339
Other accrued expenses
payable........................ 314 262
--------- ---------
679 601
--------- ---------
Total Liabilities..... 86,067 79,608
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, par value $4 per share;
1,000,000 shares authorized,
308,917 shares issued and
outstanding........................ 1,236 1,236
Additional paid-in capital........... 5,563 5,563
Retained earnings.................... 4,667 4,246
Net unrealized depreciation on
securities available for sale, net
of deferred tax asset of $27,000
and $85,000, respectively.......... (53) (164)
--------- ---------
Total Shareholders'
Equity.................. 11,413 10,881
--------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............. $ 97,480 $ 90,489
========= =========
The accompanying notes are an integral part of these financial statements.
D-3
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest Income
Interest on real estate loans...... $ 2,508 $ 2,553 $ 2,111
Commercial loans................... 1,155 1,167 1,001
Installment loans.................. 391 381 388
--------- --------- ---------
4,054 4,101 3,500
On investment securities, including
dividend income.................. 2,183 2,149 2,250
On federal funds sold.............. 451 287 276
--------- --------- ---------
Total Interest Income.... 6,688 6,537 6,026
--------- --------- ---------
Interest Expense
Interest on time deposits of
$100,000 or more................. 1,202 1,130 785
Interest on other deposits......... 1,733 1,639 1,399
--------- --------- ---------
Total Interest Expense... 2,935 2,769 2,184
--------- --------- ---------
Net Interest Income...... 3,753 3,768 3,842
Provision for loan losses............... 53 20 20
--------- --------- ---------
Net Interest Income After
Provision For Loan
Losses..................... 3,700 3,748 3,822
--------- --------- ---------
Other Income
Service charges on deposit
accounts......................... 571 557 543
Net realized gains on securities
available for sale............... -- -- 99
Other.............................. 300 274 339
--------- --------- ---------
Total Other Income....... 871 831 981
--------- --------- ---------
Other Expense
Salaries and employee benefits..... 1,460 1,454 1,420
Occupancy expenses................. 369 330 313
Other expenses..................... 935 907 1,081
--------- --------- ---------
Total Other Expenses..... 2,764 2,691 2,814
--------- --------- ---------
Income Before Income Taxes.... 1,807 1,888 1,989
Applicable income taxes................. 593 625 664
--------- --------- ---------
NET INCOME............... $ 1,214 $ 1,263 $ 1,325
========= ========= =========
Earnings Per Share...................... $ 3.93 $ 4.09 $ 4.29
========= ========= =========
Weighted average number of common shares
outstanding
(in thousands)........................ 309 309 309
========= ========= =========
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
DEPRECIATION
ON
ADDITIONAL AVAILABLE TOTAL
COMMON PAID IN RETAINED FOR SALE SHAREHOLDERS'
STOCK CAPITAL EARNINGS SECURITIES EQUITY
------ ---------- --------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, at December 31, 1993........... $ 989 $4,266 $ 3,820 $-- $ 9,075
25% stock dividend -- 61,783 shares
of common stock.................. 247 1,297 (1,544) -- --
Net income......................... -- -- 1,325 -- 1,325
Net unrealized depreciation on
securities available for sale.... -- -- -- (757) (757)
------ ---------- --------- ------------ -------------
Balance, at December 31, 1994........... 1,236 5,563 3,601 (757) 9,643
Cash dividend paid $2.00 per
share............................ -- -- (618) -- (618)
Net income......................... -- -- 1,263 -- 1,263
Net unrealized appreciation on
securities available for sale.... -- -- -- 593 593
------ ---------- --------- ------------ -------------
Balance, at December 31, 1995........... 1,236 5,563 4,246 (164) 10,881
Cash dividend paid $2.60 per
share............................ -- -- (803) -- (803)
Net income......................... -- -- 1,214 -- 1,214
Prior period adjustment............ -- -- 10 -- 10
Net unrealized appreciation on
securities available for sale.... -- -- -- 111 111
------ ---------- --------- ------------ -------------
Balance, at December 31, 1996........... $1,236 $5,563 $ 4,667 $ (53) $11,413
====== ========== ========= ============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------- --------- ----------
(DOLLARS IN THOUSANDS)
Cash Flows From Operating Activities
Net income...................... $ 1,214 $ 1,263 $ 1,325
---------- --------- ----------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation............... 120 115 118
Provision for credit
losses..................... 53 20 20
Deferred income taxes...... 1 4 10
Net realized gain on
securities available for
sale.................... -- -- (100)
Sale of other real estate
owned................... 110 42 --
Net realized gain on sale
of capital assets....... -- -- (20)
(Increase) decrease in
accrued income and other
assets.................. (68) 53 (221)
Increase in accrued
expenses and other
liabilities............. 19 (6) 102
---------- --------- ----------
Total Adjustments............... 235 228 (91)
---------- --------- ----------
Net Cash Provided By Operating
Activities......................... 1,449 1,491 1,234
---------- --------- ----------
Cash Flows From Investing Activities
Purchases of securities
available for sale............ (1,100) -- (10,466)
Proceeds from maturities of
securities available for
sale.......................... 9,457 3,486 4,250
Proceeds from sale of securities
available for sale............ -- -- 2,713
Purchase of securities to be
held to maturity.............. (17,765) (6,315) (500)
Proceeds from maturities of
securities held to maturity... 8,081 7,250 3,800
Net (increase) decrease in
loans......................... 682 328 (2,175)
Purchases of properties and
equipment..................... (83) (132) (58)
Proceeds from sale of capital
asset......................... -- -- 255
---------- --------- ----------
Net Cash Provided (Used) In Investing
Activities......................... (728) 4,617 (2,181)
---------- --------- ----------
Cash Flows From Financing Activities
Net increase (decrease) in
non-interest bearing demand
deposits...................... 995 (69) 1,177
Net increase (decrease) in time
deposits...................... 5,387 (1,002) (579)
Dividends paid.................. (803) (618) --
Prior period adjustment......... 10
---------- --------- ----------
Net Cash Provided (Used) By Financing
Activities......................... 5,589 (1,689) 598
---------- --------- ----------
Net Increase (Decrease) in Cash and
Cash Equivalents................... 6,310 4,419 (349)
Cash and cash equivalents at
beginning of year.................. 12,287 7,868 8,217
---------- --------- ----------
Cash and cash equivalents at end of
year............................... $ 18,597 $ 12,287 $ 7,868
========== ========= ==========
Supplemental Disclosure Of Cash Flow
Information:
Cash paid during the year for:
Interest................... $ 2,910 $ 2,664 $ 2,125
Federal income taxes....... 600 586 821
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Brownsville
Bancshares, Inc. its wholly-owned subsidiary, BNB Bancshares, Inc., and its
indirect wholly-owned subsidiary, Brownsville National Bank (the Bank),
wholly-owned by BNB Bancshares, Inc. All significant transactions and balances
have been eliminated in consolidation.
Organization and Acquisition of Subsidiary -- BNB Bancshares, Inc. was
incorporated in the State of Delaware on March 12, 1996 for the purpose of
conducting business as a bank holding company. On May 15, 1996, all of the stock
of Brownsville National Bank was transferred by Brownsville Bancshares, Inc. to
BNB Bancshares, Inc. and BNB Bancshares, Inc. simultaneously transferred all of
its common stock to Brownsville Bancshares, Inc. In connection with these
transactions, 236,241 shares of Brownsville National Bank common stock was
exchanged for 1,000 shares of BNB Bancshares, Inc. common stock.
B. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those entities.
C. CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statement of Cash Flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and due from banks" and "Federal funds sold."
D. INVESTMENT SECURITIES
The Bank's investments in securities for the current year are classified in
two categories:
o Securities Held To Maturity -- Bonds, notes and debentures for which
the Bank has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion
of discounts which are recognized in interest income using the
interest method over the period to maturity.
o Securities Available For Sale -- Securities available for sale consist
of bonds, notes, debentures, and certain equity securities not
classified as trading securities nor as securities to be held to
maturity.
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 when
applicable.
Unrealized holding gains and losses, net of tax, on securities available
for sale are reported as a net amount in a separate component of shareholders'
equity until realized.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
D-7
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
E. LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs and allowance for loan
losses.
Loan origination fees and certain direct origination costs are presently
not capitalized and recognized as an adjustment of the yield of the related
loans since such net amounts are immaterial.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent payments
are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic evaluation
of the adequacy of the allowance is based on the Bank's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current economic conditions.
F. FORECLOSED REAL ESTATE
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in loss on
foreclosed real estate.
G. INCOME TAXES
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.
H. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation
and amortization. The provisions for depreciation and amortization is computed
principally by the straight-line method over the estimated useful lives for the
assets.
Expenditures for maintenance and repairs are charged to operations, and the
expenditures for major replacements and betterment are added to the property and
equipment accounts. The cost and accumulated depreciation of the property and
equipment retired or sold are eliminated from the property accounts at the time
of retirement or sale and the resulting gain or loss is reflected in current
operations.
Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the related carrying amount may
not be recoverable. When required, impairment losses on assets to be held and
used will be recognized based on the excess of the asset's carrying amount and
fair value of the asset and long-lived assets to be disposed of will be reported
at the lower of carrying amount or fair value less cost to sell.
I. FINANCIAL INSTRUMENTS
Off-Balance-Sheet Financial Instruments: In the ordinary course of
business, the Bank has entered into off-balance-sheet financial instruments
consisting of commitments to extend credit, commitments under
D-8
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
credit card arrangements, commercial letters of credit and standby letters of
credit. Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
J. FAIR VALUES OF FINANCIAL INSTRUMENTS
Although the Bank is exempt from certain required disclosures about
financial instruments, it has voluntarily elected to disclose the methods and
assumptions used by the Bank in estimating fair values of financial instruments
as disclosed herein:
CASH AND SHORT-TERM INSTRUMENTS -- The carrying amounts of cash and
short-term instruments approximate their fair value.
SECURITIES HELD TO MATURITY AND SECURITIES AVAILABLE FOR SALE -- Fair
values for investment securities are based on quoted market prices.
ACCRUED INTEREST -- The carrying amounts of accrued interest approximate
their fair values.
NOTE B -- DEBT AND EQUITY SECURITIES
Debt and investment securities have been classified in the balance sheets
according to management's intent. The carrying amounts of investment securities
as shown in the balance sheets of the Bank and their estimated market values at
December 31 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for
sale -- December 31, 1996:
U.S. Government and agency
securities...................... $ 13,719 $ 17 $ 96 $ 13,640
Other securities................ 150 -- 2 148
---------- ----------- ----------- ----------
$ 13,869 $ 17 $ 98 $ 13,788
========== =========== =========== ==========
Securities held to
maturity -- December 31, 1996:
U.S. Government and agency
securities.................... $ 20,185 $ 39 $ 118 $ 20,106
State and municipal
securities.................... -- -- -- --
Other........................... 1,400 33 1 1,432
---------- ----------- ----------- ----------
$ 21,585 $ 72 $ 119 $ 21,538
========== =========== =========== ==========
Securities available for
sale -- December 31, 1995:
U.S. Government and agency
securities.................... $ 22,176 $ 38 $ 287 $ 21,927
Other securities................ 50 -- -- 50
---------- ----------- ----------- ----------
$ 22,226 $ 38 $ 287 $ 21,977
========== =========== =========== ==========
Securities held to
maturity -- December 31, 1995:
U.S. Government and agency
securities.................... $ 10,394 $ 116 $ 4 $ 10,506
State and municipal
securities.................... 1,307 36 2 1,341
Other securities................ 200 -- -- 200
---------- ----------- ----------- ----------
$ 11,901 $ 152 $ 6 $ 12,047
========== =========== =========== ==========
</TABLE>
Assets, principally securities, carried at approximately $10.4 million at
December 31, 1996 and $13.6 million at December 31, 1995 were pledged to secure
public deposits and for other purposes required or permitted by law.
D-9
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The scheduled maturities of securities held to maturity and securities
available for sale at December 31, 1996 are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
SECURITIES SECURITIES AVAILABLE
HELD TO MATURITY FOR SALE
---------------- --------------------
(DOLLARS IN THOUSANDS)
Due in one year or less.............. $-- $--
Due from one year to five years...... 2,515 5,500
Due from five to ten years........... 19,070 8,369
---------------- --------------------
$ 21,585 $ 13,869
================ ====================
Fair Value........................... $ 21,538 $ 13,788
================ ====================
NOTE C -- LOANS RECEIVABLE
The components of loans in the consolidated balance sheets were as follows:
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Commercial loans........................ $ 13,077 $ 12,782
Real estate loans....................... 24,112 25,678
Consumer loans.......................... 3,430 2,903
Overdrafts.............................. 25 35
--------- ---------
$ 40,644 $ 41,398
========= =========
NOTE D -- ALLOWANCE FOR CREDIT LOSSES
An analysis of the change in the allowance for credit losses follows:
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance -- January 1.................... $ 307 $ 252 $ 320
Credits charged off..................... (84) (43) (126)
Recoveries.............................. 13 78 38
--------- --------- ---------
Net (charged off) recoveries............ (71) 35 (88)
Provision for credit losses............. 53 20 20
--------- --------- ---------
Balance -- End of Year.................. $ 289 $ 307 $ 252
========= ========= =========
During the years 1996 and 1995, there were no impairment of loans that have
to be recognized in conformity with FASB Statement 114, as amended by FASB 118.
There were no loans transferred to foreclosed real estate in 1996 or 1995.
Transactions on foreclosed real estate acquired before 1995 includes net
income of $10 thousand in 1996 and net expense of $9 thousand in 1995 and $53
thousand in 1994.
D-10
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE E -- PROPERTIES AND EQUIPMENT
Components of properties and equipment included in the consolidated balance
sheets at December 31, 1996 and 1995 were as follows:
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Cost:
Land............................... $ 408 $ 408
Bank premises...................... 1,723 1,723
Furniture and equipment............ 1,120 1,062
Automobiles........................ 71 39
Landscaping........................ 29 29
--------- ---------
Total cost.................... 3,351 3,261
Less accumulated depreciation...... (1,531) (1,404)
--------- ---------
Net Book Value................ $ 1,820 $ 1,857
========= =========
The Bank leases certain items of equipment under various cancelable one
year leases. Rent expense was $4 thousand in 1996, $4 thousand in 1995 and $3
thousand in 1994.
NOTE F -- INCOME TAXES
The consolidated provision for federal income taxes consisted of the
following:
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Current tax expense..................... $ 592 $ 621 $ 654
Deferred tax expense.................... 1 4 10
--------- --------- ---------
Total Expense................. $ 593 $ 625 $ 664
========= ========= =========
Deferred tax assets and liabilities included in other liabilities at
December 31, consist of the following:
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Deferred tax assets:
Net unrealized depreciation on
available-for-sale securities.... $ 27 $ 85
--------- ---------
Deferred tax liabilities:
Allowance for loan losses.......... (179) (184)
Accumulated depreciation........... (88) (82)
--------- ---------
(267) (266)
--------- ---------
Net Deferred Tax (Liability) Asset...... $ (240) $ (181)
========= =========
No valuation allowance for deferred tax assets was recorded at December 31,
1996 or 1995.
NOTE G -- RELATED PARTIES
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. The aggregate amounts receivable from such
D-11
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
related parties as of December 31, 1996 amounted to approximately $347 thousand
and $420 thousand as of December 31, 1995.
NOTE H -- COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to litigation and claims arising in the normal course
of business. Management, after consultation with legal counsel, believes that
the liabilities, if any, arising from such litigation and claims will not be
material to the bank's financial position.
NOTE I -- FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments consist primarily of commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the consolidated balance sheets. The contract or notional amounts
of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
CONTRACT OR
NOTIONAL AMOUNT
--------------------
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Financial instruments whose contract
amounts represent credit risk:
Commercial loan commitments..... $ 7,934 $ 10,113
Unfunded lines-of-credit........ 3,760 2,553
Letter of credit................ 1,427 459
--------- ---------
Total......................... $ 13,121 $ 13,125
========= =========
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payments of a fee. Since many of the commitments are expected to
be drawn upon, the total commitment amounts generally represent future cash
requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty. If collateral is required, it normally consists of real property.
D-12
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The estimated fair values of the Bank's financial instruments it has
elected to disclose were as follows at:
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Financial Assets
Cash and due from banks......... $ 6,037 $ 6,037 $ 4,522 $ 4,522
Federal funds sold.............. 12,560 12,560 7,765 7,765
Securities available for sale... 13,788 13,788 21,977 21,977
Securities held to maturity..... 21,585 21,538 11,901 12,047
Accrued interest receivable..... 1,083 1,083 1,017 1,017
NOTE J -- DEPOSITS
The aggregate amount of the Bank's time deposits as of December 31, 1996,
evidenced by CD's, amounts to $52.9 million, all due within one year except for
$71 thousand of IRA's deposits whose maturity dates extend beyond one year, but
upon maturity, will be converted to one year IRA's.
NOTE K -- CONCENTRATION OF CREDIT RISK
Practically all of the Bank's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the Bank's market
area and customers domiciled outside the United States, primarily in Mexico.
Practically all such customers are depositors of the Bank. Investment in state
and municipal securities also include governmental entities within the Bank's
market area and state. The concentrations of credit by type of loan are set
forth in Note C.
NOTE L -- RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1996,
approximately $2.4 million of retained earnings were available for dividend
declaration without prior regulatory approval.
NOTE M -- REGULATORY MATTERS
The Bank 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank 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, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of December 11, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as adequately capitalized
under the regulatory framework for prompt
D-13
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
corrective action. To be categorized as adequately capitalized the Bank 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 Bank's actual capital amounts and ratios are also presented in the
table. There were no amounts required to be deducted from capital for interest
rate risk in 1996 nor 1995.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RISK AMOUNT RISK AMOUNT RISK
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk-Weighted
Assets)............................... $ 11,629 23.76% .$3,916 .8.0% .$4,895 .10.0%
Tier I Capital (to Risk-Weighted
Assets)............................... 11,441 23.37 . 1,958 .4.0 .2,937 .6.0
Tier I Capital (to Average Assets)...... 11,441 11.86 . 3,910 .4.0 .4,888 .5.0
As of December 31, 1995:
Total Capital (to Risk-Weighted
Assets)............................... 11,253 23.76 . 3,790 .8.0 .4,737 .10.0
Tier I Capital (to Risk-Weighted
Assets)............................... 11,046 23.32 . 1,895 .4.0 .2,842 .6.0
Tier I Capital (to Average Assets)...... 11,046 12.16 . 3,632 .4.0 .4,539 .5.0
</TABLE>
NOTE N -- RECLASSIFICATIONS
Certain items for 1995 have been reclassified to conform with the 1996
presentation. Such reclassification had no effect on net earnings or
stockholders' equity as previously reported.
NOTE O -- BROWNSVILLE BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL
STATEMENTS
CONDENSED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
Assets
Cash in Subsidiary Bank......... $ 4 $ 7
--------- ---------
Total Cash and Cash
Equivalents.................. 4 7
Investment in Consolidated
Subsidiary......................... 11,390 10,880
Other Assets......................... 19 9
--------- ---------
Total Assets............... $ 11,413 $ 10,896
========= =========
Liabilities
Accrued Liabilities............. $ -- $ 15
--------- ---------
Total Liabilities.......... -- 15
Shareholders' Equity................. 11,413 10,881
--------- ---------
Total Liabilities and
Shareholders' Equity............ $ 11,413 $ 10,896
========= =========
D-14
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
CONDENSED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Income
Dividends Received From
Subsidiary........................ $ 833 $ 641 $ --
--------- --------- ---------
Total Income.................. 833 641 --
--------- --------- ---------
Expense
Franchise Tax...................... 27 -- 22
--------- --------- ---------
Total Expense................. 27 -- 22
--------- --------- ---------
Income Before Income Tax Expense and
Equity in Undistributed Net Income
(Loss) of Subsidiary.................. 806 641 (22)
Income Tax Expense (Benefit)....... (9) -- (8)
--------- --------- ---------
Income (Loss) Before Equity in
Undistributed Net Income of
Subsidiary............................ 815 641 (14)
Equity in Undistributed Net Income of
Subsidiary............................ 399 622 1,339
--------- --------- ---------
Net Income......................... $ 1,214 $ 1,263 $ 1,325
========= ========= =========
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Cash Flows From Operating Activities:
Net Income......................... $ 1,214 $ 1,263 $ 1,325
Adjustments to Reconcile Net Income
To Net Cash Provided By (Used In)
Operating Activities
Undistributed Net Income of
Subsidiary...................... (399) (622) (1,339)
(Increase) Decrease in Tax
Benefits Receivable............. (9) (10) 1
Increase (Decrease) in Accrued
Expenses........................ (16) (13) 13
--------- --------- ---------
Net Cash Provided By Operating
Activities......................... 790 618 --
--------- --------- ---------
Cash Flows From Investing Activities.... -- -- --
--------- --------- ---------
Cash Flows From Financing Activities:
Cash Dividends Paid................ (803) (618) --
Prior Year Adjustment.............. 10 -- --
--------- --------- ---------
Net Cash Used In Financing
Activities................ (793) (618) --
--------- --------- ---------
Net Increase (Decrease) In Cash and Cash
Equivalents........................... (3) -- --
Cash and Cash Equivalents at Beginning
of Year............................... 7 7 7
--------- --------- ---------
Cash and Cash Equivalents at End of
Year.................................... $ 4 $ 7 $ 7
========= ========= =========
Supplemental Disclosures of Cash Flow
Information
Interest Paid...................... $ -- $ -- $ --
Income Taxes Paid.................. 600 586 821
D-15
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and Due From Banks.............. $ 4,711 $ 5,402
Federal Funds Sold................... 14,795 8,785
--------- ---------
Total Cash and Cash
Equivalents.................. 19,506 14,187
Securities Available for Sale........ 10,345 16,557
Securities Held to Maturity
(Estimated Market Value of
$22,862,000 and
$21,466,000 at September 30, 1997
and 1996, respectively)............ 22,793 21,691
Loans, Net of Unearned Discount of
$327,000 and $263,000 at September
30,
1997 and 1996, respectively........ 41,843 41,237
Less Allowance for Loan Losses....... (224) (273)
--------- ---------
Net Loans....................... 41,619 40,964
Premises and Equipment, Net.......... 1,827 1,849
Accrued Interest Receivable.......... 1,012 997
Other Assets......................... 319 292
--------- ---------
Total Assets............... $ 97,421 $ 96,537
========= =========
LIABILITIES
Deposits
Demand.......................... $ 13,948 $ 13,509
Savings......................... 8,082 8,727
Money Market Checking and
Savings........................ 9,640 9,955
Time Deposits................... 52,766 52,069
--------- ---------
Total Deposits............. 84,436 84,260
Accounts Payable and Accrued
Liabilities..................... 1,276 699
--------- ---------
Total Liabilities.......... 85,712 84,959
--------- ---------
SHAREHOLDERS' EQUITY
Common stock, par value $4 per share,
1,000,000 shares authorized,
308,917 shares issued and
outstanding........................ 1,236 1,236
Paid-In Capital...................... 5,563 5,563
Retained Earnings.................... 4,933 4,912
Unrealized Gain (Loss) on Securities
Available for Sale................. (23) (133)
--------- ---------
Total Shareholders'
Equity....................... 11,709 11,578
--------- ---------
Total Liabilities and
Shareholders' Equity.... $ 97,421 $ 96,537
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
D-16
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS,
EXCEPT PER SHARE
DATA)
Interest Income
Loans, Including Fees.............. $ 3,058 $ 3,040
Investment Securities
Taxable......................... 1,605 1,589
Tax-Exempt...................... 50 50
Federal Funds Sold.............. 504 303
--------- ---------
Total Interest Income......... 5,217 4,982
Interest Expense
Deposits........................... 2,362 2,160
--------- ---------
Net Interest Income.................. 2,855 2,822
Provision for Loan Losses............ 10 33
--------- ---------
Net Interest Income After Provision
for Loan Losses................. 2,845 2,789
--------- ---------
Noninterest Income
Service Charges on Deposit
Accounts........................... 541 424
Other Service Charges.............. 217 201
Investment Securities Gains
(Losses)........................... 3 --
Other Operating Income............. 33 24
--------- ---------
Total Noninterest Income...... 794 649
--------- ---------
Noninterest Expense
Salaries and Employee Benefits..... 1,106 1,090
Net Occupancy Expense.............. 210 195
Equipment Expense.................. 99 85
Other Real Estate (Income) Expense,
Net............................. -- (10)
Other Noninterest Expense.......... 629 636
--------- ---------
Total Noninterest Expense..... 2,044 1,996
--------- ---------
Income Before Income Tax Expense..... 1,595 1,442
Income Tax Expense 527 478
--------- ---------
Net Income........................... $ 1,068 $ 964
========= =========
Earnings Per Share (Note 2).......... $ 3.46 $ 3.12
========= =========
Weighted Average Number of Common
Shares Outstanding (In Thousands).. 309 309
========= =========
The accompanying notes are an integral part of the consolidated financial
statement.
D-17
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON SECURITIES TOTAL
COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FOR SALE EQUITY
------ -------- --------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, at December 31, 1995........ $1,236 $ 5,563 $ 4,247 $ (164) $10,882
Cash Dividends....................... -- -- (309) -- (309)
Changes in Unrealized Gain (Loss) on
Securities Available for Sale...... -- -- -- 31 31
Prior Period Adjustment.............. -- -- 10 -- 10
Net Income........................... -- -- 964 964
------ -------- --------- ------------- -------------
Balance, at September 30, 1996....... $1,236 $ 5,563 $ 4,912 $ (133) $11,578
====== ======== ========= ============= =============
Balance, at December 31, 1996........ $1,236 $ 5,563 $ 4,668 $ (53) $11,414
Cash Dividends....................... -- -- (803) -- (803)
Changes in Unrealized Gain (Loss) on
Securities Available for Sale...... -- -- -- 30 30
Net Income........................... -- -- 1,068 -- 1,068
------ -------- --------- ------------- -------------
Balance, at September 30, 1997....... $1,236 $ 5,563 $ 4,933 $ (23) $11,709
====== ======== ========= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
D-18
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
--------- ----------
(DOLLARS IN
THOUSANDS)
Cash Flows from Operating Activities
Net Income...................... $ 1,068 $ 964
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation, Amortization
and Accretion, Net...... 74 63
Provision for Loan
Losses....................... 10 33
Gain on Sales of Securities
Available for Sale...... 3 --
(Increase) Decrease in
Accrued Interest
Receivable and Other
Assets.................. 3 (23)
Increase (Decrease) in
Accounts Payable and
Accrued Liabilities..... 583 98
--------- ----------
Net Cash Provided by Operating
Activities........................... 1,741 1,135
--------- ----------
Cash Flows from Operating Activities
Proceeds from Maturing
Securities Available for
Sale........................... 3,500 6,481
Purchases of Securities
Available for Sale............. -- (997)
Proceeds from Maturing
Securities Held to Maturity.... 7,500 7,000
Purchases of Securities Held to
Maturity....................... (8,708) (16,780)
Loan Originations and
Advances........................ (1,275) 82
Recoveries of Charged-Off Loans 2 12
Proceeds from Sale of Other Real
Estate.......................... -- 110
Purchases of Premises and
Equipment....................... (96) (81)
--------- ----------
Net Cash Provided (Used) In Investing
Activities......................... 923 (4,173)
--------- ----------
Cash Flows from Financing Activities
Net Increase (Decrease) in
Demand, Savings, Money Market
Checking and Savings Deposit
Accounts....................... (723) 90
Net (Decrease) Increase in Time
Deposits....................... (229) 5,162
Prior Year Adjustment........... -- (5)
Cash Dividends Paid on Common
Stock........................... (803) (309)
--------- ----------
Net Cash Provided (Used) by
Financing Activities.... (1,755) 4,938
--------- ----------
Increase in Cash and Cash
Equivalents........................ 909 1,900
Cash and Cash Equivalents at
Beginning of Year.................. 18,597 12,287
--------- ----------
Cash and Cash Equivalents at End of
Quarter............................ $ 19,506 $ 14,187
========= ==========
Supplemental Disclosures of Cash Flow
Information
Interest Paid................... $ 2,390 $ 2,187
Income Taxes Paid............... 509 457
Supplemental Schedule of Noncash
Investing and Financing Activities
Foreclosure and Repossession in
Partial Satisfaction of Loans
Receivable......................... 30 8
The accompanying notes are an integral part of the consolidated financial
statements.
D-19
<PAGE>
BROWNSVILLE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. However, the unaudited consolidated financial
statements furnished reflect all adjustments which are in the opinion of
management, necessary for a fair presentation of the results for the interim
periods. All such adjustments were of a normal and recurring nature. The
unaudited consolidated financial statements include Brownsville Bancshares, Inc.
its wholly-owned subsidiary, BNB Bancshares, Inc., and its indirect wholly-owned
subsidiary, Brownsville National Bank (the Bank), wholly owned by BNB
Bancshares, Inc. All intercompany balances and transactions have been
eliminated.
(2) EARNINGS PER SHARE COMPUTATIONS
In February 1996, Financial Accounting Standards Board issued Statements
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded.
(3) INCOME TAX
Deferred income tax assets and liabilities are computed for differences
between the financial statements and the tax basis of assets and liabilities
that have future tax consequences using the currently enacted tax laws and rates
that apply to the periods in which they are expected to effect taxable income.
Valuation allowances are established, if necessary, to reduce the deferred tax
assets to the amount that will more likely than not be realized. Income tax
expense is the current tax payable or refundable for the period plus or minus
the net change in the deferred tax assets and liabilities.
(4) DIVIDENDS
On September 17, 1997, the Board of Directors approved a cash dividend of
$1.60 per share for shareholders of record on September 17, 1997 and payable on
October 6, 1997.
Provision for this cash dividend payable has been recorded on these
financial statements as of September 30, 1997.
(5) SUBSEQUENT EVENT -- PLAN OF REORGANIZATION
On October 20, 1997, Brownsville Bancshares, Inc. and Texas Regional
Bancshares, Inc. executed an Agreement and Plan of Reorganization for the
purpose of merging Brownsville Bancshares, Inc. with and into TRD, a newly
formed wholly-owned subsidiary of Texas Regional Bancshares, Inc., subject to
regulatory approval.
D-20
<PAGE>
ANNEX E
TAX OPINION
December 5, 1997
Texas Regional Bancshares, Inc.
3700 North 10th Street
P.O. Box 5910
McAllen, Texas 78502
Brownsville Bancshares, Inc.
629 E. Elizabeth
P.O. Box 2159
Brownsville, Texas 78520
Re: Texas Regional Bancshares, Inc.: Acquisition of
Brownsville Bancshares, Inc.
Dear Sir or Madam:
You have requested the opinion of KPMG Peat Marwick LLP ("KPMG") as to
certain Federal income tax consequences to Texas Regional Bancshares, Inc.,
Texas Regional Delaware, Inc., Texas State Bank, BNB Bancshares, Inc.,
Brownsville National Bank, Brownsville Bancshares, Inc. and the latter's
shareholders with respect to the proposed transaction described below. Our
opinion is based solely upon information provided to us in an "Agreement and
Plan of Reorganization" dated October 20, 1997 ("the Agreement") with respect
to the three mergers described below and information and representations
provided to us as set forth in the sections of this letter entitled "FACTS,"
"PROPOSED TRANSACTION" and "REPRESENTATIONS."
You have advised us that your statements provide an accurate and complete
description of the facts and circumstances concerning the transaction, and we
have made no independent inquiry into them. In addition, we have made certain
assumptions with respect to the facts herein. Any variance or omission in the
facts and circumstances, assumptions or representations set forth below may
adversely affect the views stated herein. We have reviewed no other legal
documents other than the Agreement which are necessary to effectuate the
transaction. We assume that all steps will be properly effectuated under the
applicable laws of the United States and the states of Texas and Delaware, and
are consistent with the information submitted to us.
Further, in rendering our opinion, we are relying upon the Internal Revenue
Code of 1986 and Treasury Department regulations thereunder, as amended and in
effect on the date hereof, and Revenue Rulings, Revenue Procedures and reported
judicial decisions as they existed on the date of this opinion letter. Each of
the foregoing is subject to change or modification by subsequent legislation or
regulatory, administrative or judicial decisions. Any such change could also
have an effect on the validity of the conclusions set forth herein retroactively
or prospectively. Further, the opinion which is rendered should be considered
together with various risks set forth in the "CAVEAT"section of this letter.
Unless requested otherwise, we undertake no responsibility to update our opinion
in the event of any subsequent change in the foregoing.
E-1
<PAGE>
FACTS
Texas Regional Bancshares, Inc. ("Texas Regional") is a Texas corporation
that is a bank holding company. Texas Regional is the common parent of an
affiliated group of corporations that file a consolidated federal income tax
return. The authorized capital of Texas Regional consists of 20 million shares
of Class A Voting Common Stock, par value $1.00 per share, of which 13,110,639
are issued and outstanding. Texas Regional also has authorized 10 million shares
of preferred stock, none of which are issued or outstanding.
Texas Regional Delaware, Inc. ("TRD") was incorporated in Delaware on
October 1, 1997, as a wholly-owned subsidiary of Texas Regional for the purpose
of facilitating the proposed transaction herein described. The authorized
capital of TRD consists of 3,000 shares of common stock of which 3,000 are
issued and outstanding.
Texas State Bank ("Texas State Bank") is a Texas state banking
association and at the time of the merger, will be a wholly-owned subsidiary of
TRD. The authorized capital of Texas State Bank consists of 9 million shares of
common stock of which 9 million were issued and outstanding as of October 20,
1997.
Brownsville Bancshares, Inc. ("Brownsville Bancshares") is a Texas
corporation that is a bank holding company. The authorized capital of
Brownsville Bancshares consists of 1,000,000 shares of $4.00 par value common
stock of which 308,917 shares are issued and outstanding.
BNB Bancshares, Inc. ("BNB Bancshares") is a Delaware corporation that is
a bank holding company. BNB Bancshares is a wholly-owned subsidiary of
Brownsville Bancshares.
Brownsville National Bank ("Brownsville National") is a national bank
engaged in the commercial banking business in Texas. Brownsville National is a
wholly-owned subsidiary of BNB Bancshares. The authorized capital of Brownsville
National consists of 236,241 shares of $4.00 par value common stock, all of
which are issued and outstanding.
Brownsville Bancshares has adopted a plan under which incentive stock
options (having no readily ascertainable fair market value on the date of the
grant) have been granted to certain key employees. The holders of the options
have agreed to terminate their options in exchange for Texas Regional Class A
Voting Common Stock.
The respective managements of Texas Regional and Brownsville Bancshares
believe that a combination of their respective businesses will enable both
companies to grow and operate more efficiently.
PROPOSED TRANSACTION
In order to accomplish the aforementioned goals, the following transaction
has been proposed:
(1) Brownsville Bancshares will merge with and into TRD with TRD
surviving, pursuant to the applicable laws of the states of Delaware and
Texas. As a result of the merger, the shares of Brownsville Bancshares
common stock (other than any shareholder validly exercising dissenters'
rights of appraisal) shall be automatically converted into 3.06608 shares
of Texas Regional Class A Voting Common Stock ("Texas Regional Common
Stock") for each share of Brownsville Bancshares common stock. Fractional
shares shall not be issued and any amount attributable to fractional shares
shall be paid in cash. Amounts payable in respect of shareholders
exercising dissenters' rights of appraisal shall be payable by TRD.
(2) As a result of the merger of Brownsville Bancshares with and into
TRD, each Brownsville Bancshares option holder ("Option Holder") will
receive 1.77634 shares of Texas Regional Common Stock for each share of
Brownsville Bancshares common stock subject to the Option Holder's option.
Fractional shares shall not be issued and any amount attributable to
fractional shares shall be paid in cash. All of the holders of the options
to purchase Brownsville Bancshares shares have joined in the execution of
the Agreement to evidence their consent to accept Texas Regional Common
Stock in exchange for their options.
E-2
<PAGE>
(3) Concurrently with the merger of Brownsville Bancshares into TRD,
BNB Bancshares will merge with and into TRD with TRD surviving, pursuant to
the applicable laws of the state of Delaware.
(4) Concurrently with or immediately after the merger of BNB
Bancshares into TRD, Brownsville National will merge with and into Texas
State Bank, with Texas State Bank surviving, pursuant to the applicable
laws of the state of Texas.
REPRESENTATIONS
In connection with the proposed transaction, the following representations
have been made:
(a) The fair market value of the Texas Regional Common Stock to be
received by the Brownsville Bancshares shareholders will in each instance
be approximately equal to the fair market value of the Brownsville
Bancshares common stock to be surrendered in exchange therefor.
(b) The managements of Brownsville Bancshares and Texas Regional are
not aware of any plan or intention on the part of the Brownsville
Bancshares shareholders to sell or otherwise dispose of a number of shares
of Texas Regional Common Stock to be received in the proposed transaction
that will reduce such shareholders' ownership to a number of shares having,
in the aggregate, a value of less than 50 percent of the fair market value
of the Brownsville Bancshares common stock outstanding as of the effective
date of the proposed transaction. Sales, redemptions, and other
dispositions of Brownsville Bancshares common stock (including payment of
cash to dissenters and exchanges for cash in lieu of fractional shares of
Texas Regional Common Stock) will be considered in determining whether
there is a 50 percent continuing interest through stock ownership as of the
effective date of the proposed transaction.
(c) TRD will acquire at least 90 percent of the fair market value of
the net assets and at least 70 percent of the fair market value of the
gross assets held by Brownsville Bancshares immediately prior to the
transaction. For purposes of this representation, amounts paid by
Brownsville Bancshares or TRD to dissenters, amounts paid by Brownsville
Bancshares to shareholders who receive cash or other property, assets of
Brownsville Bancshares used to pay its reorganization expenses, and all
redemptions and distributions (except for regular, normal dividends) made
by Brownsville Bancshares immediately preceding the transaction will be
included as assets of Brownsville Bancshares immediately prior to the
transaction.
(d) Prior to the transaction, Texas Regional will be in control of
TRD within the meaning of 368(c).1
(e) Following the transaction, TRD will not issue additional shares
of its stock that would result in Texas Regional losing control of TRD
within the meaning of 368(c).
(f) The mergers of Brownsville Bancshares and BNB Bancshares into TRD
will qualify as statutory mergers under the applicable laws of the states
of Delaware and Texas and the merger of Brownsville National into Texas
State Bank will qualify as a statutory merger under the applicable of the
state of Texas.
(g) Texas Regional, TRD and Texas State Bank have no plan or
intention to sell or otherwise dispose of any of the assets to be received
from Brownsville Bancshares, BNB Bancshares and Brownsville National,
except for dispositions made in the ordinary course of business.
(h) Following the proposed transaction, Texas Regional, TRD and Texas
State Bank will continue to conduct the banking businesses of Brownsville
National in a substantially unchanged manner.
- ------------------
1All references to "Section" or "" will be to the Internal Revenue Code of
1986, as amended, unless otherwise noted.
E-3
<PAGE>
(i) The liabilities of Brownsville Bancshares and BNB Bancshares to
be assumed by TRD, the liabilities of Brownsville National to be assumed by
Texas State Bank and the liabilities to which the transferred assets of
Brownsville Bancshares, BNB Bancshares and Brownsville National are subject
were incurred by Brownsville Bancshares, BNB Bancshares and Brownsville
National in the ordinary course of their businesses, in each instance.
(j) There is no intercorporate indebtedness existing between (i) any
of Brownsville Bancshares, BNB Bancshares or Brownsville National and (ii)
any of Texas Regional, TRD or Texas State Bank that was issued, acquired,
settled or will be settled at a discount.
(k) Texas Regional and its shareholders, Brownsville Bancshares and
its shareholders, TRD, BNB Bancshares, Brownsville National and Texas State
Bank will pay their own expenses, if any, incurred in or arising out of the
proposed transaction.
(l) None of the parties to the proposed transaction are "investment
companies" as defined in Section 368(a)(2)(F)(iii) and (iv).
(m) The fair market value and the adjusted basis of the assets of
Brownsville Bancshares to be transferred to TRD will each exceed the sum of
liabilities to be assumed by TRD plus the amount of liabilities to which
the assets to be transferred are subject.
(n) The fair market value and adjusted basis of the assets of BNB
Bancshares to be transferred to TRD will each exceed the sum of liabilities
to be assumed by TRD plus the amount of liabilities to which the assets to
be transferred are subject.
(o) The fair market value and adjusted basis of the assets of
Brownsville National to be transferred to Texas State Bank will each exceed
the sum of liabilities to be assumed by Texas State Bank plus the amount of
liabilities to which the assets to be transferred are subject.
(p) The payment of cash in lieu of fractional shares of Texas
Regional Common Stock is solely for the purpose of avoiding the expense and
inconvenience to Texas Regional of issuing fractional shares and does not
represent separately bargained for consideration. The total cash
consideration that will be paid in the transaction to the Brownsville
Bancshares shareholders instead of issuing fractional shares of Texas
Regional Common Stock will not exceed one percent of the total
consideration that will be given in the transaction to the Brownsville
Bancshares shareholders in exchange for their shares of Brownsville
Bancshares common stock and no one shareholder will receive, in the
aggregate, cash in lieu of more than a fractional share of Texas Regional
Common Stock.
(q) Texas Regional has no plan or intention to redeem or otherwise
reacquire its stock to be issued in the proposed transaction.
(r) Texas Regional has no plan or intention to liquidate TRD; to
merge TRD with and into another corporation; to sell or otherwise dispose
of the stock of TRD; or to cause TRD to sell or otherwise dispose of any of
the assets of Brownsville Bancshares or BNB Bancshares acquired in the
transaction, except for dispositions made in the ordinary course of
business or transfers described in 368(a)(2)(C).
(s) Texas Regional and TRD have no plan or intention to sell or
otherwise dispose of the stock of Texas State Bank or to liquidate Texas
State Bank.
(t) No stock of TRD will be issued in the proposed transaction.
(u) Compensation to be paid to shareholder-employees of Brownsville
Bancshares, BNB Bancshares or Brownsville National after the proposed
transaction will be for services actually rendered and will be commensurate
with amounts paid to third parties bargaining at arm's length for similar
services. No part of such compensation will be in consideration for their
Brownsville Bancshares stock.
E-4
<PAGE>
ISSUE
Whether (i) the proposed merger of Brownsville Bancshares with and into
TRD, (ii) the proposed merger of BNB Bancshares with and into TRD and (iii) the
proposed merger of Brownsville National with and into Texas State Bank will each
qualify as a reorganization within the meaning of 368(a)(1) and, if so, what are
the federal income tax consequences to Texas Regional, TRD, Texas State Bank,
BNB Bancshares, Brownsville National, Brownsville Bancshares and its
shareholders.
OPINION
Based on the facts and representations set forth above and the Agreement,
it is our view that the federal income tax consequences of the proposed mergers
are as follows:
(1) Provided that the merger of Brownsville Bancshares with and into
TRD qualifies as a statutory merger under the applicable laws of the states
of Delaware and Texas, such merger involving the acquisition by TRD of
substantially all of the assets of Brownsville Bancshares in exchange for
Texas Regional Common Stock and the assumption by TRD of the liabilities of
Brownsville Bancshares will constitute a reorganization within the meaning
of 368(a)(1)(A) and 368(a)(2)(D). For this purpose, "substantially all"
means at least ninety percent of the fair market value of the net assets
and at least seventy percent of the fair market value of the gross assets
of Brownsville Bancshares. Texas Regional, Brownsville Bancshares, and TRD
will each be a "party to a reorganization" within the meaning of 368(b).
(2) Provided that the merger of BNB Bancshares with and into TRD
qualifies as a statutory merger under the applicable laws of the state of
Delaware, such merger will constitute a reorganization within the meaning
of 368(a)(1), and BNB Bancshares and TRD will each be a "party to a
reorganization" within the meaning of 368(b).
(3) Provided that the merger of Brownsville National with and into
Texas State Bank qualifies as a statutory merger under the applicable laws
of the state of Texas, such merger will constitute a reorganization within
the meaning of 368(a)(1) and Brownsville National and Texas State Bank will
each be a "party to a reorganization" within the meaning of 368(b).
(4) No gain or loss will be recognized by the shareholders of
Brownsville Bancshares upon receipt of solely Texas Regional Common Stock
in exchange for Brownsville Bancshares common stock (including any
fractional share interests to which they may be entitled) as described
above (Section 354(a)(1)).
(5) The basis of the Texas Regional Common Stock to be received by
the shareholders of Brownsville Bancshares (including any fractional share
interests to which they may be entitled) will be the same as the basis of
the Brownsville Bancshares common stock surrendered in exchange therefor
(Section 358(a)(1)).
(6) The holding period of the Texas Regional Common Stock to be
received by the shareholders of Brownsville Bancshares (including any
fractional share interests to which they may be entitled) will include the
period during which the Brownsville Bancshares common stock surrendered in
exchange therefor was held, provided that the Brownsville Bancshares common
stock was held as a capital asset on the date of the exchange (Section
1223(1)).
(7) The payment of cash to Brownsville Bancshares shareholders in
lieu of fractional shares of Texas Regional Common Stock will be treated
for federal income tax purposes as if the fractional shares were
distributed as part of the exchange and then were redeemed by Texas
Regional. The cash payments will be treated as having been received as
distributions in full payment in exchange for the stock redeemed as
provided in 302(a) (Rev. Rul. 66-365, 1966-2 C.B. 116, and Rev. Proc.
77-41, 1977-2 C.B. 574). As provided in 1001, gain or loss will be realized
and recognized to such shareholders measured by the difference between the
redemption price and the adjusted basis of the Texas Regional Common Stock
surrendered as determined under 1012.
E-5
<PAGE>
(8) Where cash is received by a dissenting Brownsville Bancshares
shareholder in exchange for his, her or its Brownsville Bancshares common
stock, as described above, such cash will be treated as having been
received by such shareholder as a distribution in redemption of his, her or
its Brownsville Bancshares common stock subject to the provisions and
limitations of 302.
(9) No gain or loss will be recognized by Brownsville Bancshares upon
the transfer of substantially all of its assets to TRD in exchange for
Texas Regional Common Stock and the assumption by TRD of all the
liabilities of Brownsville Bancshares (Sections 361 and 357(a)).
(10) No gain or loss will be recognized by BNB Bancshares upon the
transfer of its assets to TRD in constructive exchange for TRD common stock
and the assumption by TRD of all the liabilities of BNB Bancshares
(Sections 361 and 357(a)).
(11) No gain or loss will be recognized by Brownsville National upon
the transfer of its assets to Texas State Bank in constructive exchange for
Texas State Bank common stock and the assumption by Texas State Bank of all
the liabilities of Brownsville National (Sections 361 and 357(a)).
(12) No gain or loss will be recognized by either Texas Regional or
TRD upon the acquisition by TRD of substantially all of the assets of
Brownsville Bancshares in exchange for Texas Regional Common Stock and the
assumption by TRD of the liabilities of Brownsville Bancshares (Treas. Reg.
section 1.1032-2 and Rev. Rul. 57-278, 1957-1 C.B. 124).
(13) No gain or loss will be recognized by TRD on the receipt by TRD
of the assets of BNB Bancshares in constructive exchange for shares of TRD
stock (Section 1032(a)).
(14) No gain or loss will be recognized by Texas State Bank on the
receipt by Texas State Bank of the assets of Brownsville National in
constructive exchange for shares of Texas State Bank stock (Section
1032(a)).
(15) The basis of the assets of Brownsville Bancshares and BNB
Bancshares acquired by TRD and the basis of the assets of Brownsville
National acquired by Texas State Bank will be the same as the basis of such
assets in the hands of Brownsville Bancshares, BNB Bancshares and
Brownsville National immediately prior to the exchange (Section 362(b)).
(16) The fair market value of the Texas Regional Common Stock
received in exchange for the cancellation of Brownsville Bancshares
compensatory options will be taxed as compensation income to the recipient.
This compensation will be subject to applicable Federal income and Social
Security tax withholdings. The tax basis of the Texas Regional Common Stock
received in exchange for the cancellation of the Brownsville Bancshares
options will be the fair market value of the Texas Regional Common Stock
and the holding period will begin on consummation of the transaction.
CAVEAT
No opinions are provided with respect to issues not specifically set forth
in the "OPINION" section of this letter. No inference should be drawn
regarding any matter not specifically opined upon. Our opinion has not been
requested and none is expressed with respect to any foreign, state or local tax
consequences to Brownsville Bancshares or its shareholders, Texas Regional or
its shareholders, BNB Bancshares, Brownsville National, TRD or Texas State Bank
including, but not limited to, income, franchise, sales, use, excise or transfer
taxes which may be significant.
Our conclusions with respect to the subject transaction are based upon the
assumption that the stock consideration received by the shareholders of
Brownsville Bancshares in exchange for their Brownsville Bancshares stock
consists solely of Texas Regional Class A Voting Common Stock (other than
payments for fractional shares and payments to dissenters), and no views are
expressed with respect to the subject transaction if consideration other than
Texas Regional Common Stock is issued to the shareholders of Brownsville
Bancshares in exchange for their shares.
E-6
<PAGE>
This opinion letter sets forth our views based on the completeness and
accuracy of the above stated facts and any assumptions that were included. If
any of the foregoing is not entirely complete or accurate, it is imperative that
we be informed immediately, as the inaccuracy or incompleteness could have a
material effect on our conclusions. In rendering our opinion, we are relying
upon the relevant provisions of the Internal Revenue Code of 1986, as amended,
the regulations thereunder, and judicial and administrative interpretations
thereof, which are subject to change or modification by subsequent legislative,
regulatory, administrative, or judicial decisions. Any such changes could also
have an effect on the validity of our opinion. This opinion is not binding on
the Internal Revenue Service, any other tax authority, or any court. No
assurance can be given that a position different than that expressed herein will
not be asserted by a tax authority and sustained by a court.
Very truly yours,
/s/ KPMG PEAT MARWICK LLP
KPMG Peat Marwick LLP
E-7
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 2.02A(16) and 2.02-1 of the Texas Business Corporation Act grants
to each corporation organized thereunder the power to indemnify its directors
and officers against liability, and to purchase and maintain liability insurance
for those persons as, and to the extent, permitted by Article 2.02-1 of the
Texas Business Corporation Act. In addition, reference is hereby made to Article
V of the Bylaws of the Registrant.
The general effect of Articles 2.02.A.(16) and 2.02-1 of the Texas Business
Corporation Act, and Article V of the Bylaws of Texas Regional is that the
person may be indemnified only if it is determined that the person conducted
himself in good faith, reasonably believed that the conduct was in the
corporation's best interests (or not opposed to its best interests), and in the
case of criminal proceeding he had no reasonable cause to believe the conduct
was unlawful. In any case, a person may not be indemnified if the basis for
liability was a personal benefit improperly received by the person or if the
person is found liable to the corporation. The indemnification may generally
include judgments, penalties, fines, settlements and reasonable expenses
incurred. Unless the indemnification has been made mandatory in the Articles of
Incorporation or Bylaws of the company, a determination of indemnification must
be made by a majority vote of quorum of directors who at the time are not named
defendants or respondents, or (if such a quorum can not be obtained) by a
committee of the board composed of two or more directors who are not named
defendants or respondents, or by special legal counsel selected in accordance
with prescribed procedures, or by shareholders in a vote that excludes shares
held by directors. Management of Texas Regional is taking the position that the
indemnification under Art. 2.02-1 B has been made mandatory by Article V of
Texas Regional's bylaws. In addition Article 2.02-1 provides that the
corporation shall indemnify a director or officer against reasonable expenses
incurred by him in connection with a proceeding in which he is or was a
defendant or respondent because he is or was a director or officer in which he
has been wholly successful in his defense.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. EXHIBITS:
(Note: Certain Exhibits are omitted as permitted by S-K Item 601, since
registrant has elected under Form S-4 to provide information concerning
registrant at a level prescribed by Forms S-2 or S-3 and such omitted
Exhibits are not required by Form S-2 or S-3.)
<TABLE>
<CAPTION>
<S> <C> <C>
2 -- Agreement and Plan of Reorganization dated as of October 20, 1997, by and between Texas
Regional Bancshares, Inc. and Brownsville Bancshares, Inc. (included as Annex A to the
Prospectus/Proxy Statement).
5 -- Opinion of McGinnis, Lochridge & Kilgore, L.L.P.
8 -- Opinion of KPMG Peat Marwick LLP (included as Annex C to the Prospectus / Proxy Statement)
* 10(a) -- Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan.
* 10(b) -- Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock Option Plan.
23(a) -- Consent of McGinnis, Lochridge & Kilgore, L.L.P. (included in their opinion filed as
Exhibit 5).
* 23(b) -- Consent of Garcia, Marren & Company, P.C.
* 23(c) -- Consent of KPMG Peat Marwick LLP.
* 23(d) -- Consent of Service Asset Management Company.
* 99(a) -- Form of Proxy (Brownsville Bancshares, Inc. shareholders meeting).
* 99(b) -- Notice of Special Meeting of the Shareholders of Brownsville Bancshares, Inc.
</TABLE>
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* Filed herewith.
II-1
<PAGE>
b. FINANCIAL STATEMENT SCHEDULES:
Not applicable.
c. REPORT, OPINION OR APPRAISAL:
Attached as Annex C to the Prospectus/Proxy Statement is the written report
of Service Asset Management Company.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bonefide offering thereof.
The undersigned Registrant undertakes to deliver or cause to be delivered
with the prospectus, to each person to whom the prospectus is sent or given, the
latest annual report to security holders that is incorporated by reference in
the prospectus and furnished pursuant to and meeting the requirements of Rule
14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c) the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable
II-2
<PAGE>
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items of
the applicable form.
The registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MCALLEN, STATE OF TEXAS,
ON JANUARY 8, 1998.
TEXAS REGIONAL BANCSHARES, INC.
By: /s/ G. E. RONEY
GLEN E. RONEY,
CHAIRMAN OF THE BOARD
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
<S> <C> <C>
SIGNATURE TITLE DATE
- ------------------------------------- -------------------------------------- ------------------
/s/G. E. RONEY Chairman of the Board, President January 8, 1998
GLEN E. RONEY and Director (Principal
Executive Officer)
/s/GEORGE R. CARRUTHERS Chief Financial Officer January 8, 1998
GEORGE R. CARRUTHERS (Principal Financial Officer)
/s/ANN SEFCIK Controller (Principal January 8, 1998
ANN SEFCIK Accounting Officer)
/s/MORRIS ATLAS Director January 8, 1998
MORRIS ATLAS
/s/FRANK N. BOGGUS Director January 8, 1998
FRANK N. BOGGUS
/s/ROBERT G. FARRIS Director January 8, 1998
ROBERT G. FARRIS
/s/JOE M. KILGORE Director January 8, 1998
JOE M. KILGORE
II-4
<PAGE>
/s/C. KENNETH LANDRUM, M.D. Director January 8, 1998
C. KENNETH LANDRUM, M.D.
/s/JULIE G. UHLHORN Director January 8, 1998
JULIE G. UHLHORN
/s/PAUL G. VEALE, SR. Director January 8, 1998
PAUL G. VEALE, SR.
/s/JACK WHETSEL Director January 8, 1998
JACK WHETSEL
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
(Note: Certain Exhibits are omitted as permitted by S-K Item 601, since
registrant has elected under Form S-4 to provide information concerning
registrant at a level prescribed by Forms S-2 or S-3 and such omitted
Exhibits are not required by Form S-2 or S-3.)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
2 -- Agreement and Plan of Reorganization dated as of October 20, 1997, by and between Texas
Regional Bancshares, Inc. and Brownsville Bancshares, Inc. (included as Annex A to the
Prospectus/Proxy Statement).
5 -- Opinion of McGinnis, Lochridge & Kilgore, L.L.P.
8 -- Opinion of KPMG Peat Marwick LLP (included as Annex C to the Prospectus / Proxy Statement)
* 10(a) -- Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan.
* 10(b) -- Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock Option Plan.
23(a) -- Consent of McGinnis, Lochridge & Kilgore, L.L.P. (included in their opinion filed as
Exhibit 5).
* 23(b) -- Consent of Garcia, Marren & Company, P.C.
* 23(c) -- Consent of KPMG Peat Marwick LLP.
* 23(d) -- Consent of Service Asset Management Company.
* 99(a) -- Form of Proxy (Brownsville Bancshares, Inc. shareholders meeting).
* 99(b) -- Notice of Special Meeting of the Shareholders of Brownsville Bancshares, Inc.
</TABLE>
- ------
* Filed herewith.
EXHIBIT 10(a)
TEXAS REGIONAL BANCSHARES, INC.
1997 INCENTIVE STOCK OPTION PLAN
Texas Regional Bancshares, Inc., a Texas corporation (hereinafter called
the "Corporation") believes that allowing certain key employees to obtain shares
of the Class A Voting Common Stock of the Corporation through the use of stock
options hereinafter provided for will be beneficial to the initial and continued
success of the Corporation. In furtherance of the foregoing, the Corporation
hereby establishes the Texas Regional Bancshares, Inc., 1997 Incentive Stock
Option Plan (the "Plan").
1. PURPOSE. The purpose of the Plan is to secure for the Corporation and
its stockholders the benefits which flow from providing key employees of the
Corporation and its subsidiaries with the incentive inherent in common stock
ownership. It is generally recognized that stock option plans aid in retaining
competent employees and furnish a device to attract employees of exceptional
ability to the Corporation because of the opportunity offered to acquire a
proprietary interest in the business. For purposes of the Plan, a subsidiary is
any corporation in which the Corporation owns, directly or indirectly, stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock or over which the Corporation has effective operating control.
The Corporation intends that any stock option granted or exercised under this
Plan qualify as an "incentive stock option" which is given favorable income tax
treatment under Section 422 of the Internal Revenue Code of 1986, as amended
from time to time, and pertinent regulations.
2. AMOUNT OF STOCK. The total number of shares of Class A Voting Common
Stock to be subject to options granted pursuant to the Plan shall not exceed one
hundred thousand (100,000) shares of the Corporation's Class A Voting Common
Stock (hereinafter referred to as the "Common Stock" or the "Stock") each having
a par value of $1.00. This total number of shares shall be subject to
appropriate increase or decrease in the event of a stock dividend upon, or a
subdivision, split-up, combination or reclassification of, the shares
purchasable under such options. In the event that options granted under this
Plan shall lapse without being exercised in whole or in part, other options may
be granted covering the shares not purchased under such lapsed options.
3. STOCK OPTION COMMITTEE. The Board of Directors shall from time to time
appoint a Stock Option Committee (hereinafter called the "Committee") to serve
under this Plan. The Committee shall consist of either:
<PAGE>
(i) Three or more directors, none of whom are, on the date selected for
the Committee, and for one year prior thereto, eligible for
selection under the Plan, any other plan of the Corporation or any
affiliate of the Corporation to acquire stock, stock options or
stock appreciation rights of the Corporation or any of its
affiliates; or
(ii) The entire Board of Directors of the Corporation, so long as a
majority of the Board and a majority of the Directors acting as
members of the Committee are not, at the time of selection for the
Committee, and for one year prior thereto, eligible for selection
under the Plan, any other plan of the Corporation or any affiliate
of the Corporation to acquire stock, stock options or stock
appreciation rights of the Corporation or any of its affiliates.
A person serving on the Committee shall not be considered as being
eligible to acquire stock, stock options, or stock appreciation rights if such
eligibility is under the terms of an employee benefit plan of the Corporation
which is open to all employees of the Corporation and the eligibility and
allocation criteria are fixed and uniform for all employees.
Persons serving on the Committee may receive options if such options
being granted to any such person are subject to shareholder approval and are
independent of any type of plan.
4. ELIGIBILITY AND PARTICIPATION. Options may be granted pursuant to the
Plan to key employees of the Corporation and any parent or subsidiary of the
Corporation (hereinafter sometimes called "employee" or "employees"); provided
that no option may be granted under the Plan to an employee who, immediately
before or at the time such option is granted, owns stock possessing more than
ten percent (10%) of the total combined voting power or value of all classes of
stock of the employer corporation or of any parent or subsidiary corporation.
For the purposes of the preceding sentence: (a) the employee shall be considered
as owning the stock owned directly or indirectly by or for himself, the stock
which the employee may purchase under outstanding options, and the stock owned,
directly or indirectly, by or for his brothers and sisters (whether of the whole
or half blood), spouse, ancestors, and lineal descendants; and (b) stock owned,
directly or indirectly, by or for a corporation, partnership, estate, or trust
shall be considered as being owned proportionately by or for its shareholders,
partners, or beneficiaries.
From time to time the Committee shall select the key employees to whom
options may be granted by the Board of Directors and shall determine the number
of shares to be covered by each option so granted. Future as well as present key
employees (including key employees who are directors) shall be eligible to
participate in the Plan. If the entire Board of Directors constitutes the
Committee, then members of the Committee that are otherwise eligible to
participate in the Plan shall be allowed to participate in the Plan, provided
that
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<PAGE>
such eligible members constitute a minority of the Board of Directors, and
provided further, that any individual member of the Committee allowed to
participate will be prohibited from voting upon or in any way influencing the
other members of the Committee in designating such individual member as a
recipient of option grants or in exercising any other discretion granted to the
Committee regarding the option grants to such individual member. If the
Committee is appointed under the terms of subparagraph (i) of Section 3 hereof,
then any members of the Committee (including those who are key employees of the
Corporation or a subsidiary corporation of the Corporation) shall not be
eligible to participate in the Plan.
5. OPTION AGREEMENT. The terms and provisions of options granted pursuant
to the Plan shall be set forth in an agreement, herein called Option Agreement,
between the Corporation and the employee receiving the same. The Option
Agreement may be in such form, not inconsistent with the terms of this Plan, as
shall be approved by the Board of Directors.
6. PRICE. The purchase price per share of Common Stock purchasable under
options granted pursuant to the Plan shall be an amount equal to one hundred
percent (100%) of the fair market value of the stock, as determined by the Board
of Directors, at the time the options are granted. The full purchase price of
shares purchased shall be paid upon exercise of the option. Under certain
circumstances such purchase price per share shall be subject to adjustment as
referred to in Section 11 of this Plan.
7. EXERCISE PERIOD. The right to purchase any Common Stock pursuant to the
exercise of an option granted under this Plan may be either cumulative or
non-cumulative, as determined by the Board of Directors. Any Common Stock
purchasable pursuant to the exercise of an option granted under this Plan will
be purchasable in accordance with the schedule set forth in the Option Agreement
between the Corporation and the employee receiving the option, subject to any
other limitation provided in this Plan. In the event the portion of Common Stock
purchasable per the Option Agreement involves a fraction of a share, the amount
purchasable at that time shall be rounded upward to the next complete share to
allow the purchase of a complete share of Common Stock.
8. OPTION PERIOD. No option granted pursuant to the Plan shall be
exercisable after the expiration of ten (10) years from the date the option is
first granted. The expiration date for any option or portion thereof, which may
be any period not in excess of ten (10) years following the date of grant of the
option, shall be stated in the Option Agreement and is hereinafter called the
"Expiration Date".
Notwithstanding any other provision of this Plan, no option shall be
granted under this Plan more than ten (10) years after the date this Plan is
adopted by the Board of Directors, or the date this Plan is approved by the
Common Stock stockholders, whichever is earlier.
-3-
<PAGE>
9. TERMINATION OF EMPLOYMENT. The Option Agreement may provide that:
(a) If, prior to the Expiration Date for any option granted
hereunder, the employee shall for any reason whatever, other than (1) his
permanent and total disability as defined in (c) below, or (2) his death,
cease to be employed by the Corporation, or a parent or subsidiary
corporation of the Corporation, then any unexercised portion of such
option shall automatically terminate upon the date of such termination of
employment.
(b) If, prior to the Expiration Date for any option granted
hereunder, the employee shall die at a time when he had been employed by
the Corporation, or a parent or subsidiary corporation of the Corporation,
from the date of granting of such option until the date of his death, then
the legal representatives of his estate or a legatee or legatees of the
option shall have the right, for a period of three (3) months after his
death, to purchase all or any part of the Stock subject to the option
outstanding and unexpired as of his date of death.
(c) If, prior to the Expiration Date for any option granted
hereunder, the employee shall cease to be employed by the Corporation, or
a parent or subsidiary corporation of the Corporation, because he becomes
permanently and totally disabled, as hereinafter defined, and prior to
such termination of employment by reason of disability, the employee had
been employed by the Corporation, or a parent or subsidiary corporation of
the Corporation, at all times since the date of the granting of such
option, then such employee or his legal representative shall have the
right, for a period of one (1) year from the date of such termination of
employment by reason of disability, to exercise any right to purchase
Stock pursuant to the option.
An employee is "permanently and totally disabled" if he is unable to
engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result
in death or which has lasted or can be expected to last for a continuous
period of not less than twelve (12) months. Such determination of
permanent and total disability shall be made as allowable under Section
22, and applicable regulations, of the Internal Revenue Code of 1986, as
amended, or any other applicable method necessary for the continued
qualification of this Plan under Section 422 of the Internal Revenue Code.
In the absence of any specific requirements for this determination, the
decision of the Board of Directors, as aided by any physicians they
designate, shall be conclusive.
Nothing in (a), (b), or (c) shall extend the time for exercising any option
granted pursuant to the Plan beyond the Expiration Date for the option.
-4-
<PAGE>
10. ASSIGNABILITY. The Option Agreement shall provide that the option
granted thereby shall not be transferable or assignable by the employee
otherwise than by will or by the laws of descent and distribution, and during
the lifetime of the employee shall be exercisable only by him.
11. ADJUSTMENT IN CASE OF STOCK SPLITS, STOCK DIVIDENDS, ETC. The Option
Agreement may contain such provisions as the Board of Directors may approve as
equitable concerning the effect upon the option granted thereby and upon the per
share or per unit option price, of (a) stock dividends upon, or subdivisions,
split-ups, combinations or reclassifications of, the securities purchasable
under the option, or (b) proposals to merge or consolidate the Corporation or to
sell all or substantially all of its assets or to liquidate or dissolve the
Corporation.
12. INVESTMENT PURPOSE. As a condition to the exercise of any portion of
an option, the Corporation may require the person exercising such option to
represent and warrant at the time of any such exercise that the shares are being
purchased for investment and not with a view to the distribution or resale of
such shares if, in the opinion of the Corporation or its counsel, such
representation is required under the Securities Act of 1933 or any other
applicable law, regulation or rule of any governmental agency. A legend to this
effect shall be affixed to the certificates evidencing such shares.
13. CORPORATE MERGER, CONSOLIDATION, REORGANIZATION, ETC. In the event of
a dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving corporation, any outstanding options
hereunder may be terminated by the Corporation as of the effective date of such
dissolution, liquidation, merger or consolidation by giving notice to each
holder thereof or his personal representative of its intention to do so and by
permitting the exercise during a period of not more than a specified number of
days determined by the Board next preceding such effective date, or the
Expiration Date, whichever is earlier, of all of such outstanding options in
whole or in part without regard to the provisions of Section 7 hereof. Subject
to the preceding sentence, if the Corporation is reorganized or merged or
consolidated with another corporation, while unexercised options are outstanding
under the Plan, and the Corporation is not the surviving corporation, there
shall be substituted for the Common Stock subject to the unexercised and
outstanding options an appropriate number of shares of each class of stock or
other securities of the reorganized or merged or consolidated corporation which
were distributed to shareholders of the Corporation in respect of the Common
Stock, in accordance with Section 424(a) of the Internal Revenue Code. Such
substitution may be accomplished by the assumption of such options by the
surviving corporation or the substitution for the old options of new options by
the surviving corporation. The existence of this Plan or of options hereunder
shall not in any way prevent any transaction described herein and no Optionee
shall have the right to prevent any such transaction.
-5-
<PAGE>
14. AMENDMENT OF THE PLAN. The Board of Directors of the Corporation may
from time to time alter, amend, suspend or discontinue the Plan and make rules
for its administration, except that the Board of Directors shall not amend the
Plan in any manner which would have the effect of preventing options issued
under the Plan from being "incentive stock options" as defined in Section 422 of
the Internal Revenue Code of 1986 (as amended).
15. OPTIONS DISCRETIONARY. The granting of options under the Plan shall be
entirely discretionary and nothing in the Plan shall be deemed to give any key
employee any right to participate in the Plan or to receive options.
16. STOCKHOLDER APPROVAL. The Plan will be submitted to the Common Stock
stockholders of the Corporation within twelve (12) months of the date of the
adoption of the Plan by the Board of Directors.
17. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon its
adoption by the favorable vote of the holders of a majority of the outstanding
shares of the Common Stock of the Corporation.
18. TERMINATION OF PLAN. This Plan shall terminate ten (10) years after
its approval by the Common Stock stockholders or adoption by the Board of
Directors, whichever is earlier. Any option outstanding under this Plan at the
time of its termination shall remain in effect until the option shall have been
exercised or the Expiration Date, whichever is earlier.
19. ADOPTION OF PLAN BY BOARD OF DIRECTORS. The undersigned hereby
certifies that this Plan is the true and correct 1997 Texas Regional Bancshares,
Inc., Incentive Stock Option Plan of the Corporation voted upon and adopted at a
meeting of the Board of Directors duly held on the 9th day of December, 1997.
-6-
EXHIBIT 10(b)
TEXAS REGIONAL BANCSHARES, INC.
1997 NONSTATUTORY STOCK OPTION PLAN
Texas Regional Bancshares, Inc., a Texas corporation (hereinafter called
the "Corporation") believes that allowing certain key employees to obtain shares
of the Class A Voting Common Stock of the Corporation through the use of stock
options hereinafter provided for will be beneficial to the initial and continued
success of the Corporation. In furtherance of the foregoing, the Corporation
hereby establishes the Texas Regional Bancshares, Inc., 1997 Nonstatutory Stock
Option Plan (the "Plan").
1. PURPOSE. The purpose of the Plan is to provide a special incentive to
selected key employees of the Corporation and its subsidiaries to promote the
Corporation's business. The Plan is designed to accomplish this purpose by
offering such employees an opportunity to purchase shares of the Class A Voting
Common Stock (hereinafter "Common Stock") of the Corporation. For purposes of
the Plan, a subsidiary is any corporation in which the Corporation owns,
directly or indirectly, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock or over which the
Corporation has effective operating control. Stock options granted or exercised
under this Plan are not intended to qualify as "incentive stock options" under
Section 422 of the Internal Revenue Code of 1986, as amended from time to time,
and pertinent regulations.
2. ADMINISTRATION. The Plan shall be administered by a Nonstatutory Option
Committee (hereinafter "Committee") to be established by the Board of Directors
of the Corporation. The Committee shall consist of three or more members, one of
whom shall be neither an officer nor an employee of the Corporation. The
Committee shall have authority, consistent with the Plan:
(a) to determine which of the key employees of the Corporation
and its subsidiaries shall be granted options;
(b) to determine the time or times when options shall be granted and
the number of shares of Common Stock to be subject to each option;
(c) to determine the option price of the shares subject to each
option and the method of payment of such price;
<PAGE>
(d) to determine the time or times when each option becomes
exercisable and the duration of the exercise period, subject to the
limitations contained in Paragraph 6(b);
(e) to prescribe the form or forms of the instruments evidencing any
options granted under the Plan and of any other instruments required under
the Plan and to change such forms from time to time;
(f) to adopt, amend and rescind rules and regulations for the
administration of the Plan and the options and for its own acts and
proceedings; and
(g) to decide all questions and settle all controversies and
disputes which may arise in connection with the Plan. All decisions,
determinations and interpretations of the Committee shall be binding on
all parties concerned.
3. PARTICIPANTS. The participants in the Plan shall be key employees of
the Corporation or of any of its subsidiaries, whether or not also officers or
directors, as may be selected from time to time by the Committee in its
discretion. Directors who are not employees shall not be eligible. In any grant
of options after the initial grant, employees who were previously granted
options or sold shares under the Plan may be included or excluded.
4. LIMITATIONS. No option shall be granted under the Plan after December
8, 2007, but options theretofore granted may extend beyond that date. Subject to
adjustment as provided in Section 8 of the Plan, the number of shares of Common
Stock of the Corporation which may be issued under the Plan shall not exceed one
hundred twenty-five thousand (125,000) in the aggregate. To the extent that any
option granted under the Plan shall expire or terminate unexercised or for any
reason become unexercisable as to any shares subject thereto, such shares shall
thereafter be available for further grants under the Plan, within the limit
specified above.
5. STOCK TO BE ISSUED. Stock to be issued under the Plan may constitute an
original issue of authorized stock or may consist of previously issued stock
acquired by the Corporation, as shall be determined by the Board of Directors.
The Board of Directors and the proper officers of the Corporation shall take any
appropriate action required for such issuance.
6. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan
shall be subject to the following terms and conditions (except as provided in
Section 7) and to such other terms and conditions as the Committee shall
determine to be appropriate to accomplish the purposes of the Plan:
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<PAGE>
(a) OPTION PRICE. The option price under each option shall be
determined by the Committee and may be more, equal to or less than the
then current fair market value of the Common Stock as the Committee may
deem to be appropriate, but in no event may such price be less than par
value; provided, however, that in the event the Committee shall determine
to grant an option at less than the then current fair market value of the
Common Stock, such option shall not be granted without the prior approval
of the Board of Directors.
(b) PERIOD OF OPTIONS. The period of an option shall not exceed ten
years from the date of grant.
(c) EXERCISE OF OPTIONS.
(i) Each option shall be made exercisable at such time or
times, whether or not in installments, as the Committee shall prescribe at
the time the option is granted.
(ii) A person electing to exercise an option shall give
written notice to the Corporation, as specified by the Committee, of his
election and of the number of shares he has elected to purchase, such
notice to be accompanied by such instruments or documents as may be
required by the Committee, and unless otherwise directed by the Committee
shall at the time of such exercise tender the purchase price of the shares
he has elected to purchase.
(d) PAYMENT FOR ISSUANCE OF SHARES. Upon exercise of any option
granted hereunder, payment in full shall be made at the time of such
exercise for all such shares then being purchased.
The Corporation shall not be obligated to issue any shares unless
and until, in the opinion of the Corporation's counsel, (i) all applicable
laws and regulations have been complied with, (ii) in the event the
outstanding Common Stock is at the time listed upon any stock exchange,
the shares to be issued have been listed or authorized to be added to the
list upon official notice of issuance upon such exchange, and (iii) all
other legal matters in connection with the issuance and delivery of shares
have been approved by the Corporation's counsel. Without limiting the
generality of the foregoing, the Corporation may require from the
participant such investment representation or such agreement, if any, as
counsel for the Corporation may consider necessary in order to comply with
the Securities Act of 1933 as then in effect, and may require that the
participant agree that any sale of the shares will be made only in such
manner permitted by law. The participant shall take any action reasonably
requested by the Corporation in such
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<PAGE>
connection. A participant shall have the rights of a stockholder only as
to shares actually acquired by him under the Plan.
(e) NONTRANSFERABILITY OF OPTIONS. No option may be transferred by
the participant otherwise than by will or by the laws of descent and
distribution, and during the participant's lifetime the option may be
exercised only by him.
(f) CONSIDERATION FOR OPTION. Each person receiving a stock option
must agree that he will remain in the employ of the Corporation upon the
terms of employment then existing (unless different terms are mutually
agreed upon) for at least one (1) year from (i) the date of the granting
of the option or (ii) the date of expiration of the then current
employment contract, whichever is later, subject to the right of the
Corporation to terminate his employment at any time.
(g) TERMINATION OF EMPLOYMENT. If the employment of a participant
terminates for any reason other than his death or permanent disability (as
hereinafter defined), he may thereafter exercise his option as provided
below, but only to the extent he was entitled to exercise the option on
the date when his employment terminated. If such termination of employment
is voluntary on the part of the participant, he may exercise his option
only within ten days after the date of termination of his employment
(unless a longer period not in excess of three months is allowed by the
Committee). If such termination of employment is involuntary on the part
of the participant, he may exercise his option only within three months
after the date of termination of his employment. In no event, however, may
such participant exercise his option at a time when the option would not
be exercisable had the participant remained an employee. For purposes of
this subsection (g), a participant's employment shall not be considered
terminated in the case of sick leave or other bona fide leave of absence
approved by the Corporation or a subsidiary, or in the case of a transfer
to the employment of a subsidiary or to the employment of the Corporation.
Anything herein to the contrary notwithstanding, an option may be
exercised only to the extent exercisable on the date of termination of
employment by death, disability or otherwise.
(h) RETIREMENT. If prior to the expiration date of his option an
optionee shall retire with the Corporation's consent, such option may be
exercised in the same manner as if the optionee had continued in the
Corporation's employ; provided however, the Committee may terminate all
unexercised options if it shall determine that the retired optionee had
engaged in any activity detrimental to the Corporation's interests.
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<PAGE>
(i) DEATH OR PERMANENT DISABILITY. If a participant dies or becomes
"permanently disabled" (as hereinafter defined) at a time when he is
entitled to exercise an option, then at any time or times within one (1)
year after his death or determination of permanent disability (or such
further period as the Committee may allow) such option may be exercised,
as to all or any of the shares which the participant was entitled to
purchase immediately prior to his death or determination of permanent
disability, by his executor or administrator or the person or persons to
whom the option is transferred by will or the applicable laws of descent
and distribution (in the case of death) or by his legal guardian (in the
case of permanent disability), and except as so exercised such option
shall expire at the end of such period. In no event, however, may an
option be exercised after the expiration of the option period.
For purposes of the Plan, the term "permanent disability" shall mean
any physical and/or mental condition which, in the sole discretion of a
majority of the Committee, renders the participant unable to discharge his
duties in the employ of the Corporation or any subsidiary for a period of
ninety (90) consecutive days.
7. REPLACEMENT OPTIONS. The Corporation may grant options under the Plan
on terms differing from those provided for in Section 6 where such options are
granted in substitution for options held by employees of other corporations who
concurrently become employees of the Corporation or a subsidiary as the result
of a merger, consolidation or other reorganization of the employing corporation
with the Corporation or subsidiary, or the acquisition by the Corporation or a
subsidiary of the business, property or stock of the employing corporation. The
Committee may direct that the substitute options be granted on such terms and
conditions as the Committee considers appropriate in the circumstances.
8. CHANGES IN STOCK. In the event of a stock dividend, stock split or
recapitalization or merger in which the Corporation is the surviving
corporation, or other similar capital change, the number and kind of shares of
stock of the Corporation to be subject to the Plan and to options then
outstanding or to be granted thereunder, the maximum number of shares which may
be issued or sold under the Plan, the option price and other relevant provisions
shall be appropriately adjusted by the Board of Directors of the Corporation,
the determination of which shall be binding on all persons.
9. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any
employee of the Corporation or a subsidiary any right to continue employment
with the Corporation or a subsidiary, as the case may be, nor does it interfere
in any way with the right of the Corporation or a subsidiary to terminate the
employment of any of its employees at any time.
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<PAGE>
10. AMENDMENTS. The Committee may at any time discontinue granting options
under the Plan. The Board of Directors of the Corporation may at any time or
times amend the Plan or amend any outstanding option or options for the purpose
of satisfying the requirements of any changes in applicable laws or regulations
or for any other purpose which may at the time be permitted by law, provided
that except to the extent required or permitted under Section 8 no such
amendment shall, without the approval of the stockholders of the Corporation,
increase the maximum number of shares available under the Plan, or without the
consent of the participant void or diminish options previously granted, nor
increase or accelerate the conditions and actions required for the exercise of
the same, except that nothing herein shall limit the Corporation's right to call
stock issued for deferred payment to be evidenced by promissory note, where the
participant is in default of his obligations on such note.
11. STOCKHOLDER APPROVAL. The Plan will be submitted to the Common Stock
stockholders of the Corporation within twelve (12) months of the date of the
adoption of the Plan by the Board of Directors. This Plan shall become effective
upon its adoption by the favorable vote of the holders of a majority of the
outstanding shares of the Common Stock of the Corporation.
12. ADOPTION OF PLAN BY BOARD OF DIRECTORS. The undersigned hereby
certifies that this Plan is the true and correct 1997 Texas Regional Bancshares,
Inc., Nonstatutory Stock Option Plan of the Corporation voted upon and adopted
at a meeting of the Board of Directors duly held on the 9th day of December,
1997.
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EXHIBIT 23(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Brownsville Bancshares, Inc.
We consent to the use of our report herein and to the reference to our firm
under the caption "Experts" in this Prospectus.
/s/ GARCIA, MARREN & COMPANY, P.C.
GARCIA, MARREN & COMPANY, P.C.
Certified Public Accountants
Brownsville, Texas
January 8, 1998
EXHIBIT 23(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Texas Regional Bancshares, Inc.
We consent to the use of our report incorporated herein by reference and to
the reference to our firm under the headings "Experts" and "Federal Income
Tax Consequences" in the registration statement and prospectus/proxy statement.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Houston, Texas
January 8, 1998
EXHIBIT 23(d)
January 8, 1998
The Board of Directors
Brownsville Bancshares, Inc.
We hereby consent to the use of our report contained herein and the
reference to our firm under the captions "Summary --Reasons for the Merger,"
"Information About the Transaction -- Terms of the Agreement," "Information
About the Transaction -- Opinion of Financial Advisor" and "Experts" in this
Prospectus.
Service Asset Management Company
By: /s/DORY WILEY
DORY WILEY
EXHIBIT 99(a)
BROWNSVILLE BANCSHARES, INC.
SPECIAL MEETING OF SHAREHOLDERS -- FEBRUARY 11, 1998
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints Horacio L. Barrera, Jesus M. Castellano, and
Alfredo Gavito, and each of them, proxies, with full power of substitution, to
vote in the manner indicated on the reverse side hereof on proposal (1) and in
their discretion on such other business as may properly come before the meeting,
any and all of my (our) shares
of record of Brownsville Bancshares, Inc., Capital Stock, at the special meeting
of shareholders to be held February 11, 1998, at 12:00 noon, at the Four Points
Sheraton Hotel, 3777 North Expressway, Brownsville, Texas, and at all
adjournments of the meeting.
The merger must be approved by the vote of two-thirds of the shareholders of
Brownsville Bancshares, Inc. Execution of this Proxy, if voted FOR the merger
transaction, will constitute the approval required by Texas law.
Dated , 1998
SIGNATURES
SIGNATURE(S) SHOULD AGREE WITH THE
NAME(S) TO THE LEFT
(CONTINUED FROM FRONT)
(Please mark date, sign and return in the enclosed envelope)
Unless otherwise specified, proxies will be voted FOR proposal (1).
The Board of Directors recommends a vote FOR proposal (1).
(1) Approval of the agreement to merge Brownsville Bancshares, Inc., and its
subsidiary, BNB Bancshares, Inc., with and into Texas Regional Delaware,
Inc., a wholly-owned subsidiary of Texas Regional Bancshares, Inc., for
consideration to consist of 3.06608 shares of Texas Regional Class A Voting
Common Stock for each share of Brownsville Bancshares, Inc., capital stock,
and the related approval of the merger of BNB Bancshares, Inc.'s wholly
owned subsidiary, Brownsville National Bank, with and into Texas Regional's
wholly owned subsidiary, Texas State Bank.
[ ]FOR [ ]AGAINST [ ]ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED OR IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE BOARD OF DIRECTORS' RECOMMENDATIONS. THIS PROXY
ALSO CONFERS DISCRETIONARY AUTHORITY TO VOTE ON OTHER MATTERS PROPERLY BROUGHT
BEFORE THE MEETING.
(PLEASE SIGN ON OTHER SIDE)
EXHIBIT 99(b)
BROWNSVILLE BANCSHARES, INC.
BROWNSVILLE, TEXAS
629 E. ELIZABETH
BROWNSVILLE, TEXAS 78596
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY 11, 1998
Notice is hereby given that a special meeting of the Shareholders of
Brownsville Bancshares, Inc., Brownsville, Texas ("Brownsville Bancshares")
will be held at the Four Points Sheraton Hotel, 3777 North Expressway,
Brownsville, Texas, on February 11, 1998 at 12:00 noon, local time, for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization (the "Agreement"), dated as of
October 20, 1997, between Brownsville Bancshares, Inc., a Texas corporation
("Brownsville Bancshares"), and Texas Regional Bancshares, Inc., a Texas
corporation ("Texas Regional"), providing for the merger (the "Merger")
of Brownsville Bancshares and its wholly-owned subsidiary, BNB Bancshares,
Inc. ("BNB"), with and into Texas Regional Delaware, Inc., a Delaware
corporation that is a wholly-owned subsidiary of Texas Regional (herein
referred to as "TRD"). As a result of the Merger, Brownsville Bancshares
would become a subsidiary of Texas Regional, the shareholders of
Brownsville Bancshares would be entitled to receive 3.06608 shares of Texas
Regional Class A Voting Common stock for each share of Brownsville
Bancshares capital stock then held by them, and option holders of
Brownsville Bancshares would be entitled to receive 1.77634 shares of Texas
Regional Class A Voting Common Stock for each share subject to such
holder's options, all as more fully described in the accompanying
Prospectus/Proxy Statement and in the Agreement, a copy of which is annexed
to the Prospectus/Proxy Statement as Annex A. At the meeting, the
shareholders will also consider and vote on approval of the merger of BNB's
subsidiary, Brownsville National Bank, with and into TRD's subsidiary,
Texas State Bank.
2. To transact such other business as may properly come before the
meeting and any adjournment thereof.
The Board of Directors of Brownsville Bancshares has fixed the close of
business on January 12, 1998 as the record date for the determination of
shareholders entitled to notice of and to vote at the special meeting or at any
adjournment thereof.
DATED: BY ORDER OF THE BOARD OF DIRECTORS
January 12, 1998
President
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY
AT YOUR EARLIEST CONVENIENCE. THE ENCLOSED ENVELOPE MAY BE USED FOR THAT
PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY, IF YOU WISH, WITHDRAW YOUR PROXY
AND VOTE IN PERSON.
