-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LU1bPxbHndkzrWE/iSnfTI2Ttxs7JJNgArYsM7yRjjLFzFXSBR8JHuZaufAt/rHI xjhqCMCHoCmVRs09cBzkRQ== 0000890566-98-000305.txt : 19980312 0000890566-98-000305.hdr.sgml : 19980312 ACCESSION NUMBER: 0000890566-98-000305 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980311 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEXAS REGIONAL BANCSHARES INC CENTRAL INDEX KEY: 0000787648 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 742294235 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14517 FILM NUMBER: 98563538 BUSINESS ADDRESS: STREET 1: 3700 N TENTH STE 301 STREET 2: PO BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501 BUSINESS PHONE: 9566315400 MAIL ADDRESS: STREET 1: P O BOX 5910 STREET 2: P O BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78501-5910 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ------ ACT OF 1934 For the fiscal year ended December 31, 1997 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ------ EXCHANGE ACT OF 1934 For the transition period from to ------------- ------------- Commission File No. 0-14517 TEXAS REGIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) Texas 74-2294235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3700 North 10th Suite 301, McAllen, Texas 78501 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: 956-631-5400 Securities registered pursuant to Section 12(b) of the Act: Name of Exchange Title of Class on Which Registered -------------- ------------------- None None Securities registered pursuant to Section 12(g) of the Act: Class A Voting Common, $1.00 Per Value Per Share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 27, 1998 was $426,240,813.00. The number of shares outstanding of each of the registrant's classes of common stock, as of February 27, 1998 are as follows: Class A Voting Common - 14,403,484 shares DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for Annual Meeting on April 27, 1998 Part III PART I ITEM 1. BUSINESS GENERAL Texas Regional Bancshares, Inc. ("Texas Regional" or the "Corporation"), a Texas business corporation registered as a bank holding company under the Bank Holding Company Act of 1956, was incorporated in 1983 and is headquartered in McAllen, Texas. Texas Regional Delaware, Inc., incorporated under the laws of the state of Delaware, is wholly owned by Texas Regional. Texas Regional Delaware, Inc., owns all banking and nonbanking subsidiaries of the Corporation, including the Corporation's principal operating subsidiary, Texas State Bank (the "Bank") (collectively, the "Company"). As of December 31, 1997, the Bank operated sixteen banking locations in the Rio Grande Valley: five banking locations in McAllen (including its main office), three banking locations in Mission, two banking locations in Weslaco, and one banking location each in Edinburg, Harlingen, Hidalgo, Penitas, Rio Grande City and Roma. At December 31, 1997, Texas Regional had consolidated total assets of $1.4 billion, loans outstanding (net of unearned discount) of $886.9 million, total deposits of $1.2 billion, and shareholders' equity of $145.7 million. On February 19, 1998, Texas Regional completed the acquisitions of TB&T Bancshares, Inc. of Brownsville, Texas ("TB&T"), Brownsville Bancshares, Inc. of Brownsville, Texas ("BBI") and Raymondville Bancorp, Inc. of Raymondville, Texas ("Raymondville"). As of February 19, 1998 these bank holding companies had an aggregate of approximately $208.7 million in assets and five banking locations. An aggregate of 1,292,845 shares of Texas Regional's Class A Voting Common Stock were issued in connection with the acquisitions of TB&T and BBI, and $9.6 million of cash was paid to the shareholder of Raymondville in connection with the acquisition of Raymondville. The subsidiary banks of TB&T, BBI and Raymondville were merged with and into Texas State Bank immediatly following the acquisitions. TSB Securities, Inc. was formed by the Company in 1997, to provide full service broker-dealer services and perform other transactions or operations related to the sale and purchase of securities. TSB Securities, Inc. is a wholly owned subsidiary of Texas Regional Delaware, Inc. TSB Properties, Inc., a wholly owned subsidiary of Texas State Bank was created in 1998 to receive and liquidate foreclosed assets. The business strategy of Texas Regional is for the Bank to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and level of service of a community bank. The Board of Directors and senior management of the Company have maintained the Company's community orientation by tailoring products and services to meet community and customer needs. Management believes that the Company is well positioned in its market due to its responsive customer service, the strong community involvement of Texas State Bank management and employees, recent trends in the Texas banking environment in general and the economy of the Rio Grande Valley in particular. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Company's operations. Management believes that individualized customer service will allow the Company to increase its market share in lending volume and deposits. As part of its operating and growth strategies, the Company is working to continue to attract business from, and provide service to, small and medium sized businesses, and expand operations in the Rio Grande Valley. For its business customers, the Bank offers checking facilities, certificates of deposit, short term loans for working capital purposes, construction financing, mortgage loans, term loans for fixed asset and expansion needs, and other commercial loans. The services provided for individuals by the Bank include checking accounts, savings accounts, certificates of deposit, individual retirement accounts and consumer loan programs, including installment loans for home repair and for purchases of consumer goods, including automobiles, trucks and boats, and mortgage loans. The Bank also provides travelers checks, money orders and safe deposit facilities, and offers trust services. The Bank provides services to third-party correspondent banks. The Bank's data processing center, for example, presently serves three banks in addition to providing data processing services for all of the Bank's banking locations. Management believes there may be opportunities to expand by acquiring financial institutions or by acquiring assets and deposits that will allow the Company to enter adjacent markets or further increase market share in existing markets. Management intends to pursue acquisition opportunities in strategic markets in circumstances in which management believes that its managerial, operational and capital resources will enhance the performance of acquired institutions. COMPETITION Texas Regional's operations are located in the Rio Grande Valley, which consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and Starr Counties are each directly adjacent to the Rio Grande River, which forms part of the border between the United States and Mexico. Texas State Bank's banking locations are currently located in Hidalgo County (McAllen, Hidalgo, Mission, Penitas and Weslaco), Cameron County (Brownsville and Harlingen), Starr County (Rio Grande City and Roma), and Willacy County (Raymondville). The banking industry in the market area served by the Bank is highly competitive. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit, service charges assessed, the quality and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. A substantial number of the commercial banks in the Rio Grande Valley are branches of much larger organizations affiliated with national, regional or state-wide banking companies, and as a result of those affiliations have greater resources than Texas Regional or Texas State Bank. However, as an independent community bank headquartered in Texas State Bank's primary market area, management of the Company believes that Texas State Bank's community commitment and involvement in its primary market area, as well as its commitment to quality and personalized banking services, are factors that contribute to the Company's competitiveness. REGULATION AND SUPERVISION In addition to the generally applicable state and federal laws governing businesses and employers, the Company and Texas State Bank are further extensively regulated by special federal and state laws applicable only to financial institutions and their parent companies. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight, from laws regulating consumer finance transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as the Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the specific protection of shareholders of the Company. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. REGULATION OF THE COMPANY Texas Regional is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHCA"), as amended, and therefore is subject to regulation and supervision by the Federal Reserve Board (the "FRB"). In addition, the Company is required to file reports with and to furnish such other information as the FRB may require pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB has the authority to issue bank holding companies orders to cease and desist from unsound practices and violations of conditions imposed by, or violation of agreements with, the FRB. The FRB is also empowered to assess civil penalties against companies or individuals who violate the BHCA or orders or regulations thereunder in amounts up to $1.0 million per day, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The FRB and the Federal Deposit Insurance Corporation (the "FDIC"), as appropriate, are authorized to exercise comparable authority, under the Federal Deposit Insurance Act (the "FDI Act") and other statutes, with respect to subsidiary banks. The FRB takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB's position that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB regulations or both. Changes in the FDI Act made by the Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDICIA") now require an undercapitalized institution to submit to the FRB a capital restoration plan with a guaranty by each company having control of the bank of the bank's compliance with the plan. The BHCA and the Change in Bank Control Act, together with regulations promulgated by the FRB, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exemptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption. As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. The Company is also prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary bank, except that it may engage in and may own shares of companies engaged in certain activities found by the FRB to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card, or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the FRB considers whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse affects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In considering any application for approval of an acquisition or merger, the FRB is also required to consider the financial and managerial resources of the companies and the banks concerned, as well as the applicant's record of compliance with the Community Reinvestment Act (the "CRA"). The CRA generally requires a financial institution to take affirmative action to ascertain and meet the credit needs of its entire community, including low and moderate income neighborhoods. The BHCA generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve System and other banks and non-bank companies in the same holding company. Under the BHCA and the FRB's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. The Company, as an affiliate of the Bank, is subject to certain restrictions regarding transactions between a bank and companies with which it is affiliated. These provisions limit extensions of credit (including guarantees of loans) by the Bank to affiliates, investments in the stock or other securities of the Company by the Bank, and the nature and amount of collateral that the Bank may accept from any affiliate to secure loans extended to the affiliate. REGULATION OF THE BANK Texas State Bank is a Texas state-chartered bank subject to regulation by the Banking Department. Texas State Bank, the deposits of which are insured by the Bank Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve System, and therefore the FRB is the primary federal regulator for Texas State Bank. The requirements and restrictions applicable to Texas State Bank under laws of the United States and the State of Texas include (i) the requirement that reserves be maintained, (ii) restrictions on the nature and amount of loans which can be made, (iii) restrictions on the business activities in which the Bank may engage, (iv) restrictions on the payment of dividends to shareholders, and (v) the maintenance of minimum capital requirements. Texas Regional is dependent upon dividends received from Texas State Bank for discharge of Texas Regional's obligations and for payment of dividends to the Company's shareholders. However, the application of minimum capital requirements and other rules and regulations applicable to Texas State Bank restrict dividend payments by Texas State Bank. The Banking Department and the FRB can each further limit payment of dividends if the regulatory authority finds that the payment of dividends would constitute an unsafe or unsound practice. Except to absorb losses in excess of undivided profits and uncertified surplus, such certified surplus may not be reduced without the prior written consent of the Banking Commissioner. Interest rate limitations for Texas State Bank are primarily governed by the laws of the State of Texas. The maximum annual interest rate that may be charged on most loans made by Texas State Bank is based on doubling the average auction rate, to the nearest 0.25%, for United States Treasury Bills, as computed by the Office of Consumer Credit Commissioner of the State of Texas. However, the maximum rate does not decline below 18% or rise above 24% (except for loans in excess of $250,000 that are made for business, commercial, investment or other similar purposes (excluding agricultural loans), in which case the maximum annual rate may not rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious rate is to be determined at the time the rate is contracted, while on floating rate and open-end loans (such as credit cards), the rate varies over the term of the indebtedness. State usury laws (but not late charge limitations) have been preempted by federal law for loans secured by a first lien on residential real property. Banks are affected by the credit policies of other monetary authorities, including the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. FDICIA FDICIA requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the FRB and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically undercapitalized". Under these regulations, an institution is considered well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An institution is considered adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), and the institution does not meet the definition of a well capitalized institution. An institution is considered undercapitalized if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A significantly undercapitalized institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%. A critically undercapitalized institution is one which has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The FRB is authorized by the legislation to take various enforcement actions against any significantly undercapitalized institution and any undercapitalized institution that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the appropriate agency. These powers include, among other things, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring a new election of directors, and requiring the dismissal of directors and officers. If imposed these restrictions, either individually or in aggregate, could have a significantly adverse impact on the operations of the Bank. With certain exceptions, an institution will be prohibited from making capital distributions or paying management fees if the payment of such distributions or fees will cause the institution to become undercapitalized. Furthermore, undercapitalized institutions will be required to file capital restoration plans with the appropriate federal regulator. Pursuant to FDICIA, undercapitalized institutions also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The FRB also may, among other things, require an undercapitalized institution to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances to divest itself of any subsidiary. Critically undercapitalized institutions may be subject to more extensive control and supervision and the FRB may prohibit any critically undercapitalized institution from, among other things, entering into any material transaction not in the ordinary course of business, amending its charter or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of an institution becoming critically undercapitalized, the FRB must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued operation. Based on Texas State Bank's capital ratios at December 31, 1997, Texas State Bank was classified as "well capitalized" under the applicable regulations. As a result, the Company does not believe that FDICIA's prompt corrective action regulations will have any material effect on the activities or operations of Texas State Bank. FDICIA also requires the FDIC to establish a schedule to increase (over a period of not more than 15 years) the reserve ratio of the BIF, which insures deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher deposit insurance premiums on BIF members, if necessary, to achieve that ratio. FDICIA also requires a risk-based assessment system for deposit insurance premiums commencing January 1, 1994. Since BIF reached its designated reserve ratio in mid-1995, the FDIC adjusted the BIF assessments, so that the assessment rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100 of deposits. FDICIA contains numerous other provisions, including accounting, auditing and reporting requirements, the termination of the "too big to fail" doctrine except in special cases, regulatory standards in areas such as asset quality, earnings and compensation, and revised regulatory standards for the powers of state chartered banks, real estate lending, bank closures and capital adequacy. The Deposit Insurance Funds Act of 1996 (the "Funds Act") was enacted on September 30, 1996. Among its provisions, the Funds Act authorizes the Financing Corporation (the "FICO") to impose periodic assessments on depository institutions that are members of BIF in addition to institutions that are members of the Savings Association Insurance Fund (the "SAIF") in order to spread the cost of the interest payments on the outstanding FICO bonds over a larger number of institutions. Until this change in the law, only SAIF-member institutions bore the cost of funding these interest payments. Thus, BIF-member institutions will share in the cost of financing outstanding FICO bonds. An institution's FICO assessments will fluctuate based on a defined rate applied to deposits held in periods after the date the legislation was enacted. Currently, the FICO BIF annual rate is 1.3 cents for each $100 of qualified deposits. ACQUISITIONS The BHC Act generally limits acquisitions by the Company to commercial banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The Company's direct activities are generally limited to furnishing to its subsidiaries services that qualify under the prescribed regulatory tests. Prior Federal Reserve Board approval is required under the BHC Act for new activities and acquisitions of most nonbanking companies. The BHC Act, the Federal Bank Merger Act, and the Texas Banking Code regulate the acquisition of commercial banks. The BHC Act requires the prior approval of the Federal Reserve Board for the direct or indirect acquisition of more than five percent of the voting shares of a commercial bank or bank holding company. With respect to the Company's subsidiary bank, the approval of the Texas Department of Banking is required for branching, purchasing the assets of other banks and for bank mergers. In reviewing bank acquisition and merger applications, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, and the applicant's record under the Community Reinvestment Act and fair housing laws. The Corporation regularly evaluates acquisition opportunities and regularly conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases negotiations, regularly take place and future acquisitions could occur. INTERSTATE BANKING AND BRANCHING LEGISLATION The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"), authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997 IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out of interstate branching. ECONOMIC ENVIRONMENT The earnings of the Bank are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. The FRB regulates the supply of credit in order to influence general economic conditions, primarily through open market operations in United States government obligations, varying the discount rate of financial institution borrowings, varying reserve requirements against financial institutions and their subsidiaries. The deregulation of interest rates has had and is expected to continue to have an impact on the competitive environment in which the Bank operates. Governmental policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. However, the Company cannot accurately predict the nature or extent of any effect which such policies may have on its future business and earnings. PERSONNEL At December 31, 1997, Texas Regional employed 564 full-time equivalent employees. Employees of Texas Regional enjoy a variety of employee benefit programs, including an employee stock ownership plan with 401(k) provisions, medical, accident, group life and long-term disability plans, and paid vacations. The Company's employees are not unionized, and management believes employee relations to be favorable. Item 2. Properties All of Texas Regional's banking locations are owned by Texas Regional, except for the Company's Roma, Texas banking location. The Edinburg, Harlingen, Hidalgo, McAllen, Mission, Penitas, and Weslaco, Texas banking locations include extensive drive-through facilities. The Kerria Plaza banking location and the main office of Texas Regional are located within the Kerria Plaza Building. Management believes that it will be desirable in the future to consider the establishment of additional banking locations. As indicated above, on February 19, 1998, the Company completed the acquisitions of TB&T Bancshares, Inc. of Brownsville, Texas, and Brownsville Bancshares, Inc. of Brownsville, Texas, and Raymondville Bancorp, Inc. of Raymondville, Texas, The bank subsidiaries of these companies had a total of four banking locations in Brownsville, Texas and one banking location in Raymondville, Texas. Construction of a new headquarters building for the Company in McAllen, Texas is in progress. The new building will include the main offices of the Bank and Texas Regional, and will include space for lease to third party tenants and for future growth. The new building is projected for completion mid-1998. ITEM 3. LEGAL PROCEEDINGS Texas State Bank is involved in routine litigation in the normal course of its business, which in the opinion of management of Texas Regional will not have a material adverse effect on the financial condition or results of operations of Texas Regional. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since March 1994, the Common Stock has traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the Symbol: "TRBS." The following table shows (i) high and low prices of the Common Stock as reported in the Summary of Activity provided to the Company by The Nasdaq Stock Market for transactions occurring on The Nasdaq Stock Market during the past two years, and (ii) the total number of shares involved in such transactions. The following information has been restated to retroactively give effect to the three-for-two stock split declared and distributed by the Corporation during the third quarter of 1997.
PRICE PER SHARE CASH -------------------- DIVIDENDS NUMBER OF HIGH LOW DECLARED SHARES --------- --------- ----------- ----------- 1997 Fourth Quarter................... $ 31.50 $26.00 $ 0.11 1,049,074 Third Quarter.................... 31.50 24.50 0.11 1,691,818 Second Quarter................... 30.25 19.00 0.07 1,371,797 First Quarter.................... 24.50 21.17 0.07 926,227 1996 Fourth Quarter................... 23.00 18.83 0.07 1,242,633 Third Quarter.................... 19.50 15.67 0.07 934,507 Second Quarter................... 17.33 13.33 0.07 2,484,147 First Quarter.................... 15.67 11.33 0.06 396,700
During the two years ended December 31, 1997, an aggregate of 34,500 shares purchased by the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401 (k) provisions) are included in the foregoing table. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company's Board of Directors and will depend on conditions then existing, including Texas Regional's profitability, liquidity, financial condition, capital requirements and other relevant factors, including regulatory restrictions applicable to the Company. The Company's principal source of the funds to pay dividends on the Common Stock is dividends from Texas State Bank. The payment of dividends by Texas State Bank is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. At December 31, 1997, an aggregate of $30.2 million was available for payment of dividends by the Bank to the Company under the applicable limitations and without regulatory approval. ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial information below for, and as of, each of the years in the five-year period ended December 31, 1997 has been derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors.
1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------ Summary of Operations Interest Income $ 102,344 $ 78,226 $ 45,592 $ 34,631 $ 29,691 Interest Expense 46,092 33,248 18,052 11,690 10,494 - ------------------------------------------------------------------------------------------ Net Interest Income 56,252 44,978 27,540 22,941 19,197 Provision for Loan Losses 2,817 2,120 1,685 1,085 392 Noninterest Income 11,614 9,395 6,518 5,772 5,032 Noninterest Expense 32,603 27,962 18,977 16,507 14,513 - ------------------------------------------------------------------------------------------ Income Before Income Tax Expense 32,446 24,291 13,396 11,121 9,324 Income Tax Expense 11,029 7,912 4,671 3,936 3,345 Cumulative Effect of Change in Accounting Principle - - - - 32 - ------------------------------------------------------------------------------------------ Net Income $ 21,417 $ 16,379 $ 8,725 $ 7,185 $ 6,011 ========================================================================================== Per Share Data Net Income - Basic $ 1.64 $ 1.41 $ 0.94 $ 0.80 $ 0.87 Net Income - Diluted 1.61 1.38 0.94 0.79 0.78 Book Value at Year-End 11.11 9.81 6.75 6.00 5.18 Cash Dividends Declared Per Common Share 0.36 0.27 0.27 0.16 - Average Shares Outstanding (in Thousands) Basic 13,085 11,650 9,291 8,669 6,279 Diluted 13,317 11,831 9,327 9,049 7,755 Year-End Balance Sheet Data Total Assets $1,395,863 $1,230,577 $646,769 $531,834 $473,263 Loans 886,854 757,656 450,854 339,939 290,500 Investments Securities 367,259 318,136 131,641 126,828 127,540 Interest-Earning Assets 1,256,813 1,086,307 586,095 468,067 422,965 Deposits 1,236,997 1,091,735 579,731 472,108 429,521 Shareholders' Equity 145,654 128,148 62,720 55,731 39,983 Performance Ratios Return on Average Assets 1.65% 1.62% 1.51% 1.43% 1.34% Return on Average Shareholders' Equity 15.62 16.11 14.69 14.11 16.15 Net Interest Margin 4.93 5.14 5.33 5.12 4.84 Loan to Deposit Ratio 71.69 69.40 77.77 72.00 67.63 Demand Deposit to Total Deposit Ratio 14.92 15.46 20.77 21.11 20.81 Asset Quality Ratios Nonperforming Assets as a % of Total Loans and Foreclosed Assets 1.23% 0.97% 0.79% 1.41% 1.69% Net Charge-Offs (Recoveries) to Average Total Loans Outstanding, Net of Unearned Discount 0.29 0.21 0.30 0.33 (0.04) Allowance for Loan Losses as a Percentage of: Loans 1.19 1.32 1.01 1.03 1.18 Nonperforming Loans 134.81 155.62 216.49 143.42 146.05 Nonperforming Assets 95.87 135.72 126.62 72.96 69.39 Capital Ratios Equity to Assets Ratio 10.43% 10.41% 9.70% 10.48% 8.45% Tier I Capital Ratio 13.01 13.17 11.70 14.71 12.05 Total Capital Ratio 14.14 14.44 12.64 15.67 13.21 Leverage Capital Ratio 9.01 8.45 8.96 10.37 7.88 ==========================================================================================
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELECTED CONSOLIDATED FINANCIAL INFORMATION Net income for the year ended December 31, 1997 was $21.4 million, reflecting a net increase of $5.0 million or a 30.8% increase compared to net income of $16.4 million for the year ended December 31, 1996. The earnings per share of $1.64 for the year ended December 31, 1997 increased $0.23 or 16.3% compared to the earnings per share of $1.41 for the year ended December 31, 1996. Earnings performance for the year ended December 31, 1997 reflected gains in net interest income and an increase in noninterest income. These positive factors were partially offset by an increase in provision for loan losses and noninterest expenses. A more detailed description of the results of operations is included in the material that follows. The number of shares outstanding, dividends per share declared and paid, and related earnings per share amounts have been restated to retroactively give effect for the three-for-two stock split declared and distributed by Texas Regional Bancshares, Inc. during the third quarter of 1997. On May 14, 1996, Texas Regional Bancshares, Inc. (the "Corporation") completed its secondary public offering of 2.5 million shares of the Corporation's Class A Voting Common Stock (priced at $22.25 per share). On May 14, 1996, Texas Regional also completed the acquisition of First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo, Texas (which transactions are called the "Mergers" in this Management's Discussion and Analysis of Financial Condition and Results of Operations), through merger with Texas State Bank (the "Bank"), the principal operating subsidiary of Texas Regional Bancshares, Inc. (collectively, the "Company"). The purchase price of the Mergers was financed with a combination of proceeds from the 2.5 million share common equity offering and cash on the balance sheet of the Company. The Mergers included the assumption of $241.8 million in loans and the assumption of $450.4 million in deposit liabilities. The Mergers were accounted for as a purchase; therefore, the results of operations of the two acquired banks are included in the consolidated financial statements from the date of each respective acquisition. Accordingly, certain income statement and balance sheet comparisons may not be appropriate. The Company paid cash and used the purchase method of accounting for the Mergers which has resulted in the creation of intangible assets. These intangible assets are deducted from capital in the determination of regulatory capital. Thus, "cash" earnings represent the regulatory capital generated during the year and can be viewed as net income excluding intangible amortization, net of tax. While the definition of "cash" earnings may vary by company, management of Texas Regional believe this definition is appropriate as it measures the per share growth of regulatory capital, which impacts the amount available for dividends and acquisitions. The following table reconciles reported net income to net income excluding intangible assets amortization ("cash" earnings): Cash Earnings Taxable-Equivalent basis * (Dollars in Thousands, Except Per Share Data) 1997 1996 1995 - ------------------------------------------------------------------------------- Reported Net Income $ 21,417 $ 16,379 $ 8,725 Intangible Amortization 2,252 1,590 320 Income Tax Adjustment (444) (333) (91) - ------------------------------------------------------------------------------- Cash Earnings $ 23,225 $ 17,636 $ 8,954 =============================================================================== Cash Earnings Per Common Share Basic $ 1.77 $ 1.51 $ 0.96 Diluted 1.74 1.49 0.96 Cash Earnings Return on Average Assets 1.79% 1.75% 1.55% Cash Earnings Return on Average Shareholders' Equity 16.94 17.34 15.07 =============================================================================== * Taxable-Equivalent basis assuming a 35% federal income tax rate. ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is the difference between interest earned on assets and interest expense incurred for the funds supporting those assets. Earning assets consists of loans, investment securities and federal funds sold. For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets. Earning assets are financed by consumer and commercial deposits and short-term borrowings. In addition to these interest-bearing funds, assets also are supported by interest-free funds, primarily demand deposits and shareholders' equity. Variations in the volume and mix of assets and liabilities, and their relative sensitivity to interest rate movements, determine changes in net interest income. Taxable-equivalent net interest income was $57.8 million for the year ended December 31, 1997, an increase of $11.2 million or 23.9% compared to the year ended December 31, 1996, and taxable-equivalent net interest income of $46.6 million for the year ended December 31, 1996, increased $18.9 million or 67.9% compared to the year ended December 31, 1995. Both net interest income and the yield on earning assets were reduced by interest foregone on nonaccrual and renegotiated loans. If interest on those loans had been accrued at the original contractual rates, additional interest income would have approximated $1.2 million, $765,000, and $247,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The net yield on total interest-earning assets, also referred to as net interest margin, represents net interest income divided by average interest-earning assets. Since a significant portion of the Company's funding is derived from interest-free sources, primarily demand deposits and shareholders' equity, the effective rate paid for all funds is lower than the rate paid on interest-bearing liabilities alone. As the following table illustrates, the net interest margin of 4.93% for the year ended December 31, 1997 decreased 21 basis points compared to 5.14% for the year ended December 31, 1996 while the net interest margin of 5.14% for the year ended December 31, 1996 decreased 19 basis points compared to 5.33% for the year ended December 31, 1995. The decrease in the interest margin for the year ended December 31, 1997 is reflective of the increase in the rate paid on interest-bearing liabilities. The rate paid on interest-bearing liabilities of 4.70% for the year ended December 31, 1997 increased 25 basis points compared to 4.45% for the year ended December 31, 1996 and the interest paid on interest-bearing liabilities of 4.45% for the year ended December 31, 1996 increased 6 basis points compared to 4.39% for the year ended December 31, 1995. The increase in the rate paid on interest-bearing liabilities during 1997 was primarily attributable to the general increase in average short-term interest rates and increased competition from local financial institutions. The yield on interest-earning assets of 8.87% for the year ended December 31, 1997 increased 6 basis points compared to 8.81% for the year ended December 31, 1996 and the yield on interest-earning assets of 8.81% for the year ended December 31, 1996 increased 2 basis points compared to 8.79% for the year ended December 31, 1995. The mix of average interest-earning assets for the year ended December 31, 1997 compared to year ended December 31, 1996 was changed by total average loans of $812.3 million increasing $192.7 million or 31.1%, total average investment securities of $333.3 million increasing $75.0 million or 29.0% and average federal funds sold of $25.6 million decreasing $3.2 million or 11.1%. The decrease in loan yield for 1997 reflects the increase in competition from local financial institutions. The decrease in loan yield for 1996 reflects the general decrease in average interest rates in 1996 compared to 1995. The increase in investment securities yield for the years ended December 31, 1997 and 1996 resulted from lower yielding investment securities maturing and the reinvesting of the proceeds into higher yields. The following table presents for the last three calendar years the total dollar amount of interest income from average interest-earning assets and the resultant yields, reported on a tax-equivalent basis, as well as the average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 35% effective tax rate for 1997 and 1996, and a 34% effective income tax rate for 1995.
Three-Year Financial Summary Years Ended December 31, ------------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ------------------------ Taxable-Equivalent Basis(1) Average Yield/ Average Yield/ Average Yield/ (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------------------------------------------------------------------------------------------------- Assets Interest-Earning Assets Loans Commercial $ 281,682 $ 27,328 9.70% $ 219,923 $21,324 9.70% $125,321 $12,355 9.86% Real Estate 453,417 45,170 9.96 339,834 34,247 10.08 208,035 21,197 10.19 Consumer 77,177 7,711 9.99 59,824 6,064 10.14 36,918 3,647 9.88 - ----------------------------------------------------------------------------------------------------- Total Loans 812,276 80,209 9.87 619,581 61,635 9.95 370,274 37,199 10.05 - ----------------------------------------------------------------------------------------------------- Investment Securities Taxable 308,787 20,044 6.49 231,844 14,240 6.14 126,086 7,004 5.55 Tax-Exempt 24,524 2,164 8.82 26,451 2,427 9.18 4,907 431 8.78 - ----------------------------------------------------------------------------------------------------- Total Investment Securities 333,311 22,208 6.66 258,295 16,667 6.45 130,993 7,435 5.68 - ----------------------------------------------------------------------------------------------------- Federal Funds Sold 25,584 1,433 5.60 28,793 1,554 5.40 19,807 1,172 5.92 - ----------------------------------------------------------------------------------------------------- Total Interest- Earning Assets 1,171,171 103,850 8.87 906,669 79,856 8.81 521,074 45,806 8.79 - ----------------------------------------------------------------------------------------------------- Cash and Due from Banks 48,726 43,785 31,151 Premises and Equipment, Net 40,552 29,866 16,365 Other Assets 48,048 35,943 13,507 Allowance for Loan Losses (10,351) (8,138) (4,158) - ----------------------------------------------------------------------------------------------------- Total Assets $1,298,146 $1,008,125 $577,939 ===================================================================================================== Liabilities Interest-Bearing Liabilities Savings $ 89,729 2,876 3.21 $ 75,360 2,374 3.15 $ 31,360 840 2.68 Money Market Checking and Savings 224,176 6,632 2.96 205,707 5,763 2.80 129,012 3,484 2.70 Time Deposits 665,781 36,532 5.49 465,262 25,091 5.39 249,167 13,666 5.48 - ----------------------------------------------------------------------------------------------------- Total Savings and Time Deposits 979,686 46,040 4.70 746,329 33,228 4.45 409,539 17,990 4.39 - ----------------------------------------------------------------------------------------------------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements 980 52 5.31 507 20 3.94 1,093 46 4.21 Short-Term Borrowings - - - - - - 232 16 6.90 - ----------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 980,666 46,092 4.70 746,836 33,248 4.45 410,864 18,052 4.39 - ----------------------------------------------------------------------------------------------------- Demand Deposits 169,799 150,779 103,842 Other Liabilities 10,575 8,831 3,835 - ----------------------------------------------------------------------------------------------------- Total Liabilities 1,161,040 906,446 518,541 - ----------------------------------------------------------------------------------------------------- Shareholders' Equity 137,106 101,679 59,398 - ----------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $1,298,146 $1,008,125 $577,939 ===================================================================================================== Net Interest Income $57,758 $46,608 $27,754 ===================================================================================================== Net Yield on Total Interest- Earning Assets 4.93% 5.14% 5.33% =====================================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 35% effective federal income tax rate for 1997 and 1996, and a 34% effective federal income tax rate for 1995). The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category.
Analysis of Changes in Net Interest Income Taxable-Equivalent Basis(1) Year Ended December 31, Due to Change in 1997 Compared to 1996 Net ------------------------------ (Dollars in Thousands) Change Volume Rate Rate/Volume - --------------------------------------------------------------------------------------- Interest Income Loans, Including Fees $18,574 $19,173 $ (496) $ (103) Investment Securities Taxable 5,804 4,724 811 269 Tax-Exempt (263) (177) (95) 9 Federal Funds Sold (121) (173) 58 (6) - --------------------------------------------------------------------------------------- Total Interest Income 23,994 23,547 278 169 - --------------------------------------------------------------------------------------- Interest Expense Deposits 12,812 10,384 1,866 562 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 32 19 7 6 - --------------------------------------------------------------------------------------- Total Interest Expense 12,844 10,403 1,873 568 - --------------------------------------------------------------------------------------- Net Interest Income Before Allocation of Rate/Volume 11,150 13,144 (1,595) (399) - --------------------------------------------------------------------------------------- Allocation of Rate/Volume - (350) (49) 399 - --------------------------------------------------------------------------------------- Changes in Net Interest Income $11,150 $12,794 $(1,644) $ - ======================================================================================= Analysis of Changes in Net Interest Income Taxable-Equivalent Basis(1) Year Ended December 31, Due to Change in 1996 Compared to 1995 Net ------------------------------ (Dollars in Thousands) Change Volume Rate Rate/Volume - --------------------------------------------------------------------------------------- Interest Income Loans, Including Fees $24,436 $25,055 $ (370) $ (249) Investment Securities Taxable 7,236 5,870 744 622 Tax-Exempt 1,996 1,892 20 84 Federal Funds Sold 382 532 (103) (47) - --------------------------------------------------------------------------------------- Total Interest Income 34,050 33,349 291 410 - --------------------------------------------------------------------------------------- Interest Expense Deposits 15,238 14,785 246 207 Federal Funds Purchased and Securities Sold Under Repurchase Agreements (26) (25) (3) 2 Short-Term Borrowings (16) (16) - - - --------------------------------------------------------------------------------------- Total Interest Expense 15,196 14,744 243 209 - --------------------------------------------------------------------------------------- Net Interest Income Before Allocation of Rate/Volume 18,854 18,605 48 201 - --------------------------------------------------------------------------------------- Allocation of Rate/Volume - 145 56 (201) - --------------------------------------------------------------------------------------- Changes in Net Interest Income $18,854 $18,750 $ 104 $ - =======================================================================================
(1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 35% effective federal income tax rate for 1997 and 1996, and a 34% effective federal income tax rate for 1995). NET YIELD ON EARNING ASSETS The following table presents net interest income, average earning assets and the net yield by quarter for the past three years. Income and yield on earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 35% effective federal income tax rate for 1997 and 1996, and a 34% effective federal income tax rate for 1995.
Net Yield on Earning Assets Quarter Taxable-Equivalent Basis % Change --------------------------------------------- (Dollars in Thousands) Prior Year Year Fourth Third Second First - --------------------------------------------------------------------------------------------- 1997 Net Interest Income 23.9% $ 57,758 $ 14,691 $ 14,284 $ 14,742 $ 14,041 Average Earning Assets 29.2 1,171,171 1,234,357 1,191,855 1,134,898 1,123,574 Net Yield 4.93% 4.72% 4.75% 5.21% 5.07% 1996 Net Interest Income 67.9% $ 46,608 $ 13,713 $ 14,019 $ 10,981 $ 7,895 Average Earning Assets 74.0 906,669 1,098,972 1,090,068 847,169 590,467 Net Yield 5.14% 4.96% 5.12% 5.21% 5.38% 1995 Net Interest Income 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489 Average Earning Asset 15.7 521,074 574,033 542,783 492,880 474,600 Net Yield 5.33% 5.28% 5.15% 5.36% 5.54% =============================================================================================
PROVISION FOR LOAN LOSSES The provision for loan losses for the year ended December 31, 1997 was $2.8 million, an increase of $697,000 or 32.9% from the $2.1 million for the year ended December 31, 1996. The provision for loan losses for the year ended December 31, 1996 of $2.1 million reflects an increase of $435,000 or 25.8% from the $1.7 million provision for loan losses for the year ended December 31, 1995. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, particularly as they relate to the Company's lending area, and other factors related to the collectibility of the Company's loan portfolio. The increase in the provision for the year ended December 31, 1997, compared to the provision for the year ended December 31, 1996, was primarily attributable to loan growth of $129.2 million and net charge-offs of $2.3 million. See "Allowance for Loan Losses." NONINTEREST INCOME Noninterest income of $11.6 million for the year ended December 31, 1997 increased $2.2 million or 23.6% compared to $9.4 million for the year ended December 31, 1996, and noninterest income of $9.4 million for the year ended December 31, 1996 increased $2.9 million or 44.1% compared to $6.5 million for the year ended December 31, 1995. All categories of noninterest income for the year ended December 31, 1997 increased when compared to the year ended December 31, 1996, and the increase was primarily attributable to the increased volume of business conducted by the Company, in part as a result of the Mergers. All categories of noninterest income, except Other Operating Income for the year ended December 31, 1996, increased when compared to the year ended December 31, 1995. Total Service Charges of $7.3 million for the year ended December 31, 1997, increased $1.3 million or 22.4% compared to $6.0 million for the year ended December 31, 1996. Total Service Charges of $6.0 million for the year ended December 31, 1996 increased $1.7 million or 38.2% compared to $4.3 million for the year ended December 31, 1995. The increase in Total Service Charges for the years ended December 31, 1997, 1996 and 1995 is attributable to increased account transaction fees as a result of the deposit growth experienced by the Company and as a result of the Mergers. Trust Service Fees of $1.7 million for the year ended December 31, 1997 increased $186,000 or 12.4% compared to $1.5 million for the year ended December 31, 1996, and Trust Service Fees of $1.5 million for the year ended December 31, 1996 increased $249,000 or 19.8% compared to $1.3 million for the year ended December 31, 1995. The increase in Trust Service Fees in each of the years 1997 and 1996 is attributable to an increase in the number of trust accounts managed. The book value of assets managed at December 31, 1997 of $221.8 million decreased $45.5 million or 17.0% compared to $267.3 million at December 31, 1996, and was primarily attributable to two public entities, one of which represents a bond issue for a high school construction project which is close to completion. Assets held by the trust department of the Bank in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated balance sheets. Net Investment Securities Gains (Losses) was a $731,000 gain for the year ended December 31, 1997, compared to an $401,000 gain for the year ended December 31, 1996. The sale of securities in 1997 and 1996 was designed to reduce asset sensitivity of callable bonds and improve bond quality. Other Operating Income of $789,000 for the year ended December 31, 1997 increased $195,000 or 32.8% compared to $594,000 for the year ended December 31, 1996 and Other Operating Income of $594,000 for the year ended December 31, 1996 decreased $7,000 or 1.2% compared to $601,000 for the year ended December 31, 1995. The increase in Other Operating Income for 1997 was primarily attributable to the increased volume of business conducted by the Company. A detailed summary of noninterest income during the last three years is presented in the following table:
Noninterest Income % % Years Ended December 31, Change From Change From (Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995 - --------------------------------------------------------------------------------------------- Service Charges on Deposit Accounts $ 5,961 19.7% $ 4,982 43.5% $ 3,472 Other Service Charges 1,362 35.8 1,003 16.8 859 - --------------------------------------------------------------------------------------------- Total Service Charges 7,323 22.4 5,985 38.2 4,331 Trust Service Fees 1,691 12.4 1,505 19.8 1,256 Net Investment Securities Gains (Losses) 731 82.3 401 461.3 (111) Data Processing Service Fees 1,080 18.7 910 106.3 441 Other Operating Income 789 32.8 594 (1.2) 601 - --------------------------------------------------------------------------------------------- Total $11,614 23.6% $ 9,395 44.1% $ 6,518 =============================================================================================
NONINTEREST EXPENSE Noninterest expense of $32.6 million for the year ended December 31, 1997 increased $4.6 million or 16.6% compared to $28.0 million for the year ended December 31, 1996, and noninterest expense of $28.0 million for the year ended December 31, 1996 increased $9.0 million or 47.3% compared with $19.0 million for the year ended December 31, 1995. These increases for the years ended December 31, 1997 and 1996 were primarily attributable to an increased volume of business conducted by the Company, the impairment loss and the Mergers. The largest category of noninterest expense, Salaries and Employee Benefits ("Personnel"), of $15.4 million for the year ended December 31, 1997 increased $1.4 million or 10.3% compared to year ended December 31, 1996 levels of $13.9 million. Personnel expenses of $13.9 million for the year ended December 31, 1995 increased $4.4 million or 45.5% compared to year ended December 31, 1995 levels of $9.6 million. Personnel expenses increased for the year ended December 31, 1997 primarily due to staffing increases, including the staff acquired as a result of the Mergers. Net Occupancy Expense of $2.3 million for the year ended December 31, 1997 increased $391,000 or 20.0% compared to $2.0 million for the year ended December 31, 1996, and Net Occupancy Expense of $2.0 million for the year ended December 31, 1996 increased $882,000 or 82.5% when compared to Net Occupancy Expense of $1.1 million for the year ended December 31, 1995. The increase for the year ended December 31, 1997 and 1996 is primarily attributable to the occupancy expenses associated with the Mergers. Equipment Expense of $3.5 million for the year ended December 31, 1997 increased $341,000 or 10.8% compared to $3.2 million for the year ended December 31, 1996 and Equipment Expense of $3.2 million for the year ended December 31, 1996 increased $1.1 million or 56.1% when compared with $2.0 million for the year ended December 31, 1995. The Equipment Expense increase noted during the year ended December 31, 1997 is primarily attributable to equipment obtained in the Mergers and equipment acquired to service the Company's increasing customer base. Other Real Estate (Income) Expense, Net includes rent income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of Other Real Estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. The category Other Real Estate (Income) Expense, Net reflects net loss of $112,000 for the year ended December 31, 1997 which compares unfavorably to $67,000 net income for the year ended December 31, 1996. Other Real Estate (Income) Expense, Net of $67,000 net income for the year ended December 31, 1996 increased $174,000 or 162.6% compared to $107,000 net expense for the year ended December 31, 1995. The net improvement for year ended December 31, 1996 is primarily attributable to net reduction in Other Real Estate owned and a net gain on the sale of foreclosed properties. Management is actively seeking buyers for all Other Real Estate. The Intangible Asset Amortization expense of $2.3 million for the year ended December 31, 1997 increased $659,000 or 41.4% compared to $1.6 million for the year ended December 31, 1996 and increased $1.3 million or 393.2% compared to $323,000 for the year ended December 31, 1995. The increase in Intangible Asset Amortization expense was due to the amortization of goodwill and core deposit premium associated with the Mergers. An impairment loss of $630,000 was recorded during the three months ended June 30, 1997 to reflect the impairment of an existing bank building. Construction of a new bank building in McAllen, Texas is in progress. The new bank building will be the headquarters for Texas State Bank and Texas Regional Bancshares, Inc. and is being constructed next to Texas State Bank main banking facility. Upon completion of the new bank building, the existing building will be razed to make room for parking. The amount of the impairment loss was the book value of the building at June 30, 1997. Other Noninterest Expense $8.4 million for the year ended December 31, 1997 increased $1.0 million or 13.6% compared to $7.4 for the year ended December 31, 1996 and Other Noninterest Expense of $7.4 million for the year ended December 31, 1996 increased $1.5 million or 25.8% compared to $5.9 million for the year ended December 31, 1995. The increase in Other Noninterest Expense for 1997 and 1996 was primarily attributable to an increased volume of business, primarily due to the Mergers. All Other Noninterest Expense categories, not previously discussed, reflect a net increase for year ended December 31, 1997 compared to the year ended December 31, 1996 and was attributable to an increased volume of business, primarily due to the Mergers. A detailed summary of noninterest expense during the last three years is presented in the following table:
Noninterest Expense % % Years Ended December 31, Change From Change From (Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995 - --------------------------------------------------------------------------------------------- Salaries and Wages $12,459 12.9% $ 11,033 45.1% $ 7,605 Employee Benefits 2,892 0.4 2,881 47.1 1,958 - --------------------------------------------------------------------------------------------- Total Salaries and Employee Benefits 15,351 10.3 13,914 45.5 9,563 - --------------------------------------------------------------------------------------------- Net Occupancy Expense 2,342 20.0 1,951 82.5 1,069 - --------------------------------------------------------------------------------------------- Equipment Expense 3,506 10.8 3,165 56.1 2,028 - --------------------------------------------------------------------------------------------- Other Real Estate (Income) Expense, Net Rent Income (61) (43.0) (107) (36.4) (146) (Gain) Loss on Sale (113) (44.3) (203) (686.7) 3 Expenses 262 31.0 200 52.7 131 Write-Downs 24 (44.2) 43 (63.9) 119 - --------------------------------------------------------------------------------------------- Total Other Real Estate (Income) Expense, Net 112 (267.2) (67) (162.6) 107 - --------------------------------------------------------------------------------------------- Intangible Asset Amortization 2,252 41.4 1,593 393.2 323 - --------------------------------------------------------------------------------------------- Impairment Loss 630 * - * - - --------------------------------------------------------------------------------------------- Other Noninterest Expense Advertising and Public Relations 1,277 6.7 1,197 55.1 772 Data Processing and Check Clearing 845 (10.3) 942 91.9 491 Director Fees 333 (2.9) 343 20.8 284 Franchise Tax 496 102.5 245 23.7 198 Insurance 288 47.7 195 (14.5) 228 FDIC Insurance 138 * 3 (99.4) 540 Legal 958 39.0 689 55.2 444 Professional Fees 637 8.0 590 38.5 426 Postage, Delivery and Freight 594 28.3 463 43.3 323 Stationery and Supplies 951 4.9 907 37.8 658 Telephone 381 10.1 346 38.4 250 Other Losses 521 (16.9) 627 0.5 624 Miscellaneous Expense 991 15.4 859 32.3 649 - --------------------------------------------------------------------------------------------- Total Other Noninterest Expense 8,410 13.6 7,406 25.8 5,887 - --------------------------------------------------------------------------------------------- Total $32,603 16.6% $27,962 47.3% $18,977 =============================================================================================
* Not meaningful. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides the following postretirement benefits: (i) the benefits provided under the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401 (K) provisions), (ii) a nonqualified deferred compensation plan for the benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive Officer, (iii) as a result of the consummation of the Mergers, the Company acquired four existing separate nonqualified deferred compensation plans for the benefit of certain employees of the Mission and Hidalgo banks and (iv) medical insurance is also provided on a selected basis. INCOME TAX The Company recorded income tax expense of $11.0 million for the year ended December 31, 1997 compared to $7.9 million for the year ended December 31, 1996. The increase in income tax expense for the year ended December 31, 1997 is due primarily to an increased level of pretax income during the year ended December 31, 1997. NET INCOME Net income was $21.4 million, $16.4 million and $8.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET COMPOSITION The Company continues to experience growth in total assets, deposits and loans attributable in the opinion of management, to the Mergers and in part to the vitality of the Rio Grande Valley economy. The effects of NAFTA and the continued devaluation of the Mexican peso relative to the U.S. dollar have increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management does not believe that the on-going Mexican financial problems will materially affect the Company's growth and earnings prospects. Average interest-earning assets of $1.2 billion increased $264.5 million or 29.2% for the year ended December 31, 1997 compared to $906.7 million for the year ended December 31, 1996 and increased $385.6 million or 74.0% compared to $521.1 million for the year ended December 31, 1995. Average loans increased $192.7 million or 31.1% to $812.3 million for the year ended December 31, 1997 compared to December 31, 1996 levels of $619.6 million, while average investment securities of $333.3 million increased $75.0 million or 29.0% for the year ended December 31, 1997 compared to December 31, 1996 levels of $258.3 million. Total average assets increased $281.0 million or 27.9% to $1.3 billion for the year ended December 31, 1997 compared to December 31, 1996 levels and $430.2 million or 74.4% to $1.0 billion for the year ended December 31, 1996 compared to December 31, 1995 levels of $577.9 million. Average interest-bearing deposits increased $233.4 million or 31.3% to $979.7 million for the year ended December 31, 1997 compared to the year ended December 31, 1996 levels of $746.3 million. Demand deposits also increased $19.0 million or 12.6% for the year ended December 31, 1997 to $169.8 million compared to the year ended December 31, 1996 levels of $150.8 million. The following table presents the Company's average balance sheets during the last three years: Average Balance Sheets Years Ended December 31, (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Assets Loans $ 812,276 $ 619,581 $370,274 Investment Securities Taxable 308,787 231,844 126,086 Tax-Exempt 24,524 26,451 4,907 Federal Funds Sold 25,584 28,793 19,807 - ------------------------------------------------------------------------------- Total Interest-Earning Assets 1,171,171 906,669 521,074 Cash and Due From Banks 48,726 43,785 31,151 Bank Premises and Equipment, Net 40,552 29,866 16,365 Other Assets 48,048 35,943 13,507 Allowance for Loan Losses (10,351) (8,138) (4,158) - ------------------------------------------------------------------------------- Total $1,289,146 $1,008,125 $577,939 =============================================================================== Liabilities Demand Deposits Commercial and Individual $ 163,792 $ 144,777 $ 96,773 Public Funds 6,007 6,002 7,069 - ------------------------------------------------------------------------------- Total Demand Deposits 169,799 150,779 103,842 - ------------------------------------------------------------------------------- Savings Commercial and Individual 89,061 74,788 30,748 Public Funds 668 572 612 Money Market Checking and Savings Commercial and Individual 182,935 157,624 101,881 Public Funds 41,241 48,083 27,131 Time Deposits Commercial and Individual 537,488 406,645 232,966 Public Funds 128,293 58,617 16,201 - ------------------------------------------------------------------------------- Total Interest-Bearing Deposits 979,686 746,329 409,539 - ------------------------------------------------------------------------------- Total Deposits 1,149,485 897,108 513,381 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 980 507 1,093 Short-Term Borrowings - - 232 Other Liabilities 10,575 8,831 3,835 Shareholders' Equity 137,106 101,679 59,398 - ------------------------------------------------------------------------------- Total $1,298,146 $1,008,125 $577,939 =============================================================================== CASH AND DUE FROM BANKS Texas State Bank, through its main office and branches, offers a broad range of commercial banking services to individuals and businesses in its service area. Texas State Bank also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations and other correspondent services. The amount of cash and due from banks held on any one day is significantly influenced by temporary changes in cash items in process of collection. At December 31, 1997, cash and due from banks was $54.0 million. INVESTMENT SECURITIES Investment securities consist of U. S. Treasury, federal agency, state, county and municipal securities, mortgage-backed, corporate debt and equity securities. The Bank classifies debt and equity securities into one of three categories: Held to Maturity, Trading or Available for Sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as Held to Maturity and measured at amortized cost in the consolidated balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as Trading and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses included in earnings. Investments not classified as either Held to Maturity or Trading are classified as Available for Sale and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses reported in a separate component of shareholders' equity net of applicable income taxes until realized. At December 31, 1997, 1996 and 1995, no securities were classified as Trading. The Company does not currently engage in trading activities or use derivative instruments to control rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. The following table presents estimated market value of Securities Available for Sale at December 31, 1997, 1996 and 1995:
Securities Available for Sale % Change From % Change From (Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995 - --------------------------------------------------------------------------------------------- U.S. Treasury $ 7,002 (22.0)% $ 8,973 49.3% $ 6,012 U.S. Government Agency 269,562 70.9 157,705 183.3 55,668 Mortgage-Backed 15,561 * 92 * - States and Political Subdivisions 20,898 (8.4) 22,811 * - Other 2,701 (0.7) 2,720 85.0 1,470 - --------------------------------------------------------------------------------------------- Total $315,724 64.2% $192,301 204.5% $63,150 =============================================================================================
* Not meaningful. The following table presents the maturities, amortized cost, estimated market value and weighted average yields of the Securities Available for Sale at December 31, 1997:
Amortized Cost(1) Maturing ------------------------------------------ After One After Five Estimated Securities Available for Sale One Year Through Through After Amortized Market (Dollars in Thousands) Or Less Five Years Ten Years Ten Years Cost(1) Value - --------------------------------------------------------------------------------------------- U.S. Treasury $ - $ 6,976 $ - $ - $ 6,976 $ 7,002 U.S. Government Agency 30,592 156,201 82,358 - 269,151 269,562 Mortgage-Backed 66 - - 15,483 15,549 15,561 States and Political Subdivisions 581 1,381 14,371 3,594 19,927 20,898 Other - 25 75 2,592 2,692 2,701 - --------------------------------------------------------------------------------------------- Total $31,239 $164,583 $96,804 $21,669 $314,295 $315,724 ============================================================================================= Weighted Average Yields (Taxable-Equivalent Basis) - --------------------------------------------------------------------------------------------- U.S. Treasury -% 5.94% -% -% 5.94% U.S. Government Agency 5.67 6.47 6.84 - 6.49 Mortgage-Backed 8.50 8.50 - 6.60 8.50 States and Political Subdivisions 8.12 8.39 7.67 8.36 7.86 Other - 7.50 7.67 5.97 6.03 Total 5.97 6.59 7.01 6.83 6.57 =============================================================================================
(1) Amortized cost for Securities Available for Sale is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discounts received. The following table presents amortized cost of Securities Held to Maturity at December 31, 1997, 1996 and 1995:
Securities Held to Maturity % Change From % Change From (Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995 - --------------------------------------------------------------------------------------------- U.S. Treasury $15,953 (58.2)% $ 38,160 32.6% $28,787 U.S. Government Agency 29,941 (63.0) 81,003 136.6 34,230 States and Political Subdivisions 5,641 (15.5) 6,672 21.9 5,474 - --------------------------------------------------------------------------------------------- Total $51,535 (59.0)% $125,835 83.7% $68,491 =============================================================================================
All investments in states and political subdivisions are investments in entities within the State of Texas. No single issuer accounted for as much as 10.0% of total shareholders' equity at December 31, 1997. Of the obligations of states and political subdivisions held by the Company at December 31, 1997, 68.7% were rated A or better by Moody's Investor Services, Inc. and 94.1% of the non-rated issues or $5.1 million are local issues purchased in private placement transactions. The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Held to Maturity at December 31, 1997:
Amortized Cost (1) Maturing ------------------------------------------ After One After Five Estimated Securities Held to Maturity One Year Through Through After Amortized Market (Dollars in Thousands) Or Less Five Years Ten Years en Years Cost(1) Value - --------------------------------------------------------------------------------------------- U.S. Treasury $ 5,924 $10,029 $ - $ - $15,953 $ 16,182 U.S. Government Agency 9,988 19,953 - - 29,941 30,062 States and Political Subdivisions 1,142 2,657 1,742 100 5,641 5,792 - --------------------------------------------------------------------------------------------- Total $17,054 $32,639 $ 1,742 $ 100 $51,535 $ 52,036 ============================================================================================= Weighted Average Yields (Taxable-Equivalent Basis) - --------------------------------------------------------------------------------------------- U.S. Treasury 6.56% 6.63% -% -% 6.60% U.S. Government Agency 6.24 7.45 - - 7.05 States and Political Subdivisions 7.58 7.75 9.52 10.29 8.31 Total 6.44 7.22 9.52 10.29 7.05 =============================================================================================
(1) Amortized cost for Securities Held to Maturity is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discount received. LOANS The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and risk products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continues to refine the Company's credit policies and procedures to address the risks in the current and prospective environment and to reflect management's current strategic focus. The credit process is controlled with continuous credit review and analysis, and by review by internal and external auditors and regulatory authorities. The Company's loans are widely diversified by borrower and industry group. The Company has collateral management policies in place so that collateral lending of all types is approached on a basis consistent with safe and sound standards. Valuation analysis is utilized to take into consideration the potentially adverse economic conditions under which liquidation could occur. Collateral accepted against the commercial loan portfolio includes accounts receivable and inventory, marketable securities, equipment and agricultural products. Autos, deeds of trust, life insurance and marketable securities are accepted as collateral for the installment loan portfolio. Management of the Company believes that the Company has benefited from increased loan demand due to passage of the North American Free Trade Agreement ("NAFTA") and the strong population growth in the Rio Grande Valley. The effects of NAFTA and the continued devaluation of the Mexican peso relative to the U.S. dollar have increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management believes the on-going Mexican financial problems will not have a material adverse effect on the Company's growth and earnings prospects, in part because the Company presently has a low percentage of loans secured by Mexican assets or that otherwise rely on collateral located in Mexico. The extension of credits denominated in a currency other than that of the country in which a borrower is located are called "cross-border" credits. With the completion of the Mergers, the Company has acquired some dollar-denominated cross-border credits to individuals or companies that are residents of, or domiciled in Mexico. The Company's total cross-border credits at December 31, 1997 of $7.7 million were less than 0.9% of total loans. See "Nonperforming Assets" for additional information on cross-border credits. Total loans of $886.9 million for the year ended December 31, 1997 increased $129.2 million or 17.1% compared to the year ended December 31, 1996 levels of $757.7 million and increased $306.8 million or 68.0% for the year ended December 31, 1996 compared to levels of $450.9 million at December 31, 1995. The increase in total loans for the year ended December 31, 1997 reflects growth in all loan categories except Commercial Tax-Exempt loans and is representative in part to the vitality of the Rio Grande Valley economy. The increase in total loans for the year ended December 31, 1996 is primarily attributable to the Mergers. A substantial portion of the increase in loans classified as Real Estate-Commercial Mortgage loans consists of loans secured by real estate and other assets to commercial customers. The following table presents the composition of the loan portfolio at the end of each of the last five years: Loan Portfolio Composition December 31, (Dollars in Thousands) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Commercial $230,024 $198,752 $112,042 $101,866 $ 91,697 Commercial Tax-Exempt 29,024 34,777 34,419 - - - -------------------------------------------------------------------------------- Total Commercial Loans 259,048 233,529 146,461 101,866 91,697 - -------------------------------------------------------------------------------- Agricultural 51,214 32,639 25,097 17,199 13,829 - -------------------------------------------------------------------------------- Real Estate Construction 67,872 47,400 29,967 18,809 11,846 Commercial Mortgage 287,204 243,198 129,953 113,677 98,635 Agricultural Mortgage 31,001 28,803 17,057 10,263 5,153 1-4 Family Mortgage 105,852 100,301 59,052 47,425 42,647 - -------------------------------------------------------------------------------- Total Real Estate 491,929 419,702 236,029 190,174 158,281 - -------------------------------------------------------------------------------- Consumer 84,663 71,786 43,267 30,700 26,693 - -------------------------------------------------------------------------------- Total Loans $886,854 $757,656 $450,854 $339,939 $290,500 ================================================================================ The contractual maturity schedule of the loan portfolio at December 31, 1997 is presented in the following table: Loan Maturities One After One Year After December 31, 1997 Year Through Five (Dollars in Thousands) Or Less Five Years Years Total - ------------------------------------------------------------------------------- Commercial $114,832 $ 94,080 $ 21,112 $230,024 Commercial Tax-Exempt 4,061 24,246 717 29,024 Agricultural 44,067 6,810 337 51,214 Real Estate Construction 55,143 10,646 2,083 67,872 Commercial Mortgage 47,021 182,489 57,694 287,204 Agricultural Mortgage 2,662 21,057 7,282 31,001 1-4 Family Mortgage 19,263 83,165 3,424 105,852 Consumer 32,892 51,436 335 84,663 - ------------------------------------------------------------------------------- Total $319,941 $473,929 $ 92,984 $886,854 =============================================================================== Variable-Rate Loans $142,224 $209,189 $ 70,262 $421,675 Fixed-Rate Loans 177,717 264,740 22,722 465,179 - ------------------------------------------------------------------------------- Total $319,941 $473,929 $ 92,984 $886,854 =============================================================================== As shown in the preceding table, loans maturing within one year totaled $319.9 million at year-end 1997. The Company's policy on maturity extensions and rollovers is based on management's assessment of individual loans. Approvals for the extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless the loans are fully secured and properly margined by cash or marketable securities, or are revolving lines subject to annual analysis and renewal. NONPERFORMING ASSETS The Bank has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends. Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. Nonaccrual loans of $7.8 at December 31, 1997 increased $1.4 million or 21.1% compared to $6.4 million at December 31, 1996 and nonaccrual loans at December 31, 1996 of $6.4 million increased $4.4 million or 208.1% compared to $2.1 million at December 31, 1995. The increase in nonaccrual loans during 1997 are due to several diverse credits secured primarily by real estate. The increase in nonaccrual loans during 1996 were primarily attributable to three cross-border credits totaling $3.4 million. The cross-border nonaccrual credits at December 31, 1997 of $2.9 million reflect a decrease of $500,000 when compared to the $3.4 million at December 31, 1996. The decrease in cross-border nonaccrual credits is a result of loan collections. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more for the years ended December 31, 1997, 1996 and 1995 that are not classified as nonaccrual totaled $3.0 million, $4.1 million and $642,000, respectively. The decrease in accruing loans past due 90 days or more at December 31, 1997 as compared to the year ended December 31, 1996 is partly attributable to loan collections. Nonperforming Assets of $11.0 million at December 31, 1997 increased $3.6 million or 48.4% compared to December 31, 1996 levels of $7.4 million and increased $3.8 million or 106.0% compared to December 31, 1995 levels of $3.6 million. The increase in Foreclosed Assets during 1997 was primarily attributable to a higher foreclosure rate of loans with real estate collateral, net of write-downs and liquidations. Management actively seeks buyers for all Other Real Estate. See "Noninterest Expense" above. The ratio of Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a percent of Total Loans and Foreclosed Assets at December 31, 1997 increased to 1.57% from 1.51% at December 31, 1996 due primarily to the increase in foreclosed assets. The Company's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. The Company identifies loans to be reported as impaired when such loans are in nonaccrual status or are considered troubled debt restructurings due to the granting of a below-market rate of interest or a partial forgiveness of indebtedness on an existing loan. Impairment of loans having recorded investments of $7.8 million at December 31, 1997 and $6.4 million at December 31, 1996 has been recognized in conformity with Statement 114, as amended by Statement 118. The average recorded investment in impaired loans during 1997 and 1996 was $8.1 million and $4.8 million, respectively. The total allowance for loan losses related to these loans was $786,000 and $506,000 on December 31, 1997 and 1996, respectively. Interest income on impaired loans of $178,000 and $532,000 was recognized for cash payments received in 1997 and 1996, respectively. An analysis of the components of nonperforming assets for the last five years is presented in the following table:
Nonperforming Assets December 31, (Dollars in Thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------- Nonaccrual Loans $ 7,802 $ 6,445 $2,092 $2,435 $2,305 Renegotiated Loans - 1 6 13 47 - --------------------------------------------------------------------------------------------- Nonperforming Loans 7,802 6,446 2,098 2,448 2,352 Foreclosed Assets 3,169 945 1,489 2,364 2,598 - --------------------------------------------------------------------------------------------- Total Nonperforming Assets 10,971 7,391 3,587 4,812 4,950 Accruing Loans 90 Days or More Past Due 3,041 4,089 642 226 439 - --------------------------------------------------------------------------------------------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due $14,012 $11,480 $4,229 $5,038 $5,389 ============================================================================================= Nonperforming Loans as a % of Total Loans 0.88% 0.85% 0.47% 0.72% 0.81% Nonperforming Assets as a % of Total Loans and Foreclosed Assets 1.23 0.97 0.79 1.41 1.69 Nonperforming Assets as a % of Total Assets 0.79 0.60 0.55 0.90 1.05 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Foreclosed Assets 1.57 1.51 0.94 1.47 1.84 =============================================================================================
Interest income that would have been recorded for the year ended December 31, 1997 on nonaccrual and renegotiated loans had such loans performed in accordance with their original contractual terms and been outstanding throughout the year ended December 31, 1997, or since origination, if held for only part of that year, was approximately $1.2 million. For the year ended December 31, 1997, the amount of interest income actually recorded on nonaccrual and renegotiated loans was approximately $552,000. Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at December 31, 1997, all such loans had been identified and included in the nonaccrual, renegotiated or 90 days past due loan totals reflected in the table above. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged-off. In addition, the loan review committee of the Bank reviews the assessments of management in determining the adequacy of the Bank's allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at year ended December 31, 1997 was $10.5 million, which represents a net increase of $487,000 or 4.9% as compared to $10.0 million at December 31, 1996. Management believes that the allowance for loan losses at December 31, 1997 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. The following table summarizes the activity in the allowance for loan losses for the last five years:
Allowance for Loan Loss Activity Years Ended December 31, (Dollars in Thousands) 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------- Balance at Beginning of Year $10,031 $4,542 $3,511 $3,435 $2,929 Balance from Acquisitions - 4,647 450 - - Provision for Loan Losses 2,817 2,120 1,685 1,085 392 Charge-Offs Commercial 1,731 883 813 169 64 Agricultural 477 158 416 781 - Real Estate 59 82 111 153 89 Consumer 797 659 300 132 93 - --------------------------------------------------------------------------------------------- Total Charge-Offs 3,064 1,782 1,640 1,235 246 - --------------------------------------------------------------------------------------------- Recoveries Commercial 124 160 401 163 113 Agricultural 48 - 66 4 13 Real Estate 350 161 4 10 128 Consumer 212 183 65 49 106 - --------------------------------------------------------------------------------------------- Total Recoveries 734 504 536 226 360 - --------------------------------------------------------------------------------------------- Net Charge-Offs (Recoveries) 2,330 1,278 1,104 1,009 (114) - --------------------------------------------------------------------------------------------- Balance at End of Year $10,518 $10,031 $4,542 $3,511 $3,435 ============================================================================================= Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount 1.19% 1.32% 1.01% 1.03% 1.18% Ratio of Allowance for Loan Losses to Nonperforming Assets 95.87 135.72 126.62 72.96 69.39 Ratio of Net Charge-Offs (Recoveries) to Average Total Loans Outstanding, Net of Unearned Discount 0.29 0.21 0.30 0.33 (0.04) =============================================================================================
The allocation of the allowance for loan losses by loan category and the percentage of loans in each category to total loans at the end of each of the last five years is presented in the table below:
1997 1996 1995 1994 1993 Allocation of the -------------- --------------- --------------- -------------- ------------- Allowance for % of Loans % of Loans % of Loans % of Loans % of Loans Loan Losses in Each in Each in Each in Each in Each December 31, Category Category Category Category Category (Dollars in of Total of Total of Total of Total of Total Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans - --------------------------------------------------------------------------------------------- Commercial $ 2,489 29.2% $ 2,102 30.8% $ 965 32.5% $1,057 30.0% $1,348 31.6% Agricultural 1,329 5.8 391 4.3 304 5.6 478 5.1 138 4.7 Real Estate 5,242 55.5 5,663 55.4 2,401 52.3 1,644 55.9 1,705 54.5 Consumer 491 9.5 432 9.5 296 9.6 257 9.0 215 9.2 Unallocated 967 - 1,443 - 576 - 75 - 29 - - --------------------------------------------------------------------------------------------- Total $10,518 100.0% $10,031 100.0% $4,542 100.0% $3,511 100.0% $3,435 100.0% =============================================================================================
PREMISES AND EQUIPMENT Premises and equipment of $49.3 million at December 31, 1997 increased $12.2 million or 33.0% compared to $37.1 million at December 31, 1996 in addition to a net increase of $18.7 million or 107.7% for December 31, 1996 compared to $18.4 million at December 31, 1995. The net increase for the year ended December 31, 1997 was primarily attributable to $9.2 million for construction in progress of the Company's new headquarters in McAllen. As previously reported the Company's new headquarters is approximately 187,000 square feet at a cost of approximately $18.5 million. The Bank will occupy approximately 110,000 square feet, leaving approximately 77,000 square feet available for prospective tenants. Completion of the building is expected by mid-1998. The net increase for the year ended December 31, 1996 was primarily attributable to the Mergers. INTANGIBLES Intangibles of $24.1 million at December 31, 1997 decreased $2.3 million or 8.6% compared to $26.3 million at December 31, 1996 and increased $20.6 million or 360.8% for December 31, 1996 compared to $3.7 million at December 31, 1995. The decrease in 1997 was due to amortization of existing intangibles. The net increase for the year ended December 31, 1996 is attributable to the intangibles recorded as a result of the Mergers. DEPOSITS Total deposits of $1.2 billion at December 31, 1997 increased $145.3 million or 13.3% compared to December 31, 1996 levels of $1.1 billion and total deposits of $1.1 billion for the year ended December 31, 1996 increased $512.0 million or 88.3% compared to December 31, 1995 levels of $579.7 million. The increase in total deposits for the year ended December 31, 1997 is attributable in part to the vitality of the Rio Grande Valley economy. The increase in total deposits at December 31, 1996 compared to December 31, 1995 is primarily attributable to the Mergers. Total noninterest-bearing deposits of $184.5 million for the year ended December 31, 1997 represented an increase of $15.8 million or 9.4% compared to the year ended December 31, 1996 and increased $48.3 million or 40.1% for the year ended December 31, 1996 compared to the year ended December 31, 1995. Total public funds deposits (consisting of Public Funds Demand Deposits, Savings, Money Market Checking and Savings and Time Deposits) of $205.4 million for the year ended December 31, 1997 increased $42.2 million or 25.9% compared to December 31, 1996 levels of $163.2 million. The Bank actively seeks consumer and commercial deposits, including deposits from correspondent banks and public funds deposits. The following table presents the composition of total deposits at the end of the last three years:
Total Deposits December 31, % Change From % Change From (Dollars in Thousands) 1997 Prior Year 1996 Prior Year 1995 - --------------------------------------------------------------------------------------------- Demand Deposits Commercial and Individual $ 180,467 11.0% $ 162,650 43.5% $113,345 Public Funds 4,054 (33.3) 6,078 (14.0) 7,069 - --------------------------------------------------------------------------------------------- Total Demand Deposits 184,521 9.4 168,728 40.1 120,414 - --------------------------------------------------------------------------------------------- Interest-Bearing Deposits Savings Commercial and Individual 89,231 (5.2) 94,114 165.0 35,521 Public Funds 771 4.5 738 20.6 612 Money Market Checking and Savings Commercial and Individual 186,576 2.8 181,495 72.2 105,409 Public Funds 39,523 (26.0) 53,432 139.8 22,278 Time Deposits Commercial and Individual 575,299 17.3 490,294 71.7 285,545 Public Funds 161,076 56.5 102,934 * 9,952 - --------------------------------------------------------------------------------------------- Total Interest-Bearing Deposits 1,052,476 14.0 923,007 101.0 459,317 - --------------------------------------------------------------------------------------------- Total Deposits $1,236,997 13.3% $1,091,735 88.3% $579,731 ============================================================================================= Weighted Average Rate on Interest-Bearing Deposits 4.70% 4.45% 4.39% =============================================================================================
* Not meaningful Time deposits of $100,000 or more are solicited from markets served by the Bank and are not sought through brokered sources. Time deposits continue to be a significant source of funds. The following table presents the maturities of time deposits of $100,000 or more as of December 31, 1997 and 1996:
Maturities of Time Deposits of $100,000 or More December 31, (Dollars in Thousands) 1997 1996 - ----------------------------------------------------------------------------------------- Three Months or Less $211,408 $180,868 After Three through Six Months 96,952 56,980 After Six through Twelve Months 64,657 47,093 After Twelve Months 60,247 51,510 - ----------------------------------------------------------------------------------------- Total $433,264 $336,451 ========================================================================================= Weighted Average Rate on Time Deposits of $100,000 or More 5.55% 5.43% =========================================================================================
Mexico is a part of the trade territory of the Company and foreign deposits from Mexican sources have traditionally been a source of funding. In December 1995, the Mexican government announced a 20% devaluation of the Mexican peso relative to the United States dollar, and the Mexican peso has since continued to decline relative to the dollar. The Company does not anticipate any negative impact on foreign deposits due to these recent devaluations of the peso. The increase in foreign deposits is primarily attributable to Mexican deposits obtained with the Mergers during 1996. The following table presents foreign deposits, primarily from Mexican sources, as of December 31, 1997 and 1996: Foreign Deposits December 31, (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Demand Deposits $ 6,975 $ 6,366 - ------------------------------------------------------------------------------- Interest-Bearing Deposits Savings 18,542 17,894 Money Market Checking and Savings 19,607 20,727 Time Deposits Under $100,000 45,869 42,296 Time Deposits of $100,000 or more 82,038 78,111 - ------------------------------------------------------------------------------- Total Interest-Bearing Deposits 166,056 159,028 - ------------------------------------------------------------------------------- Total Foreign Deposits $173,031 $165,394 =============================================================================== Percentage of Total Deposits 14.0% 15.1% =============================================================================== Weighted Average Rate on Foreign Deposits 4.81% 4.64% =============================================================================== LIQUIDITY Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew and acquire additional deposit liabilities is a major source of liquidity. The Company's principal sources of funds are primarily within the local markets of the Bank and consist of deposits, interest and principal payments on loans and investment securities, sales of loans and investment securities and borrowings. See previous discussion regarding the maturity dates for "Loans," "Investment Securities" and "Deposits." Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. These include cash, federal funds sold and U.S. Government-backed securities. At December 31, 1997, the Company's liquidity ratio, defined as cash, U.S. Government-backed securities and federal funds sold as a percentage of deposits, was 31.9% compared to 32.3% at December 31, 1996 and compared to 27.5% at December 31, 1995. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. These sources of liquidity are short-term in nature and are used, as necessary, to fund asset growth and meet short-term liquidity needs. During 1997, funds for $269.4 million of investment purchases and $135.7 million of net loan growth came from various sources, including a net increase in deposits of $145.3 million, $106.0 million in proceeds from sale of investment securities, $115.7 million in proceeds from maturing investment securities and $21.4 million of net income. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the Federal Reserve Board and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically undercapitalized." The classifications are generally determined by applicable ratios of the institution, including Tier I capital to risk-weighted assets, total capital to risk-weighted assets and leverage ratios. Based on Texas State Bank's capital ratios as of December 31, 1997, Texas State Bank was classified as "well capitalized" under the applicable regulations. As a result, the Company does not believe that the prompt corrective action regulations have any material effect on the activities or operations of the Company or Texas State Bank. The Corporation is dependent on dividend and interest income from the Bank and the sale of stock for its liquidity. Applicable Federal Reserve Board regulations provide that bank holding companies are permitted by regulatory authorities to pay cash dividends on their common or preferred stock if consolidated earnings and consolidated capital are within regulatory guidelines and the Bank is classified as "well capitalized" for purposes of FDICIA. The principal sources of liquidity for the Corporation during 1997 were interest income of $452,000 from the Bank. The funds received were used primarily to pay expenses. The funds management policy of the Company is to maintain a reasonably balanced position of rate sensitive assets and liabilities to avoid adverse changes in net interest income. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. Rate sensitive liabilities maturing within one year exceeded rate sensitive assets with comparable maturities at December 31, 1997 by $287.7 million. Management monitors the rate sensitivity GAP on a regular basis and takes steps when appropriate to improve the sensitivity. The cumulative rate sensitive GAP to Total Assets at a period of twelve months or less was (20.6)% at December 31, 1997. The following table summarizes interest rate sensitive assets and liabilities by their repricing dates at December 31, 1997:
Interest Rate Sensitivity Analysis December 31, 1997 0-3 4-6 7-12 1-5 Over (Dollars in Thousands) Months Months Months Years 5 Years Total - --------------------------------------------------------------------------------------------- Loans $ 471,779 $ 34,186 $ 74,391 $283,756 $ 22,742 $ 886,854 Investment Securities Available for Sale 27,684 1,003 2,547 165,116 119,374 315,724 Held to Maturity 1,012 9,988 6,054 32,639 1,842 51,535 Federal Funds Sold 2,700 - - - - 2,700 - --------------------------------------------------------------------------------------------- Total Interest-Earning Assets 503,175 45,177 82,992 481,511 143,958 1,256,813 - --------------------------------------------------------------------------------------------- Savings 90,002 - - - - 90,002 Money Market Checking and Savings Accounts 226,099 - - - - 226,099 Time Deposits 315,255 162,063 123,816 134,866 375 736,375 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,801 - - - - 1,801 - --------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 633,157 162,063 123,816 134,866 375 1,054,277 - --------------------------------------------------------------------------------------------- Rate Sensitivity GAP(1) $(129,982) $(116,886) $ (40,824) $346,645 $143,583 $ 202,536 ============================================================================================= Cumulative Rate Sensitivity GAP $(129,982) $(246,868) $(287,692) $ 58,953 $202,536 ============================================================================================= Ratio of Cumulative Rate Sensitivity GAP to Total Assets (9.31)% (17.69)% (20.61)% Ratio of Cumulative Rate Sensitive Interest-Earning Assets to Cumulative Rate Sensitive Interest-Bearing Liabilities 79.5:1 69.0:1 68.7:1 =============================================================================================
(1) Rate sensitive interest-earning assets less rate sensitive interest-bearing liabilities. Gap analysis is the simplest representation of the Company's interest rate sensitivity. However, it cannot reveal the impact of factors such as administered rates (e.g., the prime lending rate), pricing strategies on consumer and business deposits, changes in balance sheet mix, or the effect of various options embedded in balance sheet instruments. Accordingly, the Funds Management Committee conducts simulations of net interest income under a variety of market interest rate scenarios. These simulations which consider forecasted balances sheet changes, and forecasted changes in interest rate spreads provide the Committee with an estimate of earnings at risk for given changes in interest rates. At December 31, 1997, based on these simulations, earnings at risk to an immediate 100 basis points rise in market interest rates was estimated to be less than 4.5 percent of projected 1998 after-tax net income. An immediate 100 basis point rise in interest rates is hypothetical rate scenario, used to calibrate risk, and does not necessarily represent management's current view of future market developments. All the measurements of risk described above are made based upon the Company's business mix and interest rate exposures at the particular point in time. The exposures change continuously as a result of the Corporation's ongoing business and its risk management initiatives. While management believes these measures provide a meaningful representation of the Company's interest rate sensitivity, they do not necessarily take in account all business developments that have an effect on net income, such as changes in credit quality or the size and composition of the balance sheet. The Company does not currently engage in trading activities or use derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments of maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. CAPITAL RESOURCES Shareholders' equity of $145.7 million for the year ended December 31, 1997 reflects a net increase of approximately $17.5 million or 13.7% compared to shareholders' equity of $128.1 million for the year ended December 31, 1996. This net increase was primarily attributable to the earnings for 1997. The risk-based capital standards as established by the Federal Reserve Board of Governors apply to Texas Regional and Texas State Bank. The numerator of the risk-based capital ratio for bank holding companies includes Tier I capital, consisting of common shareholders' equity and qualifying cumulative and noncumulative perpetual preferred stock; and Tier II capital, consisting of other preferred stock, reserve for possible loan losses and certain subordinated and term-debt securities. Goodwill is deducted from Tier I capital. At no time is Tier II capital allowed to exceed Tier I capital in the calculation of total capital. The denominator or asset portion of the risk-based ratio aggregates generic classes of balance sheet and off-balance sheet exposures, each weighted by one of four factors, ranging from 0% to 100%, based on the relative risk of the exposure class. Ratio targets are set for both Tier I and total capital (Tier I plus Tier II capital). The minimum level of Tier I capital to total assets is 4.0% and the minimum total capital ratio is 8.0%. The Federal Reserve Board has guidelines for a leverage ratio that is designed as an additional evaluation of capital adequacy of banks and bank holding companies. The leverage ratio is defined to be the company's Tier I capital divided by its quarterly average total assets less goodwill and other intangible assets. An insured depository institution is "well capitalized" for purposes of FDICIA if its Total Capital Ratio is equal to or greater than 10.0%, Tier I Capital Ratio is equal to or greater than 6.0%, and Leverage Capital Ratio is equal to or greater than 5.0%. The Company's Tier I Capital Ratio was approximately 13.01% and 13.17% as of December 31, 1997 and 1996, respectively. The Company's Total Capital Ratio was approximately 14.14% and 14.44% as of December 31, 1997 and 1996, respectively. The Company's Leverage Capital Ratio was 9.01% and 8.45% at December 31, 1997 and 1996, respectively. Based on capital ratios, the Company is within the definition of "well capitalized" for Federal Reserve purposes as of December 31, 1997. The following table presents the Company's risk-based capital calculation: Risk-Based Capital December 31, (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Total Shareholders' Equity before unrealized gains or losses on Securities Available for Sale $144,732 $127,628 Less Goodwill and Other Deductions (24,001) (26,251) - ------------------------------------------------------------------------------- Total Tier I Capital 120,731 101,377 Total Tier II Capital 10,518 9,732 - ------------------------------------------------------------------------------- Total Qualifying Capital $131,249 $111,109 =============================================================================== Risk Adjusted Assets (Including Off-Balance Sheet Exposure) $928,342 $769,574 =============================================================================== Tier I Capital Ratio 13.01% 13.17% Total Capital Ratio 14.14 14.44 Leverage Capital Ratio 9.01 8.45 =============================================================================== CURRENT ACCOUNTING ISSUES In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, ("Statement 125") "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In December 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 127, ("Statement 127") "Deferral of the Effective Date of Certain Provisions of FASB No. 125." Statement 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is to be applied prospectively. Statement 127 defers for a year the effective date for all transfers of financial assets for repurchase agreements, dollar rolls, securities lending and similar transactions. Statement 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of Statement 125 did not have a material impact on the Company's financial position, results of operations, or liquidity. Management of the Company does not expect that adoption of Statement 127 will have a material impact on the Company's financial position, results of operation, or liquidity. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, ("Statement 128") "Earnings per Share." Statement 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 replaces primary EPS and fully diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the basic EPS computation to the diluted EPS. Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options are considered in earnings per share calculations if dilutive, using the treasury stock method. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted Statement 128 in 1997, accordingly, all prior-period earnings per share data presented in the accompanying consolidated financial statements has been restated to conform to the requirements of Statement 128. Adoption of Statement 128 did not have a material effect on the Company's consolidated financial statements. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, ("Statement 129") "Disclosure of Information about Capital Structure." Statement 129 lists required disclosures about capital structure that had been included in a number of previously existing separate statements and opinions. It applies to all entities, public and nonpublic. Statement 129 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of Statement 129 did not have a material effect or significantly alter the Company's consolidated financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("Statement 130") "Reporting Comprehensive Income." Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Statement 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Statement 130 is effective for fiscal years beginning after December 15, 1997. Management of the Company does not expect that adoption of Statement 130 will have a material impact on the Company's financial position, results of operation, or liquidity. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about Segments of an Enterprise and Related Information." Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Management of the Company does not expect that adoption of Statement 131 will have a material impact on the Company's financial position, results of operation, or liquidity. FOURTH QUARTER RESULTS The fourth quarter net income for 1997 of $5.6 million or $0.43 per share reflected an increase of $610,000 or 12.2% compared to $5.0 million or $0.38 per share for the fourth quarter of 1996. Earnings performance for the fourth quarter of 1997 as compared to the fourth quarter of 1996 reflects increases in net interest income, noninterest income and a slight decrease in noninterest expense. Net interest income of $14.7 million for the fourth quarter of 1997 increased $978,000 or 7.1% compared to $13.7 million for the fourth quarter of 1996, reflecting an increased volume of earning assets in part to the vitality of the Rio Grande Valley economy and the Mergers. Average earning assets of $1.2 billion for the fourth quarter of 1997 increased $135.4 million or 12.3% compared to $1.1 billion for the fourth quarter of 1996. The fourth quarter of 1997 interest margin was 4.72% compared to 4.96% for the fourth quarter of 1996 and 4.75% in the third quarter of 1997. The provision for loan losses charged against earnings in the fourth quarter of 1997 was $1.0 million compared to $794,000 for the fourth quarter of 1996, reflecting an increase of $252,000 or 31.7%. The provision for loan losses in the fourth quarter of 1997 was primarily attributable to loan growth and net charge-offs. Noninterest income of $3.1 million for the fourth quarter of 1997 increased $261,000 or 9.3% compared to $2.8 million for the fourth quarter of 1996, primarily due to an increased volume of business. All components of noninterest income, except Other Operating Income and Net Investment Security Gains (Losses), reflect increases for fourth quarter of 1997 compared to fourth quarter of 1996. Investment Securities Gains of $214,000 for the fourth quarter of 1997 reflect a net decrease of $30,000 compared to $244,000 for the fourth quarter of 1996. Noninterest expense of $7.9 million for the fourth quarter of 1997 decreased $101,000 or 1.3% compared to $8.0 million for the fourth quarter of 1996. The fourth quarter net income for 1997 of $5.6 million or $0.43 per share reflected an increase of $143,000 or 2.6% compared to $5.5 million or $0.42 per share for the third quarter of 1997. Earnings performance for the fourth quarter of 1997 as compared to the third quarter of 1997 reflects decreases in net interest income, noninterest income and a slight decrease in noninterest expense. Provision for loan losses and income tax expense for the fourth quarter of 1997 as compared to the third quarter of 1997 increased. All categories of noninterest income for the fourth quarter of 1997 reflect increases when compared to each respective category for the third quarter of 1997 except Other Operating Income. The nonaccrual and renegotiated loans at December 31, 1997 of $7.8 million decreased $613,000 or 7.3% compared to $8.4 million of September 30, 1997. The nonaccrual and renegotiated loans are several credit relationships primarily secured by real estate. The following table presents a summary of operations for the last five quarters:
Condensed Quarterly Income 1997 1996 Statements Taxable-Equivalent Basis * ------------------------------------------- --------- (Dollars in Thousands, Fourth Third Second First Fourth Except Per Share Data) Quarter Quarter Quarter Quarter Quarter - --------------------------------------------------------------------------------------------- Interest Income $ 27,353 $ 26,343 $ 25,612 $ 24,542 $ 23,973 Interest Expense 12,662 12,059 10,870 10,501 10,260 - --------------------------------------------------------------------------------------------- Net Interest Income 14,691 14,284 14,742 14,041 13,713 Provision for Loan Losses 1,046 695 463 613 794 Noninterest Income 3,072 2,877 2,771 2,894 2,811 Noninterest Expense 7,867 7,883 8,864 7,989 7,968 - --------------------------------------------------------------------------------------------- Income Before Taxable-Equivalent Adjustment and Income Tax 8,850 8,583 8,186 8,333 7,762 Taxable-Equivalent Adjustment 354 368 383 401 392 Applicable Income Tax Expense 2,893 2,755 2,692 2,689 2,377 - --------------------------------------------------------------------------------------------- Net Income $ 5,603 $ 5,460 $ 5,111 $ 5,243 $ 4,993 ============================================================================================= Net Income Per Common Share Basic $ 0.43 $ 0.42 $ 0.39 $ 0.40 $ 0.38 Diluted 0.42 0.41 0.38 0.39 0.38 ============================================================================================= Average Balances Total Assets $1,365,628 $1,318,956 $1,261,489 $1,246,511 $1,218,434 Loans 855,362 824,262 795,066 774,414 727,308 Investment Securities 357,659 328,463 321,421 325,701 340,948 Earning Assets 1,234,357 1,191,855 1,134,898 1,123,574 1,098,972 Deposits 1,207,718 1,168,910 1,116,436 1,104,876 1,079,220 Shareholders' Equity 144,429 139,557 133,814 130,624 126,234 - --------------------------------------------------------------------------------------------- Selected Financial Data Return on Average Assets 1.63% 1.64% 1.63% 1.71% 1.63% Return on Average Shareholders' Equity 15.39 15.52 15.32 16.28 15.74 Net Interest Income to Average Earning Assets * 4.72 4.75 5.21 5.07 4.96 Efficiency Ratio * 44.90 45.95 50.75 47.75 49.11 Allowance for Loan Losses $ 10,518 $ 9,898 $ 10,441 $ 10,237 $ 10,031 Net Charge-Offs (Recoveries) 426 1,238 259 407 684 Nonaccrual and Renegotiated Loans 7,802 8,415 6,824 6,469 6,446 Foreclosed Assets 3,169 2,688 2,767 1,078 945 =============================================================================================
* Taxable-Equivalent basis assuming a 35% tax rate. SUBSEQUENT EVENTS On February 19, 1998, Texas Regional completed the aquisitions of TB&T Bancshares, Inc. of Brownsville, Texas ("TB&T"), Brownsville Bancshares, Inc. of Brownsville, Texas ("BBI") and Raymondville Bancorp, Inc., of Raymondville, Texas ("Raymondville"). As of February 19, 1998, these bank holding companies had an aggregate of approximately $208.7 million in assets and five banking locations. An aggregate of 1,292,845 shares of Texas Regional's Class A Voting Common Stock were issued in connection with the acquistions of TB&T and BBI, and $9.6 million of cash was paid to the shareholder of Raymondville in connection with the acquisition of Raymondville. The subsidiary banks of TB&T, BBI and Raymondville were merged with and into Texas State Bank immediately following the acquisitions. ITEM 8. -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING To Our Shareholders The management of Texas Regional Bancshares, Inc. and its subsidiaries has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles. The consolidated financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the consolidated financial statements. Management maintains a comprehensive system of internal control to assure the proper authorization of transactions, the safeguarding of assets, and the reliability of the financial records. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The Company maintains a strong internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. Management believes that as of December 31, 1997, the Company maintains an effective system of internal control. The Audit Committee of the Board of Directors reviews the systems of internal control and financial reporting. The Committee meets and consults regularly with management, the internal auditors and the independent accountants to review the scope and results of their work. The accounting firm of KPMG Peat Marwick LLP has performed an independent audit of the Company's consolidated financial statements. Management has made available to KPMG Peat Marwick LLP all of the Company's financial records and related data, as well as the minutes of shareholders' and directors' meetings. Furthermore, management believes that all representations made to KPMG Peat Marwick LLP during its audit were valid and appropriate. The firm's report appears below. Glen E. Roney Chairman of the Board, President & Chief Executive Officer George R. Carruthers Executive Vice President & Chief Financial Officer January 30, 1998 INDEPENDENT AUDITORS' REPORT Board of Directors Texas Regional Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Texas Regional Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Regional Bancshares, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Houston, Texas January 30, 1998, except as to note 19, which is as of February 19,1998 CONSOLIDATED FINANCIAL STATEMENTS
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 1997 and 1996 (Dollars in Thousands) 1997 1996 - --------------------------------------------------------------------------------------------- Assets Cash and Due From Banks (Note 2) $ 53,956 $ 56,100 Federal Funds Sold 2,700 10,515 - --------------------------------------------------------------------------------------------- Total Cash and Cash Equivalents 56,656 66,615 Securities Available for Sale (Note 3) 315,724 192,301 Securities Held to Maturity (Estimated Market Value of $52,036 and $126,896 for 1997 and 1996, Respectively) (Note 3) 51,535 125,835 Loans, Net of Unearned Discount of $2,184 in 1997 and $1,607 in 1996 886,854 757,656 Less: Allowance for Loan Losses (10,518) (10,031) - --------------------------------------------------------------------------------------------- Net Loans (Note 4) 876,336 747,625 Premises and Equipment, Net (Note 5) 49,270 37,054 Accrued Interest Receivable 14,691 13,743 Other Real Estate 2,974 742 Intangibles 24,066 26,318 Other Assets 4,611 20,344 - --------------------------------------------------------------------------------------------- Total Assets $ 1,395,863 $ 1,230,577 ============================================================================================= Liabilities Deposits Demand $ 184,521 $ 168,728 Savings 90,002 94,852 Money Market Checking and Savings 226,099 234,927 Time Deposits (Note 6) 736,375 593,228 - --------------------------------------------------------------------------------------------- Total Deposits 1,236,997 1,091,735 Federal Funds Purchased and Securities Sold Under Repurchase Agreements (Note 7) 1,801 632 Accounts Payable and Accrued Liabilities 11,411 10,062 - --------------------------------------------------------------------------------------------- Total Liabilities 1,250,209 1,102,429 - --------------------------------------------------------------------------------------------- Commitments and Contingencies (Notes 11 and 12) Shareholders' Equity Preferred Stock; $1.00 Par Value, 10,000,000 Shares Authorized; None Issued and Outstanding (Note 9) Common Stock - Class A Voting; $1.00 Par Value, 20,000,000 Shares Authorized; Issued and Outstanding 13,110,639 Shares for 1997 and 8,708,898 for 1996 (Note 10) 13,111 8,708 Paid-In Capital 79,063 78,605 Retained Earnings 52,558 40,315 Unrealized Gain (Loss) on Securities Available for Sale (Note 3) 922 520 - --------------------------------------------------------------------------------------------- Total Shareholders' Equity 145,654 128,148 - --------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 1,395,863 $ 1,230,577 =============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Statements of Income Years Ended December 31, 1997, 1996 and 1995 (Dollars in Thousands, Except Per Share Data) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Interest Income Loans, Including Fees $ 79,450 $ 60,844 $ 37,131 Investment Securities Taxable 20,044 14,240 7,004 Tax-Exempt 1,417 1,588 285 Federal Funds Sold 1,433 1,554 1,172 - --------------------------------------------------------------------------------------------- Total Interest Income 102,344 78,226 45,592 - --------------------------------------------------------------------------------------------- Interest Expense Deposits 46,040 33,228 17,990 Federal Funds Purchased and Securities Sold Under Repurchase Agreements 52 20 46 Short-Term Borrowings - - 16 - --------------------------------------------------------------------------------------------- Total Interest Expense 46,092 33,248 18,052 - --------------------------------------------------------------------------------------------- Net Interest Income 56,252 44,978 27,540 Provision for Loan Losses (Note 4) 2,817 2,120 1,685 - --------------------------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 53,435 42,858 25,855 - --------------------------------------------------------------------------------------------- Noninterest Income Service Charges on Deposit Accounts 5,961 4,982 3,472 Other Service Charges 1,362 1,003 859 Trust Service Fees 1,691 1,505 1,256 Net Investment Securities Gains (Losses) 731 401 (111) Data Processing Service Fees 1,080 910 441 Other Operating Income 789 594 601 - --------------------------------------------------------------------------------------------- Total Noninterest Income 11,614 9,395 6,518 - --------------------------------------------------------------------------------------------- Noninterest Expense Salaries and Employee Benefits (Note 11) 15,351 13,914 9,563 Net Occupancy Expense 2,342 1,951 1,069 Equipment Expense 3,506 3,165 2,028 Other Real Estate (Income) Expense, Net 112 (67) 107 Intangible Asset Amortization 2,252 1,593 323 Impairment Loss (Note 5) 630 - - Other Noninterest Expense (Note 13) 8,410 7,406 5,887 - --------------------------------------------------------------------------------------------- Total Noninterest Expense 32,603 27,962 18,977 - --------------------------------------------------------------------------------------------- Income Before Income Tax Expense 32,446 24,291 13,396 Income Tax Expense (Note 8) 11,029 7,912 4,671 - --------------------------------------------------------------------------------------------- Net Income $ 21,417 $ 16,379 $ 8,725 ============================================================================================= Basic Earnings Per Common Share (Note 14) Net Income $ 1.64 $ 1.41 $ 0.94 ======= ======== ======= Weighted Average Number of Common Shares Outstanding (in Thousands) 13,085 11,650 9,291 - --------------------------------------------------------------------------------------------- Diluted Earnings Per Common Share (Note 14) Net Income $ 1.61 $ 1.38 $ 0.94 ======= ======== ======= Weighted Average Number of Common Shares Outstanding (in Thousands) 13,317 11,831 9,327 =============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity Years Ended December 31, 1997, 1996 and 1995 Unrealized Gain (Loss) Class A on Total Voting Securities Share- Common Paid-In Retained Available holders' (Dollars in Thousands) Stock Capital Earnings for Sale Equity - --------------------------------------------------------------------------------------------- Balance, December 31, 1994 $ 6,193 $ 29,204 $20,921 $(587) $ 55,731 Exercise of stock options, 3,162 shares of Class A Voting Common Stock 3 35 - - 38 Change in Unrealized Gain (Loss) on Securities Available for Sale - - - 704 704 Class A Voting Common Stock Cash Dividends - - (2,478) - (2,478) Net Income - - 8,725 - 8,725 - --------------------------------------------------------------------------------------------- Balance, December 31, 1995 6,196 29,239 27,168 117 62,720 Exercise of stock options, 2,107 shares of Class A Voting Common Stock 2 23 - - 25 Change in Unrealized Gain (Loss) on Securities Available for Sale - - - 403 403 Class A Voting Common Stock Cash Dividends - - (3,232) - (3,232) Sale of 2,510,000 shares of Class A Voting Common Stock 2,510 49,343 - - 51,853 Net Income - - 16,379 - 16,379 - --------------------------------------------------------------------------------------------- Balance, December 31, 1996 8,708 78,605 40,315 520 128,148 Exercise of stock options, 35,814 shares of Class A Voting Common Stock 36 458 - - 494 Change in Unrealized Gain (Loss) on Securities Available for Sale - - - 402 402 Class A Voting Common Stock Cash Dividends - - (4,803) - (4,803) Class A Voting Common Stock 3-for-2 Stock Split 4,367 - (4,371) - (4) Net Income - - 21,417 - 21,417 - --------------------------------------------------------------------------------------------- Balance, December 31, 1997 $ 13,111 $ 79,063 $ 52,558 $ 922 $ 145,654 =============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Texas Regional Bancshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (Dollars in Thousands) 1997 1996 1995 - --------------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $ 21,417 $ 16,379 $ 8,725 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Amortization and Accretion, Net 3,132 2,794 2,013 Provision for Loan Losses 2,817 2,120 1,685 Provision for Estimated Losses on Other Real Estate and Other Assets 70 43 119 (Gain) Loss on Sale of Securities Available for Sale (731) (401) 111 (Gain) Loss on Sale of Other Assets (13) 11 (3) (Gain) Loss on Sale of Other Real Estate (113) (202) 3 (Gain) Loss on Sale of Fixed Assets (2) (2) 14 Impairment Loss (Note 5) 630 - - (Increase) Decrease in Deferred Income Taxes (1,001) (1,138) (336) (Increase) Decrease in Accrued Interest Receivable and Other Assets 17,153 (15,164) (159) Increase (Decrease) in Accounts Payable and Accrued Liabilities 1,558 (1,185) 613 - --------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities 44,917 3,255 12,785 - --------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Proceeds from Sales of Securities Available for Sale 105,989 159,350 12,610 Proceeds from Maturing Securities Available for Sale 41,350 73,339 45,000 Purchases of Securities Available for Sale (269,446) (183,626) (64,961) Proceeds from Maturing Securities Held to Maturity 74,360 44,965 17,460 Purchases of Securities Held to Maturity - (89,086) (14,390) Proceeds from Sale of Loans 46 6,142 5,731 Purchases of Loans (1,051) (2,012) (1,159) Loan Originations and Advances (134,723) (73,330) (74,068) Recoveries of Charged-Off Loans 734 504 536 Proceeds from Sale of Fixed Assets 2 45 2 Proceeds from Sale of Other Assets 277 508 25 Proceeds from Sale of Other Real Estate 1,019 2,815 1,409 Purchases of Premises and Equipment (16,122) (5,766) (3,597) Proceeds from the Acquisition of Two Branch Bank Locations, Net of Cash Acquired - - 30,606 Net Cash Used in Mergers - (15,404) - - --------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities (197,565) (81,556) (44,796) - --------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net Increase (Decrease) in Demand Deposits, Money Market Checking and Savings Accounts 2,115 (6,437) (24,518) Net Increase in Time Deposits 143,147 68,048 52,421 Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Repurchase Agreements 1,169 (125) (392) Net Decrease in Short-Term Borrowings - - (429) Proceeds from Sale of Class A Voting Common Stock 494 51,878 38 Cash Dividends Paid on Class A Voting Common Stock (4,236) (2,981) (2,353) - --------------------------------------------------------------------------------------------- Net Cash Provided by Financing Activities 142,689 110,383 24,767 - --------------------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents (9,959) 32,082 (7,244) Cash and Cash Equivalents at Beginning of Year 66,615 34,533 41,777 - --------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $56,656 $66,615 $34,533 ============================================================================================= Supplemental Disclosures of Cash Flow Information Interest Paid $ 45,245 $ 31,950 $ 17,248 Income Taxes Paid 11,599 7,727 4,752 Supplemental Schedule of Noncash Investing and Financing Activities Cost of Securities Transferred to Available for Sale - - 1,455 Foreclosure and Repossession in Partial Satisfaction of Loans Receivable 3,466 2,395 679 The Company Acquired First State Bank & Trust Co., Mission, Texas and The Border Bank, Hidalgo, Texas on May 14, 1996. The Company also Acquired two Branch Bank Locations, one in Rio Grande City, Texas and the other in Roma, Texas during August 1995. Assets Acquired and Liabilities Assumed are as follows: Fair Value of Assets Acquired - 554,240 75,850 Cash Paid - (99,500) (4,250) Liabilities Assumed - 458,740 80,100 =============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Texas Regional Bancshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies The accounting and reporting policies of Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and subsidiaries (collectively, the "Company") conform to generally accepted accounting principles and to prevailing practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the more significant accounting policies follows: Financial Statement Presentation - The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. and its wholly-owned subsidiaries, Texas Regional Delaware, Inc., Texas State Bank (the "Bank"), TSB Securities, Inc. and Texas Regional Acquisition Corp. All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in the subsidiaries are accounted for on the equity method in the Parent's financial statements. Trust Assets - Assets held by the trust department of the subsidiary bank in fiduciary or agency capacities are not assets of Texas Regional Bancshares, Inc. or its subsidiaries and are not included in the consolidated balance sheets. Investment Securities - At acquisition, a bank is required to classify debt and equity securities into one of three categories: Held to Maturity, Trading or Available for Sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as Held to Maturity and measured at amortized cost in the balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as Trading and measured at fair value in the balance sheet with unrealized holding gains and losses included in net income. Investments not classified as Held to Maturity or Trading are classified as Available for Sale and measured at fair value in the balance sheet with unrealized holding gains and losses reported as a separate component of shareholders' equity until realized. Gains and losses on the sale of Trading and Available for Sale securities are determined using the specific-identification method. Declines in the fair value of individual Held to Maturity and Available for Sale securities below their cost that are other than temporary, result in write downs of the individual securities to their fair value. The related write downs are included in earnings as realized losses. Premiums and discounts are recognized in interest income using the interest method over the period from acquisition to the earlier of maturity or call date. Loans - Loans are stated at the principal amount outstanding, net of unearned discount. Interest income on discounted loans is recognized on the sum-of-the-months-digits method which approximates the interest method, while interest income on other loans is calculated using applicable interest rates and the daily amount of outstanding principal. Loan Fees - Loan origination fees and certain direct loan origination costs are deferred and recognized as an adjustment of the yields of the related loans. Nonperforming Assets - Nonperforming assets are comprised of (a) loans for which the accrual of interest has been discontinued, (b) loans for which the interest rate has been reduced to less than originally contracted rates due to a serious weakening in the borrower's financial condition and (c) other assets which consist of real estate and other property which have been acquired in lieu of loan balances due and which are awaiting disposition. A loan is generally placed on nonaccrual status when principal or interest is past due 90 days or more, and the loan is not both well-secured and in the process of collection. A loan is also placed on nonaccrual status immediately if, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. Real estate and other assets acquired in lieu of loan balances due are recorded at the lesser of cost basis or estimated fair value less estimated closing costs. Valuation losses are charged to the allowance for loan losses on foreclosure. Write-downs of real estate and other assets are charged to noninterest expense if the estimated fair value subsequently declines below its carrying value. Realized gains and losses on sales of other real estate are included in noninterest expense. A loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. An impaired loan is valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. The Company makes an assessment for impairment when a loan is placed on nonaccrual status or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. Allowance for Loan Losses - The allowance for loan losses is established by a charge to operations (provision for loan losses). Actual loan losses or recoveries are charged or credited directly to this allowance. Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experiences, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged-off. In addition, the loan review committee of the Bank reviews the assessment of management in determining the adequacy of the Bank's allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. Premises and Equipment - Premises and equipment are stated at cost, net of accumulated depreciation. Depreciable assets are depreciated over their estimated useful lives. For financial reporting, depreciation is computed using the straight-line method; in computing federal income tax, both the straight-line and accelerated methods are used. Maintenance and repairs which do not extend the life of premises and equipment are charged to noninterest expense. Goodwill - Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Year 2000 - The Company has developed and implemented a plan to deal with the Year 2000 problem. The plan provides for addressing critical and noncritical issues, complete with the assignment of responsibility and target dates for completion. Core applications, such as mainframe software and hardware, and some platform software have been certified as Year 2000 compliant. Testing of these applications are planned for later this year. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Company is expensing all costs incurred as a result of addressing the Year 2000 issue. Income Tax- Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The Company files a consolidated federal income tax return. Stock Option Plan- Prior to January 1, 1996, the Company accounted for its stock compensation programs in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, ("Statement 123") "Accounting for Stock-Based Compensation," which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, Statement 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in Statement 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of Statement 123. Earnings Per Common Share Computations- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, ("Statement 128") "Earnings per Share." Statement 128 specifies the computation, presentation, and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 replaces primary EPS and fully diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the basic EPS computation to the diluted EPS. Basic EPS is calculated by dividing net income available to common shareholders, by the weighted average number of common shares outstanding. The computation of diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The dilutive effect of stock options are considered in earnings per share calculations if dilutive, using the treasury stock method. Statement 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted Statement 128 in 1997, accordingly, all prior-period earnings per share data presented in the accompanying consolidated financial statements has been restated to conform to the requirements of Statement 128. Adoption of Statement 128 did not have a material effect on the Company's consolidated financial statements. Cash Flows - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of - The Company adopted the provisions of Statement of Financial Accounting Standards No. 121, ("Statement 121") "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," on January 1, 1996. Statement 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this Statement did not have a material impact on the Company's financial position, results of operations, or liquidity. Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, ("Statement 125") "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In December 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 127, ("Statement 127") "Deferral of the Effective Date of Certain Provisions of FASB No. 125." Statement 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is to be applied prospectively. Statement 127 defers for a year the effective date for all transfers of financial assets for repurchase agreements, dollar rolls, securities lending and similar transactions. Statement 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Adoption of Statement 125 did not have a material impact on the Company's financial position, results of operations, or liquidity. Management of the Company does not expect that adoption of Statement 127 will have a material impact on the Company's financial position, results of operation, or liquidity. Disclosure of Information About Capital Structure - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 129, ("Statement 129") "Disclosure of Information about Capital Structure." Statement 129 lists required disclosures about capital structure that had been included in a number of previously existing separate statements and opinions. It applies to all entities, public and nonpublic. Statement 129 is effective for financial statements issued for periods ending after December 15, 1997. Adoption of Statement 129 did not have a material effect or significantly alter the Company's consolidated financial statements. Reporting Comprehensive Income - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, ("Statement 130") "Reporting Comprehensive Income." Statement 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Statement 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. Statement 130 is effective for fiscal years beginning after December 15, 1997. Management of the Company does not expect that adoption of Statement 130 will have a material impact on the Company's financial position, results of operation, or liquidity. Disclosures About Segments of an Enterprise and Related Information - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, ("Statement 131") "Disclosures about Segments of an Enterprise and Related Information." Statement 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. Statement 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement 131 is effective for financial statements for periods beginning after December 15, 1997. Management of the Company does not expect that adoption of Statement 131 will have a material impact on the Company's financial position, results of operation, or liquidity. (2) Reserve Requirements Cash of approximately $1.4 million and $22.9 million at December 31, 1997 and 1996, respectively, was maintained to satisfy regulatory reserve requirements. (3) Investment Securities The amortized cost and estimated market value of investments in Securities Available for Sale at December 31, 1997 and December 31, 1996 follows: 1997 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Treasury $ 6,976 $ 26 $ - $ 7,002 U.S. Government Agency 269,151 668 257 269,562 Mortgage - Backed 15,549 47 35 15,561 States and Political Subdivisions 19,927 975 4 20,898 Other 2,692 9 - 2,701 - ------------------------------------------------------------------------------ Total $314,295 $1,725 $296 $315,724 =============================================================================== 1996 -------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - ------------------------------------------------------------------------------- U.S. Treasury $ 8,965 $ 15 $ 7 $ 8,973 U.S. Government Agency 157,951 436 682 157,705 Mortgage-Backed 91 1 - 92 States and Political Subdivisions 21,770 1,042 1 22,811 Other 2,718 4 2 2,720 - ------------------------------------------------------------------------------- Total $191,495 $1,498 $692 $192,301 =============================================================================== The amortized cost and estimated market value of investments in Securities Held to Maturity at December 31, 1997 and December 31, 1996 follows: 1997 ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Treasury $15,953 $229 $ - $16,182 U.S. Government Agency 29,941 121 - 30,062 States and Political Subdivisions 5,641 151 - 5,792 - -------------------------------------------------------------------------------- Total $51,535 $501 $ - $52,036 ================================================================================ 1996 ------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market (Dollars in Thousands) Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Treasury $ 38,160 $ 284 $14 $ 38,430 U.S. Government Agency 81,003 601 16 81,588 States and Political Subdivisions 6,672 206 - 6,878 - -------------------------------------------------------------------------------- Total $125,835 $1,091 $30 $126,896 ================================================================================ The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities ------------------------------------------- Available for Sale Held to Maturity --------------------- ------------------- Estimated Estimated Amortized Market Amortized Market (Dollars in Thousands) Cost Value Cost Value - ------------------------------------------------------------------------------------- Due in One Year or Less $ 31,239 $ 31,234 $17,054 $17,102 Due After One Year Through Five Years 164,583 165,116 32,639 32,963 Due After Five Years Through Ten Years 96,804 97,469 1,742 1,864 Due After Ten Years 21,669 21,905 100 107 - ------------------------------------------------------------------------------------- Total $314,295 $315,724 $51,535 $52,036 =====================================================================================
Proceeds from sales of Securities Available for Sale for the year ended December 31, 1997 were $106.0 million. Gross gains of $778,000 and gross losses of $47,000 were realized on sales for the year ended December 31, 1997. Proceeds from sales of Securities Available for Sale for the year ended December 31, 1996 were $159.3 million. Gross gains of $705,000 and gross losses of $304,000 were realized on sales for the year ended December 31, 1996. Proceeds from sales of Securities Available for Sale for the year ended December 31, 1995 were $12.6 million. Gross losses of $111,000 and no gross gains were realized on sales for the year ended December 31, 1995. Net unrealized holding gains of $922,000 and $520,000 at December 31, 1997 and 1996, respectively, on Securities Available for Sale are included as a separate component of shareholders' equity for each respective year. There were no sales from the Held to Maturity category in 1997, 1996 or 1995. Investment securities having a carrying value of $281.7 million at December 31, 1997 and $224.2 million at December 31, 1996 were pledged to secure public funds and trust assets on deposit and for other purposes required or permitted by law. (4) Loans and Allowance for Loan Losses An analysis of loans at December 31, 1997 and December 31, 1996 follows: (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Commercial $230,024 $198,752 Commercial Tax-Exempt 29,024 34,777 Agricultural 51,214 32,639 Real Estate Construction 67,872 47,400 Commercial Mortgage 287,204 243,198 Agricultural Mortgage 31,001 28,803 1-4 Family Mortgage 105,852 100,301 Consumer 84,663 71,786 - ------------------------------------------------------------------------------- Total $886,854 $757,656 =============================================================================== In the ordinary course of business, the Company's subsidiary bank makes loans to its officers and directors, including entities related to those individuals. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. An analysis of these loans for the years ended December 31, 1997 and December 31, 1996 follows: (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Balance at Beginning of Year $4,371 $3,974 Additions 4,339 2,765 Reductions Collections 3,203 2,368 Changes to Unrelated Status - - Charge-Offs - - - ------------------------------------------------------------------------------- Balance at End of Year $5,507 $4,371 =============================================================================== A summary of the transactions in the allowance for loan losses for years ended December 31, 1997, 1996 and 1995 follows: (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Balance at Beginning of Year $10,031 $ 4,542 $3,511 Balance from Acquisitions - 4,647 450 Provision Charged to Expense 2,817 2,120 1,685 Recovery of Amounts Previously Charged to Allowance 734 504 536 Losses Charged to Allowance (3,064) (1,782) (1,640) - ------------------------------------------------------------------------------- Balance at End of Year $10,518 $10,031 $4,542 =============================================================================== Nonaccrual loans and renegotiated loans were $7.8 million, $6.4 million and $2.1 million at December 31, 1997, 1996 and 1995, respectively. If interest on these nonaccrual and renegotiated loans had been accrued at the original contractual rates, interest income would have been increased by approximately $1.2 million, $765,000 and $247,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Impaired loans were $7.8 million at December 31, 1997 and $6.4 million at December 31, 1996. The average recorded investment in impaired loans during 1997 and 1996 was $8.1 million and $4.8 million, respectively. The total allowance for loan losses related to these loans was $786,000 and $506,000 at December 31, 1997 and 1996, respectively. Interest income on impaired loans of $178,000, $532,000 and $91,000 was recognized for cash payments received in 1997, 1996 and 1995, respectively. (5) Premises and Equipment A summary of premises and equipment and related accumulated depreciation and amortization as of December 31, 1997 and December 31, 1996 follows: Estimated (Dollars in Thousands) Useful Lives 1997 1996 - ------------------------------------------------------------------------------- Land $ 7,220 $ 7,020 Buildings and Leasehold Improvements 2-40 years 28,905 25,458 Construction in Progress 9,407 1,100 Furniture and Equipment 3-10 years 16,265 13,783 - ------------------------------------------------------------------------------- Subtotal 61,797 47,361 Less Accumulated Depreciation and Amortization (12,527) (10,307) - ------------------------------------------------------------------------------- Total $49,270 $ 37,054 =============================================================================== Depreciation and amortization expense for the years ended December 31, 1997, 1996 and 1995 was approximately $3.2 million, $2.6 million and $1.6 million, respectively. An impairment loss of $630,000 was recorded during the three months ended June 30, 1997 to reflect the impairment of an existing bank building. Construction of a new bank building in McAllen, Texas is in progress. The new bank building will be the headquarters for Texas State Bank and Texas Regional Bancshares, Inc. and is being constructed next to the Company's existing bank site. Upon completion of the new bank building, the existing building will be razed to make room for parking. The amount of the impairment loss was the book value of the building at June 30, 1997. (6) Time Deposits Time deposits of $100,000 or more totaled $433.3 million and $336.5 million at December 31, 1997 and 1996, respectively. Interest expense for the years ended December 31, 1997, 1996 and 1995 on time deposits of $100,000 or more was approximately $21.5 million, $13.3 million and $5.7 million, respectively. (7) Federal Funds Purchased and Securities Sold Under Repurchase Agreements The following table summarizes selected information regarding federal funds purchased and securities sold under repurchase agreements as of and for the years ended December 31, 1997, 1996 and 1995: (Dollars in Thousands) 1997 1996 1995 - ---------------------------------------------------------------------------- Balance at End of Year $ 1,801 $ 632 $ 757 Rate on Balance at End of Year 5.98% 3.92% 3.60% Average Daily Balance $ 980 $ 502 $1,093 Average Interest Rate 5.27% 3.74% 4.20% Maximum Month-End Balance $11,100 $ 700 $1,349 ============================================================================ Securities sold under agreements to repurchase are comprised of customer deposit agreements with maturities ranging from overnight to six months. These obligations are not federally insured but are collateralized by a security interest in various investment securities. These pledged securities are segregated and maintained by a third party bank. (8) Income Tax The components of income tax expense for the years ended December 31, 1997, 1996 and 1995 consisted of the following: (Dollars in Thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- Current Income Tax Expense Federal $11,710 $7,647 $4,790 State 320 168 217 - -------------------------------------------------------------------------------- Total Current Income Tax Expense 12,030 7,815 5,007 - -------------------------------------------------------------------------------- Deferred Income Tax Expense (Benefit) Federal (981) 125 (320) State (20) (28) (16) - -------------------------------------------------------------------------------- Total Deferred Income Tax Expense (Benefit) (1,001) 97 (336) - -------------------------------------------------------------------------------- Total Income Tax Expense $11,029 $7,912 $4,671 ================================================================================ Following is a reconciliation between the amount of reported income tax expense for the years ended December 31, 1997, 1996 and 1995 and the amount computed by multiplying the income before tax by the federal statutory tax rate:
1997 1996 1995 ---------------- ---------------- ------------- (Dollars in Thousands) Amount Rate Amount Rate Amount Rate - --------------------------------------------------------------------------------------------- Tax at Statutory Rate $11,356 35% $8,502 35% $4,689 35% (Reductions) Additions Tax-Exempt Interest (852) (3) (969) (4) (124) (1) State Earned Surplus Tax, Net of Federal Income Tax Effect 221 1 91 1 130 1 Goodwill Amortization 344 1 223 1 21 - Other - Net (40) - 65 - (45) - - --------------------------------------------------------------------------------------------- Total Income Tax Expense $11,029 34% $7,912 33% $4,671 35% =============================================================================================
The net deferred tax liability included with accounts payable and accrued expenses in the accompanying consolidated balance sheets is comprised of the following deferred tax assets and liabilities as of December 31, 1997 and December 31, 1996. (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Deferred Tax Liability Premises and Equipment $ 4,212 $ 4,394 Intangibles 2,764 3,120 Unrealized Gain on Securities Available for Sale 507 286 Other 424 290 - ------------------------------------------------------------------------------- Total Deferred Tax Liability 7,907 8,090 - ------------------------------------------------------------------------------- Deferred Tax Asset Allowance for Loan Losses 3,009 2,291 Unrealized Losses on Loans 834 1,062 Other Real Estate 45 27 Other 535 446 - ------------------------------------------------------------------------------- Total Deferred Tax Assets Before Valuation Allowance 4,423 3,826 Valuation Allowance (36) (36) - ------------------------------------------------------------------------------- Total Deferred Tax Assets less Valuation Allowance 4,387 3,790 - ------------------------------------------------------------------------------- Net Deferred Tax Liability $ 3,520 $ 4,300 =============================================================================== For the years ended December 31, 1997 and December 31, 1996, the deferred tax liability results primarily from the use of accelerated methods of depreciation of equipment for tax purposes and the write-off of core deposits for book purposes. The deferred tax asset results from differences in the bad debts written-off for financial statement purposes and the amount allowed under tax law, and a difference in other real estate basis due to write-downs for financial statement purposes for both years ended December 31, 1997 and 1996, respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1997. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. (9) Preferred Stock The Corporation has 10.0 million authorized shares of $1 par value Preferred Stock. The Articles of Incorporation of the Corporation grant discretion to the Board of Directors to establish series of Preferred Stock with such rights, preferences and limitations as may be determined by resolution of the Board. No shares of preferred stock are currently outstanding. (10) Common Stock The Corporation has 20.0 million authorized shares of $1 par value Common Stock. At December 31, 1997, 1996 and 1995, the number of common shares outstanding retroactively adjusted for stock split effected as a stock dividend, were 13,110,639, 13,063,347 and 9,295,187, respectively. On May 14, 1996, Texas Regional Bancshares, Inc. completed its secondary public offering of 2.5 million shares of the Corporation's Class A Voting Common Stock. On May 14, 1996 Texas Regional Bancshares, Inc. also completed the acquisition of First State Bank & Trust Co., Mission, Texas, and the Border Bank, Hidalgo, Texas, (the "Mergers"), through merger with Texas State Bank, the principal operating subsidiary of Texas Regional Bancshares, Inc. The purchase price of the Mergers was financed with a combination of proceeds from the 2.5 million share common equity offering and cash on the balance sheet of the Company. (11) Employee Benefits The Company has an Employee Stock Ownership Plan (with section 401(k) provisions) (the "KSOP") covering substantially all of their employees. Employer contributions to the KSOP are discretionary, and as such, determined at the sole discretion of the Board of Directors. The KSOP covers employees who have completed twelve consecutive months of credited service, as defined in the plan, and attained age 21. A participant's account balance will be fully vested after six years of credited service. Pension expense, which includes employer matching as discussed below, for the years ended December 31, 1997, 1996 and 1995 was $652,000, $814,000, and $526,000, respectively. A participant in the KSOP may authorize the Company to contribute to the Trust on his behalf Salary Reduction Contributions. Such Salary Reduction Contributions shall be stated as a whole percentage and shall not be less than 1% or more than 15% of the participant's compensation. The total amount of Salary Reduction Contributions for any Plan Year shall not exceed $7,000, multiplied by any cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Internal Revenue Code. Such contributions are matched at the discretion of the Board of Directors up to a maximum of 100% of the participant's Salary Reduction Contribution and shall be based on a participant's Salary Reduction Contribution of up to 4% of such participant's compensation. The participant's and Employer matching contributions are vested immediately. The following discussion concerning stock option plans has been restated to retroactively give effect for the three-for-two stock split declared and distributed by the Corporation during the third quarter of 1997. In March 1986, the shareholders of the Company approved three separate stock plans involving the Class A Voting Common Stock, providing for the issuance of up to 380,152 shares to certain key employees for their purchase and 10,000 shares as part of a bonus plan for employees of the Company. One option plan provides for sale of up to 190,076 shares to the chief executive officer at a price to be determined by a committee of directors on the date of grant; another provides for sale of up to 190,076 shares at fair market value at the date the options are granted, to key employees of the Company, excluding the chief executive officer. The third plan, the bonus plan, was terminated effective January 9, 1996. On May 10, 1994, options to acquire up to 190,076 Class A Voting Common shares at $8.00 per share were granted to Glen E. Roney, Chief Executive Officer and a member of the Board of Directors of Texas Regional, pursuant to the Texas Regional Bancshares, Inc. 1985 Nonstatutory Stock Option Plan exercisable commencing May 10, 1995. In addition, options to acquire up to 78,892 Class A Voting Common shares at $8.00 per share were granted to certain key employees of the Company pursuant to the Texas Regional Bancshares, Inc. Incentive Stock Option Plan exercisable commencing May 10, 1995 including options to acquire 12,500 shares granted to Glen E. Roney. The Incentive Stock Option Plan expired in September 1995, except with respect to awards outstanding. Any options outstanding under this Plan, at the time of its termination, remain in effect until the options shall have been exercised or the expiration date of the option, whichever is earlier. The options to acquire 78,892 Class A Voting Common Stock were awarded May 10, 1994, and expire on May 10, 2000. During 1997 and 1996, options to acquire 39,522 and 3,161 Class A Voting Common Stock, respectively, were exercised at a price of $8.00 per share. In May 1996, the shareholders of the Company approved the 1995 Nonstatutory Stock Option Plan of Texas Regional Bancshares, Inc. (the "Plan"), which provides for granting to key employees of the Company options to acquire up to an aggregate maximum of 135,000 shares of the Class A Voting Common Stock of the Corporation, subject to adjustment for stock dividends, stock splits and upon the occurrence of other events as specified in the Plan. In addition, options to acquire up to 135,000 Class A Voting Common shares at $11.50 per share were granted to certain key employees of the Company pursuant to the Plan including options to acquire 97,500 shares granted to Glen E. Roney. Options to purchase one-fourth of the shares as granted shall be exercisable commencing on July 1, 1996, and options to purchase an additional one-fourth of the shares as granted pursuant to these resolutions shall be exercisable beginning July 1 of each year thereafter, and in each case options to purchase shares granted pursuant to these resolutions shall thereafter be exercisable at any time prior to July 1, 2002, subject to other provisions applicable to such options as specified in the Plan. During 1997 options to acquire 7,875 Class A Voting Common Stock were exercised at a price of $11.50 per share. Effective December 19, 1997, the Company adopted the 1997 Incentive Stock Option Plan and the 1997 Nonstatutory Stock Option Plan of Texas Regional Bancshares, Inc. (the "Plans"), which provides for granting to key employees of the Company options to acquire up to an aggregate maximum of 100,000 and 125,000 shares, respectively of the Class A Voting Common Stock of the Corporation, subject to adjustment for stock dividends, stock splits and upon the occurrence of other events as specified in the Plans. The Board of Directors recommends the Plans to the shareholders of the Corporation and authorizes and directs the officers of the Corporation to submit the Plans to the shareholders for approval at the next regular or special meeting of the shareholders of the Corporation. At December 31, 1997, the Company has three stock-based compensation plans, which are described above. The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Had compensation cost for the Company's three stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: (Dollars in Thousands, Except Per Share Data) 1997 1996 1995 - -------------------------------------------------------------------------------- Net Income As reported $21,417 $16,379 $8,725 Pro forma 21,298 16,065 8,649 Basic earnings per share As reported 1.64 1.41 0.94 Pro forma 1.63 1.38 0.93 Diluted earnings per share As reported 1.61 1.38 0.94 Pro forma 1.60 1.36 0.93 ================================================================================ The fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: 1997 1996 1995 - -------------------------------------------------------------------------------- Expected life (years) - - 3.5 Interest rate - - 5.52% Volatility - - 27.30 Dividend yield - - 1.17 ================================================================================ No options were granted during the years ended December 31, 1997 and 1996. Pro forma net income reflects only options granted in 1995. Therefore, the full impact of calculating compensation cost for stock options under Statement 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years and compensation cost for options granted prior to January 1, 1995 is not considered. A summary of the status of the Company's three fixed option plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
1997 1996 1995 ------------------- ------------------- ------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Fixed Options (000) Price (000) Price (000) Price - --------------------------------------------------------------------------------------------- Outstanding at beginning of year 391 $9.21 394 $9.20 264 $ 8.00 Granted - - - - 135 11.50 Exercised 47 8.58 3 8.00 5 8.00 Forfeited - - - - - - - --------------------------------------------------------------------------------------------- Outstanding at end of year 344 $9.29 391 $9.21 394 $ 9.20 ============================================================================================= Options exercisable at year-end 276 290 259 Options available for grant at year-end None None None Weighted-average fair value of options granted during the year N/A N/A $11.50 =============================================================================================
The following table summarizes information about fixed stock options outstanding at December 31, 1997.
Options Outstanding Options Exercisable --------------------------------------- ------------------------ Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 12/31/97 Life Price at 12/31/97 Price - --------------------------------------------------------------------------------------------- $ 8.00 216,802 2.3 years $ 8.00 216,802 $ 8.00 $11.50 127,125 4.5 11.50 59,626 11.50 - --------------------------------------------------------------------------------------------- $ 8.00 to $11.50 343,927 276,428 =============================================================================================
Effective as of December 14, 1993, the Company adopted a Deferred Compensation Plan for the benefit of Glen E. Roney. The Deferred Compensation Plan provides for a retirement benefit payable to Mr. Roney (or his designated beneficiary or his estate if Mr. Roney dies prior to payment of the full amount of deferred compensation) of $100,000 per year commencing October 29, 2002, and continuing annually thereafter for fourteen years. In the event payments are to commence after October 30, 2002, the Company shall pay to Employee on the Late Retirement Date a lump sum equal to the amount of money that would have been paid to Employee had payments commenced on October 30, 2002 (the "Catch-Up Amount"), and in addition, the Company shall pay to Employee $100,000 per year commencing on October 30 of the year next following the Late Retirement Date and continuing regularly on the same calendar day of each year thereafter, until the Employee has been paid under this paragraph (including the Catch-Up Amount and all other payments) the aggregate sum of $1,500,000; and on the Late Retirement Date, the Company shall pay Employee an amount intended to compensate for Employee's lost earnings potential on the Catch-Up Amount. If Mr. Roney dies prior to commencement of the retirement benefit, payments would commence immediately and be paid to his designated beneficiary or his estate. The Company also adopted the Trust Under Glen E. Roney Deferred Compensation Plan, in the form prescribed by applicable regulations adopted by the Internal Revenue Service for nonqualified deferred compensation plans. Among other things, the Plan and Trust provide for an initial deposit into the Trust by the Company and subsequent deposits at the discretion of the Board of Directors, and further provide for full funding of the amount necessary to discharge the retirement benefit in the event of a change of control, as that term is defined in the Trust. With the consummation of the Mergers the Company acquired four existing separate deferred compensation plans for the benefit of certain Texas State Bank employees. The plans provide for retirement benefits to be paid to the specific employee (or a designated beneficiary or estate if death occurs prior to payment of the full amount of deferred compensation) on reaching age 65. One plan entered into on December 10, 1963, commenced payments of approximately $13,000 each year on January 4, 1988, continuing annually thereafter through June 2003. A second plan, entered into on September 1, 1979, provides for payments of approximately $13,000 each year which was scheduled to commence on April 1, 1990, continuing annually thereafter through June 2005; however, the employee elected to receive an amount less than that provided for in the plan over a longer period of time. The third plan provides for a retirement benefit payable of $50,000 per year commencing in March 1999 and continuing annually thereafter for 20 years. The fourth plan provides for a retirement benefit payable of $13,350 each year beginning March 15, 1995 and continuing annually thereafter for fourteen years. The Company has incurred deferred compensation expense of $152,000, $130,000 and $87,000 for the years ended December 31, 1997, 1996 and 1995, respectively, related to the five deferred compensation plans previously discussed. The Bank owns and is the beneficiary of five life insurance policies on the former employees covered by the deferred compensation plans. The life insurance policies' face values are amounts equal to the total benefits paid under the plan. (12) Commitments and Contingencies In the normal course of business, the Company enters into various transactions which, in accordance with generally accepted accounting principles, are not included on the consolidated balance sheets. These transactions are referred to as "off-balance sheet commitments." The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company attempts to minimize its exposure to loss under these commitments by subjecting them to the same credit approval and monitoring procedures as its other credit facilities. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company's commitments to extend credit are contingent on customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses. Letters of credit are written for conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company's policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. At December 31, 1997, the Company had outstanding commitments to extend credit of approximately $125.6 million which included standby letters of credit of approximately $13.0 million. Management does not anticipate any losses as a result of these commitments. Future minimum lease payments on operating leases as of December 31, 1997 are as follows: Office Office (Dollars in Thousands) Space Equipment Total - ------------------------------------------------------------------------------- 1998 $ 86 $105 $191 1999 19 104 123 2000 19 104 123 2001 19 104 123 2002 19 103 122 - ------------------------------------------------------------------------------- Total $162 $520 $682 =============================================================================== Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $128,000, $96,000, and $12,000, respectively. The Company is a defendant in various legal proceedings arising in connection with its ordinary course of business. In the opinion of management, the financial position of the Company will not be materially affected by the final outcome of these legal proceedings. (13) Other Noninterest Expense Other noninterest expense for the years ended December 31, 1997, 1996 and 1995 consisted of the following: (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Advertising and Public Relations $1,277 $1,197 $ 772 Data Processing and Check Clearing 845 942 491 Director Fees 333 343 284 Franchise Tax 496 245 198 Insurance 288 195 228 FDIC Insurance 138 3 540 Legal 958 689 444 Professional 637 590 426 Postage, Delivery and Freight 594 463 323 Stationery and Supplies 951 907 658 Telephone 381 346 250 Other Losses 521 627 624 Miscellaneous Expense 991 859 649 - ------------------------------------------------------------------------------- Total $8,410 $7,406 $5,887 =============================================================================== (14) Earnings Per Common Share Computations - Basic earnings per share was computed by dividing net income available to common shareholders by the weighted average number of common stock outstanding during the year, retroactively adjusted for stock splits effected as a stock dividend. Diluted earnings per share was computed by dividing net income by the weighted average number of common stock and common stock equivalents outstanding during the year, retroactively adjusted for stock splits effected as a stock dividend. The diluted earnings per share computations include the effects of common stock equivalents applicable to stock option contracts. The number of shares outstanding and related earnings per share ("EPS") amounts have been restated to retroactively give effect for the three-for-two stock split declared and distributed by the Company during the third quarter of 1997. The table below presents a reconciliation of basic and diluted earnings per share computations for the years ended December 31, 1997, 1996 and 1995.
(Dollars in thousands, except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net income available to common shareholders $ 21,417 $ 16,379 $ 8,725 - ------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding used in basic EPS calculation 13,085,149 11,649,892 9,290,839 Add assumed exercise of outstanding stock options as adjustments for dilutive securities 231,565 181,242 36,414 - ------------------------------------------------------------------------------------------ Weighted average number of common shares outstanding used in diluted EPS calculations 13,316,714 11,831,134 9,327,253 ========================================================================================== Basic EPS $ 1.64 $ 1.41 $ 0.94 Diluted EPS $ 1.61 $ 1.38 $ 0.94 ==========================================================================================
(15) Texas Regional Bancshares, Inc. (Parent Only) Condensed Financial Statements Condensed Balance Sheets December 31, 1997 and 1996 (Dollars in Thousands) 1997 1996 - ------------------------------------------------------------------------------- Assets Cash in Subsidiary Bank $ 9,694 $ 10,605 Time Deposits in Subsidiary Bank - 3,059 - ------------------------------------------------------------------------------- Total Cash and Cash Equivalents 9,694 13,664 Investments in Consolidated Subsidiaries 137,316 114,935 Furniture and Equipment 56 68 Other Assets 95 406 - ------------------------------------------------------------------------------- Total Assets $147,161 $129,073 =============================================================================== Liabilities Accounts Payable and Accrued Liabilities $ 65 $ 54 Dividends Payable 1,442 871 - ------------------------------------------------------------------------------- Total Liabilities 1,507 925 Shareholders' Equity 145,654 128,148 - ------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $147,161 $129,073 =============================================================================== Condensed Statements of Income- Years Ended December 31, 1997, 1996 and 1995 (Dollars in Thousands) 1997 1996 1995 - ------------------------------------------------------------------------------- Income Interest Income $ 451 $ 417 $ 338 Dividends Received 17 - - - ------------------------------------------------------------------------------- Total Income 468 417 338 - ------------------------------------------------------------------------------- Expense Occupancy Expense 6 4 4 Equipment Expense 17 14 3 Director Fees 113 125 119 Franchise Tax 198 78 80 Legal and Professional 55 40 24 Shareholder Services 96 126 - Other 51 54 77 - ------------------------------------------------------------------------------- Total Expense 536 441 307 - ------------------------------------------------------------------------------- Income (Loss) Before Income Tax Expense (Benefit) and Equity in Undistributed Net Income of Subsidiaries (68) (24) 31 Income Tax Expense (Benefit) (49) (2) 15 - ------------------------------------------------------------------------------- Income (Loss) Before Equity in Undistributed Income of Subsidiaries (19) (22) 16 Equity in Undistributed Net Income of Subsidiaries 21,436 16,401 8,709 - ------------------------------------------------------------------------------- Net Income $21,417 $16,379 $8,725 ===============================================================================
Condensed Statements of Cash Flows Years Ended December 31, 1997, 1996 and 1995 (Dollars in Thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------------- Cash Flows from Operating Activities Net Income $21,417 $16,379 $8,725 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities Depreciation and Amortization 14 15 5 Undistributed Net Income of Subsidiaries (21,436) (16,401) (8,709) (Increase) Decrease in Other Assets 16 (323) 52 Increase (Decrease) in Income Taxes Payable 6 6 (1) Decrease in Deferred Income Taxes 2 - - Increase (Decrease) in Accounts Payable and Accrued Liabilities 3 13 2 - ---------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 22 (311) 74 - ---------------------------------------------------------------------------------------- Cash Flows from Investing Activities Purchase of Equipment - - (78) Investment in Subsidiaries (250) (40,000) (2,000) - ---------------------------------------------------------------------------------------- Net Cash Used In Investing Activities (250) (40,000) (2,078) - ---------------------------------------------------------------------------------------- Cash Flows from Financing Activities Cash Dividends Paid on Common Stock (4,236) (2,981) (2,353) Proceeds from Issuance of Class A Voting Common Stock 494 51,878 38 - ---------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities (3,742) 48,897 (2,315) - ---------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (3,970) 8,586 (4,319) Cash and Cash Equivalents at Beginning of Year 13,664 5,078 9,397 - ---------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 9,694 $13,664 $5,078 ======================================================================================== Supplemental Disclosures of Cash Flow Information Income Taxes Paid $11,599 $ 7,727 $4,752 ========================================================================================
(16) Restrictions on Retained Earnings The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. The amount of retained earnings in the Bank at December 31, 1997 was $49.9 million. On December 31, 1997, the aggregate amount of dividends which legally could be paid to the Corporation without prior approval of various regulatory agencies was approximately $30.2 million. (17) Regulatory Matters The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes that the Company meets all capital adequacy requirements to which it is subject at December 31, 1997. At December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation categorized the Company as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Company's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ------------------ ------------------ ------------------- (Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------ December 31, 1997 Total Capital (to Risk Weighted Assets) $131,249 13.01% *$74,267 *8.0% *$92,834 *10.0% Tier I Capital (to Risk Weighted Assets) 120,731 14.14 * 37,134 *4.0 * 55,701 * 6.0 Tier I Capital (to Average Assets) 120,731 9.01 * 37,134 *4.0 * 46,417 * 5.0 December 31, 1996 Total Capital (to Risk Weighted Assets) $111,109 14.44% *$61,565 *8.0% *$76,957 *10.0% Tier I Capital (to Risk Weighted Assets) 101,377 13.17 * 30,783 *4.0 * 46,174 * 6.0 Tier I Capital (to Average Assets) 101,377 8.45 * 47,968 *4.0 * 59,960 * 5.0 ========================================================================================== * greater than or equal to
(18) Fair Value of Financial Instruments Disclosures About Fair Value of Financial Instruments- Statement of Financial Accounting Standards No. 107 ("Statement 107"), "Disclosures about Fair Value of Financial Instruments", requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. Debt Securities- For securities held as investments, fair market value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for a similar security. Investments not classified as Held to Maturity or Trading are classified as Available for Sale and measured at fair value in the consolidated balance sheets with unrealized holding gains and losses reported as a separate component of shareholders' equity until realized. The following table presents the amortized cost and estimated fair value of securities classified as Available for Sale at December 31, 1997 and December 31, 1996:
1997 1996 ------------------------- ------------------------ Amortized Estimated Amortized Estimated (Dollars in Thousands) Cost Fair Value Cost Fair Value - --------------------------------------------------------------------------------------------- U.S. Treasury $ 6,976 $ 7,002 $ 8,965 $ 8,973 U.S. Government Agency 269,151 269,562 157,951 157,705 Mortgage-Backed 15,549 15,561 91 92 States and Political Subdivisions 19,927 20,898 21,770 22,811 Other 2,692 2,701 2,718 2,720 - --------------------------------------------------------------------------------------------- Total $314,295 $315,724 $191,495 $192,301 =============================================================================================
The following table presents the carrying value and estimated fair value of securities classified as Held to Maturity at December 31, 1997 and December 31, 1996:
1997 1996 ----------------------- ----------------------- Carrying Estimated Carrying Estimated (Dollars in Thousands) Amount Fair Value Amount Fair Value - --------------------------------------------------------------------------------------------- U.S. Treasury $ 15,953 $ 16,182 $ 38,160 $ 38,430 U.S. Government Agency 29,941 30,062 81,003 81,588 States and Political Subdivisions 5,641 5,792 6,672 6,878 - --------------------------------------------------------------------------------------------- Total $ 51,535 $ 52,036 $125,835 $126,896 =============================================================================================
Loans- The Company does not consider its loan portfolio to have the homogeneous categories of loans for which the fair value could be estimated by using quoted market prices for securities backed by similar loans. Therefore, the fair value of all loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The following table presents information for loans at December 31, 1997 and December 31, 1996:
1997 1996 ---------------------------- ---------------------------- Carrying Average Calculated Carrying Average Calculated (Dollars in Thousands) Amount Yield Fair Value Amount Yield Fair Value - --------------------------------------------------------------------------------------------- Commercial and Agriculture Adjustable $196,937 9.77% $194,877 $149,986 9.26% $149,686 Fixed 113,325 10.06 113,820 116,182 10.08 116,864 Real Estate Adjustable 222,544 9.67 221,460 195,284 9.67 193,095 Fixed 269,385 10.15 271,786 224,418 10.40 225,147 Consumer 84,663 10.72 83,963 71,786 10.56 71,482 - --------------------------------------------------------------------------------------------- Total Loans, Net of Unearned Discount 886,854 9.99% 885,906 757,656 9.95% 756,274 - --------------------------------------------------------------------------------------------- Allowance for Loan Losses 10,518 - 10,031 - - --------------------------------------------------------------------------------------------- Total Loans, Net $876,336 $885,906 $747,625 $756,274 =============================================================================================
Deposit Liabilities- The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The following table presents the carrying value and estimated fair value of deposit liabilities at December 31, 1997 and December 31, 1996:
1997 1996 ---------------------- ----------------------- Carrying Estimated Carrying Estimated (Dollars in Thousands) Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------------- Noninterest-Bearing Demand Deposits $ 184,521 $ 184,521 $ 168,728 $ 168,728 Savings 90,002 90,002 94,852 94,852 Money Market Checking and Savings Accounts 226,099 226,099 234,927 234,927 Time Deposits 736,375 740,402 593,228 594,187 - ------------------------------------------------------------------------------------------- Total Deposits $1,236,997 $1,241,024 $1,091,735 $1,092,694 ===========================================================================================
The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The Company has not attempted to determine the amount of increase in net assets that would result from the benefit of considering the low-cost funding provided by deposit liabilities. Commitments to Extend Credit, Standby Letters of Credit and Financial Guarantees Written - These financial instruments are not sold or traded, and estimated fair values are not readily available. The carrying amount of commitments to extend credit and standby letters of credit is the net unamortized deferred cost or income arising from these unrecognized financial instruments. The estimated fair value of these commitments is considered to be the carrying value. Financial guarantees written consist of obligations for credit cards issued to certain customers. Substantially all of the liability for financial guarantees written is collateralized by deposits pledged to the Company. The following table presents the contract amount, carrying amount and estimated fair value for commitments to extend credit, standby letters of credit and financial guarantees written at December 31, 1997 and 1996:
1997 1996 ---------------------------- ---------------------------- Contract Carrying Estimated Contract Carrying Estimated (Dollars in Thousands) Amount Amount Fair Value Amount Amount Fair Value - ----------------------------------------------------------------------------------------- Commitments to Extend Credit $111,170 $(1,088) $(1,088) $88,646 $(604) $(604) Standby Letters of Credit 12,965 4 4 6,309 4 4 Financial Guarantees Written 1,510 - - 1,541 - - =========================================================================================
Limitations- Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax liabilities, property, plant, equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. (19) Acquisition Activity The Company signed a definitive agreement on October 15, 1997, to acquire TB&T Bancshares, Inc. ("TB&T"), and its subsidiary, Texas Bank & Trust of Brownsville, Texas. At December 31, 1997 TB&T has assets of $45.7 million and equity of $3.9 million. The transaction was closed on February 19, 1998 and was accounted for under the pooling-of-interests method of accounting. The definitive agreement provides for the exchange of a maximum of 308,076 shares of the Company for all of the outstanding shares of TB&T. This is based upon an exchange ratio of 0.1522126 Company shares for each of the 1,695,775 outstanding TB&T shares (or approximately 258,118 Company shares in the aggregate) to be delivered at closing, and 0.0294605 Company shares for each TB&T share (approximately 49,958 shares in the aggregate) to be placed in escrow for distribution to the shareholder or for return to the Company based upon the resolution of certain claims against TB&T's subsidiary, Texas Bank & Trust. The Company signed a definitive agreement on October 20, 1997, to acquire Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank of Brownsville, Texas. At December 31, 1997 Brownsville Bancshares, Inc. has assets of $97.2 million, and equity of $12.0 million. The transaction was closed on February 19, 1998 and was accounted for under the pooling-of-interests method of accounting. The definitive agreement provides for the exchange of a maximum of 985,000 shares of the Company for all of the outstanding shares of Brownsville Bancshares. This is based upon an exchange ratio of 3.06608 Company shares for each of the 308,917 outstanding Brownsville Bancshares, Inc. shares or approximately 947,164 shares in aggregate. In addition, the Company has agreed to issue approximately 37,836 Company shares in consideration of and in exchange for the cancellation of outstanding Brownsville Bancshares options. The Company signed a definitive agreement on December 15, 1997, to acquire Raymondville Bancorp, Inc., and its subsidiary, Bank of Texas. At December 31, 1997 Raymondville Bancorp, Inc. has assets of $64.4 million and equity of $4.8 million. The transaction was closed on February 19, 1998 and was accounted for under the purchase method of accounting. The definitive agreement provides for a total cash consideration of $9.6 million for all of the outstanding shares of Raymondville Bancorp, Inc. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the directors and executive officers of the Company is set forth in Texas Regional's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 1998 in the sections entitled "Election of Directors" and "Executive Officers". Mr. Paul G. Veale, Sr., CPA has been a director of the Company since 1985. His principal occupation for the last five years has been investments. Mr. Veale has chosen to retire and not stand for re-election. ITEM 11. EXECUTIVE COMPENSATION The information concerning the compensation of the executive officers of the Company is set forth in Texas Regional's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 1998 in the section entitled "Executive Compensation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Ownership of the Company's common stock by certain beneficial owners and by management is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 1998 in the section entitled "Stock Ownership of Management and Others". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning transactions between management and others and the Company is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 1998 in the section entitled "Transactions with Management and Others". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following consolidated financial statements of the registrant and its subsidiaries, are included herein: Independent Auditors' Report Consolidated Balance Sheets-December 31, 1997 and 1996 Consolidated Statements of Income-Years Ended December 31, 1997, 1996, and 1995 Consolidated Statements of Changes in Shareholders' Equity- Years Ended December 31, 1997, 1996, and 1995 Consolidated Statements of Cash Flows-Years Ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements - December 31, 1997, 1996 and 1995 (2) Financial Statement Schedules are omitted because the required information is not applicable. (3) Exhibits 2.1 Agreement and Plan of Reorganization dated as of October 15, 1997, by and between Texas Regional Bancshares, Inc. and Raymondville Bancorp, Inc. 2.2 Agreement and Plan of Reorganization dated as of October 20, 1997, by and between Texas Regional Bancshares, Inc. and Brownsville Bancshares, Inc. (incorporated by reference from Form S-4, Commission File No. 333-41959). 2.3 Agreement and Plan of Reorganization dated as of October 15, 1997, by and between Texas Regional Bancshares, Inc. and TB&T Bancshares, Inc. (incorporated by reference from Form S-4, Commission File No. 333-41945). 2.4 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, First State Bank & Trust Co., Mission, Texas ("First State Bank"), Texas Regional Bancshares, Inc., and certain shareholders of First State Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 0-14517). 2.5 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas ("Border Bank"), Texas Regional Bancshares, Inc., and certain shareholders of Border Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 0-14517). 3.1 Articles of Incorporation of Texas Regional Bancshares, Inc. (incorporated by reference from Form 10, Commission File No. 0-14517). 3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed December 28, 1983 (incorporated by reference from Form 10, Commission File No. 0-14517). 3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed June 25, 1986 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 4, 1988 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 12, 1991 (incorporated by reference from Form 10-K, Commission File No. 0-14517). 3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed March 2, 1992 (incorporated by reference from Form 10-K, Commission File No. 0-14517). 3.7 Resolution Eliminating from the Articles of Incorporation certain preferred series of shares of Texas Regional Bancshares, Inc., filed February 21, 1995 (incorporated by reference from 1994 Form 10-K, Commission File No. 0-14517). 3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated by reference from Form S-1, Commission File No. 33-74992). 4 Relevant portions of Texas Regional Bancshares, Inc. Articles of Incorporation and Bylaws (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.1 Incentive Stock Option Plan (incorporated by reference from Form 10, Commission File No. 0-14517). 10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from Form 10, Commission File No. 0-14517). 10.3 1995 Non-Statutory Stock Option Plan (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.4 Texas Regional Bancshares, Inc., 1997 Incentive Stock Option Plan (incorporated by reference from Form S-4, Commission File No. 0-14517). 10.5 Texas Regional Bancshares, Inc., 1997 Nonstarutory Stock Option Plan (incorporated by reference from Form S-4, Commission File No. 0-14517). 10.6 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions) (incorporated by reference from Form S-8, Commission File No. 33-39386). 10.7 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted July 9, 1991 (incorporated by reference from 1991 Form 10-K, Commission File No. 0-14517). 10.8 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted May 12, 1992 (incorporated by reference from 1992 Form 10-K, Commission File No. 0-14517). 10.9 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted September 8, 1992, effective January 1, 1992 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.10 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.11 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from 1994 Form 10-K, Commission File No. 0-14517). 10.12 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provision), adopted as of August 8, 1995 (incorporated by reference from Form S-1, Commission File No. 333-1467). 10.13 Amendment No. 7 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted May 21, 1996 (incorporated by reference from 1996 Form 10-K, Commission File No. 0-14517). 10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted March 10, 1998. 10.15 Glen E. Roney Amended and Restated Deferred Compensation Plan dated as of March 11, 1997 (incorporated by reference from Form S-4, Commission File No. 333-41959). 21 Subsidiaries of the Registrant. 27 Financial Data Schedule (b) Reports on Form 8-K No report on Form 8-K was filed by Texas Regional Bancshares, Inc. during the the three months ended December 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEXAS REGIONAL BANCSHARES, INC. (Registrant) By: /s/ G.E. Roney ---------------------------- Glen E. Roney Chairman of the Board, President and Chief Executive Officer Date: March 10, 1998 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Title Date - ---------- ----- ---- /s/Morris Atlas Director March 10, 1998 - ------------------------------- Morris Atlas /s/Frank N. Boggus Director March 10, 1998 - ------------------------------- Frank N. Boggus /s/George R. Carruthers Executive Vice President - ------------------------------- & Chief Financial Officer March 10, 1998 George R. Carruthers /s/Robert G. Farris Director March 10, 1998 - ------------------------------- Robert G. Farris /s/Joe M. Kilgore Director March 10, 1998 - ------------------------------- Joe M. Kilgore /s/C. Kenneth Landrum,M.D. Director March 10, 1998 - ------------------------------- C. Kenneth Landrum,M.D. /s/Glen E. Roney Chairman of the Board, March 10, 1998 - ------------------------------- President, Chief Executive Glen E. Roney Officer & Director /s/Nancy Schultz Senior Vice President & March 10, 1998 - ------------------------------- Secretary/Treasurer Nancy Schultz /s/Ann Sefcik Controller & Assistant March 10, 1998 - ------------------------------- Secretary Ann Sefcik /s/Julie G. Uhlhorn Director March 10, 1998 - ------------------------------- Julie G. Uhlhorn Director ______________ - ------------------------------- Paul G. Veale /s/Jack Whetsel Director March 10, 1998 - ------------------------------- Jack Whetsel INDEX TO EXHIBITS FILED HEREWITH SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBIT - -------- ------------ 2.1 Agreement and Plan of Reorganization dated as of December 15, 1997, by and between Texas Regional Bancshares, Inc. and Raymondville Bancorp, Inc. 10.14 Amendment No. 8 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions), adopted March 10, 1998. 21 Subsidiaries of the Registrant 27 Financial Data Schedule EX-2.1 2 EXHIBIT 2.1 AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (hereinafter called the "Agreement"), dated as of December 15, 1997, is executed by and between Texas Regional Bancshares, Inc., McAllen, Texas, a Texas corporation ("Texas Regional") and Raymondville Bancorp, Inc., a Texas corporation ("Raymondville"). 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's wholly owned subsidiary, Texas Regional Delaware, Inc. ("TRD"), has formed a new wholly owned subsidiary corporation, Texas Regional Acquisition Corp. ("TRA"), for purposes of facilitating the transaction herein described. Raymondville operates a commercial banking business in Texas through its wholly owned subsidiary, Bank of Texas ("Bank of Texas"). As used in this Agreement, any reference to the subsidiaries of Raymondville includes any and all direct or indirect subsidiaries of Raymondville, including specifically but without limitation Bank of Texas. Rollins M. Koppel is the sole shareholder of Raymondville (the "Shareholder") and he joins into the execution hereof for the limited purpose of evidencing his consent to and approval of the transaction herein described and to confirm that he has heretofore approved the merger transaction as herein described. W I T N E S S E T H: This Agreement provides for the merger of Raymondville with TRA, a wholly owned subsidiary of TRD, as a result of which Raymondvllle will be the surviving corporation, pursuant to the terms of this Agreement and Plan of Reorganization. As a result of the merger, the sole shareholder of Raymondville will receive cash, as herein provided, in exchange for his shares of Raymondville common stock. Upon the closing of the transaction, it is anticipated that (i) Raymondville shall be merged with TRA, with Raymondville being the surviving corporation, and the sole shareholder of Raymondville will receive cash in exchange for his shares of Raymondville, and (ii) Bank of Texas will be merged with and into Texas State Bank and Bank of Texas will cease its separate existence. As a result of the merger of TRA with and into Raymondville, all rights, privileges, immunities, powers and franchises of each of TRA and Raymondville shall be merged into Raymondville as the surviving corporation. Without any other action, at the Effective Time, the surviving corporation 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 TRA and Raymondville shall survive and any liens shall be preserved unimpaired in Raymondville as the surviving corporation. All of the foregoing shall be effected pursuant to and as set forth in this Agreement and in a Certificate of Merger (the "Certificate of Merger") to be executed by and among TRA and Raymondville, in the form required by applicable provisions of the Texas Business Corporation Act. In addition, at or immediately following the Effective Time of the merger of TRA with and into Raymondville, Bank of Texas will be merged with and into Texas State Bank, and all rights, privileges, immunities, powers and franchises of each of Texas State Bank and Bank of Texas 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 Bank of Texas and Texas State Bank and shall thereafter possess all of the interests, both public and private, of each of Bank of Texas and Texas State Bank, and all claims of creditors of each of Texas State Bank and Bank of Texas 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 Bank of Texas. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE PLAN OF MERGER 1.1 THE MERGER. Upon and subject to the terms and provisions hereof, at the Effective Time, as hereafter defined, TRA shall be merged with and into Raymondville (the "Merger"). The effect of the Merger is that the separate existence of TRA shall cease. Following approval of such merger transaction by applicable regulatory authorities and the fulfillment of other conditions precedent to such merger transaction as herein described, TRA and Raymondville shall each execute and deliver the Articles of Merger, in the form required by the Texas Business Corporation Act, for filing with the Secretary of State of Texas. At the Effective Time of the Merger, the rights of the sole shareholder of -2- Raymondville shall, without the requirement of further action on the part of the shareholder, immediately be converted into the right to receive cash, as herein provided, and such shareholder shall cease to be a shareholder of Raymondville and his share certificate shall for all purposes be deemed only to represent a right to receive the cash consideration to be paid pursuant to this Agreement. 1.2 CONSIDERATION TO RAYMONDVILLE SOLE SHAREHOLDER. 1.2.1 At the Effective Time (as hereinafter defined), all of the outstanding shares of Raymondville capital stock shall be converted into the right to receive an aggregate of $9,100,000.00 in cash, payable at the time of closing of the transaction herein described, and evidence, in the form of a safekeeping receipt, that Texas State Bank, Trust Department, is holding an additional aggregate amount of $500,000.00 (the "Koppel Escrow Account"). The Koppel Escrow Account will be held and disbursed pursuant to section 9.11 of this Agreement. 1.2.2 The consideration to which the sole shareholder of Raymondville becomes entitled shall be delivered by Texas Regional to the shareholder upon surrender of such shareholder's share certificate or certificates evidencing shares of Raymondville stock. A number of Raymondville shares equal to the number of outstanding TRA shares shall then be issued to TRD as the sole shareholder of TRA, in exchange for and in cancellation of TRD's TRA shares. The stock transfer records of TRA shall for all purposes be closed as of the Effective Time, and no transfer of record of any of the shares of TRA capital stock shall take place thereafter. 1.3 CLOSING. Each of Raymondville and Texas Regional will use reasonable efforts to close the transactions herein described on or before February 10, 1998, provided that the conditions to closing as herein described have been met in a timely manner to permit closing by such date. 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 February 10, 1998; 1.3.2 The thirtieth calendar day after the date of approval by the Federal Reserve Board as required by Section 7.2 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 -3- 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 7.2 hereof, has elected to contest (he same, then 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 Raymondville 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 he mutually agreeable. If such Closing shall not have been accomplished on or before April 1, 1998, this Agreement shall, at the election of either Raymondville or Texas Regional by written notice, terminate and be of no further force or effect. Any termination which occurs through 110 fault of Raymondville 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 Raymondville 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 Texas, pursuant to which TRA is merged with and into Raymondville. 1.5 EFFECT OF MERGER. As a result of the merger, all or the capital stock of Bank of Texas, shall be acquired by TRD, free and clear of any and all liens, claims or encumbrances. 1.6 BANK MERGER. Raymondville 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 Bank of Texas with and into Texas State Bank, including execution and delivery of an Agreement of Merger, any requested -4- 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 RAYMONDVILLE Raymondville represents and warrants to, and covenants and agrees with, Texas Regional as follows: 2.1 ORGANIZATION AND OPERATION OF RAYMONDVILLE. Raymondville 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 Bank of Texas. Raymondville 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 Raymondville as amended to date, have been delivered to Texas Regional. Raymondville is not a reporting company under the Securities Exchange Act of 1934, as amended (the "1934 Act"). The only business of Raymondville is its ownership and operation of its subsidiary, Bank of Texas. Raymondville has no liabilities, liquidated or unliquidated, fixed or contingent, other than those shown on the Balance Sheet dated December 31, 1996 (as hereinafter described), and has no assets other than its ownership of all of the capital stock of Bank of Texas. Without limiting the generality of the foregoing, Raymondville is not a member of any joint venture or partnership and Raymondville does not own the securities of any other entity other than as herein described. 2.2 ORGANIZATION AND OPERATION OF BANK OF TEXAS. Bank of Texas is a Texas state banking association, duly organized and existing 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 commercial banking business. Bank of Texas is in good standing under the laws of the state of Texas. Bank of Texas operates out of its main bank facility in Raymondville, Texas, and one branch facility located in Brownsville, Texas. Bank of Texas has no other branch facilities, nor does Bank of Texas have any application pending for operation of any additional branch facility. True and -5- complete copies of the Articles of Association and Bylaws of Bank of Texas, as amended to date, have been delivered to Texas Regional. Bank of Texas (i) is duly authorized to conduct a general banking business, in accordance with its charter, subject to the supervision of the Texas Department of Banking 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. To the best knowledge and belief of Raymondville, all books and records related to the business of Bank of Texas are true, correct and complete. Bank of Texas' banking and other business activities are in full compliance with sound banking practices and applicable provisions of law, including the Texas Banking Code, the Federal Deposit Insurance Act, the Federal Reserve Act and applicable regulations. Except as disclosed in SCHEDULE 2.2 Bank of Texas has no subsidiaries or affiliates, owns no voting securities of any other corporation, and is not a member of any joint venture or partnership. 2.3 CAPITALIZATION AND OWNERSHIP. The authorized capital stock of Raymondville consists of 1,000,000 shares of common stock, par value $1.00 per share, of which a total of 49,991 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 Rollins M. Koppel. The Shares have not been issued in violation of the preemptive rights of any stockholder. The authorized capital stock of Bank of Texas consists of 63,331 shares of capital stock, par value $5.00 per share, all of which are duly authorized, validly issued and outstanding, fully paid, nonassessable, and are owned beneficially and of record by Raymondville. There are no outstanding options, warrants, conversion rights, calls or commitments of any kind obligating Raymondville or Bank of Texas to issue, directly or indirectly, additional shares of capital stock, and no authorization therefor has been given. Neither Raymondville nor Bank of Texas has any outstanding commitment or obligation to repurchase, reacquire or redeem any of its outstanding capital stock. 2.4 FINANCIAL STATEMENTS AND RECORDS. 2.4.1 Raymondville has delivered to Texas Regional (i) the consolidated balance sheet of Raymondville and its subsidiaries as of December 31, 1996, 1995 and 1994 (the "Balance Sheet"), and the related consolidated statements of income, changes in stockholders' equity and changes in financial position for the years then ended, as compiled by the Comptroller of Bank of Texas, from the books and records of Raymondville and the Bank of Texas. These financial statements fairly present the financial position of Raymondville 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 -6- on a consistent basis. To the best knowledge of Raymondville, the compiled consolidated financial statements of Raymondville and its subsidiaries have been prepared in accordance with generally accepted accounting principles. In addition, Raymondville has delivered to Texas Regional its unaudited parent company only balance sheets and regulatory reports of condition of Raymondville as of October 31, 1997, and its unaudited bank only balance sheets and regulatory reports of condition of Bank of Texas as of October 31, 1997 (collectively, such balance sheets are hereafter sometimes called the "Raymondville Balance Sheet" and the "Bank of Texas Balance Sheet, respectively) and the related unaudited statements of income, changes in stockholders' equity and changes in financial position for the ten-month period then ended. In the opinion of the management of Raymondville, these financial statements also fairly present the financial position of Raymondville and Bank of Texas 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 "Raymondville Financial Statements." Except as described in SCHEDULE 2.4.1, the Raymondville 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, except as described in SCHEDULE 2.4.1, Raymondville specifically represents to Texas Regional that Raymondville 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 Raymondville Financial Statements (including the Raymondville Balance Sheet and the Bank of Texas Balance Sheet) or which have been incurred in the ordinary course of business since the date of the Raymondville Balance Sheet and the Bank of Texas Balance Sheet. As of the time of Closing, any material liabilities, accrued, contingent or otherwise, which have been incurred since September 30, 1997, will have been fully disclosed to Texas Regional. 2.4.2 To the best knowledge and belief of Raymondville, except as described in SCHEDULE 2.4.1, within the past five (5) years there have not been any material changes in the financial condition, results of operations, business or prospects of Raymondville 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 Raymondville or its subsidiaries. -7- 2.4.3 The books and records of Raymondville 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 Raymondville and its subsidiaries are and will be complete, accurate and current. 2.4.4 Bank of Texas and Raymondville have no trust business. 2.5 LOANS. 2.5.1 All loans included in the assets of Raymondville and its subsidiaries, including specifically Bank of Texas, 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 Raymondville), have been made in the ordinary course of business of Raymondville and, other than those loans that have been identified on the problem loan list delivered to Texas Regional prior to or contemporaneously with the execution hereof (which problem loan list has been marked for identification by Texas Regional and Raymondville), such loans do not present more than the normal risk of uncollectibility or other unfavorable features. Raymondville will provide an updated problem loan list at the time of Closing. 2.5.2 All loans to directors, officers and beneficial owners of 5% or more of the outstanding capital stock of Raymondville 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 Raymondvllle (and marked for identification by Texas Regional and Raymondville), 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. 2.5.3 The reserves for loan losses of Bank of Texas (which constitute the total reserves of Raymondville) have been calculated in accordance with all applicable rules and regulations. In the reasonable opinion of the management, officers and directors of Raymondville, the reserve for loan losses shown on the Raymondville Balance Sheet is adequate in all respects to provide for all losses on loans outstanding as of the date of the Raymondville Balance Sheet. -8- 2.6 PROPERTIES. Subject to reservations and exceptions shown on title opinions or title policies delivered to Texas Regional (and marked for identification by Texas Regional and Raymondville), Raymondvilie and its subsidiaries, including Bank of Texas, have good and marketable title to all assets and properties, whether real or personal, tangible or intangible, which they purport to own, including without limitation, all assets and properties reflected on the Raymondville Balance Sheet or acquired subsequent thereto (except to the extent such assets and properties have been disposed of in the ordinary course of business since the date of the Raymondville Balance Sheet), subject to no liens, mortgages, security interests, encumbrances, easements, title imperfections, or charges of any kind except (i) as noted in the Raymondville Balance Sheet or the notes to the Raymondville Financial Statements, (ii) statutory liens not yet delinquent, (iii) security interests granted incident to borrowings by Bank of Texas 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 Raymondville. All improvements, buildings and structures located on real estate owned by Raymondville and its subsidiaries, and the use by Raymondville and its subsidiaries of such real estate, together with such improvements, buildings and structures, in the manner heretofore and currently used by Raymondville 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 Raymondville and its subsidiaries, and all of the material, tangible personal property owned by Raymondville and its subsidiaries, are in good operating condition and repair, reasonable wear and tear excepted Listed on SCHEDULE 2.6 are all policies of title insurance covering such properties. 2.7 ENVIRONMENTAL MATTERS. To the best knowledge and belief of Raymondville, neither any Environmental Hazards nor any Hazardous Materials Contamination exist on any real property owned or used by Raymondville and its subsidiaries, including Bank of Texas (including any owned by and used in connection with the business of Bank of Texas and any foreclosed properties owned by Bank of Texas), or on any real property used by Bank of Texas in connection with the business of Bank of Texas 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." As used in this Agreement, the term "Environmental Hazards" shall mean (i) any "hazardous waste" as defined by the Resource -9- 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.5.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. 2.8 LITIGATION. No claims have been asserted and no relief has been sought against Raymondville or any of its subsidiaries, including Bank of Texas, 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 Raymondville or any of its subsidiaries. To the best knowledge and belief of Raymondville, Raymondvilie and its subsidiaries have compiled with, and are presently in compliance with, all laws and regulations pertaining to consumer credit and truth in lending. The management of Raymondville and its subsidiaries is not aware of any material violation by Raymondville or any subsidiary of Raymondville of any of the foregoing. To the best knowledge and belief of Raymondville, Raymondville 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 Raymondville and its subsidiaries have been duly obtained and are in full force and effect, and there are no proceedings pending or, to Raymondville's 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. -10- 2.9 TAXES. Raymondvilie 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 Raymondville nor any subsidiary of Raymondville is delinquent in the payment of any taxes shown on such returns or reports. Raymondville has no examination pending by the Internal Revenue Service, the Texas Comptroller of Public Accounts, or any other tax authority, nor has Raymondville been notified of any proposed examination. There are included in the Raymondville Balance Sheet, or reflected in the Notes to the Raymondville Financial Statements, reserves adequate in the reasonable opinion of management for the payment of all accrued but unpaid federal, state and local taxes of Raymondville and its subsidiaries, including all income, franchise, ad valorem and other taxes, and all interest and penalties, whether or not disputed, for the ten-month period ended October 31, 1997, for the year ended December 31, 1996, and for all fiscal years prior thereto. Neither Raymondvilie nor any subsidiary of Raymondville 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 Raymondville 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 Raymondville nor any of its subsidiaries has filed a consent pursuant to Section 341(f) of the Internal Revenue Code or otherwise. 2.10 CONTACTS. Except as set forth in SCHEDULE 2.10 neither Raymondvilie 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 $10,000 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 $400,000 in any one transaction and $400,000 in the aggregate; (vii) agreements to which any director, officer or holder of 5% or more of the outstanding capital stock of Raymondville, 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 -11- contracts, other than the foregoing, not made in the ordinary course of business. Raymondvilie and its subsidiaries have in all material respects performed all obligations required to be performed by them to date. Neither Raymondville 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 Raymondville 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 Raymondville and its subsidiaries; or (c) under any agreement with federal or state regulatory authorities. Raymondville and its subsidiaries have not granted 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. 2.11 APPROVALS; VALIDITY OF AGREEMENT. The Board of Directors of Raymondville has approved the form, terms and provisions of this Agreement and the transactions contemplated hereby. The sole shareholder of Raymondville, Rollins M. Koppel, is the only shareholder with the power to consider and vote upon the transactions herein described, including the right to vote on the proposed merger of Raymondville and TRA. Rollins M. Koppel has joined into the execution hereof to evidence his consent to and written approval of the transaction herein described, and to represent that he has taken all action required as the sole shareholder of Raymondville to approve the transaction, and that no additional action by the shareholder is required. 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, to the best knowledge, information and belief, after due inquiry, of Raymondville, the execution, delivery and performance of this Agreement and the consummation of the merger contemplated herein, and the merger of Bank of Texas 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 Raymondville or any subsidiary thereof may be subject; (ii) any contract, agreement or instrument to which Raymondville or any subsidiary thereof is a party or pursuant to which Raymondville or any subsidiary is bound; or (iii) the Articles of Incorporation or Bylaws of Raymondville or the Articles of Association or Bylaws of Bank of Texas. 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, no consent or approval or other action by any party (including specifically but without limitation any party to a contract to which Raymondville or Bank of Texas is subject) is required for the execution, delivery and -12- performance of this Agreement and consummation of the transaction herein described or for the merger of Bank of Texas with and into Texas State Bank, as herein contemplated. The execution9 delivery and performance of this Agreement and the consummation of the transactions herein described, and the merger of Bank of Texas 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 Raymondville or its subsidiaries or upon any of the stock of Raymondville or its subsidiaries. This Agreement constitutes the legal, valid and binding obligation of Raymondville, enforceable against Raymondville in accordance with its terms, except as the same may be limited by applicable bankruptcy, insolvency9 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. 2.12 INSURANCE. Raymondville and its subsidiaries have insurance coverage with reputable insurers in amounts, types and risks insured as set forth in SCHEDULE 2.12. Bank of Texas accounts are insured by the Federal Deposit Insurance Corporation (~FDIC") to the extent permitted by law, and Bank of Texas has paid all premiums required to be paid and is in compliance with the applicable regulations of the FDIC. 2.13 ABSENCE OF ADVERSE AGREEMENTS. Neither Raymondville nor any subsidiary thereof is a party to any agreement or instrument, nor is Raymondville 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 Raymondvilie or any subsidiary of Raymondville. 2.14 ABSENCE OF CERTAIN CHANGES. Except as set forth in SCHEDULE 2.149 since December 31,1994, Raymondville and its subsidiaries have not (i) issued or sold any capital stock of Raymondville 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 Bank of Texas); (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 -13- 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 Raymondville 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 or December 31, 1996 or any severance or 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 Raymondville 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 September 30, 1997, there has been no material adverse change in Raymondville or Bank of Texas. 2.15 AGREEMENTS WITH DIRECTORS, OFFICERS AND STOCKHOLDERS. The name of each director and executive officer of Raymondville and each of its subsidiaries, and the name and address of the holder of one hundred percent (100%) of the outstanding capital stock of Raymondville, 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 2.15. Except as set forth on 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 Raymondville or any subsidiary (including Bank of Texas). All transactions with directors, executive officers, 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 -14- Transaction List, neither Raymondvilie nor any subsidiary thereof has any commitments, written or oral, to lend any funds to any such person. 2.16 AFFILIATED CORPORATIONS. Raymondville 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 Raymondville or for the shareholders of Raymondville. 2.17 REGULATORY MATTERS AND EXAMINATION REPORTS. Neither Raymondville 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 Texas Banking Department, or any other regulatory authority (collectively, the "Regulatory Authorities"), nor does Raymondville or any subsidiary have any examination pending by any applicable Regulatory Authorities nor has Raymondville or any subsidiary been notified of any proposed examination by any Regulatory Authorities, except for an examination by the Federal Reserve Board scheduled to begin on January 5, 1998, to facilitate the transactions herein described. To the extent permitted by law, Raymondville has provided to Texas Regional complete and correct copies of (i) all examination reports by Regulatory Authorities forwarded to Raymondville or any subsidiary thereof during the calendar years 1994, 1995, 1996 and to date 1997; (ii) any correspondence between Raymondville (or any subsidiary of Raymondville) and such agencies during such periods, and (iii) any agreements, arrangements or understandings between Raymondvllle (or any subsidiary of Raymondville) and such agencies, including any agreements, arrangements or understandings arising out of or related to any such examinations. 2.18 COMPLIANCE WITH THE APPLICABLE LAW. To the best knowledge and belief of Raymondville, Raymondville 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 Raymondville or any subsidiary, which violation might result in any material adverse change in the condition, business, prospects, properties or assets of Raymondville or its subsidiaries. 2.19 DISCLOSURE. Neither the financial statements nor any representation or warranty contained herein, nor any information delivered or to be delivered by Raymondville 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. -15- 2.20 FINDERS. Neither Raymondville 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, Raymondville 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. TRA 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. 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. -16- ARTICLE 4 INDEMNIFICATION 4.1 RAYMONDVILLE AGREEMENT TO INDEMNIFY. Raymondville hereby agrees to indemnity, 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 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 Raymondville 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 Raymondville or any subsidiary thereof, or any omission of a material fact necessary in order to make any statements made by or on behalf of Raymondville, in light of the circumstances under which they were made, not misleading, including any such statement or omission in the context of solicitation by Raymondville of proxies for approval of the transactions described in this Agreement by the shareholders of Raymondville; and (iii) any disclosure by any officer, director, shareholder or present or former employee of Raymondville or any subsidiary thereof of any confidential information related to Raymondvilie 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 Raymondville and its officers, directors, employees, agents and attorneys from and against any and all losses, claims, damages, expenses or liabilities to which Raymondville 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: -17- (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 Raymondville (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. 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 -18- 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 AND ARBITRATION. The indemnity agreement contained in this Article 4 shall survive any investigation made by or on behalf of any Indemnified Party but shall not survive the closing of the transactions described in this Agreement. In the event of any disputed claim for indemnification under this Article 4, the claim shall be submitted to binding arbitration within thirty (30) days of the request by either the party or parties claiming indemnification or the party or parties against whom the indemnification obligation is claimed, in the following manner, to wit: the party or parties claiming indemnification and shall select a qualified, commercial arbitrator and the party or parties from whom indemnification is sought shall select one qualified, commercial arbitrator. The two arbitrators so selected shall in turn select a third arbitrator who shall participate with the two arbitrators selected by the parties as an arbitration panel. The arbitrators shall in each case be qualified in arbitrating matters such as the disputed claim for indemnification, and they shall arbitrate the dispute in a location in Cameron County, Texas, in accordance with applicable Commercial Arbitration Rules of the American Arbitration Association. Any ruling rendered by the arbitrators shall be final, binding and conclusive. No provision of, nor the exercise of any rights under, this article shall limit the right of any party, and the parties shall have the right during any dispute, to seek, use and employ ancillary or preliminary remedies, either legal or equitable, judicial or otherwise, for the purposes of realizing upon, preserving, or protecting rights hereunder. To the extent permitted by -19- applicable law, the arbitrator(s) shall have the power to award and allocate recovery of all 'I costs and fees (including attorneys' fees, administrative fees and arbitrators' fees) between the parties. THE PARTIES WILL BE LEGALLY OBLIGATED TO ABIDE BY THE AWARD RENDERED BY THE ARBITRATOR(S). A COURT JUDGMENT MAY BE ENTERED UPON THE AWARD OR SUCH AWARD MAY BE ENFORCED BY INJUNCTIVE RELIEF, RECEIVERSHIP RELIEF, OR OTHER EQUITABLE RELIEF. ARTICLE 5 SPECIAL COVENANTS 5.1 STOCKHOLDER APPROVAL BY RAYMONDVILLE. The sole shareholder of Raymondville has heretofore approved this Agreement and the Merger transaction herein described, and Raymondville and such sole shareholder covenant and agree not to take any action to rescind or revoke such approval, nor shall either Raymondville or such sole shareholder take any action that is not expressly consistent with such approval. This Agreement and the proposed merger of Bank of Texas with and into Texas State Bank have already been approved by the Board of Directors of Raymondville as the sole shareholder of Bank of Texas. 5.2 PERIODIC REPORTS AND STATEMENT INFORMATION. Raymondville 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 any registration statement for the registration of the Texas Regional Class A Voting Common stock to be issued in the connection with any pending transaction or any transaction hereafter entered into by Texas Regional, and (iii) communications with shareholders of Texas Regional pending the Closing (collectively, the "Raymondville Information"). Raymondville hereby represents and warrants that the Raymondville Informati6n 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, Raymondville shall afford to the officers, attorneys, accountants and other authorized representatives of Texas Regional full and free access to the properties, books, contracts, commitments and records -20- of Raymondville and its subsidiaries, including Bank of Texas, 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 Raymondville and its subsidiaries as such representatives may reasonably request. 5.4 ENVIRONMENTAL INSPECTION. Raymondville 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, Raymondville and its subsidiaries, including Bank of Texas, 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. Raymondville 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 Raymondville and Bank of Texas 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 Raymondville 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 by Texas Regional. In the event Texas Regional arranges for and causes such tests to be conducted, and if such tests indicate the presence of Hazardous Material Contamination, Texas Regional shall be entitled to terminate this Agreement by written notice to Raymondville without further liability or obligation. 5.5 ACTION BY RAYMONDVILLE PRIOR TO CLOSING. 5.5.1 From and after the date of this Agreement until the Closing Date, Raymondville will (and Raymondvllle will cause its subsidiaries, including Bank of Texas, to): (i) carry on its business in accordance with prudent banking practices and in substantially the same manner as it is presently conducted; -21- (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 $10,000 in any single transaction and $25,000 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) use its best efforts to 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; (vii) use its best efforts to 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; (x) not declare or pay any dividend or make any stock split or purchase or otherwise acquire for value any of its shares; -22- (xi) not issue (without the prior consent of Texas Regional) 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, Raymondville specifically covenants and agrees that Raymondville 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. Raymondville will not incur (and will not permit its subsidiaries to incur) significant expenses outside of the ordinary course of business. In addition, neither Raymondville nor any subsidiary of Raymondville will increase expenses in any material way (either individually or in the aggregate), nor will Raymondville nor any subsidiary of Raymondville make any changes in its capital structure. 5.5.3 Provided that seeking such approvals is in accordance with applicable banking law and regulations, Raymondville 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 $400,000 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 $50,000 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, Raymondville 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, Raymondvilie 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, Raymondville covenants and agrees that neither it nor any of its subsidiaries will enter into any forward commitment to acquire any such securities. -23- 5.5.6 From and after the date of this Agreement until the Closing Date, Raymondville 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 Raymondville or any subsidiary thereof, or (ii) take any action described in Section 2.10 herein, without the prior written consent of Texas Regional. 5.6 TERMINATION OF EMPLOYMENT ARRANGEMENTS. At or prior to Closing, Raymondvllle will terminate (without liability or penalty to Raymondville, any subsidiary of Raymondvllle, 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 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 Brownsville Bancshares, Inc. and its subsidiary, Brownsville National Bank, and TB&T Bancshares, Inc., and its subsidiary, Texas Bank & Trust Co., 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). 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 Raymondville in this Agreement shall have been true when made and, except for changes -24- 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 Raymondville 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 a~ the Closing. Texas Regional shall have been furnished with a certificate, signed by the President of Raymondville in his capacity as such and dated the Closing Date, and a certificate, signed by the President of Raymondville in his capacity as such and dated the Closing Date, in each case to the foregoing effect. 6.2 STOCKHOLDER APPROVAL. The shareholders of Raymondville shall have approved the transaction pursuant to a unanimous consent in lieu of special meeting of the shareholders, and Raymondville shall have delivered to Texas Regional a certificate signed by the President and Secretary of Raymondville in his or her capacity as such, confirming the approval of this transaction by the unanimous action of the shareholders of Raymondville. 6.3 REGULATORY APPROVALS. Texas Regional shall have received approval of the transactions contemplated by this Agreement including the merger of TRA with and into Raymondville, and the merger of Bank of Texas 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. 6.4 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 restrain9 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 Raymondville or any of its subsidiaries which might result in any material adverse change in the financial condition, results of operations, business or prospects of Raymondville or any of its subsidiaries. Texas Regional shall have been furnished with a certificate, dated the Closing Date and signed by the President of Raymondville 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. -25- 6.5 OPINION OF COUNSEL. Prior to closing, Raymondville shall deliver to Texas Regional the opinion of Raymondville's counsel, in form and content satisfactory to Texas Regional, to the effect that (i) Raymondvilie 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 Raymondville consists of 1,000,000 shares of capital stock, par value of $1.00 per share, of which a total of 49,991 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 Raymondville 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; (iii) Bank of Texas is a duly organized, validly existing and in good standing as a banking association under the laws of the State of Texas, and has full power and authority to carry on its business as presently conducted; (iv) the authorized capital stock of Bank of Texas consists of 63,331 shares of capital stock, par value of $5.00 per share, of which all 63,331 shares are validly issued, fully paid, nonassessable, and owned beneficially and of record by Raymondville and no options, warrants, conversion or other rights, agreements or commitments of any kind obligating Bank of Texas 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) this Agreement has been duly authorized by all necessary corporate action on the part of Raymondville, its directors and shareholders, and this Agreement constitutes the valid and binding obligation of Raymondville 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; -26 (vi) 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 Raymondville, the Articles of Association or Bylaws of Bank of Texas, or, to the best knowledge and belief of such counsel, any agreement or instrument to which Raymondville or Bank of Texas is a party or is bound, or any law, regulation, judgment or order binding on any of them; and (vii) the merger of Bank of Texas with and into Texas State bank has been duly authorized by all necessary corporate action on the part of Bank of Texas, its directors and shareholders, and the consummation of the merger of Bank of Texas 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 Bank of Texas, or, to the best knowledge and belief of such counsel, any agreement or instrument to which Raymondville or Bank of Texas is a party or is bound, or any law, regulation, judgment or order binding on any of them. 6.6 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 Raymondville 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 reflect a material adverse change in the condition, financial position or business prospects of Raymondville or any of its subsidiaries. 6.7 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 Raymondville or any of its subsidiaries, or by which Raymondville or any of its subsidiaries is bound as a result of an order 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 Raymondville or any subsidiary of Raymondville 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 Raymondville or any subsidiary is a party, the fact that no default exists (or which could with -27- 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. 6.8 NET WORTH OF RAYMONDVILLE AND BANK OF TEXAS. The net worth of Raymondville, calculated in accordance with applicable regulatory requirements, shall be not less than the sum of $4,798,000, increased by $25,000 per month for each month elapsed during the period from October 31, 1997, until the date of Closing. The net worth of Bank of Texas, calculated in accordance with applicable regulatory requirements, shall be not less than the sum of $5,052,911, increased by $25,000 per month for each month elapsed during the period from October 31, 1997, until the date of Closing. 6.9 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. 6.10 COVENANT NOT TO COMPETE. Texas Regional shall have entered into a covenant not to compete with Terry Wadkins, in the form attached hereto as Schedule 6.11, in consideration of the payment by Texas Regional to Terry Wadkins of consideration consisting of $100,000 cash payable at the time of Closing. ARTICLE 7 CONDITIONS TO OBLIGATIONS OF RAYMONDVILLE The obligations of Raymondville under this Agreement are subject, in the discretion of Raymondville, 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 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. Raymondville shall have been furnished with a certificate dated the -28- Closing Date, signed by the President of Texas Regional, in his capacity as such, to the foregoing effect. 7.2 REGULATORY APPROVALS. Texas Regional shall have received approval of the transactions contemplated by this Agreement, including the merger of TRA with and into Raymondville, and the merger of Bank of Texas 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. 7.3 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 Raymondville 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. 7.4 OPINION OF COUNSEL. Prior to closing, Texas Regional shall deliver to Raymondvilie the opinion of Texas Regional's counsel, in form and content satisfactory to Texas Regional, to the effect that (i) Texas Regional is a duly organized, validly existing and in good standing as a corporation under tile 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) Texas State Bank is a duly organized, validly existing and in good standing as a banking association under the laws of the State of Texas, and has full power and authority to carry on its business as presently conducted; (iii) this Agreement has been duly authorized by all necessary corporate action on the part of Texas Regional, and its directors, and this Agreement constitutes the valid and binding obligation of Texas Regional, enforceable in -29- 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; and (iv) 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 Texas Regional, the Articles of Association or Bylaws of Texas State Bank, or, to the best knowledge and belief of such counsel, any agreement or instrument to which Texas Regional or Texas State Bank is a party or is bound, or any law, regulation, judgment or order binding on any of them. 7.5 COVENANT NOT TO COMPETE. Texas Regional shall have entered into a covenant not to compete with Terry Wadkins, in the form attached hereto as Schedule 6.11, in consideration of the payment by Texas Regional to Terry Wadkins of consideration consisting of $100,000 cash payable at the time of Closing. ARTICLE 8 CLOSING OBLIGATIONS 8.1 TEXAS REGIONAL OBLIGATIONS. AT THE CLOSING, TEXAS REGIONAL SHALL DELIVER THE following: 8.1.1 Articles of Merger, in the form required to be delivered for filing with the Secretary of State of Texas, pursuant to applicable provisions of the Texas Business Corporation Act, providing for the merger of TRA with and into Raymondvllle. 8.1.2 Officer's Certificate, including an incumbency certification and further certifying as to the existence and good standing of Texas Regional, the accuracy of all representations and warranties of Texas Regional, the approval by the Board of Directors of Texas Regional, and Texas Regional as the sole shareholder of TRA, of resolutions authorizing and approving the merger transaction. -30- 8.1.3 Delivery to the sole shareholder of Raymondville cash consideration in the amount of $9,100,000 as required by section 1.2 of this Agreement and evidence, in the form of a safekeeping receipt, that Texas State Bank, Trust Department is holding an additional aggregate amount of $500,000.00. The Koppel Escrow account to be held and disbursed pursuant to Section 9.11 of this Agreement. 8.1.4 An opinion of Texas Regional's counsel in form and substance required by this Agreement and otherwise acceptable to Raymondville. 8.1.5 A Covenant Not To Compete executed by Texas Regional in the form of Schedule 6.11 attached hereto and incorporated herein by this reference for all relevant purposes. 8.2 RAYMONDVILLE OBLIGATIONS. At the Closing, Raymondville shall deliver the following to Texas Regional: 8.2.1 Articles of Merger, in the form required to be delivered for filing with the Secretary of State of Texas, pursuant to applicable provisions of the Texas Business Corporation Act, providing for the merger of TRA with and into Raymondville. 8.2.2 Officer's Certificates of Raymondville and Bank of Texas, 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 Raymondville, the approval by the Board of Directors of each of Raymondville and Bank of Texas, and by the sole shareholder of Raymondville, and by Raymondville as the sole shareholder of Bank of Texas, in each case authorizing and approving the transaction. 8.2.3 Certificates of Existence and Good Standing of each of Raymondville (issued by the Secretary of State of Texas) and Bank of Texas (issued by the Texas Department of Banking) 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 Raymondville (issued by the Texas Comptroller of Public Accounts) and Bank of Texas (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 -31- Texas Regional to effect the merger of Bank of Texas with and into Texas State Bank. 8.2.6 An opinion of Raymondville's counsel in form and substance required by this Agreement and otherwise acceptable to Texas Regional. 8.2.7 A Covenant Not To Compete executed by Terry Wadkins in the form of Schedule 6.11 attached hereto and incorporated herein by this reference for all relevant purposes. ARTICLE 9 MISCELLANEOUS 9.1 SURVIVAL OF REPRESENTATION AND WARRANTIES. The representations and warranties contained in this Agreement shall survive any investigation of the parties hereto, but shall not survive the Closing of the transaction contemplated hereby except as specifically provided in this section 9.1. The only representations and warranties which will survive the closing are the representations and warranties contained in sections 9.11 of this Agreement. 9.2 BROKERS. Texas Regional and Raymondville 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 Raymondvilie 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 Bank of Texas 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. 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, except that, IN the event that the transactions herein described are not consummated, other than AS a result of a default by Raymondville or Rollins M. Koppel, and other than a termination by Texas Regional as a result of a breach of a representation, warranty or covenant made by Raymondville pursuant to this Agreement, Texas Regional shall pay additional required -32- audit expense of Raymondville, in an amount not to exceed $30,000.00, related to the audit of the financial statements of Bank of Texas and its subsidiaries. 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, 1300 Capitol Center 919 Congress Avenue Austin, Texas 78701 If to Raymondville, Bank of Texas or to Rollins M. Koppel, then to: Rollins M. Koppel 312 East Van Buren Harlingen, Texas 78551 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 43, the directors, officers and Rollins M. Koppel, but shall not be assigned by any party without the prior written consent of the other party. -33- 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 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 Raymondville. 9.8 WAIVERS. Texas Regional or Raymondville 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. 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 SOLE SHAREHOLDER OF RAYMONDVILLE. Rollins M. Koppel, who executes this Agreement as the sole shareholder of Raymondville (herein referred to as "Koppel"), hereby joins into the execution of this Agreement to evidence his consent to and approval of the transaction herein described and to evidence his qualified agreement to reimburse Texas State Bank for certain losses as herein described. Koppel represents to Texas Regional (i) that he owns all of the outstanding common stock of Raymondville; (ii) that he, as the sole shareholder of Raymondville common stock, is the only person entitled to consider and vote on the transaction described in this Agreement and Plan of Reorganization and that he has heretofore approved the transaction as herein described; (iii) that he has the full power and authority to enter into and perform this Agreement; and (iv) 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. Koppel specifically agrees to take any and all additional corporate action as may be necessary to approve the transaction herein described. In addition, Koppel represents, warrants and agrees that: a. To the best of Koppel's knowledge, Bank of Texas has disclosed to Texas Regional any and all information available to it in the context of the Casa de Cambio Tamibe, S.A. de C.V. ("Tamibe") deposit relationship at Bank -34- of Texas, and, according to such information, all charge backs on Tamibe accounts at Bank of Texas of stolen and/or forged United States Postal Service money orders have been fully paid by Tamibe and Bank of Texas has not heretofore suffered any loss related thereto. b. Bank of Texas is presently holding two certificates of deposit deposited on behalf of Tamibe in the amount of $200,000 and $50,000, respectively, pursuant to an Agreement in Regard to Check Processing by and between Bank of Texas, Tamibe and Maria del Pilar Oliver Gaya, individually and as chairman of Tamibe. Such agreement permits Bank of Texas to offset losses in the Tamibe accounts, as therein provided. Bank of Texas has delivered a true, correct and complete copy of the Agreement in Regard to Check Processing to Texas Regional, which copy has been marked for identification by Texas Regional and Koppel. The Agreement in Regard to Check Processing described in this paragraph shall survive the merger of Bank of Texas with and into Texas State Bank and will inure to the benefit of Texas State Bank (and Koppel in the event of a loss sustained by Texas State Bank that is reimbursed by Koppel as provided herein) following the closing of the transaction described in this Agreement and Plan of Reorganization. c. Koppel hereby agrees that he will have contingent liability to reimburse Texas State Bank for a portion of future losses, if any, suffered by Texas State Bank as successor in interest to Bank of Texas, as a result of charge backs or other claims made arising out of stolen and/or forged United States Postal Service money orders or other items charged back against deposits made by Tamibe or on its behalf into accounts at Bank of Texas prior to December 10, 1997, provided that Texas State Bank has complied with the terms and provisions of its obligations pursuant to this section 9.11. In this connection, it is understood and agreed that at the time of closing of the transaction described in this Agreement, Texas State Bank, Trust Department, acting as escrow agent as specified in section 1.2.1 hereof, will be delivered funds by TRD in the amount of $500,000, which are to be held and which are, subject to the rights of Texas Regional and Koppel upon the occurrence of certain contingencies described in this section 9.11. This is the account defined in section 12.1 as the "Koppel Escrow Account." Texas State Bank, Trust Department shall cause the funds in the Koppel Escrow Account to be held in an account or accounts bearing interest at the rate of six percent (6%) per annum, with such interest being payable to Koppel on a monthly basis. -35- Funds shall be disbursed pursuant to, and the contingent liability of Koppel pursuant to this provision is subject to, the following: (1) If any losses are sustained by Texas State Bank following closing as a result of deposits made by Tamibe prior to December 10, 1997, such losses shall first be paid out of funds on deposit by Tamibe which have been left in the general clearing account of Tamibe in the manner provided by the Agreement With Regard to Check Processing between Tamibe and Bank of Texas as herein described; (2) To the extent that Texas State Bank sustains losses in excess of amounts remaining in the Tamibe general clearing account as herein described, such losses shall be paid first out of the certificates of deposit described herein obtained by Bank of Texas in the total amount of $250,000; (3) If losses are sustained by Texas State Bank as a result of deposits made on or before December 10, 1997, by Tamibe in excess of the funds in the general clearing account of Tamibe and in excess of the $250,000 contained in the certificates of deposit referred to herein, such losses shall be paid out of the Koppel Escrow Account referred to herein, up to the aggregate additional amount of $250,000, (4) If losses are sustained by Texas State Bank in excess of $500,000 in addition to the funds contained in the Tamibe general clearing account based upon prior deposits made by Tamibe in Bank of Texas on or before December 10, 1997, such losses shall be shared equally by Koppel and Texas State Bank, up to a maximum additional sum of $500,000, with $250,000 being paid out of funds remaining in the aforesaid Koppel Escrow Account referred to herein and Texas State Bank incurring unreimbursed losses for all additional sums which relate to deposits previously made by Tamibe. (5) The maximum exposure to Koppel for deposits made by Tamibe pursuant to this section 9.11 as a result of the Tamibe account as referred to herein following the closing of this transaction shall be the sum of $500,000, and all of such -36- losses shall be paid by Texas State Bank by offsetting such losses against the Koppel Escrow Account established at the time of closing of this transaction as described herein, provided that it is acknowledged and agreed that Texas Regional and Texas State Bank shall be deemed for all purposes to have rights and interests in such Koppel Escrow Account that are superior to those of Koppel in the amount of any losses on Tainibe accounts incurred by Texas State Bank which arc to be reimbursed from the Koppel Escrow Account to the extent of the contingent liability assumed by Koppel pursuant to this Section 9.11. (6) Following the closing of this transaction, subject to Texas State Bank and Texas Regional being provided with a written consent from Tamibe permitting such disclosure, Koppel shall be advised in writing promptly upon receipt of the item (but not less often than weekly) of any lost, stolen or forged items previously deposited by Tamibe into the Bank of Texas prior to December 10,1997, which Texas State Bank proposes to fund by offsetting the account balances of Tainibe in its clearing accounts, the certificates of deposit deposited by Tamibe or the Koppel Escrow Account described in this paragraph. Provided that written consent has been obtained from Tamibe as herein provided to permit Koppel to have access to such information, Koppel shall be entitled to information related to Tamibe's account balances and account activity for purposes of monitoring compliance by Tamibe with the Agreement With Regard to Check Processing referred to herein. After receipt of such notice, Koppel shall, to the extent permitted by law and Texas State Bank collection practices, be afforded five (5) working days to object to the return of any item and at all times Koppel shall be afforded the right to inspect documentation of any proposed return item; (7) Pursuant to this Agreement, Koppel and Texas State Bank shall each have the right, at such party's own expense, to pursue collection efforts against Maria del Pilar Oliver Gaya by reason of her unconditional guarantee of the relationship between Bank of Texas and Tamibe as referred to herein. If either party elects not to pursue such collection -37- efforts, the other shall be entitled nonetheless to pursue such collection efforts on his or its own behalf. Each party shall bear its own expenses in pursuing any such collection efforts. (8) The term of the Koppel Escrow Account to be purchased at closing pursuant to section 1.2.1 above shall be for a period beginning on the date of closing and continuing until January 10, 2000. Any money remaining in the Koppel Escrow Account as of January 10, 2000, shall be paid to Koppel and Texas State Bank, TRD, and Texas Regional shall be deemed for all purposes to have discharged their obligation to pay such funds to Koppel pursuant to this Agreement, Including section 12 hereof by such payment to Koppel; and (9) During the period of this Agreement, neither Koppel nor his heirs, executors, assigns, designees or nominees will have any right to exercise any dominion, control or possession over the funds in the Koppel Escrow Account held by Texas State Bank Trust Department pursuant to this provision. Texas State Bank and Texas Regional shall have the sole right to exercise dominion, control and possession over the aforesaid Koppel Escrow Account, subject to the terms of this Agreement. d. The agreement contained in this section 9.11 shall survive any investigation made by or on behalf of any party. In the event of any disputed claim for reimbursement under this section 9.11, the claim shall be submitted to binding arbitration within thirty (30) days of the request by either the party or parties claiming reimbursement or the party or parties against whom the reimbursement obligation is claimed, each of whom shall select a qualified, commercial arbitrator. The two arbitrators so selected shall in turn select a third arbitrator who shall participate with the two arbitrators selected by the parties as an arbitration panel. The arbitrators shall in each case be qualified in arbitrating matters such as the disputed claim for reimbursement, and they shall arbitrate the dispute in accordance with applicable Commercial Arbitration Rules of the American Arbitration Association. Any ruling rendered by the arbitrators shall be final, binding and conclusive. No provision of, nor the exercise of any rights under, this article shall limit the right of any party, and the parties shall have the right during any dispute, to seek, use and -38- employ ancillary or preliminary remedies, either legal or equitable, judicial or otherwise, for the purposes of realizing upon, preserving or protecting rights hereunder. To the extent permitted by applicable law, the arbitrator(s) shall have the power to award and allocate recovery of all costs and fees (including attorneys' fees, administrative fees and arbitrators' fees) between the parties. THE PARTIES WILL BE LEGALLY OBLIGATED TO ABIDE BY THE AWARD RENDERED BY THE ARBITRATOR(S). A COURT JUDGMENT MAY BE ENTERED UPON THE AWARD OR SUCH AWARD MAY BE ENFORCED BY INJUNCTIVE RELIEF, RECEIVERSHIP RELIEF, OR OTHER EQUITABLE RELIEF. e. The obligations of Koppel described in this section 9.11 shall be binding upon Koppel's heirs, legal representatives, successors and assigns. The representations, warranties and covenants of Koppel contained in this section 9.11 shall be deemed remade as of the time of closing of the transaction herein described and shall survive the closing of the transaction described in this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above. TEXAS REGIONAL BANCSHARES, INC. BY: /s/ GLEN E. RONEY Glen E. Roney, Chairman of the Board ATTEST: /s/ ANN SEFCIK Secretary -39- RAYMONDVILLE BANCORP, INC. ATTEST: By: /s/ ROLLINS M. KOPPEL Rollins M. Koppel, /s/ TERRY S. WADKINS Chairman of the Board SECRETARY /s/ ROLLINS M. KOPPEL as the sole shareholder of Raymondville Bancorp, Inc. -40- EX-10.14 3 EXHIBIT 10.14 AMENDMENT NUMBER 8 TO THE TEXAS REGIONAL BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS) Texas Regional Bancshares, Inc., a corporation organized and operating under the laws of the state of Texas, and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, hereby adopts the following amendments to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "Plan"), effective as of February 19, 1998: WHEREAS, effective as of February 19, 1998, Brownsville National Bank, Texas Bank & Trust and Bank of Texas each merged with and into the Corporation's wholly owned subsidiary, Texas State Bank; and WHEREAS, as a part of those mergers, Texas State Bank has become the employer of the employees of the former Brownsville National Bank, Texas Bank & Trust and Bank of Texas; and WHEREAS, it is the desire of Texas Regional Bancshares, Inc., and its wholly owned subsidiary Texas State Bank that eligible former employees of Brownsville National Bank, Texas Bank & Trust and Bank of Texas, as a result of becoming employees of Texas State Bank pursuant to the merger, now be entitled to participate in the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions); and WHEREAS, the Board of Directors desires to coordinate and consolidate the employee benefit programs available to all employees of the Corporation and its subsidiary; NOW THEREFORE, IT IS HEREBY AGREED THAT the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "ESOP"), is hereby amended effective as of February 19, 1998, as follows: 1. AMENDMENT RELATED TO DEFINITION OF "SERVICE." The definition of "Service" in Section 2 of the Plan (as originally stated in the Plan and as the same may have been previously amended) is hereby deleted and substituted therefor is the following language: "SERVICE. Employment with (i) the Company, (ii) an Affiliated Company, (iii) Mid Valley Bank, as predecessor to the Company's subsidiary, Texas State Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pension Plan), (iv) First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch bank facilities by Texas State Bank), (v) First State Bank & Trust Co. and The Border Bank (with respect to those Employees who were employed by First State Bank & Trust Co. or The Border Bank as employees of such banks as of the time of the merger of such banks with and into Texas State Bank), and (vi) Brownsville National Bank, Texas Bank & Trust and Bank of Texas (with respect to those Employees who were employed by Brownsville National Bank, Texas Bank & Trust or Bank of Texas as of the time of the merger of such banks with and into Texas State Bank)." 2. AMENDMENT RELATED TO CREDITED SERVICE. Section 13(a) of the Plan (as originally stated in the Plan and as the same may have been previously amended) is hereby amended in its entirety to read as follows: "(a) GENERAL RULE. For purposes of vesting, an Employee's Credited Service includes the number of Plan Years after January 1, 1984 in which he is credited with at least 1,000 Hours of Service. Credited Service shall include such Service with (i) the Company, (ii) any other Employer, (iii) any Affiliated Company, (iv) Mid Valley Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pension Plan), (v) First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch facilities by Texas State Bank), (vi) First State Bank & Trust Co. and The Border Bank (with respect to those Employees who were employed by First State Bank & Trust Co. or The Border Bank as of the time of merger of First State Bank & Trust Co. and The Border Bank with and into Texas State Bank) and (vii) Brownsville National Bank, Texas Bank & Trust and Bank of Texas (with respect to those Employees who were employed by Brownsville National Bank, Texas Bank & Trust or Bank of Texas as of the time of the merger of Brownsville National Bank, Texas Bank & Trust and Bank of Texas with and into Texas State Bank)." -2- 3. PARTICIPANTS. As a result of the amendments to the Plan pursuant to sections 1 and 2 of this Amendment Number 8, persons who are employees of Brownsville National Bank, Texas Bank & Trust and Bank of Texas as of the date of merger of each such bank with and into Texas State Bank, will become Participants (as that term is defined in the Plan) as of the date that such persons become employees of Texas State Bank upon merger of such banks with and into Texas State Bank, without regard to the requirement of entry on January 1st or July 1st subsequent to his or her initial date of service, provided that they are otherwise qualified to be Participants as set forth in section 3 of the Plan. The Plan is hereby further amended to provide that such persons thus become Participants immediately upon commencement of employment by Texas State Bank as of the date of merger, without regard to the requirement of entry on January 1st or July 1st subsequent to his or her initial date of service, provided that they are otherwise qualified under section 3 of the Plan. Notwithstanding the foregoing, each such employee shall only be credited (pursuant to and in accordance with the rules set forth in the Plan) with the amount of compensation paid by Texas State Bank following the effective date of the mergers, and shall not be credited with any part of such employee's compensation paid by Brownsville National Bank, Texas Bank & Trust and Bank of Texas prior to the effective date of the mergers for purposes of determining allocations of Employer Contributions and Forfeitures and for all other purposes. 4. DEFINITIONS. Defined terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Plan. IN WITNESS WHEREOF, the undersigned, a duly authorized officer of Texas Regional Bancshares, Inc., hereby certifies the adoption of this Amendment Number 8 to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) effective as of February 19, 1998. TEXAS REGIONAL BANCSHARES, INC. By: /s/ GLEN E. RONEY Glen E. Roney, Chairman of the Board and Chief Executive Officer -3- EX-21 4 EXHIBIT 21 TEXAS REGIONAL BANCSHARES, INC. List of Subsidiaries March 10, 1998 JURISDICTION OF PERCENTAGE INCORPORATION/ OF VOTING NAME ORGANIZATION SECURITIES OWNED - ----- --------------- ---------------- Texas Regional Delaware, Inc. Delaware 100% Domicile: Wilmington, DE Texas State Bank Texas 100% Domicile: McAllen, TX TSB Securities, Inc. Texas 100% Domicile: McAllen, TX TSB Properties, Inc. Texas 100% Domicile: McAllen, TX EX-27 5
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, Consolidated Statements of Income, included herein and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1997 DEC-31-1997 53,956 0 2,700 0 315,724 51,535 52,036 886,854 (10,518) 1,395,863 1,236,997 1,801 11,411 0 0 0 13,111 132,543 1,395,863 79,450 21,461 1,433 102,344 46,040 46,092 56,252 2,817 731 32,603 32,446 32,446 0 0 21,417 1.64 1.61 4.93 7,802 3,041 0 0 10,031 3,064 734 9,551 0 0 967
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