-----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, SuSxw/qmojitp/3VvX46IjYeTlJbZEbaTqV2UWo6qlIncKlr4FAoFfj2fKpy9EEj qfzH/RiDFMN8s1beir4hyA== 0000912057-96-003939.txt : 19960307 0000912057-96-003939.hdr.sgml : 19960307 ACCESSION NUMBER: 0000912057-96-003939 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19960306 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: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-01467 FILM NUMBER: 96531576 BUSINESS ADDRESS: STREET 1: 3700 N TENTH STE 301 STREET 2: PO BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78502 BUSINESS PHONE: 5126315400 MAIL ADDRESS: STREET 2: P O BOX 5910 CITY: MCALLEN STATE: TX ZIP: 78502-5910 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 6, 1996. REGISTRATION NO. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- TEXAS REGIONAL BANCSHARES, INC. (Exact name of registrant as specified in its charter) 6022 (Primary Standard TEXAS Industrial 74-2294235 (State or other jurisdiction of Classification Code (I.R.S. Employer incorporation or organization) Number) Identification Number) TEXAS REGIONAL BANCSHARES, INC. KERRIA PLAZA, SUITE 301 3700 NORTH 10TH STREET MCALLEN, TEXAS 78501 (210) 631-5400 (Address, including ZIP code, and telephone number, including area code, of registrant's principal executive offices) -------------------------- COPIES OF CORRESPONDENCE TO: WILLIAM A. ROGERS, JR., ESQ. MCGINNIS, LOCHRIDGE & KILGORE, RICHARD K. KNEIPPER, ESQ. L.L.P. JONES, DAY, REAVIS & POGUE 1300 CAPITOL CENTER 2300 TRAMMELL CROW CENTER 919 CONGRESS AVENUE 2001 ROSS AVENUE AUSTIN, TEXAS 78701 DALLAS, TEXAS 75201 (512) 495-6033 (214) 220-3939 (Name, address, including ZIP code, and telephone number of agent for service) -------------------------- Approximate date of commencement of proposed sale to the public: As soon as possible after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. / / -------------------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / __________________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF TO BE REGISTERED REGISTERED (1) PER UNIT (2) OFFERING PRICE (2) REGISTRATION FEE Class A Voting Common Stock, par value $1.00/share.............. 2,530,000 $21.00 $53,130,000 $18,320.69
(1) Includes 330,000 shares of Common Stock issuable upon exercise of an over-allotment option granted to the Underwriters. (2) Estimated solely for the purpose of determining the registration fee. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEXAS REGIONAL BANCSHARES, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
ITEM NO. CAPTION LOCATION IN PROSPECTUS - --------- ---------------------------------------------------- ---------------------------------------------------- 1. Forepart of Registration Statement and Outside Front Forepart of Registration Statement and Outside Front Cover Page of Prospectus Cover Page of Prospectus; Cross-Reference Sheet 2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus Prospectus; Available Information; Table of Contents 3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; The Company Earnings to Fixed Charges 4. Use of Proceeds Use of Proceeds; Proposed Mergers 5. Determination of Offering Price Not Applicable 6. Dilution Dilution 7. Selling Security Holders Selling Shareholder 8. Plan of Distribution Outside Front Cover Page of Prospectus; Underwriting 9. Description of Securities to be Registered Description of Capital Stock 10. Interests of Named Experts and Counsel Underwriting; Legal Matters 11. Information with Respect to the Registrant The Company; Proposed Mergers; Price Range of Common Stock and Dividend Policy; Capitalization; Texas Regional Bancshares, Inc. Selected Consolidated Financial Information; Texas Regional Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal Holders of Capital Stock; Index to Financial Statements 12. Disclosure of Commission Position on Indemnification Not Applicable for Securities Act Liabilities
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PROSPECTUS MARCH 6, 1996 2,200,000 SHARES [TEXAS REGIONAL BANCSHARES LOGO] TEXAS REGIONAL BANCSHARES, INC. CLASS A VOTING COMMON STOCK ----------- Of the shares of Class A Voting Common Stock, par value $1.00 per share (the "Common Stock"), of Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") being offered hereby, 2,180,000 shares are being sold by Texas Regional and 20,000 shares are being sold by a Texas Regional shareholder (the "Selling Shareholder"). The Company will not receive any proceeds from the sale of shares by the Selling Shareholder. The Company is selling the Common Stock to finance a portion of the cost of the acquisition by the Company of First State Bank & Trust Co., Mission, Texas, and The Border Bank, Hidalgo, Texas, which will occur contemporaneously with the closing of the offering. See "Proposed Mergers." The Common Stock, which is the only class of common stock of the Company, is traded in the over-the-counter market and quoted on the Nasdaq National Market System under the symbol "TRBS." On , 1996, the last reported sale price of the Common Stock on the Nasdaq National Market System was $ per share. -------------- SEE "RISK FACTORS" ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS. ------------- THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. PRICE UNDERWRITING PROCEEDS PROCEEDS TO TO DISCOUNTS AND TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER Per Share............... $ $ $ $ Total(3)................ $ $ $ $ (1) See "Underwriting" for information relating to indemnification of the Underwriters. (2) Before deducting expenses of the offering payable by the Company estimated at $500,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 330,000 additional shares of Common Stock solely to cover over-allotments, if any. To the extent that the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about May , 1996. ALEX. BROWN & SONS FIRST SOUTHWEST COMPANY INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1996 TEXAS REGIONAL BANCSHARES, INC. [TEXAS REGIONAL BANCSHARES LOGO] - ----------------------------------------- MAP OF BANKING LOCATIONS: RIO GRANDE VALLEY OF TEXAS [INSERT MAP] This graphic contains an enlargement of the Rio Grande Valley of Texas and shows the locations of the Company's corporate headquarters, its existing banking locations, banking locations to be acquired by the Company in the Mergers described in the Prospectus and other surrounding cities in Texas and Mexico. [INSERT MAP] This graphic contains a map of the State of Texas and a portion of Mexico and shows the locations of certain cities in Texas and Mexico and highlighting the Rio Grande Valley of Texas. THE MARKET AREA SERVED BY TEXAS STATE BANK HAS BEEN RECOGNIZED AS AMONG THE FASTEST GROWING AREAS IN THE NATION. THE MCALLEN-EDINBURG-MISSION AREA HAS A PROJECTED POPULATION GROWTH RATE OF 23.8% BETWEEN 1994 AND 2000, AND THE BROWNSVILLE-HARLINGEN AREA HAS A PROJECTED POPULATION GROWTH RATE OF 16.0% DURING THAT SAME PERIOD. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information concerning the Company may be inspected and copied at the Public Reference facilities maintained by the Commission at its office at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following Regional Offices of the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies of such material can also be obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Company has filed with the Commission in Washington, D.C., a registration statement on Form S-1 (herein together with all amendments thereto called the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities covered by this Prospectus. This Prospectus does not contain all of the information set forth in the Registration Statement, certain items of which are contained in or incorporated by reference as exhibits to the Registration Statement as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the securities offered hereby, reference is made to the Registration Statement, including the exhibits filed or incorporated by reference as a part thereof. The statements contained herein concerning the provisions of documents filed with, or incorporated by reference in, the Registration Statement as exhibits are necessarily summaries of such documents and each such statement is qualified in its entirety by reference to the copy of the applicable document filed with the Commission. All of these documents may be inspected without charge at the offices of the Commission as described above, and copies may be obtained therefrom at prescribed rates. -------------- SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: THE INFORMATION PROVIDED UNDER "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" AND "PROSPECTUS SUMMARY -- TEXAS REGIONAL BANCSHARES, INC. SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION" AND OTHER STATEMENTS WHICH ARE NOT HISTORICAL FACTS CONTAINED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: THE EFFECT OF CHANGING ECONOMIC CONDITIONS AND INTEREST RATES, ACTUAL RESULTS OF OPERATIONS FOLLOWING THE MERGERS, THE PRESENCE IN THE COMPANY'S MARKET AREA OF COMPETITORS WITH GREATER FINANCIAL RESOURCES, AND OTHER RISKS DETAILED UNDER "RISK FACTORS" AND IN OTHER SECTIONS HEREOF AND OTHER DOCUMENTS FILED BY THE COMPANY WITH THE COMMISSION. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. CONTEMPORANEOUSLY WITH THE CLOSING OF THE OFFERING MADE BY THIS PROSPECTUS, THE COMPANY WILL ACQUIRE BY MERGER TWO BANKS USING A PORTION OF THE PROCEEDS OF THE OFFERING. SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE EFFECTS ON THE COMPANY OF THE CONSUMMATION OF SUCH MERGERS. THE COMPANY Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company") is a registered bank holding company whose wholly-owned subsidiary bank, Texas State Bank ("Texas State Bank" or the "Bank"), conducts a commercial banking business in the Rio Grande Valley of Texas. At December 31, 1995, Texas Regional had consolidated assets of $646.8 million, loans outstanding (net of unearned discount) of $450.9 million, total deposits of $579.7 million, and total shareholders' equity of $62.7 million. For the years ended December 31, 1995 and 1994, the Company earned net income of $8.7 million and $7.2 million, respectively, for a return on average assets for these periods of 1.51% and 1.43%, respectively. At December 31, 1995, the Company had nonperforming assets (including loans 90 days or more past due and still accruing) of $4.2 million, representing 0.9% of period-end loans and other nonperforming assets (primarily other real estate). Texas State Bank operates a total of nine full service banking locations in the Rio Grande Valley. The market area served by Texas State Bank has been recognized as among the fastest growing areas in the nation. The McAllen-Edinburg-Mission area has a projected population growth rate of 23.8% between 1994 and 2000, and the Brownsville-Harlingen area has a projected population growth rate of 16.0% during that same period. The business strategy of Texas Regional is for the Bank to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and service level of a community bank. Management believes that the Company is well positioned in its market due to its responsive customer service, the strong community involvement of Texas State Bank management and employees, recent trends in the Texas banking environment and the economy of the Rio Grande Valley. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Company's operations. Management believes that individualized customer service will allow the Company to increase its market share in lending volume and deposits. As part of its operating and growth strategies, the Company is working to attract business from, and provide service to, small to medium sized businesses, and expand its operations in McAllen, Harlingen and other strategic areas in the Rio Grande Valley. Consistent with this strategy, during 1995, Texas State Bank acquired banking locations in Rio Grande City and Roma, Texas, and in January 1996 it entered into definitive agreements to acquire two banks headquartered in Mission and Hidalgo, Texas. See "The Company" and "Proposed Mergers." At December 31, 1995, Texas Regional employed 332 full time equivalent employees. The address of Texas Regional's principal executive office is Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, and its telephone number is (210) 631-5400. THE MERGERS Texas State Bank has for some time sought appropriate acquisitions to permit the Bank to expand within the market areas served by Texas State Bank and into adjacent market areas in the Rio Grande Valley. In January 1996, the Company entered into definitive agreements to acquire through merger First State Bank & Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo, Texas ("Border Bank") (the "Mergers"). First State Bank and Border Bank had combined total assets of approximately $524.0 million at December 31, 1995. Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995, Texas State Bank would have had total assets of $1.143 billion, which 3 would have made Texas Regional the largest bank holding company headquartered in the Rio Grande Valley. At December 31, 1995, First State Bank had total assets of $404.5 million, loans outstanding (net of unearned discount) of $188.4 million and stockholders' equity of $59.4 million. At December 31, 1995, Border Bank had total assets of $119.5 million, loans outstanding (net of unearned discount) of $47.3 million and stockholders' equity of $17.1 million. Elliot B. Bottom is the Chairman of the Board of both First State Bank and Border Bank, and the banks have substantial common ownership. The purpose of the Mergers is to further strengthen Texas State Bank's branch network and banking business in the Rio Grande Valley by adding six new banking locations in Mission, Penitas, McAllen and Hidalgo, Texas. The purchase price for the Mergers is estimated to be $99.5 million, approximately $40.0 million of which will be paid from the proceeds of the offering made hereby. The Company intends to fund the balance of the purchase price principally from liquidation of cash equivalents and, to the extent necessary, selected investment securities on a consolidated basis. See "Proposed Mergers" and "Use of Proceeds." Management of Texas State Bank believes that the Mergers will expand the Company's community banking network into contiguous markets, substantially increasing its market share and enabling the Bank to compete more effectively with other financial institutions in the Rio Grande Valley. Because of the proximity of Mission to McAllen, there is a substantial overlap in the markets served by Texas State Bank and First State Bank. For this reason and because the banks serve a similar customer base, First State Bank is considered by Texas State Bank management to be a direct competitor of Texas State Bank, particular as to loan customers. The new or expanded services to be offered to First State Bank and Border Bank customers include enhanced data processing services, additional automated teller facilities and other services now offered to Texas State Bank customers. Texas State Bank management believes that First State Bank, Border Bank and Texas State Bank customers will benefit from the expansion of Texas State Bank's branch network from nine to 15 banking locations. Texas State Bank expects to realize certain operating and administrative efficiencies as a result of the Mergers; however, because of the relatively low employee-to-asset ratio at First State Bank and Border Bank, cost savings is not a principal motivating factor for the Mergers. The operating efficiencies which are expected include the use by all banking locations of the existing Texas State Bank data processing facility, operation of a single human resources department, and economies of a combined advertising program. THE OFFERING Common Stock offered hereby................. 2,200,000 shares(1)(2) by the Company.......................... 2,180,000 shares(1) by the Selling Shareholder.............. 20,000 shares Common Stock to be outstanding after the offering.................................. 8,376,791 shares(1)(2) Use of proceeds............................. Approximately $40.0 million of the net proceeds to be received by the Company from the sale of Common Stock will be used to fund part of the consideration payable by Texas State Bank upon consummation of the Mergers. The remainder of the net proceeds, if any, will be used for general corporate purposes. See "Proposed Mergers" and "Use of Proceeds." Nasdaq National Market symbol............... TRBS
- ------------ (1) An additional 330,000 shares may be sold pursuant to an over-allotment option granted by the Company to the Underwriters. See "Underwriting." (2) The shares of Common Stock offered hereby will be sold contemporaneously with the consummation of the Mergers. 4 TEXAS REGIONAL BANCSHARES, INC. SUMMARY CONSOLIDATED FINANCIAL INFORMATION The summary consolidated financial information under the captions "Summary of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of the years in the five-year period ended December 31, 1995 has been derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The consolidated financial statements of the Company at December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS: Net Interest Income........................ $ 27,540 $ 22,941 $ 19,197 $ 16,861 $ 11,773 Net Income................................. 8,725 7,185 6,011 4,519 2,824 PER SHARE DATA (ON A FULLY-DILUTED BASIS): Net Income................................. $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79 Book Value................................. 10.12 9.00 7.73 6.42 5.22 Cash Dividends Declared on Common Stock.... 0.40 0.24 -- -- -- Average Shares Outstanding (in thousands)............................... 6,227 6,035 5,170 4,890 3,578 PERIOD-END BALANCE SHEET DATA: Total Assets............................... $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256 Loans...................................... 450,854 339,939 290,500 252,118 179,853 Deposits................................... 579,731 472,108 429,521 375,016 271,540 Shareholders' Equity....................... 62,720 55,731 39,983 34,318 19,366 PERFORMANCE RATIOS: Return on Average Assets................... 1.51% 1.43% 1.34% 1.23% 1.00% Return on Average Shareholders' Equity..... 14.69 14.11 16.15 15.23 15.85 ASSET QUALITY RATIOS: Nonperforming Assets to Loans and Other Nonperforming Assets..................... 0.79% 1.41% 1.69% 2.31% 4.27% Allowance for Loan Losses as a Percentage of: Loans.................................. 1.01 1.03 1.18 1.16 1.42 Nonperforming Assets................... 126.62 72.96 69.39 49.43 32.44
SEE "PROPOSED MERGERS" AND "TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION" REGARDING THE PRO FORMA COMBINED EFFECT ON THE COMPANY ASSUMING CONSUMMATION OF THE MERGERS AT DECEMBER 31, 1995. EXCEPT AS OTHERWISE SPECIFIED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. SEE "UNDERWRITING." 5 TEXAS REGIONAL BANCSHARES, INC. SUMMARY PRO FORMA COMBINED FINANCIAL INFORMATION The following unaudited summary pro forma combined financial information has been derived from the historical consolidated financial information of the Company, adjusted to give effect to the proposed acquisition of assets and assumption of liabilities in connection with the Mergers, the estimated purchase accounting adjustments resulting from the Mergers, and the proposed issuance of Common Stock in the offering herein described (assuming no exercise of the Underwriters' over-allotment option), in each case as though such transactions had occurred on December 31, 1995. The pro forma combined financial information is not necessarily indicative of the financial position or results of operations that would have been achieved had the transactions reflected therein occurred on such date or that may occur in the future. The pro forma adjustments with respect to the Mergers reflect December 31, 1995 balances and are subject to change prior to the closing date of the Mergers. The summary pro forma combined financial information does not purport to project the consolidated financial information of the Company for any future period. The information should be read in conjunction with (i) the pro forma financial information, including the notes thereto, which appears elsewhere in this Prospectus, and (ii) the historical consolidated financial statements of Texas Regional, First State Bank and Border Bank, including the respective notes thereto, which appear elsewhere in this Prospectus. See "Proposed Mergers," "Texas Regional Bancshares, Inc. Selected Consolidated Financial Information" and "Index to Financial Statements."
YEAR ENDED DECEMBER 31, 1995 ----------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS: Net Interest Income.................................................................. $ 49,764 Net Income........................................................................... 15,318 PER SHARE DATA (ON A FULLY-DILUTED BASIS): Net Income........................................................................... $ 1.82 Book Value........................................................................... 12.56 Average Shares Outstanding (in thousands)............................................ 8,407 PERIOD-END BALANCE SHEET DATA: Total Assets......................................................................... $ 1,143,125 Loans................................................................................ 685,286 Deposits............................................................................. 1,024,227 Shareholders' Equity................................................................. 105,253 PERFORMANCE RATIOS: Return on Average Assets............................................................. 1.39% Return on Average Shareholders' Equity............................................... 15.03 ASSET QUALITY RATIOS: Nonperforming Assets to Loans and Other Nonperforming Assets......................... 1.04% Allowance for Loan Losses as a Percentage of: Loans.............................................................................. 1.44 Nonperforming Assets............................................................... 137.11
6 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS: RISKS OF THE MERGER -- GENERAL. Upon completion of the Mergers, Texas State Bank's size will be substantially increased in terms of assets and deposit liabilities. The increases in assets and deposits will be in addition to the substantial increases in assets and deposits already experienced by Texas State Bank over the last two years. In addition, the Company has not historically made acquisitions on the same scale as the Mergers, and the future prospects of the Company will depend, in significant part, on a number of factors, including Texas State Bank's ability to compete effectively in the Mission and Hidalgo, Texas market areas; its ability to limit the outflow of deposits in the acquired banking locations formerly part of First State Bank and Border Bank; its success in retaining earning assets, particularly loans, acquired in the Mergers, and its ability to generate new earning assets; its ability to control noninterest expense in order to maintain a favorable overall efficiency ratio; its ability to attract and retain qualified management and other appropriate personnel to staff the newly acquired banking locations; and its ability to earn acceptable levels of noninterest income from the banking locations. No assurance can be given as to any of the foregoing or that the Company's existing profitability will not be adversely affected by the operations of First State Bank or Border Bank, that the Company will be able to achieve results in the future similar to those achieved in the past, or that the Company will be able to manage effectively the growth resulting from the Mergers. In addition, the Mergers will restrict the Company's ability to consummate other possible beneficial transactions which require further leverage or would result in the creation of additional intangibles. See "Proposed Mergers." RISKS OF THE MERGER -- CREDIT QUALITY. In connection with the Mergers, the Company or its representatives reviewed the First State Bank and Border Bank loan portfolios. This review included all loans on the First State Bank and Border Bank watch lists, a substantial proportion of the loans to borrowers with other large lines of credit and selected other loans in each bank's portfolio. The Company's examinations were made using criteria, analyses and collateral evaluations that the Company has traditionally used in the ordinary course of its business. Nonperforming assets (including accruing loans 90 days or more past due) at December 31, 1995 totaled $9.6 million at First State Bank and Border Bank compared to $4.2 million at Texas State Bank. See "First State Bank & Trust Co. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "The Border Bank Management's Discussion and Analysis of Financial Condition and Results of Operations." Management of Texas Regional believes that the credit quality of the loan portfolio of First State Bank and Border Bank is nonetheless acceptable in terms of risk and that the increased risk is expected to be offset by increased reserves and higher interest rates on certain classifications of loans. In addition, as a result of the Mergers, the allowance for loan loss reserves will increase. At December 31, 1995, the Company's allowance for loan losses was 1.01% of total loans, while on a pro forma basis at December 31, 1995, the Company's allowance for loan losses would have been 1.44% of total loans. However, there can be no assurance as to the future performance of the loan portfolio acquired in the Mergers. RISKS OF THE MERGER -- COMPLIANCE AND MANAGEMENT. On October 8, 1993, Border Bank entered into a Memorandum of Understanding with the Texas Department of Banking (the "Banking Department"), and on December 14, 1993, First State Bank entered into a Memorandum of Understanding with the Banking Department. The Memorandum of Understanding applicable to each bank requires each bank to, among other things, (i) develop and follow policies related to loan documentation and review, (ii) increase (and continue monitoring the adequacy of) each bank's loan valuation reserve, and (iii) review each bank's investment and funds management policies. Texas State Bank has reviewed deficiency letters received from applicable regulatory authorities related to each Memorandum of Understanding, which, among other things, indicate that in the judgment of certain regulatory authorities First State Bank and Border Bank had not yet adequately addressed the deficiencies identified in the Memoranda of Understanding. See "Proposed Mergers." Prior to entering into the agreements relating to the Mergers, First State Bank and Border Bank began to implement additional corrective efforts, including retaining an outside consultant to assist in documentation and policy reviews for First State Bank and Border Bank. Texas State Bank management believes that the implementation of Texas State Bank's policies and procedures, and the application of Texas State Bank's internal controls, make it unlikely that 7 the deficiencies identified in the Memoranda of Understanding will be repeated, although there can be no certainty that all deficiencies will be adequately addressed to the satisfaction of applicable regulatory authorities. If the problems addressed in the Memoranda of Understanding persist, they could adversely affect the future operations of the Company. Following consummation of the Mergers, (i) all lending at the facilities formerly operated by First State Bank and Border Bank will be conducted pursuant to Texas State Bank's policies and under the supervision of Texas State Bank's Chief Lending Officer, Frank A. Kavanagh, (ii) investments in securities will be managed by the investment division of Texas State Bank in accordance with Texas State Bank's investment policies and (iii) following conversion (which is expected by Texas Regional management to occur in fall 1996) all data processing will be performed by Texas State Bank's data processing center. In general, the policies and procedures for all banking locations, including the banking locations formerly operated as First State Bank and Border Bank facilities, will be Texas State Bank's policies and procedures. Nonperforming assets and loans presently past due on the books of First State Bank and Border Bank have been reviewed by or on behalf of Texas State Bank and those loans which, in the judgment of Texas State Bank, represent probable losses will be recorded at zero at the time of consummation of the Mergers, although Texas State Bank will nonetheless pursue collection in appropriate circumstances. GEOGRAPHIC CONCENTRATION. Texas Regional's profitability is dependent on the profitability of its subsidiary bank, Texas State Bank, which operates only in the Rio Grande Valley of Texas. In addition to adverse changes in general conditions in the United States, unfavorable changes in economic conditions affecting the Rio Grande Valley, such as adverse effects of weather on agricultural production, adverse changes in United States-Mexico relations, and substantial Mexican peso devaluations, may have a significant adverse impact on operations of the Company. COMPETITION. The banking industry in the Rio Grande Valley is highly competitive. Texas State Bank, First State Bank and Border Bank compete as financial intermediaries with other commercial banks, savings and loan associations, credit unions, mortgage banking companies, securities brokerage companies, consumer and commercial finance companies, insurance companies and money market mutual funds operating in Texas and elsewhere. Many of these competitors have substantially greater resources and lending limits than Texas State Bank has or will have following the Mergers, and many of these competitors offer services that Texas State Bank does not currently provide. In addition, non-depository institution competitors are generally not subject to the extensive regulation applicable to Texas State Bank. RELIANCE ON CHIEF EXECUTIVE OFFICER. Texas Regional has experienced substantial growth in assets and deposits during the recent past, particularly since Glen E. Roney became Chairman of the Board and Chief Executive Officer of the Company in 1985. Although Mr. Roney is the largest individual shareholder of the Company and is the beneficiary of a deferred compensation arrangement with the Company that generally requires continued service for vesting, the Company does not have an employment agreement with Mr. Roney and the loss of the services of Mr. Roney could have a material adverse effect on the Company's business and prospects. See "Management -- Executive Compensation." REGULATORY RESTRICTIONS AND REQUIREMENTS. Texas Regional and Texas State Bank are subject to extensive government regulation and supervision under various state and federal laws, rules and regulations, including rules and regulations promulgated by the Federal Reserve Board ("FRB") and the Banking Department. These laws and regulations are designed primarily to protect the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"), depositors and borrowers, and to further certain social policies and, consequently, may impose limitations on the Company that may not be in the best interests of the Company and holders of Common Stock. See "Business -- Regulation and Supervision" and "Business -- Capital Resources." The Company and the Bank are subject to changes in federal and state laws, as well as changes in rules and regulations, governmental policies and changes in accounting principles. The effects of any such potential changes cannot be predicted, but they could have an adverse effect on the business and operations of the Company and the Bank. DILUTION. At December 31, 1995, the net tangible book value of the Common Stock was $9.20 per share. "Net tangible book value per share" represents the tangible net worth of the Company (total assets less intangible assets (including goodwill) and total liabilities), divided by the number of shares of Common Stock outstanding. Without taking into account any changes in net tangible book value after 8 December 31, 1995, after giving effect to the sale by the Company of 2,180,000 shares of Common Stock offered hereby (assuming a public offering price of $21.00 per share) and after deducting underwriting discounts, commissions and estimated offering expenses, and after giving effect to the Mergers (assumed to have been consummated effective December 31, 1995), the pro forma net tangible book value at December 31, 1995 would have been $9.30 per share, representing an increase of $0.10 per share to current shareholders and a dilution of $11.70 per share to persons purchasing the shares offered hereby. CONCENTRATION OF OWNERSHIP. After issuance of the 2,180,000 shares offered by the Company pursuant to this Prospectus, officers and directors of the Company, and affiliates of those persons, will beneficially own 17.83% of the Company's outstanding Common Stock (or 17.17% assuming the Underwriters' overallotment option is exercised in full). See "Principal Holders of Common Stock." Accordingly, such persons have the ability to act together as a group to direct the Company's affairs and business, which may include taking actions that may not be in the interests of the other shareholders. SHARES AVAILABLE FOR FUTURE SALE. The future sale of a substantial number of shares of Common Stock by existing shareholders, or the sale of shares of Common Stock by shareholders purchasing shares of Common Stock in this offering, could have a material adverse effect on the market price of the Common Stock. The Company, its directors and executive officers, and the Selling Shareholder have agreed that for a period of 120 days after the date of this Prospectus, they will not, directly or indirectly, sell or otherwise dispose of any shares of Common Stock (except for shares of Common Stock offered hereby and other than shares offered pursuant to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "KSOP") or other employee benefit plans) without the prior written consent of the Underwriters. See "Underwriting" and "Shares Eligible for Future Sale." LIMITED MARKET FOR COMMON STOCK. The Common Stock is held by approximately 642 shareholders of record. The total trading volume for the Common Stock for 1995, as reported on the Summary of Activity for December 1995, prepared by The Nasdaq Stock Market for the Company, indicates that total share volume was 752,910 shares during 1995, representing an aggregate of 337 trades. Alex. Brown & Sons Incorporated and First Southwest Company have made a market in the Common Stock since March 1994 (when the Common Stock was first qualified for trading through the Nasdaq National Market System), and each has advised the Company that they intend to make a market in the Common Stock as long as the volume of trading activity in the Common Stock and certain other market-making considerations justify doing so. However, there can be no assurance that a liquid trading market for the Common Stock will develop, that it will continue if it does develop, or that after the completion of this offering the Common Stock will trade at or above the offering price set forth on the cover of this Prospectus. Making a market involves maintaining bid and asked quotations for the Common Stock and being available as a principal to effect transactions in reasonable quantities at those quoted prices, subject to various securities laws and other regulatory requirements. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of the Common Stock at any given time, which presence is dependent upon the individual decisions of investors and general economic and market conditions, over which neither the Company nor any market-maker has control. USE OF PROCEEDS The net proceeds to Texas Regional from this offering, after deducting estimated expenses of the offering, are estimated to be $ . The Company intends to use $40.0 million of the proceeds from this offering to finance a portion of the consideration to the shareholders of First State Bank and Border Bank in the Mergers. The remainder of the net proceeds, if any, will be used for general corporate purposes. The total consideration to be paid to both First State Bank and Border Bank shareholders in the Mergers is estimated to be $99.5 million. The Company intends to fund the balance of the consideration principally from liquidation of cash equivalents and, to the extent necessary, selected investment securities on a consolidated basis. See "Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial Information." Consummation of the offering herein described is subject to certain conditions, including the contemporaneous consummation of the Mergers. See "Proposed Mergers" and "Underwriting." 9 THE COMPANY Texas Regional is a registered bank holding company whose wholly-owned subsidiary bank, Texas State Bank, conducts a commercial banking business in the Rio Grande Valley of Texas. At December 31, 1995, Texas Regional had consolidated assets of $646.8 million, loans outstanding (net of unearned discount) of $450.9 million, total deposits of $579.7 million, and total shareholders' equity of $62.7 million. For the years ended December 31, 1995, and 1994, the Company earned net income of $8.7 million and $7.2 million, respectively, for a return on average assets for these periods of 1.51% and 1.43%, respectively. At December 31, 1995, the Company had nonperforming assets (including accruing loans 90 days or more past due) of $4.2 million, representing 0.9% of period-end loans and other nonperforming assets (primarily other real estate). Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995, Texas State Bank would have had consolidated assets of $1.143 billion, loans outstanding (net of unearned discount) of $685.3 million, total deposits of $1.024 billion, and total shareholders' equity of $105.3 million. Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995 Texas State Bank would have had non-performing assets (including accruing loans 90 days or more past due) of $13.8 million, representing 2.0% of period-end loans and other nonperforming assets (primarily other real estate). All of Texas Regional's operations are located in the Rio Grande Valley, and therefore the ability of Texas Regional to continue its rate of growth and profitability is closely linked to the economy of the Rio Grande Valley. The Rio Grande Valley is composed of the following Texas counties: Hidalgo, Cameron, Willacy and Starr (the "Rio Grande Valley"). The economy of the Rio Grande Valley is based principally on retailing (including trade with Mexico), government, agriculture, tourism, manufacturing, health care and education. A large number of retirees spend all or part of the year in the Rio Grande Valley. Many twin manufacturing and assembly plants, or "maquiladoras," are located in the Rio Grande Valley or in communities located across the border in Mexico (such as Reynosa and Matamoros). The market area served by Texas State Bank has been recognized as among the fastest growing areas in the nation. The McAllen-Edinburg-Mission area has a projected population growth rate of 23.8% between 1994 and 2000, and the Brownsville-Harlingen area has a projected population growth rate of 16.0% during that same period. Texas State Bank has a total of nine full service banking locations in the Rio Grande Valley through which the Bank offers a broad range of commercial banking services. The Bank intends to operate all of the banking locations of First State Bank and Border Bank and, after consummation of the Mergers, will have 15 full service banking locations. The Bank serves as a community bank, providing for the banking needs of retailers, manufacturers, food producers and processors, real estate developers and builders, and other businesses in the Rio Grande Valley. For commercial customers, Texas State Bank offers checking facilities, certificates of deposit, short-term loans for working capital purposes, construction financing, mortgage loans, loans for fixed assets and expansion needs and other commercial loans. The services provided for individuals by Texas State Bank include checking accounts, savings accounts, certificates of deposit, individual retirement accounts and consumer loan programs, including installment loans for home repairs and for purchases of consumer goods, including automobiles, trucks and boats, mortgage loans, travelers checks, money orders and safe deposit facilities. Where the borrowing needs of a customer exceed the lending limits of the Bank, the Bank may participate with other banks in the making of such loan. The Bank also offers trust services to commercial and individual customers. At December 31, 1995 and 1994, total trust assets under management by Texas State Bank were $237.4 million and $192.4 million, respectively. On a pro forma basis at December 31, 1995, total trust assets under management by Texas State Bank would have been $248.9 million. Due to its close proximity to Mexico, Texas State Bank has developed banking relations with depositors who are Mexican residents. At December 31, 1995, approximately 9.8% of the total demand and time deposits in Texas State Bank were deposited by or on behalf of residents of Mexico. Many of the Company's Mexican customers are long-term customers of Texas State Bank or have long-standing relationships with senior management. On a pro forma basis at December 31, 1995, approximately 14.4% 10 of the combined total demand and time deposits in Texas State Bank, First State Bank and Border Bank were deposited by or on behalf of residents of Mexico, and approximately 1.9% of the combined total loans of Texas State Bank, First State Bank and Border Bank were secured by non-U.S. collateral, primarily real estate and other assets located in Mexico. Management does not believe that the Bank's profitability is dependent on business from Mexican depositors and loan customers. Texas State Bank is a member of the Federal Reserve System, and acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal fund transactions, loan participations, data processing and other correspondent services. Texas State Bank's business strategy is to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and level of service of a community bank. Management believes that the Bank is well positioned in its market due to its responsive customer service, the strong community involvement of Texas State Bank management and employees, recent trends in the Texas banking environment and recent trends in the economy of the Rio Grande Valley. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Bank's operations. Management believes that individualized customer service will allow the Bank to increase its market share in lending volume and deposits. As part of its operating and growth strategies, the Bank intends to attract business from, and provide service to, small to medium sized businesses, and expand its operations in the Rio Grande Valley. Consistent with the Company's growth strategy, in August 1995 Texas State Bank acquired the Rio Grande City and Roma branches of First National Bank of South Texas (the "RGC/Roma Branch Acquisitions"). In the acquisition, Texas State Bank assumed deposit liabilities amounting to an aggregate of $79.7 million, and acquired loans (net of unearned discount) of $43.7 million, fixed assets (after giving effect to purchase accounting adjustments) of $1.6 million, and other assets, including foreclosed properties, of $100,000. Texas State Bank paid a net premium (after purchase accounting adjustments) of $4.1 million for the business, and the difference of approximately $30.6 million was funded in cash by First National Bank of South Texas. The RGC/Roma Branch Acquisitions provided Texas State Bank with two banking locations in Starr County, Texas. Texas State Bank has for some time sought appropriate acquisitions to permit the Bank to expand within the market areas served by Texas State Bank and into adjacent market areas. In January 1996, the Company entered into definitive agreements to acquire through merger First State Bank and Border Bank. First State Bank and Border Bank had combined total assets of approximately $524.0 million at December 31, 1995, which, on a pro forma basis at December 31, 1995, would have resulted in Texas State Bank increasing its total assets to $1.143 billion, making Texas Regional the largest bank holding company headquartered in the Rio Grande Valley. The purpose of the Mergers is to further strengthen Texas State Bank's branch network and banking business in the Rio Grande Valley by adding six new banking locations in Mission, Penitas, McAllen and Hidalgo, Texas. The purchase price for the Mergers is estimated to be $99.5 million, approximately $40.0 million of which will be paid from the proceeds of the offering made hereby. The Company intends to fund the balance principally from liquidation of cash equivalents and, to the extent necessary, selected investment securities on a consolidated basis. See "Proposed Mergers" and "Use of Proceeds." The banking industry in the market area served by Texas State Bank is highly competitive, with competition from other commercial banks, savings and loan associations, credit unions, mortgage banking companies, commercial and consumer finance companies, securities broker-dealers, mutual fund companies, insurance agents and companies and other financial institutions, located both within and outside of the Rio Grande Valley. Texas Regional is subject to regulation by the FRB, and Texas State Bank is subject to regulation by both the Banking Department and its primary federal regulator, the FRB. Such regulations are primarily 11 designed for protection of depositors and not for the benefit of the shareholders of financial institutions. See "Business -- Regulation and Supervision" and "Risk Factors -- Regulatory Restrictions and Requirements." At December 31, 1995, Texas Regional employed 332 full time equivalent employees. On a pro forma basis at December 31, 1995, after giving consideration to the Mergers, the Company would have employed 467 full time equivalent employees. Substantially all of the present First State Bank and Border Bank officers and employees are expected to be employed by Texas State Bank. The address of Texas Regional's principal executive office is Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, and its telephone number is (210) 631-5400. PROPOSED MERGERS GENERAL The Company, through its subsidiary Texas State Bank, has agreed to acquire, through the Mergers, First State Bank and Border Bank. Management of Texas State Bank believes that the Mergers will expand the Company's community banking network into contiguous markets, substantially increasing its market share and enabling the Bank to compete more effectively with other financial institutions in the Rio Grande Valley. The new or expanded services to be offered to First State Bank and Border Bank customers include enhanced data processing services, additional automated teller facilities and other services now offered to Texas State Bank customers. Texas State Bank management believes that First State Bank, Border Bank and Texas State Bank customers will benefit from the expansion of Texas State Bank's branch network from nine to 15 banking locations. Texas State Bank expects to realize certain operating and administrative efficiencies as a result of the Mergers; however, because of the relatively low employee-to-asset ratio at First State Bank and Border Bank, cost savings is not a principal motivating factor for the Mergers. The operating efficiencies which are expected include the use by all banking locations of the existing Texas State Bank data processing facility, operation of a single human resources department, and economies of a combined advertising program. The terms of the merger of First State Bank are set forth in the Agreement and Plan of Reorganization dated January 9, 1996, as amended on , 1996, by and between the Company, Texas State Bank and First State Bank ("First State Bank Agreement"), and the terms of the merger of Border Bank are set forth in the Agreement and Plan of Reorganization dated January 9, 1996, as amended on , 1996, between the Company, Texas State Bank and Border Bank ("Border Bank Agreement") (the First State Bank Agreement and the Border Bank Agreement are collectively called the "Merger Agreements," copies of which are filed as exhibits to the Registration Statement). Subject to the terms and conditions of the Merger Agreements, certain shareholders of First State Bank and Border Bank have joined into the Merger Agreements to evidence their consent to the Mergers and their agreement to vote their shares in favor of the Mergers at their respective shareholders meetings. The Merger Agreements provide that, at the time of the closing of the Mergers (the "Closing"), the net worth of First State Bank will not be less than $62.0 million and the net worth of Border Bank will not be less than $17.3 million. Elliot B. Bottom is the Chairman of the Board of both First State Bank and Border Bank, and the banks have substantial common ownership. First State Bank, the principal office of which is located in Mission, Texas, was chartered in 1909, and Border Bank, located in Hidalgo, Texas, was chartered in 1968. Because of the proximity of Mission to McAllen, there is a substantial overlap in the markets served by Texas State Bank and First State Bank. For this reason and because the banks serve a similar customer base, First State Bank is considered by Texas State Bank management to be a direct competitor of Texas State Bank, particular as to loan customers. All of the offices of First State Bank and Border Bank are located in Hidalgo County, Texas, and all such locations are expected to continue to be operated by Texas State Bank, under the Texas State Bank name, following the Mergers. Both First State Bank and Border Bank are full service community banks. The products and services offered at these locations will be expanded to include all products and services offered by Texas State Bank. 12 Substantially all of the current officers and employees of First State Bank and Border Bank are expected to be employed by Texas State Bank following the Mergers. Elliott Bottom, the President and Chief Executive Officer of First State Bank, will become President of Texas State Bank's Mission banking locations, with principal operating responsibility for the Mission banking locations, and Brent Bottom, the President of Border Bank, will become the Chief Executive Officer of Texas State Bank's Hidalgo banking location. Texas State Bank management believes that this continuity of management will provide for an orderly transition and will minimize the loss of customer relationships. The Mergers are subject to a number of conditions, including receipt of approval from applicable regulatory authorities. Both the FRB and the Banking Department have approved the Mergers, subject to certain conditions, including the successful completion of the offering of Common Stock made hereby to partially fund the Mergers. FRB approval was received on , 1996. Applicable regulations require a waiting period following receipt of FRB approval prior to consummation of the Mergers. Based on a thirty-day waiting period, Texas State Bank will be able to consummate the Mergers on , 1996. The Mergers have also been approved by the shareholders of First State Bank and Border Bank, as required by law, at meetings held on , 1996. Members of senior management of Texas State Bank, and Texas State Bank's representatives, reviewed certain information concerning First State Bank and Border Bank. This review included all loans on the First State Bank and Border Bank watch lists, a substantial proportion of the loans to borrowers with other large lines of credit and selected other loans in each bank's portfolio. The Company's examinations were made using criteria, analyses and collateral evaluations that the Company has traditionally used in the ordinary course of its business. First State Bank and Border Bank have each entered into a Memorandum of Understanding with the Banking Department, pursuant to which each bank among other things, agrees to (i) develop and follow policies related to loan documentation and review, (ii) increase (and continue monitoring the adequacy of) each bank's loan valuation reserve, and (iii) review of each bank's investment and funds management policies. The Banking Department reviewed compliance with the First State Bank Memorandum of Understanding as part of an examination of First State Bank, and the FDIC reviewed compliance with the Border Bank Memorandum of Understanding as part of an examination of Border Bank. The regulatory authorities in each case concluded that there were deficiencies in compliance with the Memorandum applicable to each Bank, and required that First State Bank and Border Bank management further address the deficiencies identified in the Memoranda. Prior to entering into the Merger Agreements, First State Bank and Border Bank began to implement additional correction efforts, including retaining an outside consultant to assist in documentation and policy reviews for First State Bank and Border Bank. Texas State Bank management believes that the implementation of Texas State Bank's policies and procedures, and the application of Texas State Bank's internal controls, make it unlikely that the deficiencies identified in the Memoranda of Understanding will be repeated, although there can be no certainty that all deficiencies will be adequately addressed to the satisfaction of applicable regulatory authorities. If the problems addressed in the Memoranda of Understanding persist, they could adversely affect the future operations of the Company. See "Risk Factors -- Risks of the Mergers -- Compliance and Management." Following the Mergers, (i) all lending at the facilities formerly operated by First State Bank and Border Bank will be conducted pursuant to Texas State Bank's policies and under the supervision of Texas State Bank's Chief Lending Officer, Frank A. Kavanagh, (ii) investments in securities will be managed by the investment division of Texas State Bank in accordance with Texas State Bank's investment policies and (iii) following conversion (which is expected by Texas Regional management to occur in fall 1996) all data processing will be performed by Texas State Bank's data processing center. In general, the policies and procedures for all banking locations, including the banking locations formerly operated as First State Bank and Border Bank facilities, will be Texas State Bank's policies and procedures. Nonperforming assets and loans presently past due on the books of First State Bank and Border Bank have been reviewed by or on behalf of Texas State Bank and those loans which, in the judgment of Texas State Bank, represent probable losses will be recorded at zero at the time of consummation of the 13 Mergers, although Texas State Bank will nonetheless pursue collection in appropriate circumstances. At December 31, 1995, the allowance for loan losses at First State Bank was $4.2 million or 52.4% of nonperforming assets plus accruing loans 90 days or more past due. At December 31, 1995, the allowance for loan losses at Border Bank was $1.1 million or 72.5% of nonperforming assets plus accruing loans 90 days or more past due. THE MERGER AGREEMENTS The information contained in this Prospectus with respect to the Merger Agreements is a summary of the material provisions of the Merger Agreements, and, as such, is qualified in its entirety by reference to the Merger Agreements, which are exhibits to the Registration Statement. The Merger Agreements provide for the merger of First State Bank and Border Bank with and into Texas State Bank. Each of the Mergers is conditioned upon the closing of the other. The total consideration payable pursuant to the First State Bank Agreement is $79.0 million, and the total consideration payable pursuant to the Border Bank Agreement is $20.5 million, in each case payable in cash and in each case subject to adjustment for amounts attributable to shareholders of First State Bank and Border Bank exercising their dissenters' rights of appraisal. [Shareholders holding shares of First State Bank and shares of Border Bank have properly exercised their dissenter's rights, which entitle them to be paid the fair value of their shares by Texas State Bank, as determined in accordance with the statutory procedure.] Each of the Merger Agreements provides that the Mergers will terminate at the election of either party in the event that the Mergers have not been consummated prior to June 30, 1996. Pending the Closing, First State Bank and Border Bank have agreed to certain operating limitations and requirements, including an obligation to operate their businesses in accordance with reasonably prudent banking practices and in substantially the same manner as conducted prior to the date of the Merger Agreements. If either of the Mergers is not consummated as a result of either a default by Texas State Bank or the failure of certain conditions precedent to Texas State Bank's obligation to close the Mergers, Texas State Bank has agreed to pay a $65,000 termination fee to each of First State Bank and Border Bank. The consummation of the Mergers is subject to a number of conditions precedent, including that shareholders holding no more than an aggregate of 2.5% of the issued and outstanding shares shall have exercised dissenters' rights of appraisal, that regulatory approvals shall have been obtained and not contested in a formal proceeding, that there shall not be litigation pending or threatened which might result in action to restrain, enjoin, or prohibit consummation of the Mergers, and that each party shall have received certain fairness opinions in form and content acceptable to that party. Texas State Bank's obligations are further conditioned on there having been no material adverse change in the condition, financial position or business prospects of First State Bank or Border Bank and that each will have terminated its existing data processing services contract on terms and conditions reasonably acceptable to Texas State Bank. Texas State Bank has reserved the right to waive any applicable condition to Closing in circumstances deemed appropriate by Texas State Bank management. One of the conditions to Texas State Bank's obligation to consummate the First State Bank Agreement is that First State Bank have a net worth as of the date of Closing of not less than $62.0 million. Similarly, one of the conditions to Texas State Bank's obligation to consummate the Border Bank Agreement is that Border Bank have a net worth as of the date of Closing of not less than $17.3 million. Other than a dividend of $500,000 paid by Border Bank in January 1996, each of the Merger Agreements prohibits payment of dividends to shareholders of First State Bank and Border Bank pending Closing. Pursuant to each of the Merger Agreements, Elliott Bottom, the Chairman of the Board and Chief Executive Officer of First State Bank and the Chairman of the Board of Border Bank, has agreed not to engage (except as an employee of Texas State Bank) in the commercial banking business in Hidalgo, Cameron, Starr or Willacy Counties, Texas, for a period of three years following the date of Closing, except that such obligation shall terminate in the event of a change of control of a majority of the 14 outstanding capital stock of either Texas State Bank or the Company. As of the date of Closing, Elliott Bottom will become President of Texas State Bank's Mission banking locations. His son, Brent Bottom, the President of Border Bank, will become the Chief Executive Officer of Texas State Bank's Hidalgo banking location. The terms of the Mergers were established in arms' length negotiations conducted by representatives of Texas State Bank, and First State Bank and Border Bank. In approving the Mergers and the amounts of the purchase price to be paid, the Board of Directors of Texas State Bank considered a number of factors, including: (i) First State Bank's and Border Bank's historical financial condition, including shareholders' equity and results of operations; (ii) First State Bank's and Border Bank's business, prospects, management and employees; (iii) current economic and market conditions; (iv) the likelihood of completing a transaction with one or more other banking institutions on comparable or more favorable terms (although no specific alternative transactions were identified); and (v) the prospects for growth of Texas State Bank assuming the Mergers are completed. The Board of Directors attached no specific relative weights to these factors in reaching its determination. In addition, the Company has received an opinion of First Southwest Company as to the fairness of the transaction, from a financial point of view, to the shareholders of the Company. Given the historically strong growth rate for Texas State Bank and the increasing population in its market area, management believes that Texas State Bank's prospects for growth in the future are strong, notwithstanding whether or not the Mergers are consummated. It is anticipated that the Mergers, which are effective upon filing and acceptance of a Certificate of Merger with the Banking Department, will be consummated contemporaneously with the closing and funding of the net proceeds of the offering herein described. PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY Since the public offering of the Common Stock in March 1994, the Common Stock has traded in the Nasdaq National Market System under the symbol "TRBS." The following table shows (i) high and low prices of the Common Stock as reported in the Summary of Activity provided to the Company by The Nasdaq Stock Market for transactions occurring on the Nasdaq National Market System during the past two years, and (ii) the total number of shares involved in such transactions. In addition, with respect to periods prior to March 16, 1994, the information is based upon transactions with respect to which the management of Texas Regional had knowledge of the transaction price, since during those periods transactions were reported on an informal basis, and no independent verification of the transaction prices was made. Therefore, during periods prior to March 16, 1994, the prices reported may not be indicative of the actual or market value of the Common Stock.
PRICE PER SHARE CASH -------------------- DIVIDENDS NUMBER OF HIGH LOW DECLARED SHARES --------- --------- ----------- ----------- 1994 First Quarter.......................................... $ 12.75 $ 11.75 $ -- 854,845 Second Quarter......................................... 14.50 11.00 0.08 1,182,385 Third Quarter.......................................... 15.50 13.25 0.08 582,094 Fourth Quarter......................................... 13.50 11.50 0.08 173,796 1995 First Quarter.......................................... 12.75 11.25 0.10 78,931 Second Quarter......................................... 14.50 11.75 0.10 335,504 Third Quarter.......................................... 16.50 13.50 0.10 248,456 Fourth Quarter......................................... 18.25 15.50 0.10 90,019 1996 First Quarter (through February 29, 1996).......................... 23.00 17.00 0.10 347,511
15 During the two years ended December 31, 1995, an aggregate of 58,500 shares purchased by the KSOP are included in the foregoing table. See "Management -- Employee Stock Ownership Plan." On , 1996, the last trading day prior to the date of this Prospectus, the last reported sale price of the Common Stock as reported on the Nasdaq National Market System was $ per share. On January 9, 1996, the day prior to the public announcement of the execution of the Merger Agreements, the last reported sale price of the Common Stock as reported on the Nasdaq National Market System was $17.00 per share. The Company paid no dividends on its Common Stock prior to June 1994. Beginning in June 1994, the Company paid a quarterly dividend of $0.08 per share of its Common Stock. During 1995, the Company increased its quarterly dividend to $0.10 per share, and currently intends to continue to pay such dividend in the foreseeable future. On , 1996, the Company's Board of Directors declared a dividend of $0.10 per share of Common Stock payable to shareholders of record as of , 1996. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company's Board of Directors and will depend on conditions then existing, including Texas Regional's profitability, liquidity, financial condition, capital requirements and other relevant factors, including regulatory restrictions applicable to the Company. The Company's principal source of the funds to pay dividends on the Common Stock is dividends from Texas State Bank. The payment of dividends by Texas State Bank is subject to certain restrictions imposed by federal and state banking laws, regulations and authorities. At December 31, 1995, an aggregate of $8.7 million was available for payment of dividends by the Bank to the Company under the applicable limitations and without regulatory approval. See "Business -- Regulation and Supervision." 16 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at December 31, 1995, adjusted to give effect to the issuance and sale of the Common Stock offered by the Company hereby and consummation of the Mergers (in each case, assuming no exercise of the Underwriters' over-allotment option and after deduction for estimated underwriting discounts and other expenses of the offering).
DECEMBER 31, 1995 ------------------------- ACTUAL AS ADJUSTED(1) --------- -------------- (IN THOUSANDS) LONG-TERM DEBT Note Payable...................................................................... $ -- $ -- SHAREHOLDERS' EQUITY Preferred Stock: $1.00 par value; 10,000,000 shares authorized.................... -- -- Common Stock: $1.00 par value; 20,000,000 shares authorized; issued and outstanding 6,196,791 shares at December 31, 1995, and 8,376,791 shares at December 31, 1995, on an "As Adjusted" basis.................................... 6,196 8,376 Paid-In Capital................................................................... 29,239 69,592 Retained Earnings................................................................. 27,168 27,168 Unrealized Gains on Securities Available for Sale.............................................................. 117 117 --------- -------------- TOTAL SHAREHOLDERS' EQUITY........................................................ 62,720 105,253 --------- -------------- TOTAL CAPITALIZATION.................................................................. $ 62,720 $ 105,253 --------- -------------- --------- --------------
- --------- (1) Reflects the receipt by Texas Regional of net proceeds of this offering of approximately $42.5 million, assuming sale by Texas Regional of 2,180,000 shares at a price of $21.00 per share, net of underwriting discounts and commissions and other estimated offering expenses. At December 31, 1995, Texas Regional had outstanding 6,196,791 shares of Common Stock held by approximately 642 shareholders of record. 17 TEXAS REGIONAL BANCSHARES, INC. SELECTED CONSOLIDATED FINANCIAL INFORMATION The selected consolidated financial information under the captions "Summary of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of the years in the five-year period ended December 31, 1995 has been derived from the consolidated financial statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The consolidated financial statements at December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest Income.................................. $ 45,592 $ 34,631 $ 29,691 $ 27,737 $ 24,484 Interest Expense................................. 18,052 11,690 10,494 10,876 12,711 ---------- ---------- ---------- ---------- ---------- Net Interest Income.............................. 27,540 22,941 19,197 16,861 11,773 Provision for Loan Losses........................ 1,685 1,085 392 220 310 Noninterest Income............................... 6,518 5,772 5,032 3,817 2,775 Noninterest Expense.............................. 18,977 16,507 14,513 13,910 9,864 ---------- ---------- ---------- ---------- ---------- Income Before Income Tax Expense................. 13,396 11,121 9,324 6,548 4,374 Income Tax Expense............................... 4,671 3,936 3,345 2,029 1,550 Cumulative Effect of Change in Accounting Principle....................................... -- -- 32 -- -- ---------- ---------- ---------- ---------- ---------- Net Income....................................... $ 8,725 $ 7,185 $ 6,011 $ 4,519 $ 2,824 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PER SHARE DATA (ON A FULLY-DILUTED BASIS) Net Income....................................... $ 1.40 $ 1.16 $ 1.16 $ 0.92 $ 0.79 Book Value....................................... 10.12 9.00 7.73 6.42 5.22 Cash Dividends Paid on Common Stock.............. 0.40 0.24 -- -- -- Average Shares Outstanding (in thousands)........ 6,227 6,035 5,170 4,890 3,578 PERIOD-END BALANCE SHEET DATA Total Assets..................................... $ 646,769 $ 531,834 $ 473,263 $ 414,331 $ 297,256 Loans............................................ 450,854 339,939 290,500 252,118 179,853 Investment Securities............................ 131,641 126,828 127,540 100,353 69,735 Interest-Earning Assets.......................... 586,095 468,067 422,965 374,671 263,958 Deposits......................................... 579,731 472,108 429,521 375,016 271,540 Shareholders' Equity............................. 62,720 55,731 39,983 34,318 19,366 PERFORMANCE RATIOS Return on Average Assets......................... 1.51% 1.43% 1.34% 1.23% 1.00% Return on Average Shareholders' Equity........... 14.69 14.11 16.15 15.23 15.85 Net Interest Margin.............................. 5.33 5.12 4.84 5.21 4.67 Loan to Deposit Ratio............................ 77.77 72.00 67.63 67.23 66.23 Demand Deposit to Total Deposit Ratio............ 20.77 21.11 20.81 21.61 20.86 ASSET QUALITY RATIOS Nonperforming Assets to Loans and Other Nonperforming Assets............................ 0.79% 1.41% 1.69% 2.31% 4.27% Net Charge-Offs to Average Loans................. 0.30 0.33 (0.04) 0.21 0.45 Allowance for Loan Losses as a Percentage of: Loans........................................ 1.01 1.03 1.18 1.16 1.42 Nonperforming Loans.......................... 216.49 143.42 146.05 257.83 67.10 Nonperforming Assets......................... 126.62 72.96 69.39 49.43 32.44 CAPITAL RATIOS Period-End Shareholders' Equity to Total Assets.. 9.70% 10.48% 8.45% 8.28% 6.51% Tier I Risk-Based Capital........................ 11.70 14.71 12.05 11.85 9.81 Total Risk-Based Capital......................... 12.64 15.67 13.21 12.91 11.06 Leverage Capital Ratio........................... 8.96 10.37 7.88 8.15 6.54 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
18 TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION The following unaudited pro forma combined condensed balance sheet at December 31, 1995, and pro forma combined condensed statement of income for the year ended December 31, 1995, combine the historical consolidated balance sheet of the Company and the historical balance sheets of First State Bank and Border Bank at December 31, 1995, as if the Mergers had been effective on December 31, 1995. The Mergers are accounted for under the purchase method of accounting, after giving effect to the pro forma adjustments and assumptions described in the accompanying notes. Under this method of accounting, which is required by generally accepted accounting principles, assets and liabilities of First State Bank and Border Bank are adjusted to their fair values (as estimated by management of the Company) and combined with the recorded values of the assets and liabilities of the Company. This pro forma combined condensed financial information should be read in conjunction with the financial information appearing under "Texas Regional Bancshares, Inc. Selected Consolidated Financial Information" and the consolidated financial statements of the Company, First State Bank and Border Bank, including the notes thereto, included elsewhere in this Prospectus. See "Index to Financial Statements." The following unaudited pro forma combined condensed statement of income for the year ended December 31, 1995 assumes the Mergers and the RGC/Roma Branch Acquisitions occurred January 1, 1995. Intangibles arising from the Mergers and the RGC/Roma Branch Acquisitions are approximately $21.6 million and $4.1 million, respectively. The pro forma adjustments reflect the amortization of the core deposit premium over a 10-year period, the fixed maturity deposit premium over a 3-year period and the goodwill intangible over a 15-year period. The pro forma combined condensed financial information is not intended to present the results that would have actually occurred if the Mergers had been in effect on the assumed dates and for the assumed periods. These results are not necessarily indicative of the results which may be obtained in the future. 19 TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED)
FIRST BORDER PRO FORMA PRO FORMA TEXAS REGIONAL STATE BANK BANK ADJUSTMENTS BALANCE --------------- ----------- ----------- -------------- ------------- (IN THOUSANDS) ASSETS Cash and Due from Banks................... $ 30,933 $ 16,270 $ 3,982 $ 42,533A $ 51,831 (41,172)F (715)B Federal Funds Sold........................ 3,600 23,350 8,750 (30,850)F 4,850 --------------- ----------- ----------- -------------- ------------- Total Cash and Cash Equivalents......... 34,533 39,620 12,732 (30,523) 56,362 Securities Available for Sale............. 63,150 23,478 6,779 (27,478)F 65,929 Securities Held to Maturity............... 68,491 143,283 47,457 2,937C 262,168 Loans, Net of Unearned Discount........... 450,854 188,424 47,345 (1,337)G 685,286 Less: Allowance for Loan Losses........... (4,542) (4,196) (1,100) -- (9,838) --------------- ----------- ----------- -------------- ------------- Net Loans............................... 446,312 184,228 46,245 (1,337) 675,448 Premises and Equipment, Net............... 18,374 5,487 3,297 7,000D 34,158 Accrued Interest Receivable............... 6,319 7,172 2,242 -- 15,733 Other Real Estate......................... 1,273 431 237 -- 1,941 Goodwill.................................. 4,641 -- -- 7,250F 11,891 Core Deposit.............................. 1,000 -- -- 14,351H 15,351 Organization Cost......................... 70 -- -- -- 70 Other Assets.............................. 2,606 771 515 (137)J 3,755 --------------- ----------- ----------- -------------- ------------- Total Assets............................ $ 646,769 $ 404,470 $ 119,504 $ (27,618) $ 1,143,125 --------------- ----------- ----------- -------------- ------------- --------------- ----------- ----------- -------------- ------------- LIABILITIES Deposits Noninterest-Bearing..................... $ 120,414 $ 39,810 $ 7,137 $ (715)B $ 166,646 Interest-Bearing........................ 459,317 303,800 94,858 (394)I 857,581 --------------- ----------- ----------- -------------- ------------- Total Deposits........................ 579,731 343,610 101,995 (1,109) 1,024,227 --------------- ----------- ----------- -------------- ------------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements......... 757 -- -- -- 757 Other Borrowings.......................... -- 157 -- -- 157 Accounts Payable and Accrued Liabilities.............................. 3,561 1,316 434 7,557E 12,731 (137) J --------------- ----------- ----------- -------------- ------------- Total Liabilities..................... 584,049 345,083 102,429 6,311 1,037,872 --------------- ----------- ----------- -------------- ------------- SHAREHOLDERS' EQUITY Preferred Stock........................... -- -- -- -- -- Common Stock.............................. 6,196 4,000 2,000 2,180A 8,376 (6,000)F Paid-In Capital........................... 29,239 21,000 9,000 40,353A 69,592 (30,000)F Retained Earnings......................... 27,168 34,405 6,078 (40,483)F 27,168 Unrealized Gain (Loss) on Securities Available for Sale....................... 117 (18) (3) 21F 117 --------------- ----------- ----------- -------------- ------------- Total Shareholders' Equity............ 62,720 59,387 17,075 (33,929) 105,253 --------------- ----------- ----------- -------------- ------------- Total Liabilities and Shareholders' Equity............................... $ 646,769 $ 404,470 $ 119,504 $ (27,618) $ 1,143,125 --------------- ----------- ----------- -------------- ------------- --------------- ----------- ----------- -------------- -------------
- --------- See Notes to Pro Forma Combined Condensed Balance Sheet (Unaudited) 20 TEXAS REGIONAL BANCSHARES, INC. PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
TEXAS RGC/ROMA FIRST BORDER PRO FORMA PRO FORMA REGIONAL BRANCHES STATE BANK BANK ADJUSTMENTS BALANCE --------- ------------- ----------- --------- ------------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income............................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (4,059)K $ 87,271 Interest Expense.............................. 17,041 2,817 13,103 4,415 131L 37,507 --------- ------------- ----------- --------- ------------- ----------- Net Interest Income........................... 26,464 3,520 19,369 4,601 (4,190) 49,764 Provision for Loan Losses..................... 1,666 19 2,425 485 -- 4,595 Net Interest Income After Provision for Loan Losses..................................... 24,798 3,501 16,944 4,116 (4,190) 45,169 Noninterest Income Service Charges on Deposit Accounts......... 3,312 469 1,146 255 -- 5,182 Other Service Charges....................... 825 97 151 33 -- 1,106 Trust Service Fees.......................... 1,256 -- 24 -- -- 1,280 Other Operating Income...................... 926 24 81 28 -- 1,059 --------- ------------- ----------- --------- ------------- ----------- Total Noninterest Income.................. 6,319 590 1,402 316 -- 8,627 --------- ------------- ----------- --------- ------------- ----------- Noninterest Expense Salaries and Employee Benefits.............. 9,247 1,334 2,824 1,056 -- 14,461 Net Occupancy Expense....................... 1,010 176 568 234 294M 2,282 Equipment Expense........................... 1,959 217 341 148 -- 2,665 Other Noninterest Expense................... 5,631 1,281 2,531 729 2,189N 12,361 --------- ------------- ----------- --------- ------------- ----------- Total Noninterest Expense................. 17,847 3,008 6,264 2,167 2,483 31,769 --------- ------------- ----------- --------- ------------- ----------- Income Before Income Tax Expense.............. 13,270 1,083 12,082 2,265 (6,673) 22,027 Income Tax Expense............................ 4,630 367 3,436 381 (2,105) 6,709 --------- ------------- ----------- --------- ------------- ----------- Net Income.................................. $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568) $ 15,318 --------- ------------- ----------- --------- ------------- ----------- --------- ------------- ----------- --------- ------------- ----------- Primary Earnings Per Common Share Net Income.................................. $ 1.39 $ 1.82 Weighted Average Number of Common Shares Outstanding (In Thousands)............................. 6,218 8,398 --------- ----------- Fully Diluted Earnings Per Common Share Net Income.................................. $ 1.39 $ 1.82 Weighted Average Number of Common Shares Outstanding (In Thousands)............................. 6,227 8,407 --------- ----------- --------- -----------
21 TEXAS REGIONAL BANCSHARES, INC. NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET The unaudited pro forma combined condensed balance sheet combines the three entities at December 31, 1995. In combining the entities, the following adjustments were made: (A) To record the estimated proceeds of the $42.5 million net capital raised through the offering based on an assumed sale by Texas Regional of 2,180,000 shares of Common Stock at a price of $21.00 per share, the closing price as of February 20, 1996 net of underwriting discounts, commissions and other estimated offering expenses. (B) To record the elimination of intercompany demand deposit accounts. (C) To adjust securities purchased to fair value at December 31, 1995. (D) To record estimated $7.0 million increase in fair value of fixed assets. (E) To record estimated deferred federal income tax on the net fair value increases. (F) To record the payment of $99.5 million to the First State Bank and Border Bank shareholders for 100% of their outstanding stock, elimination of all First State Bank and Border Bank equity accounts and the recording of goodwill. (G) To adjust loan carrying value to estimated fair value. (H) To record estimated fair value of core deposits. (I) To record estimated fair value of fixed maturity deposit premium. (J) To reclassify deferred federal income taxes. TEXAS REGIONAL BANCSHARES, INC. NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME The unaudited pro forma combined condensed statement of income combines the three entities for the year ended December 31, 1995. In combining the entities, the following adjustments were made: (K) To record a reduction in interest income on the $57.0 million net purchase price ($99.5 million less $42.5 million) of the Mergers and $4.25 million purchase price of the RGC/Roma Branch Acquisitions at the Company's average federal funds sold rate of 5.92% for the year ended December 31, 1995 and the tax effect of these transactions using an effective tax rate of 34%. (L) To amortize the fixed maturity deposit premium. (M) To record depreciation on fair market value increases of depreciable fixed assets acquired in the Mergers. (N) To record amortization of the goodwill and core deposit premium recorded in connection with the Mergers and the RGC/Roma Branch Acquisitions. 22 TEXAS REGIONAL BANCSHARES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides additional information regarding the financial condition and the results of operations for the Company for each of the years ended December 31, 1995, 1994 and 1993. This discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this Prospectus. See "Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial Information" for additional information regarding the effects on the Company of consummation of the Mergers. SELECTED CONSOLIDATED FINANCIAL INFORMATION Net income for the year ended December 31, 1995 was $8.7 million, reflecting a net increase of $1.5 million or a 21.4% increase compared to net income of $7.2 million for the year ended December 31, 1994. The earnings per share of $1.40 for the year ended December 31, 1995 increased $0.24 or 20.7% compared to the earnings per share of $1.16 for the year ended December 31, 1994. Earnings performance for the year ended December 31, 1995 reflected gains in net interest income and an increase in noninterest income. These positive factors were partially offset by an increase in provision for loan losses and noninterest expenses. A more detailed description of the results of operations is included in the material that follows. During August 1995, Texas State Bank completed the RGC/Roma Branch Acquisitions which included the purchase of $43.7 million in loans and the assumption of approximately $79.7 million in deposit liabilities of these banking locations. This transaction was accounted for as a purchase; therefore, the results of operations of the two banking locations are included in the consolidated financial statements of the Company from the date of acquisition. Purchase accounting adjustments for the purchase of loans and the assumption of deposit liabilities of these banking locations were immaterial. On March 31, 1992, the Company acquired, through merger, Mid Valley Bank, Weslaco, Texas. Simultaneously with the acquisition of Mid Valley Bank, both the surviving bank in that merger transaction and Harlingen State Bank, Harlingen, Texas, a subsidiary of the Company, merged with and into Texas State Bank and the former Weslaco and Harlingen banks became banking locations of Texas State Bank. The Mid Valley Bank merger was accounted for under the purchase method of accounting. Accordingly, certain income statement and balance sheet comparisons during calendar 1991 and 1992 and at year-end 1991 and 1992, respectively, may not be appropriate. ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is the difference between interest earned on assets and interest expense incurred for the funds supporting those assets. The largest category of earning assets consists of loans. The second largest category of earning assets is investment securities, followed by federal funds sold. For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets. Earning assets are financed by consumer and commercial deposits and short-term borrowings. In addition to these interest-bearing funds, assets also are supported by interest-free funds, primarily demand deposits and shareholders' equity. Variations in the volume and mix of assets and liabilities, and their relative sensitivity to interest rate movements, determine changes in net interest income. Taxable-equivalent net interest income was $27.8 million for the year ended December 31, 1995, an increase of $4.7 million or 20.3% compared to the year ended December 31, 1994, and taxable-equivalent net interest income of $23.1 million for the year ended December 31, 1994, increased $3.7 million or 19.3% compared to the year ended December 31, 1993. Both net interest income and the yield on earning assets were reduced by interest foregone on nonaccrual and renegotiated loans. If interest on 23 those loans had been accrued at the original contractual rates, additional interest income would have approximated $247,000, $476,000, and $149,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The net yield on total interest-earning assets, also referred to as interest rate margin, represents net interest income divided by average interest-earning assets. Since a significant portion of the Company's funding is derived from interest-free sources, primarily demand deposits and shareholders' equity, the effective rate paid for all funds is lower than the rate paid on interest-bearing liabilities alone. As the following table illustrates, the interest rate margin of 5.33% for the year ended December 31, 1995 increased 21 basis points compared to 5.12% for the year ended December 31, 1994 while the interest rate margin of 5.12% for the year ended December 31, 1994 increased 28 basis points compared to 4.84% for the year ended December 31, 1993. The increase in the interest rate margin for the year ended December 31, 1995 is reflective of the shift in the mix of interest-earning assets to loans from lower yielding investment securities, including federal funds sold, which contributed to an increase in yield on interest-earning assets during the year. The mix of interest-earning assets was changed by total average loans of $370.3 million increasing $61.2 million or 19.8%, total average investment securities of $131.0 million increasing $967,000 or 0.7% and average federal funds sold of $19.8 million increasing $8.3 million or 72.4%. The increase in loan yield reflects the general increase in average interest rates in 1995 compared to 1994. The increase in investment securities yield resulted from lower yielding investment securities maturing and the reinvesting of the proceeds into higher yields. The increase in interest on deposits during the year ended December 31, 1995 resulted primarily from increased volume and the higher average rate paid compared to the previous year. The following table presents for the last three calendar years the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from average daily balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective income tax rate. 24 THREE-YEAR FINANCIAL SUMMARY
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 1995 1994 1993 --------------------------- ---------------------------- ---------------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ TAXABLE-EQUIVALENT BASIS(1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE - ---------------------------------------- -------- -------- ------ -------- -------- ------- -------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest-Earning Assets Loans Commercial.......................... $125,321 $12,355 9.86% $107,459 $ 8,959 8.34% $100,028 $ 7,891 7.89% Real Estate......................... 208,035 21,197 10.19 172,925 16,415 9.49 139,432 13,420 9.62 Consumer............................ 36,918 3,647 9.88 28,654 2,631 9.18 24,503 2,363 9.64 -------- -------- -------- -------- -------- -------- Total Loans....................... 370,274 37,199 10.05 309,038 28,005 9.06 263,963 23,674 8.97 -------- -------- -------- -------- -------- -------- Investment Securities Taxable............................. 126,086 7,004 5.55 125,912 5,863 4.66 110,098 5,119 4.65 Tax-Exempt.......................... 4,907 431 8.78 4,114 368 8.95 4,579 415 9.06 -------- -------- -------- -------- -------- -------- Total Investment Securities....... 130,993 7,435 5.68 130,026 6,231 4.79 114,677 5,534 4.83 -------- -------- -------- -------- -------- -------- Federal Funds Sold...................... 19,807 1,172 5.92 11,490 519 4.52 20,655 623 3.02 -------- -------- -------- -------- -------- -------- Total Interest-Earning Assets..... 521,074 45,806 8.79 450,554 34,755 7.71 399,295 29,831 7.47 -------- -------- -------- -------- -------- -------- Cash and Due from Banks................. 31,151 30,392 26,999 Premises and Equipment, Net............. 16,365 15,358 13,430 Other Assets............................ 13,507 11,562 11,573 Less Allowance for Loan Losses........ (4,158) (3,663) (3,206) -------- -------- -------- Total Assets...................... $577,939 $504,203 $448,091 -------- -------- -------- -------- -------- -------- LIABILITIES Interest-Bearing Liabilities Savings............................. $ 31,360 840 2.68 $ 29,791 763 2.56 $ 27,978 780 2.79 Money Market Checking and Savings... 129,012 3,484 2.70 133,565 3,232 2.42 115,122 2,894 2.51 Time Deposits....................... 249,167 13,666 5.48 191,885 7,624 3.97 178,808 6,647 3.72 -------- -------- -------- -------- -------- -------- Total Savings and Time Deposits......................... 409,539 17,990 4.39 355,241 11,619 3.27 321,908 10,321 3.21 -------- -------- -------- -------- -------- -------- Federal Funds Purchased and Securities Sold Under Repurchase Agreements......................... 1,093 46 4.21 651 23 3.53 20 1 5.00 Short-Term Borrowings............... 232 16 6.90 436 32 7.34 804 60 7.46 Note Payable........................ -- -- -- 265 16 6.04 1,873 112 5.98 -------- -------- -------- -------- -------- -------- Total Interest-Bearing Liabilities...................... 410,864 18,052 4.39 356,593 11,690 3.28 324,605 10,494 3.23 -------- -------- -------- -------- -------- -------- Demand Deposits......................... 103,842 93,807 83,710 Other Liabilities....................... 3,835 2,896 2,552 -------- -------- -------- Total Liabilities................. 518,541 453,296 410,867 -------- -------- -------- SHAREHOLDERS' EQUITY 59,398 50,907 37,224 -------- -------- -------- Total Liabilities and Shareholders' Equity............. $577,939 $504,203 $448,091 -------- -------- -------- -------- -------- -------- Net Interest Income..................... $27,754 $23,065 $19,337 -------- -------- -------- -------- -------- -------- Net Yield on Total Interest-Earning Assets................................. 5.33% 5.12% 4.84% ------ ------- ------- ------ ------- -------
- ------------ (1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). 25 The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category.
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEAR ENDED DECEMBER 31, NET --------------------------- 1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------- ------ ------ ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ 9,194 $5,548 $3,059 $ 587 Investment Securities Taxable..................................................................... 1,141 8 1,121 12 Tax-Exempt.................................................................. 63 71 (7) (1) Federal Funds Sold............................................................ 653 376 161 116 ------- ------ ------ ----------- Total Interest Income....................................................... 11,051 6,003 4,334 714 ------- ------ ------ ----------- Interest Expense Deposits...................................................................... 6,371 1,776 3,979 616 Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 23 16 4 3 Short-Term Borrowings......................................................... (16) (15) (2) 1 Note Payable.................................................................. (16) (16) -- -- ------- ------ ------ ----------- Total Interest Expense...................................................... 6,362 1,761 3,981 620 ------- ------ ------ ----------- Net Interest Income Before Allocation of Rate/Volume............................ 4,689 4,242 353 94 ------- ------ ------ ----------- Allocation of Rate/Volume....................................................... -- 265 (171) (94) ------- ------ ------ ----------- Changes in Net Interest Income.................................................. $ 4,689 $4,507 $ 182 $-- ------- ------ ------ ----------- ------- ------ ------ ----------- TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEAR ENDED DECEMBER 31, NET --------------------------- 1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------- ------ ------ ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ 4,331 $4,043 $ 238 $ 50 Investment Securities Taxable..................................................................... 744 735 11 (2) Tax-Exempt.................................................................. (47) (42) (5) -- Federal Funds Sold............................................................ (104) (277) 310 (137) ------- ------ ------ ----------- Total Interest Income....................................................... 4,924 4,459 554 (89) ------- ------ ------ ----------- Interest Expense Deposits...................................................................... 1,298 1,070 193 35 Federal Funds Purchased and Securities Sold Under Repurchase Agreements....... 22 32 -- (10) Short-Term Borrowings......................................................... (28) (27) (1) -- Note Payable.................................................................. (96) (96) 1 (1) ------- ------ ------ ----------- Total Interest Expense...................................................... 1,196 979 193 24 ------- ------ ------ ----------- Net Interest Income Before Allocation of Rate/Volume............................ 3,728 3,480 361 (113) ------- ------ ------ ----------- Allocation of Rate/Volume....................................................... -- (38) (75) 113 ------- ------ ------ ----------- Changes in Net Interest Income.................................................. $ 3,728 $3,442 $ 286 $-- ------- ------ ------ ----------- ------- ------ ------ -----------
- --------- (1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). 26 NET YIELD ON EARNING ASSETS The following table presents net interest income, average earning assets and the net yield by quarter for the past three years. Income and yield on earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective federal income tax rate.
NET YIELD ON % CHANGE QUARTER EARNING ASSETS FROM PRIOR -------------------------------------------------- TAXABLE-EQUIVALENT BASIS YEAR YEAR FOURTH THIRD SECOND FIRST - ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) 1995 Net Interest Income................ 20.3% $ 27,754 $ 7,633 $ 7,047 $ 6,585 $ 6,489 Average Earning Assets............. 15.7 521,074 574,033 542,783 492,880 474,600 Net Yield.......................... 5.33% 5.28% 5.15% 5.36% 5.54% 1994 Net Interest Income................ 19.3% $ 23,065 $ 6,289 $ 5,891 $ 5,677 $ 5,208 Average Earning Assets............. 12.8 450,554 469,604 455,802 448,356 428,454 Net Yield.......................... 5.12% 5.31% 5.13% 5.08% 4.93% 1993 Net Interest Income................ 13.7% $ 19,337 $ 4,999 $ 4,853 $ 4,738 $ 4,747 Average Earning Assets............. 22.4 99,295 426,691 407,217 393,264 370,008 Net Yield.......................... 4.84% 4.65% 4.73% 4.83% 5.20% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
PROVISION FOR LOAN LOSSES The provision for loan losses for the year ended December 31, 1995 was $1.7 million, an increase of $600,000 or 55.3% from the $1.1 million for the year ended December 31, 1994. The provision for loan losses for the year ended December 31, 1994 of $1.1 million reflects an increase of $693,000 or 176.8% from the $392,000 provision for loan losses for the year ended December 31, 1993. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, particularly as they relate to the Company's lending area, and other factors related to the collectibility of the Company's loan portfolio. The increase in the provision for the year ended December 31, 1995, compared to the provision for the year ended December 31, 1994, was primarily attributable to loan growth of $110.9 million and net charge-offs of $1.1 million. See "Allowance for Loan Losses." In January 1995, the Company adopted Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan", and the amendment thereof, Statement of Financial Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". In management's opinion, the adoption of Statement 114 and Statement 118 did not have a material effect on the Company's financial position or results of operations. NONINTEREST INCOME Noninterest income of $6.5 million for the year ended December 31, 1995 increased $746,000 or 12.9% compared to $5.8 million for the year ended December 31, 1994, and noninterest income of $5.8 million for the year ended December 31, 1994 increased $740,000 or 14.7% compared to $5.0 million for the year ended December 31, 1993. All categories of noninterest income, except Other Service Charges and Net Investment Securities Gains (Losses), for the year ended December 31, 1995, increased when compared to the year ended December 31, 1994. Total Service Charges of $4.3 million for the year ended December 31, 1995 increased $392,000 or 10.0% compared to the year ended December 31, 1994, and Total Service Charges of $3.9 million for the year ended December 31, 1994, increased $646,000 or 19.6% compared to the year ended December 31, 1993. The increase in Total Service Charges for the years ended December 31, 1995, 1994 and 1993 is attributable to increased account transaction fees as a result 27 of the deposit growth experienced by the Company. The decline in Other Service Charges for the year ended December 31, 1995 compared to the year ended December 31, 1994 was primarily attributable to a decrease in foreign currency exchange fees. The recent events in Mexico, primarily the peso devaluation, have resulted in a decrease in volume and spread on peso exchange fee activity. Trust Service Fees of $1.3 million for the year ended December 31, 1995 increased $95,000 or 8.2% compared to $1.2 million for the year ended December 31, 1994, and Trust Service Fees of $1.2 million for the year ended December 31, 1994 increased $74,000 or 6.8% compared to $1.1 million for the year ended December 31, 1993. The increase in Trust Service Fees in each of years 1995 and 1994 is attributable to increases in both the number of trust accounts and the book value of assets managed. The book value of assets managed at December 31, 1995 and 1994 was $237.4 million and $192.4 million, respectively. Assets held by the trust department of the Bank in fiduciary or agency capacities are not assets of the Company and are not included in the consolidated balance sheets. Net Investment Securities Gains (Losses) was ($111,000) for the year ended December 31, 1995, compared to an $8,000 gain for the year ended December 31, 1994. The decrease was primarily attributable to a $99,000 loss recorded on the sale of two bonds. Other operating income of $601,000 for the year ended December 31, 1995 increased $192,000 or 46.9% compared to $409,000 for the year ended December 31, 1994 and other operating income of $409,000 for the year ended December 31, 1994 increased $27,000 or 7.1% compared to year ended December 31, 1993. A detailed summary of noninterest income during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, ------------------------------------------------------- % CHANGE FROM % CHANGE FROM NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ------------------------------------------------------------ ------ -------------- ------ ------------- ------ (DOLLARS IN THOUSANDS) Service Charges on Deposit Accounts......................... $3,472 14.4% $3,035 11.7% $2,718 Other Service Charges....................................... 859 (5.2) 904 57.2 575 ------ --- ------ ----- ------ Total Service Charges..................................... 4,331 10.0 3,939 19.6 3,293 Trust Service Fees.......................................... 1,256 8.2 1,161 6.8 1,087 Net Investment Securities Gains (Losses)................................................... (111) * 8 (75.8) 33 Data Processing Service Fees................................ 441 72.9 255 7.6 237 Other Operating Income...................................... 601 46.9 409 7.1 382 ------ --- ------ ----- ------ Total..................................................... $6,518 12.9% $5,772 14.7% $5,032 ------ --- ------ ----- ------ ------ --- ------ ----- ------
- --------- *Not meaningful. NONINTEREST EXPENSE Noninterest expense of $19.0 million for the year ended December 31, 1995 increased $2.5 million or 15.0% compared to $16.5 million for the year ended December 31, 1994, and noninterest expense of $16.5 million for the year ended December 31, 1994 increased $2.0 million or 13.7% compared with $14.5 million for the year ended December 31, 1993. These increases for the years ended December 31, 1995 and 1994 were primarily attributable to the increased volume of business conducted by the Company. The largest category of noninterest expense, Salaries and Employee Benefits ("Personnel"), of $9.6 million for the year ended December 31, 1995, increased $1.5 million or 19.3% compared to year ended December 31, 1994 levels of $8.0 million. Personnel expense of $8.0 million for the year ended December 31, 1994 increased $217,000 or 2.8% compared to year ended December 31, 1993 levels of $7.8 28 million. Personnel expense increased for the year ended December 31, 1995 primarily due to staffing increases, including the additional staff acquired as a result of the RGC/Roma Branch Acquisitions, and increases in payroll taxes, medical insurance premiums and pension expenses for all employees. Net occupancy expense of $1.1 million for the year ended December 31, 1995 increased $108,000 or 11.2% compared to $961,000 for the year ended December 31, 1994, and net occupancy expense of $961,000 for the year ended December 31, 1994 increased $141,000 or 17.2% when compared to a net occupancy expense of $820,000 for the year ended December 31, 1993. The increase for the year ended December 31, 1995 is primarily attributable to the occupancy expenses associated with the RGC/Roma Branch Acquisitions. Equipment expense of $2.0 million for the year ended December 31, 1995 increased $380,000 or 23.1% compared to $1.6 million for the year ended December 31, 1994 and equipment expense of $1.6 million for the year ended December 31, 1994 increased $282,000 or 20.6% when compared with $1.4 million for the year ended December 31, 1993. The equipment expense increase noted during the year ended December 31, 1995 is primarily attributable to equipment obtained in the RGC/Roma Branch Acquisitions and equipment acquired to service the Company's increasing customer base. Other Real Estate (Income) Expense, Net includes rent income from foreclosed properties, gain or loss on sale of other real estate properties and direct expenses of foreclosed real estate including property taxes, maintenance costs and write-downs. Write-downs of other real estate are required if the fair value of an asset acquired in a loan foreclosure subsequently declines below its carrying value. Other Real Estate (Income) Expense, Net of $107,000 for the year ended December 31, 1995 increased $32,000 or 42.7% when compared to $75,000 net expense for the year ended December 31, 1994. Other Real Estate (Income) Expense, Net of $75,000 net expense for the year ended December 31, 1994 decreased $403,000 or 122.9% compared to $328,000 net income for the year ended December 31, 1993. The increased expense during the year ended December 31, 1995 is primarily attributable to commissions paid on new lease agreements on rental property included in Other Real Estate. Management is actively seeking buyers for all Other Real Estate and is of the opinion that the carrying value of Other Real Estate approximates its estimated fair value less estimated closing costs. Advertising and Public Relations expense of $772,000 for the year ended December 31, 1995 increased $79,000 or 11.4% compared to $693,000 for the year ended December 31, 1994. The increase in advertising and public relations expense is primarily attributable to a new marketing program and additional advertising in the service area acquired in the RGC/Roma Branch Acquisitions. FDIC insurance of $540,000 for the year ended December 31, 1995, decreased $433,000 or 44.5% compared to $973,000 for the year ended December 31, 1994 due to a rebate and a premium rate reduction. On August 8, 1995, the FDIC Board of Directors voted to reduce the deposit insurance premiums paid by most members of the Bank Insurance Fund, effective as of June 1, 1995. As a result, the overpaid assessments for the period June 1 to September 30, 1995 and interest (totaling $297,000) were refunded on September 15, 1995. The Company continues to receive the most favorable risk classification for purposes of determining the annual deposit insurance assessment rate, although there can be no assurance that the Company will continue in the most favorable risk classification in the future. The increase in Other Losses represents additional losses sustained on overdraft accounts and the costs of settlement during the period ending December 31, 1995 of certain litigation. 29 A detailed summary of noninterest expense during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- % CHANGE FROM % CHANGE FROM NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ------------------------------------------- --------- ----------------- --------- ----------------- --------- (DOLLARS IN THOUSANDS) Salaries and Wages......................... $ 7,605 20.1% $ 6,334 4.5% $ 6,059 Employee Benefits.......................... 1,958 16.5 1,681 (3.3) 1,739 --------- ----- --------- ------ --------- Total Salaries and Employee Benefits..... 9,563 19.3 8,015 2.8 7,798 Net Occupancy Expense...................... 1,069 11.2 961 17.2 820 Equipment Expense.......................... 2,028 23.1 1,648 20.6 1,366 Other Real Estate (Income) Expense, Net Rent Income............................... (146) 6.6 (137) (77.6) (612) (Gain) Loss on Sale...................... 3 50.0 2 (100.4) (507) Expenses................................. 131 33.7 98 (78.2) 449 Write-Downs.............................. 119 6.3 112 (67.3) 342 --------- ----- --------- ------ --------- Total Other Real Estate (Income) Expense, Net.......................... 107 42.7 75 (122.9) (328) Other Noninterest Expense Advertising and Public Relations......... 772 11.4 693 75.9 394 Amortization of Intangibles.............. 323 44.2 224 (4.7) 235 Data Processing and Check Clearing....... 491 36.4 360 18.4 304 Director Fees............................ 284 6.4 267 (8.2) 291 Franchise Tax............................ 198 24.5 159 9.7 145 Insurance................................ 228 (27.3) 314 (1.9) 320 FDIC Insurance........................... 540 (44.5) 973 17.1 831 Legal and Professional................... 870 (13.5) 1,006 42.9 704 Stationery and Supplies.................. 658 22.3 538 12.8 477 Telephone................................ 250 23.8 202 3.6 195 Other Losses............................. 624 252.5 177 51.3 117 Miscellaneous Expenses................... 972 8.6 895 6.0 844 --------- ----- --------- ------ --------- Total Other Noninterest Expense........ 6,210 6.9 5,808 19.6 4,857 --------- ----- --------- ------ --------- Total................................ $ 18,977 15.0% $ 16,507 13.7% $ 14,513 --------- ----- --------- ------ --------- --------- ----- --------- ------ ---------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 106 ("Statement 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions", which is effective for fiscal years beginning after December 15, 1992. Statement 106 requires companies that have postretirement benefit plans to accrue the estimated cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. The Company does not presently provide postretirement benefits other than the KSOP Plan, which is available to all eligible employees, and a nonqualified deferred compensation plan for the benefit of Glen E. Roney, Chairman of the Board, President and Chief Executive Officer. INCOME TAX The Company recorded income tax expense of $4.7 million for the year ended December 31, 1995 compared to $3.9 million for the year ended December 31, 1994. The increase in income tax expense for the year ended December 31, 1995 is due primarily to an increased level of pretax income during the year ended December 31, 1995. 30 The Texas franchise tax is based in part on capital and in part on federal taxable income with certain modifications. A portion of the tax is accrued in the year in which the income to which it relates is earned, even though the tax constitutes a fee for the privilege of doing business in a succeeding period and is payable in that period. The Company recorded Texas franchise tax expense of $217,000, $207,000 and $149,000 for the years ended December 31, 1995, 1994 and 1993, respectively. NET INCOME Net income was $8.7 million, $7.2 million and $6.0 million for the years ended December 31, 1995, 1994 and 1993, respectively. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET COMPOSITION The Company continues to experience growth in total assets, deposits and loans attributable in the opinion of management, in part to the vitality of the Rio Grande Valley economy and in part to the RGC/ Roma Branch Acquisitions. The recent devaluation of the Mexican peso relative to the U.S. dollar has reduced retail sales to Mexican nationals. However, the effects of NAFTA and the devaluation have also increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management does not believe that the recent Mexican financial problems will materially adversely affect the Company's growth and earnings prospects. Average interest-earning assets of $521.1 million increased $70.5 million or 15.7% for the year ended December 31, 1995 compared to $450.6 million for the year ended December 31, 1994 and $51.3 million or 12.8% for the year ended December 31, 1994 compared to $399.3 million for the year ended December 31, 1993. Management's continued focus on lending has resulted in average loans increasing $61.2 million or 19.8% to $370.3 million for the year ended December 31, 1995 compared to December 31, 1994 levels of $309.0 million, while average investment securities of $131.0 million increased $967,000 or 0.7% for the year ended December 31, 1995 compared to December 31, 1994 levels of $130.0 million. Total average assets increased $73.7 million or 14.6% to $577.9 million for the year ended December 31, 1995 compared to December 31, 1994 levels and $56.1 million or 12.5% to $504.2 million for the year ended December 31, 1994 compared to December 31, 1993 levels of $448.1 million. Average interest-bearing deposits increased $54.3 million or 15.3% to $409.5 million for the year ended December 31, 1995 compared to the year ended December 31, 1994 levels of $355.2 million. Demand deposits also increased $10.0 million or 10.7% for the year ended December 31, 1995 to $103.8 million compared to the year ended December 31, 1994 levels of $93.8 million partially as a result of the increase in public funds from several local municipalities and independent school districts. The Company has a stable noninterest-bearing source of funds as reflected in the ratio of average demand deposits to average total deposits for years ended December 31, 1995, 1994 and 1993 of 20.2%, 20.9%, and 20.6%, respectively. 31 The following table presents the Company's average balance sheets during the last three years:
YEARS ENDED DECEMBER 31, ------------------------------------- AVERAGE BALANCE SHEETS 1995 1994 1993 - --------------------------------------------------------------------------- ----------- ----------- ----------- (IN THOUSANDS) ASSETS Loans...................................................................... $ 370,274 $ 309,038 $ 263,963 Investment Securities Taxable.................................................................. 126,086 125,912 110,098 Tax-Exempt............................................................... 4,907 4,114 4,579 Federal Funds Sold......................................................... 19,807 11,490 20,655 ----------- ----------- ----------- Total Interest-Earning Assets............................................ 521,074 450,554 399,295 Cash and Due From Banks.................................................... 31,151 30,392 26,999 Bank Premises and Equipment, Net........................................... 16,365 15,358 13,430 Other Assets............................................................... 13,507 11,562 11,573 Allowance for Loan Losses.................................................. (4,158) (3,663) (3,206) ----------- ----------- ----------- Total.................................................................... $ 577,939 $ 504,203 $ 448,091 ----------- ----------- ----------- ----------- ----------- ----------- LIABILITIES Demand Deposits Commercial and Individual................................................ $ 96,773 $ 91,039 $ 81,021 Public Funds............................................................. 7,069 2,768 2,689 ----------- ----------- ----------- Total Demand Deposits.................................................. 103,842 93,807 83,710 ----------- ----------- ----------- Savings.................................................................... 31,360 29,791 27,978 Money Market Checking and Savings Commercial and Individual................................................ 101,881 109,689 105,646 Public Funds............................................................. 27,131 23,876 9,476 Time Deposits Commercial and Individual................................................ 232,966 172,175 163,896 Public Funds............................................................. 16,201 19,710 14,912 ----------- ----------- ----------- Total Interest-Bearing Deposits........................................ 409,539 355,241 321,908 ----------- ----------- ----------- Total Deposits............................................................. 513,381 449,048 405,618 Federal Funds Purchased and Securities Sold Under Repurchase Agreements.... 1,093 651 20 Short-Term Borrowings...................................................... 232 436 804 Note Payable............................................................... -- 265 1,873 Other Liabilities.......................................................... 3,835 2,896 2,552 SHAREHOLDERS' EQUITY....................................................... 59,398 50,907 37,224 ----------- ----------- ----------- Total.................................................................. $ 577,939 $ 504,203 $ 448,091 ----------- ----------- ----------- ----------- ----------- -----------
CASH AND DUE FROM BANKS Texas State Bank, through its nine banking locations, offers a broad range of commercial banking services to individuals and businesses in its service area. Texas State Bank also acts as a correspondent to a number of banks in its service area, providing check clearing, wire transfer, federal funds transactions, loan participations, data processing and other correspondent services. The amount of cash and due from banks held on any one day is significantly influenced by temporary changes in cash items in process of collection. At December 31, 1995, cash and due from banks was $30.9 million, $9.5 million less than at December 31, 1994. INVESTMENT SECURITIES In May 1993, the FASB issued Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities". Statement 115 established 32 standards of financial accounting and reporting for investments in equity securities that have a readily determinable fair value and for all investments in debt securities. At acquisition, the Bank is required to classify debt and equity securities into one of three categories: Held to Maturity, Trading or Available for Sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as Held to Maturity and measured at amortized cost in the consolidated balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as Trading and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses included in earnings. Investments not classified as either Held to Maturity or Trading are classified as Available for Sale and measured at fair value in the consolidated balance sheet with unrealized holding gains and losses reported in a separate component of shareholders' equity until realized. Effective December 31, 1993, the Company adopted Statement 115, which caused various investment securities to be reclassified from Held to Maturity to Available for Sale. All treasury and agency bonds with a maturity of two years or less from December 31, 1993, all floating rate bonds and two small equity securities were reclassified to Available for Sale. During 1994, management continued classifying bonds purchased with a final maturity of two years or less as Available for Sale. During 1995, management has classified bonds purchased with a final maturity of three years or less as Available for Sale. All other bonds have been classified as Held to Maturity. Future purchases of investment securities will be classified as Available for Sale or Held to Maturity at time of purchase as determined by the investment committee. On October 18, 1995, the FASB decided to grant to all entities a one-time opportunity during the period from approximately the middle of November to December 31, 1995, to reconsider their intent and ability to hold securities accounted for as Held to Maturity under Statement 115. This opportunity allowed entities to transfer securities from the Held to Maturity category to Available for Sale or Trading without calling into question their intent to hold other debt securities to maturity. On December 31, 1995, the Bank transferred approximately $1.5 million in Held to Maturity securities to the Available for Sale category resulting in no change to shareholders' equity per share. As a result of this transfer, all Other Securities are classified as Available for Sale. At December 31, 1995, 1994 and 1993, no securities were classified as Trading. The following table presents estimated market value of Securities Available for Sale at December 31, 1995, 1994 and 1993:
% CHANGE FROM % CHANGE FROM SECURITIES AVAILABLE FOR SALE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ------------------------------------------- --------- ---------------- --------- ----------------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................... $ 6,012 (77.8)% $ 27,132 (55.3)% $ 60,654 U.S. Government Agency Securities.......... 55,668 104.9 27,167 11.9 24,277 Mortgage-Backed Security................... -- (100.0) 498 (2.4) 510 Other Securities........................... 1,470 * 17 54.5 11 --------- ------- --------- ----- --------- Total.................................... $ 63,150 15.2% $ 54,814 (35.9)% $ 85,452 --------- ------- --------- ----- --------- --------- ------- --------- ----- ---------
- ------------------------------ * Not meaningful. 33 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of the Securities Available for Sale at December 31, 1995:
AMORTIZED COST(1) MATURING ------------------------------------------------ AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST(1) VALUE - ---------------------------------------- --------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $ 4,001 $ 1,999 $ -- $ -- $ 6,000 $ 6,012 U.S. Government Agency Securities............................. 20,182 35,320 -- -- 55,502 55,668 Other Securities........................ -- -- 75 1,396 1,471 1,470 --------- ----------- ----------- ----------- ----------- ----------- Total................................. $ 24,183 $ 37,319 $ 75 $ 1,396 $ 62,973 $ 63,150 --------- ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - ---------------------------------------- U.S. Treasury Securities................ 5.13% 6.07% -- % -- % 5.45% U.S. Government Agency Securities....... 6.32 6.15 -- -- 6.21 Other Securities........................ -- -- 6.10 5.93 5.94 Total................................. 6.13 6.15 6.10 5.93 6.13 --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
- --------- (1) Amortized cost for Securities Available for Sale is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discount received. The following table presents amortized cost of Securities Held to Maturity at December 31, 1995, 1994 and 1993:
% CHANGE FROM % CHANGE FROM SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ------------------------------------------- --------- ----------------- --------- ----------------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................... $ 28,787 (1.7)% $ 29,270 9.4% $ 26,757 U.S. Government Agency Securities.......... 34,230 (4.8) 35,973 299.2 9,011 States and Political Subdivisions Securities................................ 5,474 (4.6) 5,736 10.1 5,208 Mortgage-Backed Security................... -- -- -- (100.0) 77 Other Securities........................... -- (100.0) 1,035 -- 1,035 --------- ------ --------- ------ --------- Total.................................... $ 68,491 (4.9)% $ 72,014 71.1% $ 42,088 --------- ------ --------- ------ --------- --------- ------ --------- ------ ---------
Total investments in states and political subdivisions represent investments in entities within the State of Texas. No single issuer accounted for as much as 10.0% of total shareholders' equity at December 31, 1995. Of the obligations of states and political subdivisions held by the Company at December 31, 1995, 88.1% were rated A or better by Moody's Investor Services, Inc. 34 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Held to Maturity at December 31, 1995:
AMORTIZED COST(1) MATURING ------------------------------------------------ AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH AFTER TEN AMORTIZED MARKET SECURITIES HELD TO MATURITY OR LESS FIVE YEARS TEN YEARS YEARS COST(1) VALUE - -------------------------------------------------- -------- ----------- ----------- --------- --------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities.......................... $ 18,412 $10,375 $-- $-- $28,787 $28,776 U.S. Government Agency Securities....................................... 6,995 26,016 1,219 -- 34,230 34,425 States and Political Subdivisions Securities...... 425 2,818 2,034 197 5,474 5,761 -------- ----------- ----------- --------- --------- --------- Total........................................... $ 25,832 $39,209 $3,253 $ 197 $68,491 $68,962 -------- ----------- ----------- --------- --------- --------- -------- ----------- ----------- --------- --------- --------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - -------------------------------------------------- U.S. Treasury Securities.......................... 4.34% 5.62% -- % -- % 4.80% U.S. Government Agency Securities....................................... 5.37 6.45 7.57 -- 6.27 States and Political Subdivisions Securities...... 9.57 8.63 8.32 9.98 8.63 Total........................................... 4.70 6.38 8.04 9.98 5.84 -------- ----------- ----------- --------- --------- -------- ----------- ----------- --------- ---------
- --------- (1) Amortized cost for Securities Held to Maturity is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discount received. LOANS The Company manages its credit risk by establishing and implementing strategies and guidelines appropriate to the characteristics of borrowers, industries, geographic locations and products. Diversification of risk within each of these areas is a primary objective. Policies and procedures are developed to ensure that loan commitments conform to current strategies and guidelines. Management continues to refine the Company's credit policies and procedures to address the risks in the current and prospective environment and to reflect management's current strategic focus. The credit process is controlled with continuous credit review and analysis, and by review by internal and external auditors and regulatory authorities. The Company's loans are widely diversified by borrower and industry group. The Company has collateral management policies in place so that collateral lending of all types is approached, to the extent possible, on a basis consistent with safe and sound standards. Valuation analysis is utilized to take into consideration the potentially adverse economic conditions under which liquidation could occur. Collateral accepted against the commercial loan portfolio includes accounts receivable and inventory, marketable securities, equipment and agricultural products. Autos, deeds of trust, life insurance and marketable securities are accepted as collateral for the installment loan portfolio. Management of the Company believes that the Company has benefitted from increased loan demand due to passage of NAFTA and the strong population growth in the Rio Grande Valley. More recently, the devaluation of the Mexican peso relative to the U.S. dollar has reduced retail sales to residents of Mexico. However, the effects of NAFTA and the devaluation have also increased cross-border trade and industrial development including activity at twin manufacturing plants located on each side of the border (referred to as maquiladoras) which benefit the Rio Grande Valley economy. Management believes the current Mexican financial problems will not have a material adverse effect on the Company's growth and earnings prospects. Total loans of $450.9 million for the year ended December 31, 1995 increased $110.9 million or 32.6% compared to the year ended December 31, 1994 levels of $339.9 million and increased $49.4 million or 17.0% for the year ended December 31, 1994 compared to levels of $290.5 million at 35 December 31, 1993. The increase in total loans for the year ended December 31, 1995 is primarily attributable to the RGC/Roma Branch Acquisitions, funding a large leveraged employee stock ownership trust loan (hereafter described) and management's efforts to improve the earnings mix of earning assets by increasing loan volume. The increase in Commercial loans in general, and Commercial-Tax Exempt loans in particular, for the year ended December 31, 1995 was primarily attributable to the funding of a $34.0 million employee stock ownership trust loan which is collateralized by stock and assets of the employer and approximately $27.5 million of cash and cash equivalent assets. Excluding this loan, Total Commercial Loans at December 31, 1995 represented an increase of $10.6 million, or 10.4%, compared to levels at December 31, 1994, and Total Loans at December 31, 1995 represented an increase of $76.9 million, or 22.6%, compared to levels at December 31, 1994. A substantial portion of the increase in loans classified as Real Estate-Commercial Mortgage loans consists of loans secured by real estate and other assets to commercial customers. The increase in total loans for the year ended December 31, 1992 is primarily due to the acquisition of Mid Valley Bank. The following table presents the composition of the loan portfolio at the end of each of the last five years:
DECEMBER 31, --------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991 - ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Commercial...................................... $ 112,042 $ 101,866 $ 91,697 $ 87,240 $ 63,638 Commercial-Tax Exempt........................... 34,419 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total Commercial Loans........................ 146,461 101,866 91,697 87,240 63,638 Agricultural.................................... 25,097 17,199 13,829 14,789 10,357 Real Estate Construction.................................. 29,967 18,809 11,846 9,534 5,886 Commercial Mortgage........................... 129,953 113,677 98,635 69,407 42,853 Agricultural Mortgage......................... 17,057 10,263 5,153 7,547 5,847 1-4 Family Mortgage........................... 59,052 47,425 42,647 40,403 32,159 Consumer........................................ 43,267 30,700 26,693 23,198 19,113 ----------- ----------- ----------- ----------- ----------- Total Loans................................... $ 450,854 $ 339,939 $ 290,500 $ 252,118 $ 179,853 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
36 The contractual maturity schedule of the loan portfolio at December 31, 1995 is presented in the following table:
LOAN MATURITIES DECEMBER 31, 1995 -------------------------------------------------- AFTER ONE ONE YEAR YEAR THROUGH AFTER OR LESS FIVE YEARS FIVE YEARS TOTAL ----------- ----------- ----------- ----------- (IN THOUSANDS) Commercial.................................................... $ 61,134 $ 45,748 $ 5,160 $ 112,042 Commercial Tax Exempt......................................... 4,411 18,851 11,157 34,419 Agricultural.................................................. 22,449 2,648 -- 25,097 Real Estate Construction................................................ 21,786 8,181 -- 29,967 Commercial Mortgage......................................... 28,613 85,681 15,659 129,953 Agricultural Mortgage....................................... 3,647 10,989 2,421 17,057 1-4 Family Mortgage......................................... 14,489 42,114 2,449 59,052 Consumer...................................................... 19,928 23,070 269 43,267 ----------- ----------- ----------- ----------- Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Variable-Rate Loans........................................... $ 105,864 $ 126,965 $ 34,354 $ 267,183 Fixed-Rate Loans.............................................. 70,593 110,317 2,761 183,671 ----------- ----------- ----------- ----------- Total..................................................... $ 176,457 $ 237,282 $ 37,115 $ 450,854 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
As shown in the preceding table, loans maturing within one year totaled $176.5 million at year-end 1995. The Company's policy on maturity extensions and rollovers is based on management's assessment of individual loans. Approvals for the extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless the loans are fully secured or are revolving lines subject to annual analysis and renewal. NONPERFORMING ASSETS The Bank has several procedures in place to assist in maintaining the overall quality of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers and monitors its delinquency levels for any negative or adverse trends, particularly with respect to credits which have total exposures of $10,000 or more. Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. At December 31, 1995, five loan relationships in excess of $100,000 totaling $1.6 million accounted for 76.1% of the total nonaccrual loans. These five nonaccrual credits are secured primarily by real estate, and management believes that it is unlikely that any material loss will be incurred on disposition of the collateral. The remaining nonaccrual loans represent loans of less than $100,000 each. The Company's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to the ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. Loans which are contractually 90 days or more past due, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such accruing loans 90 days or more past due for the years ended December 31, 1995, 1994 and 1993 totaled $642,000, $226,000 and $439,000, respectively. The increase in accruing loans 90 days or more past due at December 31, 1995 as compared to December 31, 1994 is partly attributable to two credits over $100,000 included in the category, both of which are in the process of collection. 37 Nonperforming assets of $3.6 million at December 31, 1995 decreased $1.2 million or 25.5% compared to December 31, 1994 levels of $4.8 million and decreased $138,000 or 2.9% for the year ended December 31, 1994 compared to December 31, 1993 levels of $5.0 million. Management actively seeks buyers for all Other Real Estate. See "Noninterest Expense" above. The ratio of nonperforming assets plus accruing loans 90 days or more past due as a percent of total loans and other nonperforming assets at December 31, 1995 decreased to 0.94% from 1.47% at December 31, 1994 due primarily to the reduction in other nonperforming assets and the addition of $43.7 million of performing loans from the RGC/Roma Branch Acquisitions. Management is not aware of any borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. Effective January 1, 1995, the Company adopted Statement 114 and the amendment thereof, Statement 118. Under Statement 114, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Statement 114 requires that an impaired loan be valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. Statement 118 amended Statement 114 by expanding the related disclosure requirements and permitting use of existing methods for recognizing interest income on impaired loans. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis of Financial Position and Results of Operations-- Analysis of Results of Operations -- Provision for Loan Losses." At December 31, 1995, the Company had a $2.0 million recorded investment in impaired loans for which there was a related allowance for loan losses of $172,000. At December 31, 1995, there were no impaired loans for which there was no related allowance for loan losses. The average level of impaired loans during the year ended December 31, 1995 was $1.9 million. The Company recorded interest income of $91,000 on its impaired loans during the year ended December 31, 1995. An analysis of the components of nonperforming assets for the last five years is presented in the following table:
DECEMBER 31, ----------------------------------------------------- NONPERFORMING ASSETS 1995 1994 1993 1992 1991 - -------------------------------------------------------------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual Loans.............................................. $ 2,092 $ 2,435 $ 2,305 $ 1,060 $ 3,441 Renegotiated Loans............................................ 6 13 47 76 355 --------- --------- --------- --------- --------- Nonperforming Loans......................................... 2,098 2,448 2,352 1,136 3,796 Other Nonperforming Assets (Primarily Other Real Estate)...... 1,489 2,364 2,598 4,790 4,056 --------- --------- --------- --------- --------- Total Nonperforming Assets.................................. 3,587 4,812 4,950 5,926 7,852 Accruing Loans 90 Days or More Past Due....................... 642 226 439 474 21 --------- --------- --------- --------- --------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due.............................................. $ 4,229 $ 5,038 $ 5,389 $ 6,400 $ 7,873 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Nonperforming Loans as a % of Total Loans..................... 0.47% 0.72% 0.81% 0.45% 2.11% Nonperforming Assets as a % of Total Loans and Other Nonperforming Assets......................................... 0.79 1.41 1.69 2.31 4.27 Nonperforming Assets as a % of Total Assets................... 0.55 0.90 1.05 1.43 2.64 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans And Other Nonperforming Assets..... 0.94 1.47 1.84 2.49 4.28 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
38 Interest income that would have been recorded for the year ended December 31, 1995 on nonaccrual and renegotiated loans had such loans performed in accordance with their original contractual terms and been outstanding throughout the year ended December 31, 1995, or since origination, if held for only part of that year, was approximately $247,000. For the year ended December 31, 1995, the amount of interest income actually recorded on nonaccrual and restructured loans was approximately $176,000. Management regularly reviews and monitors the loan portfolio to identify borrowers experiencing financial difficulties. Management believes that, at December 31, 1995, all such loans had been identified and included in the nonaccrual, restructured or 90 days past due loan totals reflected in the table above. Management continues to emphasize maintaining a low level of nonperforming assets and returning nonperforming assets to an earning status. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged off. In addition, the loan review committee of the Bank reviews the assessments of management in determining the adequacy of the Bank's allowance for loan losses. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at December 31, 1995 was $4.5 million, which represents an increase of $1.0 million or 29.3% as compared to the allowance for loan losses at December 31, 1994. Management believes that the allowance for loan losses at December 31, 1995 adequately reflects the risks in the loan portfolio. Various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. 39 The following table summarizes the activity in the allowance for loan losses for the last five years:
YEARS ENDED DECEMBER 31, ----------------------------------------------------- ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991 - -------------------------------------------------------------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at Beginning of Year.................................. $ 3,511 $ 3,435 $ 2,929 $ 2,547 $ 2,988 Balance from Acquisitions..................................... 450 -- -- 626 -- Provision for Loan Losses..................................... 1,685 1,085 392 220 310 Charge-Offs Commercial.................................................. 813 169 64 229 483 Agricultural................................................ 416 781 -- 64 103 Real Estate................................................. 111 153 89 490 211 Consumer.................................................... 300 132 93 84 124 --------- --------- --------- --------- --------- Total Charge-Offs......................................... 1,640 1,235 246 867 921 --------- --------- --------- --------- --------- Recoveries Commercial.................................................. 401 163 113 233 67 Agricultural................................................ 66 4 13 41 -- Real Estate................................................. 4 10 128 51 29 Consumer.................................................... 65 49 106 78 74 --------- --------- --------- --------- --------- Total Recoveries.......................................... 536 226 360 403 170 --------- --------- --------- --------- --------- Net Charge-Offs (Recoveries).................................. 1,104 1,009 (114) 464 751 --------- --------- --------- --------- --------- Balance at End of Year........................................ $ 4,542 $ 3,511 $ 3,435 $ 2,929 $ 2,547 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount......................................... 1.01% 1.03% 1.18% 1.16% 1.42% Ratio of Allowance for Loan Losses to Nonperforming Assets....................................................... 126.62 72.96 69.39 49.43 32.44 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount..................................... 0.30 0.33 (0.04) 0.21 0.45 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31, ------------------------------------------------------------------------------------------------------------------ 1995 1994 1993 1992 --------------------------- --------------------------- --------------------------- --------------------------- % OF LOANS % OF LOANS % OF LOANS % OF LOANS IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY ON TOTAL ON TOTAL ON TOTAL ON TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ----------- -------------- ----------- -------------- ----------- -------------- ----------- -------------- (DOLLARS IN THOUSANDS) Commercial.... $ 965 32.5% $ 1,057 30.0% $ 1,348 31.6% $ 1,096 34.6% Agricultural... 304 5.6 478 5.1 138 4.7 148 5.9 Real Estate... 2,401 52.3 1,644 55.9 1,705 54.5 1,380 50.3 Consumer...... 296 9.6 257 9.0 215 9.2 254 9.2 Unallocated... 576 -- 75 -- 29 -- 51 -- ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total....... $ 4,542 100.0% $ 3,511 100.0% $ 3,435 100.0% $ 2,929 100.0% ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- 1991 --------------------------- % OF LOANS IN EACH CATEGORY ON TOTAL AMOUNT LOANS ----------- -------------- Commercial.... $ 787 35.4% Agricultural.. 104 5.7 Real Estate... 1,346 48.3 Consumer...... 209 10.6 Unallocated... 101 -- ----------- ----- Total....... $ 2,547 100.0% ----------- ----- ----------- -----
PREMISES AND EQUIPMENT Premises and equipment of $18.4 million at December 31, 1995 increased $3.1 million or 20.3% compared to $15.3 million at December 31, 1994 in addition to a net increase of $480,000 or 3.2% for December 31, 1994 compared to $14.8 million at December 31, 1993. The net increase for the year 40 ended December 31, 1995 is primarily attributable to the $1.8 million in fixed assets acquired in the RGC/ Roma Branch Acquisitions and $1.0 million for new equipment and software for the data processing center. INTANGIBLES Intangibles of $5.7 million at December 31, 1995 increased $3.7 million or 188.1% compared to $2.0 million at December 31, 1994 and decreased $224,000 or 10.1% for December 31, 1994 compared to $2.2 million at December 31, 1993. The net increase for the year ended December 31, 1995 is attributable to the goodwill recorded as a result of the RGC/Roma Branch Acquisitions. DEPOSITS Total deposits of $579.7 million at December 31, 1995 increased $107.6 million or 22.8% compared to December 31, 1994 levels of $472.1 million and total deposits of $472.1 million for the year ended December 31, 1994 increased $42.6 million or 9.9% compared to December 31, 1993 levels of $429.5 million. The increase in total deposits at December 31, 1995 compared to December 31, 1994 is primarily attributable to the RGC/Roma Branch Acquisitions. Total noninterest-bearing deposits of $120.4 million for the year ended December 31, 1995 represented an increase of $20.8 million or 20.8% compared to the year ended December 31, 1994 and $10.2 million or 11.5% for the year ended December 31, 1994 compared to the year ended December 31, 1993. Total public funds deposits (consisting of Public Funds Demand Deposits, Public Funds Money Market Checking and Savings and Public Funds Time Deposits) of $39.3 million for the year ended December 31, 1995 decreased $16.3 million or 29.3% compared to December 31, 1994 levels of $55.6 million. The decline in public funds is primarily due to the loss of a large public fund to a competitor as a result of a competitive bid in September 1995. The Bank actively seeks consumer and commercial deposits, including deposits from correspondent banks and public funds deposits. The following table presents the composition of total deposits at the end of the last three years:
DECEMBER 31, ------------------------------------------------------------ % CHANGE FROM % CHANGE FROM TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ------------------------------------------------------------ -------- ------------- -------- ------------- -------- (DOLLARS IN THOUSANDS) Demand Deposits Commercial and Individual................................. $113,345 16.1% $ 97,597 11.5% $ 87,533 Public Funds.............................................. 7,069 245.5 2,046 9.4 1,871 -------- ----- -------- --- -------- Total Demand Deposits................................... 120,414 20.8 99,643 11.5 89,404 -------- ----- -------- --- -------- -------- ----- -------- --- -------- Interest-Bearing Deposits Savings................................................... 36,133 26.0 28,689 (4.6) 30,061 Money Market Checking and Savings Commercial and Individual............................... 105,409 (0.6) 106,062 6.3 99,785 Public Funds............................................ 22,278 (35.8) 34,688 7.6 32,232 Time Deposits Commercial and Individual............................... 285,545 55.0 184,177 14.1 161,464 Public Funds............................................ 9,952 (47.2) 18,849 13.7 16,575 -------- ----- -------- --- -------- Total Interest-Bearing Deposits........................... 459,317 23.3 372,465 9.5 340,117 -------- ----- -------- --- -------- Total Deposits.......................................... $579,731 22.8% $472,108 9.9% $429,521 -------- ----- -------- --- -------- -------- ----- -------- --- -------- Weighted Average Rate on Interest-Bearing Deposits................................. 4.39% 3.27% 3.21% -------- -------- -------- -------- -------- --------
41 Time deposits of $100,000 or more are solicited from markets served by the Bank and are not sought through brokered sources. Time deposits continue to be a significant source of funds. Texas State Bank does not solicit brokered deposits. The following table presents the maturities of time deposits of $100,000 or more at December 31, 1995 and 1994:
DECEMBER 31, -------------------------------- MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994 - -------------------------------------------------------------------------------- ----------------- ------------- (DOLLARS IN THOUSANDS) Three Months or Less............................................................ $ 47,925 $ 35,964 After Three through Six Months.................................................. 20,184 25,338 After Six through Twelve Months................................................. 21,152 14,422 After Twelve Months............................................................. 37,129 15,357 ----------------- ------------- Total......................................................................... $ 126,390 $ 91,081 ----------------- ------------- ----------------- ------------- Weighted Average Rate on Time Deposits of $100,000 or More...................... 5.54% 4.06% ----------------- ------------- ----------------- -------------
Mexico is a part of the trade territory of the Company and foreign deposits from Mexican sources have traditionally been a source of funding. In December 1994, the Mexican government announced a 15% devaluation of the Mexican peso relative to the United States dollar, and the Mexican peso has since continued to decline relative to the dollar. The Company does not anticipate any negative impact on foreign deposits due to these recent devaluations of the peso. The increase in foreign deposits is primarily attributable to Mexican deposits obtained with the RGC/Roma Branch Acquisitions. The following table presents foreign deposits, primarily from Mexican sources, at December 31, 1995 and 1994:
DECEMBER 31, ------------------------- FOREIGN DEPOSITS 1995 1994 - --------------------------------------------------------------------------------------- ----------- ------------ (DOLLARS IN THOUSANDS) Demand Deposits........................................................................ $ 2,287 $ 1,589 ----------- ------------ Interest-Bearing Deposits Savings.............................................................................. 2,174 1,336 Money Market Checking and Savings.................................................... 9,178 6,577 Time Deposits Under $100,000......................................................... 19,376 11,544 Time Deposits of $100,000 or more.................................................... 26,471 14,778 ----------- ------------ Total Interest-Bearing Deposits.................................................... 57,199 34,235 ----------- ------------ Total Foreign Deposits............................................................. $ 59,486 $ 35,824 ----------- ------------ Percentage of Total Deposits........................................................... 10.3% 7.6% ----------- ------------ Weighted Average Rate on Foreign Deposits.............................................. 4.78% 3.55% ----------- ------------ ----------- ------------
LIQUIDITY Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew and acquire additional deposit liabilities is a major source of liquidity. The Company's principal sources of funds are primarily within the local markets of the Bank and consist of deposits, interest and principal payments on loans and investment securities, sales of loans and investment securities and borrowings. See previous discussion regarding the maturity dates for "Loans," "Investment Securities" and "Deposits." Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. These include cash, federal funds sold and U.S. Government-backed securities. At December 31, 1995, the Company's liquidity ratio, defined as cash, U.S. Government-backed securities and federal funds sold as a percentage of deposits, was 27.5% compared to 34.2% 42 at December 31, 1994 and compared to 36.0% at December 31, 1993. The Company's liquidity ratio has declined as a result of management's efforts to improve the Company's earnings mix by increasing loan volume. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the Company's trade area. The Company does not have or nor does it solicit brokered deposits. Federal funds purchased and short-term borrowings are additional sources of liquidity. These sources of liquidity are short-term in nature and are used, as necessary, to fund asset growth and meet short-term liquidity needs. During 1995, funds for $79.4 million of investment purchases and $69.5 million of net loan growth came from various sources, including a net increase in deposits of $27.9 million, $12.6 million in proceeds from sale of investment securities, $62.5 million in proceeds from maturing investment securities and $8.7 million of net income. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the FRB and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically undercapitalized." The classifications are generally determined by applicable ratios of the institution, including Tier I capital to risk-weighted assets, total capital to risk-weighted assets and leverage ratios. Based on Texas State Bank's capital ratios at December 31, 1995, Texas State Bank was classified as "well capitalized" under the applicable regulations. As a result, the Company does not believe that the prompt corrective action regulations have any material effect on the activities or operations of the Company or Texas State Bank. The principal sources of liquidity for the Company during 1995 were the proceeds from the 1994 sale of 1.0 million shares of Common Stock and interest income of $338,000 from the Bank. The funds received were used primarily to pay common stock dividends and other expenses. The Company is dependent on dividend and interest income from the Bank and the sale of stock for its liquidity. Applicable FRB regulations provide that bank holding companies are permitted by regulatory authorities to pay cash dividends on their common or preferred stock if consolidated earnings and consolidated capital are within regulatory guidelines and the Bank is classified as "well capitalized" for purposes of FDICIA. See "Business -- Regulation and Supervision" and "Business -- Capital Resources." The funds management policy of the Company and the Bank is to maintain a reasonably balanced position of rate sensitive assets and liabilities to avoid adverse changes in net interest income. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. Rate sensitive assets maturing within one year exceeded rate sensitive liabilities with comparable maturities at December 31, 1995 by $22.3 million. Management monitors the rate sensitivity GAP on a regular basis and takes steps when appropriate to improve the sensitivity. The ratio of cumulative rate sensitivity GAP to Total Assets at a period of twelve months or less was 3.45% of interest-earning assets at December 31, 1995. 43 The following table summarizes interest rate sensitive assets and liabilities by maturity at December 31, 1995:
DECEMBER 31, 1995 ------------------------------------------------------------------------- 7-12 1-5 OVER INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS YEARS 5 YEARS TOTAL - ------------------------------------- ----------- ---------- --------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Loans................................ $ 295,292 $ 16,196 $ 26,288 $ 110,317 $ 2,761 $ 450,854 Investment Securities Available for Sale................. 9,456 1,001 17,721 33,502 1,470 63,150 Held to Maturity................... 4,445 16,248 5,139 39,209 3,450 68,491 Federal Funds Sold................... 3,600 -- -- -- -- 3,600 ----------- ---------- --------- ----------- ----------- ----------- Total Interest-Earning Assets.... 312,793 33,445 49,148 183,028 7,681 586,095 ----------- ---------- --------- ----------- ----------- ----------- Savings.............................. 36,133 -- -- -- -- 36,133 Money Market Checking and Savings Accounts............................ 127,687 -- -- -- -- 127,687 Time Deposits........................ 108,738 48,270 51,501 84,945 2,043 295,497 Federal Funds Purchased and Securities Sold Under Repurchase Agreements.......................... 757 -- -- -- -- 757 ----------- ---------- --------- ----------- ----------- ----------- Total Interest-Bearing Liabilities..................... 273,315 48,270 51,501 84,945 2,043 460,074 ----------- ---------- --------- ----------- ----------- ----------- Rate Sensitivity GAP (1)............. $ 39,478 $ (14,825) $ (2,353) $ 98,083 $ 5,638 $ 126,021 ----------- ---------- --------- ----------- ----------- ----------- ----------- ---------- --------- ----------- ----------- ----------- Cumulative Rate Sensitivity GAP................................. $ 39,478 $ 24,653 $ 22,300 $ 120,383 $ 126,021 ----------- ---------- --------- ----------- ----------- ----------- ---------- --------- ----------- ----------- Ratio of Cumulative Rate Sensitivity GAP to Total Assets................. 6.10% 3.81% 3.45% ----------- ---------- --------- ----------- ---------- --------- Ratio of Cumulative Rate Sensitive Interest-Earning Assets to Cumulative Rate Sensitive Interest-Bearing Liabilities........ 1.14:1 1.08:1 1.06:1 ----------- ---------- --------- ----------- ---------- ---------
- --------- (1) Rate sensitive interest-earning assets less rate sensitive interest-bearing liabilities. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments of maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. CAPITAL RESOURCES Shareholders' equity of $62.7 million for the year ended December 31, 1995 reflects a net increase of approximately $7.0 million or 12.5% compared to shareholders' equity of $55.7 million for the year 44 ended December 31, 1994. This net increase was primarily attributable to earnings for 1995. The net increase in shareholders' equity reflects dividends paid on Common Stock of $2.5 million which included $620,000 declared December 12, 1995 and paid on January 16, 1996. On March 21, 1994, the Board of Directors of the Company adopted a resolution calling for redemption on April 22, 1994 of all issued and outstanding preferred stock, including the Company's First Series Convertible Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991 Convertible Preferred Stock (herein collectively called the "Preferred Stock") at a redemption price of $104 per share plus all accrued and unpaid dividends through the date fixed for redemption. The Preferred Stock was convertible into 13.2 shares of Common Stock for each share of Preferred Stock held. Effective April 22, 1994, 356 shares of Preferred Stock were redeemed and 74,172 shares of Preferred Stock were converted into 979,009 shares of Common Stock. The risk-based capital standards as established by the FRB apply to Texas Regional and Texas State Bank. The numerator of the risk-based capital ratio for bank holding companies includes Tier I capital, consisting of common shareholders' equity and qualifying cumulative and noncumulative perpetual preferred stock; and Tier II capital, consisting of other preferred stock, reserve for possible loan losses and certain subordinated and term-debt securities. Beginning on December 31, 1993, goodwill is deducted from Tier I capital. At no time is Tier II capital allowed to exceed Tier I capital in the calculation of total capital. The denominator or asset portion of the risk-based capital ratio aggregates generic classes of balance sheet and off-balance sheet exposures, each weighted by one of four factors, ranging from 0% to 100%, based on the relative risk of the exposure class. Ratio targets are set for both Tier I and total capital (Tier I plus Tier II capital). The minimum level of Tier I capital to total assets is 4.0% and the minimum total capital ratio is 8.0%. The FRB has guidelines for a leverage ratio that is designed as an additional evaluation of capital adequacy of banks and bank holding companies. The leverage ratio is defined to be the company's Tier I capital divided by its risk-adjusted total assets. An insured depository institution is "well capitalized" for purposes of the FDICIA if its Total Risk-Based Capital Ratio is equal to or greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to or greater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater than 5.0%. The Company's Tier I Risk-Based Capital Ratio was approximately 11.70% and 14.71% at December 31, 1995 and 1994, respectively. The Company's Total Risk-Based Capital Ratio was approximately 12.64% and 15.67% at December 31, 1995 and 1994, respectively. The Company's Tier I Leverage Capital Ratio was 8.96% and 10.37%, at December 31, 1995 and 1994, respectively. Based on capital ratios, the Company is within the definition of "well capitalized" for FRB purposes at December 31, 1995. The following table presents the Company's risk-based capital calculation:
DECEMBER 31, ------------------------ RISK-BASED CAPITAL 1995 1994 - ---------------------------------------------------------------------------------------- ----------- ----------- (DOLLARS IN THOUSANDS) Total Shareholders' Equity, before unrealized gains or losses on Securities Available for Sale............................................................................... $ 62,603 $ 56,318 Less -- Goodwill and Other Deductions................................................... 5,711 1,982 ----------- ----------- Total Tier I Capital.................................................................... 56,892 54,336 Total Tier II Capital................................................................... 4,542 3,511 ----------- ----------- Total Qualifying Capital................................................................ $ 61,434 $ 57,847 ----------- ----------- ----------- ----------- Risk Adjusted Assets (Including Off-Balance Sheet Exposure)............................. $ 486,111 $ 369,273 ----------- ----------- ----------- ----------- Tier I Risk-Based Capital Ratio......................................................... 11.70% 14.71% Total Risk-Based Capital Ratio.......................................................... 12.64 15.67 Leverage Capital Ratio.................................................................. 8.96 10.37 ----------- ----------- ----------- -----------
45 CURRENT ACCOUNTING ISSUES Effective January 1, 1995, the Company adopted Statement 114 and the amendment thereof, Statement 118. Under Statement 114, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Statement 114 requires that an impaired loan be valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. Statement 118 amended Statement 114 by expanding the related disclosure requirements and permitting use of existing methods for recognizing interest income on impaired loans. Loans which were restructured prior to the adoption of Statement 114 and which are performing in accordance with the renegotiated terms are not required to be reported as impaired. Loans restructured subsequent to the adoption of Statement 114 are required to be reported as impaired in the year of restructuring. Thereafter, such loans can be removed from the impaired loan disclosure if the loans were paying a market rate of interest at the time of restructuring and are performing in accordance with their renegotiated terms. For loans covered by Statement 114, the Company makes an assessment for impairment when and while such loans are on nonaccrual status or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectability of principal. In management's opinion, the adoption of Statement 114 and Statement 118 did not have a material effect on the Company's results of operations. In October 1995, FASB issued Statement of Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation". Statement 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Statement 123 encourages entities to adopt a "fair value" based method of accounting for stock-based compensation plans which requires an estimate of the fair value of stock options or other equity instruments to which employees become entitled when they have rendered requisite service or satisfied other conditions necessary to earn the right to benefit from the instruments. Compensation cost is then determined based on the fair value estimate and is recognized over the service period, which is usually the vesting period. Statement 123 also requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of Statement 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. In management's opinion, implementation of Statement 123 should have no material effect on the Company's consolidated financial statements. FOURTH QUARTER RESULTS The fourth quarter net income for 1995 of $2.4 million or $0.39 per share reflected an increase of $139,000 or 6.1% compared to $2.3 million or $0.37 per share for the fourth quarter of 1994. Earnings 46 performance for the fourth quarter of 1995 as compared to the fourth quarter of 1994 reflects increases in net interest income, noninterest income and noninterest expense. The following table presents a summary of operations for the last five quarters:
1995 1994 ------------------------------------------ --------- CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER - --------------------------------------------------------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income.......................................... $ 12,804 $ 11,904 $ 10,880 $ 10,218 $ 9,629 Interest Expense......................................... 5,171 4,857 4,295 3,729 3,340 --------- --------- --------- --------- --------- Net Interest Income...................................... 7,633 7,047 6,585 6,489 6,289 Provision for Loan Losses................................ 625 372 322 366 455 Noninterest Income....................................... 1,729 1,623 1,576 1,590 1,514 Noninterest Expense...................................... 5,035 4,694 4,654 4,594 3,787 --------- --------- --------- --------- --------- Income Before Taxable-Equivalent Adjustment and Income Tax..................................................... 3,702 3,604 3,185 3,119 3,561 Taxable-Equivalent Adjustment............................ 105 35 35 39 34 Applicable Income Tax Expense............................ 1,177 1,292 1,109 1,093 1,246 --------- --------- --------- --------- --------- Net Income $ 2,420 $ 2,277 $ 2,041 $ 1,987 $ 2,281 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Income Per Common Share Primary................................................ $ 0.39 $ 0.37 $ 0.33 $ 0.32 $ 0.37 Fully Diluted.......................................... 0.39 0.36 0.33 0.32 0.37 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Net interest income of $7.6 million for the fourth quarter of 1995 increased $1.3 million or 21.4% compared to $6.3 million for the fourth quarter of 1994, reflecting the increased volume of earning assets and net increase in yield for the year ended December 31, 1995. Average earning assets of $574.0 million for the fourth quarter of 1995 increased $104.4 million or 22.2% compared to $469.6 million for the fourth quarter of 1994. The fourth quarter of 1995 interest margin was 5.28% compared to 5.31% for the fourth quarter of 1994 and 5.15% in the third quarter of 1995. The provision for loan losses charged against earnings in the fourth quarter of 1995 was $625,000 compared to $455,000 for the fourth quarter of 1994, reflecting an increase of $170,000 or 37.4%. The provision for loan losses in the fourth quarter of 1995 was primarily attributable to loan growth. Noninterest income of $1.7 million for the fourth quarter of 1995 increased $215,000 or 14.2% compared to $1.5 million for the fourth quarter of 1994, primarily due to an increased volume of business and as a result of the RGC/Roma Branch Acquisitions. All components of noninterest income reflect increases for fourth quarter of 1995 compared to fourth quarter of 1994 except Other Service Charges and Investment Securities Gains (Losses). The decline in Other Service Charges is primarily attributable to a decline in foreign currency exchange fees. Investment Securities Gains (Losses) of ($98,000) for the fourth quarter of 1995 compared to Investment Securities Gains (Losses) of $8,000 for the fourth quarter of 1994. Noninterest expense of $5.0 million for the fourth quarter of 1995 increased $1.2 million or 33.0% compared to $3.8 million for the fourth quarter of 1994. The increase in noninterest expense is primarily attributable to Other Losses of $239,000 for the fourth quarter of 1995 reflecting a net increase of $738,000 compared to a net gain of $499,000 for the fourth quarter of 1994. The net gain for the fourth quarter of 1994 was primarily attributable to a benefit of $553,000 from the reversal of a second quarter 1994 accrual. The reversal of the accrual resulted from the settlement of a lawsuit in the last quarter of 1994. 47 BUSINESS GENERAL Texas Regional, a Texas business corporation registered as a bank holding company under the Bank Holding Company Act of 1956, was incorporated in 1983. Texas Regional commenced operations as a bank holding company with the acquisition of Texas State Bank, McAllen, Texas, and Harlingen State Bank, Harlingen, Texas ("Harlingen State Bank") in May 1984. In March 1992, the Company acquired Mid Valley Bank, Weslaco, Texas ("Mid Valley Bank") and merged Harlingen State Bank and Mid Valley Bank into Texas State Bank. In 1995, Texas State Bank acquired the Rio Grande City and Roma branches of First National Bank of South Texas (the "RGC/Roma Branch Acquisitions"). Texas State Bank, which is the Company's sole subsidiary, operates nine banking locations in the Rio Grande Valley: four banking locations in McAllen (including its main office), two banking locations in Weslaco, and one banking location each in Harlingen, Rio Grande City and Roma. At December 31, 1995, Texas Regional had consolidated total assets of $646.8 million, loans outstanding (net of unearned discount) of $450.9 million, total deposits of $579.7 million, and shareholders' equity of $62.7 million. Upon consummation of the Mergers, Texas State Bank will have 15 full service banking locations. In addition to the banking locations listed in the preceding paragraph, Texas State Bank will add one banking location in McAllen, three in Mission and one each in Penitas and Hidalgo. Assuming the Mergers and this offering had been consummated at December 31, 1995, the Bank would have had pro forma consolidated assets of $1.143 billion, loans outstanding (net of unearned discounts) of $685.3 million, total deposits of $1.024 billion, and total shareholders' equity of $105.3 million. The business strategy of Texas Regional is for the Bank to provide its customers with the financial sophistication and breadth of products of a regional bank, while retaining the local appeal and level of service of a community bank. The Board of Directors and senior management of the Company have maintained the Company's community orientation by tailoring products and services to meet community and customer needs. Management believes that the Company is well positioned in its market due to its responsive customer service, the strong community involvement of Texas State Bank management and employees, recent trends in the Texas banking environment in general and the economy of the Rio Grande Valley in particular. Management's strategy is to provide a business culture in which individual customers and small and medium sized businesses are accorded the highest priority in all aspects of the Company's operations. Management believes that individualized customer service will allow the Company to increase its market share in lending volume and deposits. As part of its operating and growth strategies, the Company is working to continue to attract business from, and provide service to, small and medium sized businesses, and expand operations in the Rio Grande Valley. Management believes that the Mergers are consistent with this strategy. By maximizing personal knowledge of and contact with customers and endeavoring to understand the needs and preferences of its customers, the Company is working to maintain and further enhance its reputation of providing excellent customer service, allowing it to achieve its growth and earnings goals. The Company has developed an organizational structure that allows it to make credit and other banking decisions rapidly. Management believes that this structure, when compared to competing financial institutions, enables the Company to provide a higher degree of service and increased flexibility to creditworthy customers. The Bank continues to focus on small and medium sized businesses and individual customers as its principal market, and seeks to provide services to its customers across all product lines. Many financial institutions in the Rio Grande Valley have become part of much larger state-wide or national organizations. Management believes that the acquiring institutions in many cases have shifted decision making and operations out of the Rio Grande Valley, and therefore have decreased the level of personal service that the Company seeks to provide to small and medium sized businesses that are the core of the Company's existing business and marketing efforts. The Company intends to continue to target its marketing efforts to those businesses and individuals who prefer the personalized customer service emphasized by the Company. 48 Bank management and other employees participate actively in a wide variety of civic and community activities and organizations, including local chambers of commerce, industrial foundations and charitable and civic activities such as educational institutions, health care organizations and the McAllen Affordable Housing Corporation. Management has also been actively involved in organizations to promote border trade and economic development. The Company believes that these activities assist the Bank through increased visibility and through development and maintenance of customer relationships. For its business customers, Texas State Bank offers checking facilities, certificates of deposit, short term loans for working capital purposes, construction financing, mortgage loans, term loans for fixed asset and expansion needs, and other commercial loans. The services provided for individuals by Texas State Bank include checking accounts, savings accounts, certificates of deposit, individual retirement accounts and consumer loan programs, including installment loans for home repair and for purchases of consumer goods, including automobiles, trucks and boats, and mortgage loans. Texas State Bank also provides travelers checks, money orders and safe deposit facilities, and offers trust services. While First State Bank and Border Bank provide similar services and products for their customers, the products and services offered at these locations will be expanded to include all products and services offered by Texas State Bank. Texas State Bank has also expanded the services which it provides to third party correspondent banks. The Texas State Bank data processing center, for example, presently serves three banks in addition to providing data processing services for all Texas State Bank banking locations. It is expected that, following consummation of the Mergers and a conversion in fall 1996, data processing for the bank facilities formerly operated as First State Bank and Border Bank facilities will be performed by the Texas State Bank data processing facility. The Company has expanded its market area and increased its market share through both internal growth and through acquisitions. In August 1995, the Company completed the RGC/Roma Branch Acquisitions. In that transaction, which was accounted for as a purchase, Texas State Bank acquired substantially all of the fixed assets associated with the banking locations, certain loans coded to the banking locations, and certain other assets, in consideration of the assumption of certain deposit accounts coded to the banking locations. The RGC/Roma Branch Acquisitions increased loans and deposits of the Company by $43.7 million and $79.7 million, respectively, at the time of the acquisition. In addition to the pending Mergers, management believes there may be additional opportunities to expand by acquiring financial institutions or by acquiring assets and deposits that will allow the Company to enter adjacent markets or further increase market share in existing markets. Management intends to pursue acquisition opportunities in strategic markets in circumstances in which management believes that its managerial, operational and capital resources will enhance the performance of acquired institutions. Except for the Merger Agreements, there are currently no agreements or understandings related to any acquisition. MARKET REGIONS Texas Regional's operations are located in the Rio Grande Valley, which consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and Starr Counties are each directly adjacent to the Rio Grande River, which forms part of the border between the United States and Mexico. Texas State Bank's banking locations are located in Hidalgo County (McAllen and Weslaco), Cameron County (Harlingen), and Starr County (Rio Grande City and Roma). The offices of First State Bank and Border Bank are all located in Hidalgo County. The ability of Texas Regional to continue its rate of growth and profitability is closely linked to the economy of the Rio Grande Valley. The economy of the Rio Grande Valley is based principally on retailing (including trade with Mexico), government, agriculture, tourism, manufacturing, health care and education. A large number of retirees spend all or part of the year in the Rio Grande Valley. Many twin manufacturing plants, or "maquiladoras", are located in the Rio Grande Valley or in cities located across the border in Mexico, such as Reynosa and Matamoros. 49 The City of McAllen, which is the location of the Company's headquarters, serves as the center of a 150 mile retail market area. A large part of this trade area is composed of the Mexican states of Nuevo Leon and Tamaulipas, which had estimated populations of 3.1 million and 2.2 million, respectively, in 1990. The major industrial and commercial center of northern Mexico, the City of Monterrey in the Mexican state of Nuevo Leon, is located approximately 150 miles southwest of McAllen. Among the largest cities in the Mexican state of Tamaulipas are Reynosa, located ten miles south of McAllen and estimated to have a population in excess of 700,000 persons, and Ciudad Victoria, which is located 200 miles south of McAllen. The Rio Grande Valley market includes a U.S. population of approximately 800,000, a population which increased 128.0% (or 3.5% annually) between 1970 and 1994. The market area served by Texas State Bank has been recognized as among the fastest growing areas in the nation. The McAllen-Edinburg-Mission area has a projected population growth rate of 23.8% between 1994 and 2000, and the Brownsville-Harlingen area has a projected population growth rate of 16.0% during that same period. The Rio Grande Valley has also experienced significant recent growth in the retail and construction industries. Retail sales in the Rio Grande Valley totaled approximately $5.9 billion in 1994, representing an annual compound growth rate of 7.9% since 1984. With respect to new construction activity, building permits in the Rio Grande Valley have grown 89.8% between 1989 and 1994, representing an annual compound growth rate of 13.7%. LENDING ACTIVITIES The primary source of income generated by Texas State Bank is the interest earned from its loan and investment portfolios. Texas State Bank maintains diversification when considering investments and the granting of loan requests. Emphasis is placed on the borrower's ability to generate cash flow to support its debt obligations and other cash related expenses. Lending activities include commercial loans, agricultural loans, consumer loans and real estate loans. Commercial loans and agricultural loans are originated primarily for working capital funding. Consumer loans include those for the purchase of automobiles, mobile homes, home improvements and investments. Real estate loans include the origination of loans for commercial property acquisition or remodeling, and also include conventional mortgages for the purchase of single-family houses or lots. A substantial proportion of the properties collateralizing Texas State Bank's mortgage portfolio is located in the Company's primary market area. During 1995, Frank A. Kavanagh, President of Texas State Bank's Weslaco banking location, was appointed the Chief Lending Officer of Texas State Bank. During 1995, Texas State Bank also further standardized documentation requirements and centralized loan controls and supervision. Texas State Bank management continues to seek to preserve and enhance the quality of the Bank's loan portfolio. At December 31, 1995, Texas Regional's total loan portfolio (net of unearned discount) was $450.9 million, representing 77.8% and 69.7% of its total deposits and total assets, respectively, at that date. Total loans increased $110.9 million, or 32.6%, during 1995 from December 31, 1994 levels of $339.9 million. A significant portion of this increase was attributable to the RGC/Roma Branch Acquisitions. The Company's legal lending limit to any one borrower was $11.5 million at December 31, 1995. However, the legal lending limit does not include the portion of a loan collateralized by cash or cash equivalents and government guaranties. All current loans fall well below applicable legal lending limits. Texas Regional's lending policy generally limits loans to one borrower to $8.0 million, with exceptions allowed for selected customers. An example of an exception is a $34.0 million loan made during 1995 to fund a leveraged employee stock ownership trust, which was secured by, among other assets, cash and cash equivalents of $27.5 million. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations--Analysis of Financial Condition--Loans." Assuming consummation of the Mergers, on a pro forma basis at December 31, 1995, Texas Regional's total loan portfolio (net of unearned discount) would have been $685.3 million and its legal lending limit would have been $21.5 million. 50 At December 31, 1995, First State Bank and Border Bank had $13.0 million of loans secured by non-U.S. collateral, primarily real estate and other assets in Mexico. Management currently intends to maintain the portfolio of such loans but does not intend to significantly expand the volume of such loans. The following table summarizes the loan portfolio of the Company by loan category and amount at December 31, 1995 and on a pro forma basis at December 31, 1995, assuming that the Mergers had been consummated at December 31, 1995:
ACTUAL PRO FORMA ----------------------- ----------------------- (DOLLARS IN THOUSANDS) Commercial........................................................ $ 146,461 32.5% $ 215,279 31.4% ----------- ----- ----------- ----- Agricultural...................................................... 25,097 5.6 33,991 5.0 ----------- ----- ----------- ----- Real Estate Construction.................................................... 29,967 6.6 54,667 7.9 Commerical Mortgage............................................. 129,953 28.8 190,293 27.8 Agricultural Mortgage........................................... 17,057 3.8 27,861 4.1 1-4 Family Mortgage............................................. 59,052 13.1 98,480 14.4 ----------- ----- ----------- ----- Total Real Estate............................................. 236,029 52.3 371,301 54.2 ----------- ----- ----------- ----- Consumer.......................................................... 43,267 9.6 64,715 9.4 ----------- ----- ----------- ----- Total......................................................... $ 450,854 100.0% $ 685,286 100.0% ----------- ----- ----------- ----- ----------- ----- ----------- -----
COMMERCIAL LENDING At December 31, 1995, the Company had $146.5 million of commercial loans outstanding, representing 32.5% of its total loans. Commercial loan balances increased $44.6 million, or 43.8%, during 1995 from December 31, 1994 levels of $101.9 million. The increase in commercial loans for the year ended December 31, 1995 was primarily attributable to the funding of a $34.0 million leveraged employee stock ownership trust loan which is collateralized by stock and assets of the employer and approximately $27.5 million of cash and cash equivalent assets. Excluding this loan, commercial loans at December 31, 1995 represented an increase of $10.6 million, or 10.4%, compared to levels at December 31, 1994. On a pro forma basis at December 31, 1995, the Company would have had $215.3 million of commercial loans outstanding, representing 31.4% of total loans at December 31, 1995. Texas State Bank offers a variety of commercial loan services including term loans, lines of credit, and equipment financing. A broad range of short-to-medium term commercial loans, both collateralized and uncollateralized, is made available to businesses for working capital (including inventory and receivables), business expansion (including acquisitions of real estate and improvements), and the purchase of equipment and machinery. The purpose of a particular loan generally determines its structure. Generally, Texas State Bank's commercial loans are underwritten in the Bank's primary market area on the basis of the borrower's ability to service such debt from income. As a general practice, Texas State Bank takes as collateral a lien on any available real estate, equipment, or other assets. Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his employment and other income and which are collateralized by real property whose value tends to be more readily ascertainable, commercial loans typically are underwritten on the basis of the borrower's ability to make repayment from the cash flow of its business and generally are collateralized by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds or collateral value available to support the repayment of commercial loans may deteriorate over time, cannot be appraised with precision, and may fluctuate based on the success of the business. 51 AGRICULTURAL LOANS At December 31, 1995, the Company had $25.1 million of agricultural loans outstanding, representing 5.6% of its total loans. Agricultural loan balances increased $7.9 million, or 45.9%, during 1995 from December 31, 1994 levels of $17.2 million. On a pro forma basis at December 31, 1995, the Company would have had $34.0 million of agricultural loans outstanding, representing 5.0% of total loans. REAL ESTATE LOANS At December 31, 1995, the Company had $236.0 million of real estate loans outstanding. Real estate loan balances increased $45.9 million, or 24.1% during 1995 from December 31, 1994 levels of $190.2 million. Real estate loans represented 52.3% and 55.9% of total loans outstanding at December 31, 1995 and 1994, respectively. On a pro forma basis at December 31, 1995, the Company would have had $371.3 million of real estate loans outstanding, or 54.2% of total loans. A substantial portion of the Bank's real estate mortgage loans are secured by non-farm, non-residential properties, which are loans to commercial customers for purposes of providing working capital. In addition, some of the Bank's real estate mortgage loans have been made to finance or refinance the acquisition and holding of commercial real estate. The Bank offers a variety of mortgage loan products which generally are (i) amortized over five to 15 years, (ii) payable in monthly installments of principal and interest, and (iii) due and payable in full within three to five years. Finally, a small portion of the Bank's lending activity has consisted of the origination of single-family residential mortgage loans collateralized by owner-occupied property located in the Bank's primary market area. The Bank intends to pursue increased originations of single-family residential mortgage loans with respect to its existing customer base. Loans collateralized by single family residential real estate generally have been originated in amounts of no more than 85% of appraised value. The Bank requires mortgage title insurance and hazard insurance in the amount of the loan. Although the contractual loan payment periods for single family residential real estate loans are generally amortized over five to 20 years, they are payable in monthly installments of principal and interest and are typically due and payable in full within three to five years. At December 31, 1995, approximately $13.0 million of the single family residential mortgage loans at First State Bank and Border Bank consisted of loans to low and moderate income borrowers. The characteristics of these loans may contribute to a higher level of delinquencies. Management believes that this component of the pro forma portfolio will not have an adverse impact on the financial performance of the Company. CONSUMER LOANS At December 31, 1995, the Company had $43.3 million of consumer loans outstanding, representing 9.6% of its total loans. Aggregate consumer loan balances increased $12.6 million, or 40.9%, during 1995 from December 31, 1994 levels of $30.7 million. On a pro forma basis at December 31, 1995, the Company would have had $64.7 million of consumer loans outstanding, or 9.4% of its total loans. Consumer loans made by the Bank have included automobile loans, recreational vehicle loans, boat loans, second mortgage loans, home improvement loans, personal loans (collateralized and uncollateralized) and deposit account collateralized loans. The terms of these loans typically range from 12 to 60 months and vary based upon the nature of collateral and size of loan. Consumer loans are attractive to the Bank because they typically have a short term and carry higher interest rates than those charged on other types of loans. Installment loans, however, do pose additional risks of collectability when compared to traditional types of loans granted by commercial banks, such as residential mortgage loans. In many instances, the Bank is required to rely on the borrower's ability to repay since the collateral may be of reduced value at the time of collection. Accordingly, the initial determination of the borrower's ability to repay is of primary importance in the underwriting of consumer loans. 52 INVESTMENTS At December 31, 1995 the Company had federal funds sold of $3.6 million and investment securities of $131.6 million, including $63.1 million classified as Available for Sale and $68.5 million classified as Held to Maturity. Investments are managed to maintain adequate sources of liquidity and diversification and to generate acceptable levels of tax-equivalent yield. On a pro forma basis at December 31, 1995, after giving effect to the Mergers and this offering at December 31, 1995, the Company would have had federal funds sold of $4.9 million and investment securities of $328.1 million, including $65.9 million classified as Available for Sale and $262.2 million classified as Held to Maturity. The pro forma adjustments include assumptions regarding the use of sources of liquidity including federal funds sold and sales of certain investment securities to fund a portion of the purchase price. See "Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial Information." Management believes that sources of liquidity will be adequate to fund the required portion of consideration in the Mergers but will decide on specific securities to be sold based on market conditions at the time of Closing. The following table summarizes the investment portfolio of the Company by investment category and amount at December 31, 1995 and on a pro forma basis at December 31, 1995, assuming that the Mergers had been consummated at December 31, 1995:
ACTUAL PRO FORMA ----------------------------- ----------------------------- AVAILABLE HELD TO AVAILABLE HELD TO INVESTMENTS FOR SALE MATURITY TOTAL FOR SALE MATURITY TOTAL - ------------------------------------------------------------ --------- -------- ------ --------- -------- ------ (IN MILLIONS) Federal Funds Sold.......................................... $-- $-- $ 3.6 $-- $-- $ 4.9 Investment Securities....................................... U.S. Treasury............................................. 6.0 28.8 34.8 8.0 35.9 43.9 U.S. Government Agency.................................... 55.6 34.2 89.8 56.4 156.8 213.2 Mortgage-Backed Securities................................ -- -- -- -- 0.1 0.1 State and Political Subdivision Securities................ -- 5.5 5.5 -- 66.8 66.8 Other..................................................... 1.5 -- 1.5 1.5 2.6 4.1 --------- -------- ------ --------- -------- ------ Total....................................................... $63.1 $68.5 $135.2 $65.9 $262.2 $333.0 --------- -------- ------ --------- -------- ------ --------- -------- ------ --------- -------- ------
As a part of the Company's purchase accounting adjustments, the Company will review investment securities acquired in the Mergers for reclassification as Available for Sale or Held to Maturity. DEPOSITS The Company has a stable noninterest-bearing source of funds as reflected in the ratio of average demand deposits to average total deposits for years ended December 31, 1995 and 1994 of 20.2% and 20.9%, respectively. Deposits provide funding for the Company's investments in loans and securities, and the interest paid for deposits must be managed carefully to control the level of interest expense. Texas State Bank's deposits at December 31, 1995 were $579.7 million, an increase of $107.6 million, or 22.8% during 1995 from December 31, 1994 levels of $472.1 million. A portion of this increase was attributable to the RGC/Roma Branch Acquisitions. Deposits currently consist primarily of core deposits from the Rio Grande Valley and surrounding areas. Texas State Bank does not have any "brokered deposits", defined as deposits which, to the knowledge of management of Texas Regional, have been placed with the Bank by a person who acts as a broker in placing such deposits on behalf of others. On a pro forma basis at December 31, 1995, the Bank's deposits would have been $1.024 billion. At December 31, 1995, certificates of deposit held by Texas State Bank in excess of $100,000 were $126.4 million, or 21.8% of total deposits. On a pro forma basis at December 31, 1995, certificates of deposit held by the Bank in excess of $100,000 would have been $265.5 million, or 25.9% of total deposits. 53 Texas State Bank acts as local depository for a number of local governmental entities in its market area, including the City of McAllen, the South Texas Community College District, the City of Weslaco, the Weslaco Independent School District, the City of Rio Grande City, the City of Roma and Starr County. Local government deposits are subject to competitive bid and in many cases must be secured by government securities. Total deposits by or on behalf of governmental entities at December 31, 1995, aggregated approximately $39.3 million, or 6.8% of total deposits. On a pro forma basis at December 31, 1995, the Bank's total deposits by or on behalf of government entities would have been $128.5 million, or 12.6% of total deposits. As with loan transactions, Texas State Bank has developed deposit relations with depositors who are Mexican residents. At December 31, 1995, $56.5 million, or 9.8% of the Bank's total demand and time deposits were deposited primarily by or on behalf of residents of Mexico. On a pro forma basis at December 31, 1995, $146.9 million, or 14.4% of the Bank's total demand and time deposits, would have been deposited primarily by or on behalf of residents of Mexico. As with loan transactions, management believes that Texas State Bank's percentage of deposits by or on behalf of residents of Mexico, and the percentage of deposits on a pro forma basis at December 31, 1995, on behalf of residents of Mexico, are somewhat less than that of banks of comparable size located in the Rio Grande Valley. COMPETITION The banking industry in the market area served by Texas State Bank is highly competitive. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of banking facilities, and, in the case of loans to commercial borrowers, relative lending limits. A substantial number of the commercial banks in the Rio Grande Valley are branches of much larger organizations affiliated with national, regional or state-wide banking companies, and as a result of those affiliations have greater resources than Texas Regional or Texas State Bank. However, as an independent community bank headquartered in Texas State Bank's primary market area, management of the Company believes that Texas State Bank's community commitment and involvement in its primary market area, as well as its commitment to quality and personalized banking services, are factors that contribute to the Company's competitiveness. PERSONNEL At December 31, 1995, Texas Regional employed 332 full-time equivalent employees, and on a pro forma basis at December 31, 1995, would have employed 467 full-time equivalent employees. Substantially all of the present First State Bank and Border Bank officers and employees are expected to be employed by Texas State Bank. The Company's employees are not unionized, and management believes employee relations to be favorable. 54 PROPERTIES Texas State Bank targets commercial customers by offering a broad range of commercial banking services through a total of nine full service banking locations in the Rio Grande Valley, as follows:
NET BOOK VALUE OF PREMISES AND EQUIPMENT BANKING LOCATION DATE OPENED AT DECEMBER 31, 1995 - -------------------------------------------------------------------------------- ----------- -------------------- (IN THOUSANDS) 3900 North Tenth Street 1981(1) $3,262 McAllen, Texas Kerria Plaza 1985(1) 3,162 3700 North Tenth Street Suite 301 McAllen, Texas 2250 Nolana 1985(1) 981 McAllen, Texas 521 North 77 Sunshine Strip 1974(1) 901 Harlingen, Texas 500 South Missouri 1960(1) 2,056 Weslaco, Texas 900 E. Jackson 1994(1) 3,255 McAllen, Texas 2009 West Expressway 83 1996(1) 1,292 Weslaco, Texas 100 N. Britton Avenue 1995(2) 1,655 Rio Grande City, Texas 1004 East Highway 83 1995(2) 119 Roma, Texas
- --------- (1) Represents the date the facility opened for business as a commercial bank. (2) Represents the date the facility was acquired by Texas State Bank from a third party. All of Texas Regional's banking locations are owned by Texas Regional, except for the Company's Roma banking location. The banking locations include extensive drive-through facilities at the main bank location in McAllen, at the Harlingen location, and at the new south McAllen banking location. The Kerria Plaza banking location and the main office of Texas Regional are located within the Kerria Plaza Building. While the Texas Regional banking facilities are considered adequate for Texas State Bank's present operations, management believes that it will be desirable in the future to consider the establishment of additional banking locations in Edinburg, Harlingen and Brownsville, and to consider development or acquisition of a substantial facility in McAllen. 55 Upon consummation of the Mergers, Texas State Bank will acquire the following additional banking locations:
NET BOOK VALUE OF PREMISES AND EQUIPMENT BANKING LOCATION DATE OPENED (1) AT DECEMBER 31, 1995 - -------------------------------------------------------------------------------- --------------- -------------------- (IN THOUSANDS) 900 Conway 1909 $2,726 Mission, Texas Kika de la Garza and Tom Landry 1981 307 Mission, Texas West Highway 83 and Tom Gill Road 1993 673 Penitas, Texas Sharyland Road and FM 495 1986 707 Mission, Texas 2101 South 10th Street 1989 1,009 McAllen, Texas Bridge & Esperanza 1968 3,297 Hidalgo, Texas
- ------------ (1) Represents the date the facility opened for business as a commercial bank. REGULATION AND SUPERVISION In addition to the generally applicable state and federal laws governing businesses and employers, the Company and Texas State Bank are further extensively regulated by special federal and state laws applicable only to financial institutions and their parent companies. Virtually all aspects of the Company's operations are subject to specific requirements or restrictions and general regulatory oversight, from laws regulating consumer finance transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as the Fair Debt Collections Practices Act, the Fair Credit Reporting Act and the Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the specific protection of shareholders of the Company. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. REGULATION OF THE COMPANY Texas Regional is a bank holding company within the meaning of the Bank Holding Company Act of 1956 ("BHCA"), as amended, and therefore is subject to regulation and supervision by the FRB. In addition, the Company is required to file reports with and to furnish such other information as the FRB may require pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB has the authority to issue bank holding companies orders to cease and desist from unsound practices and violations of conditions imposed by, or violation of agreements with, the FRB. The FRB is also empowered to assess civil penalties against companies or individuals who violate the BHCA or orders or regulations thereunder in amounts up to $1.0 million per day, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The FRB and the FDIC, as appropriate, are authorized to exercise comparable authority, under the Federal Deposit Insurance Act (the "FDI Act") and other statutes, with respect to subsidiary banks. The FRB takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB's position that, in serving as a source of strength to its 56 subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB regulations or both. This doctrine has become known as the "source of strength" doctrine. Although the United States Court of Appeals for the Fifth Circuit found the FRB's source of strength doctrine invalid in 1990, stating that the FRB had no authority to assert the doctrine under the BHCA, the decision was reversed by the United States Supreme Court on procedural grounds. Changes in the FDI Act made by the FDICIA now require an undercapitalized institution to submit to the FRB a capital restoration plan with a guaranty by each company having control of the bank of the bank's compliance with the plan. The BHCA and the Change in Bank Control Act, together with regulations promulgated by the FRB, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exemptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities under Section 12 of the Exchange Act or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption. As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. The Company is also prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary bank, except that it may engage in and may own shares of companies engaged in certain activities found by the FRB to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card, or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the FRB considers whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse affects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In considering any application for approval of an acquisition or merger, the FRB is also required to consider the financial and managerial resources of the companies and the banks concerned, as well as the applicant's record of compliance with the Community Reinvestment Act (the "CRA"). The CRA generally requires a financial institution to take affirmative action to ascertain and meet the credit needs of its entire community, including low and moderate income neighborhoods. The BHCA generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve System and other banks and non-bank companies in the same holding company. Under the BHCA and the FRB's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. 57 The Company, as an affiliate of the Bank, is subject to certain restrictions regarding transactions between a bank and companies with which it is affiliated. These provisions limit extensions of credit (including guarantees of loans) by the Bank to affiliates, investments in the stock or other securities of the Company by the Bank, and the nature and amount of collateral that the Bank may accept from any affiliate to secure loans extended to the affiliate. REGULATION OF THE BANK Texas State Bank is a Texas state-chartered bank subject to regulation by the Banking Department. Texas State Bank, the deposits of which are insured by the Bank Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal Reserve System, and therefore the FRB is the primary federal regulator for Texas State Bank. The requirements and restrictions applicable to Texas State Bank under laws of the United States and the State of Texas include (i) the requirement that reserves be maintained, (ii) restrictions on the nature and amount of loans which can be made, (iii) restrictions on the business activities in which the Bank may engage, (iv) restrictions on the payment of dividends to shareholders, and (v) the maintenance of minimum capital requirements. Texas Regional is dependent upon dividends received from Texas State Bank for discharge of Texas Regional's obligations and for payment of dividends to the Company's shareholders. However, the application of minimum capital requirements and other rules and regulations applicable to Texas State Bank restrict dividend payments by Texas State Bank. The Banking Department and the FRB can each further limit payment of dividends if the regulatory authority finds that the payment of dividends would constitute an unsafe or unsound practice. In addition, Texas law requires that, before declaring a dividend, not less than 10% of the net profits of a bank earned since the last dividend was declared be transferred to a "certified surplus" account. Except to absorb losses in excess of undivided profits and uncertified surplus, such certified surplus may not be reduced without the prior written consent of the Banking Commissioner. However, state banks are not required to transfer any amount that would increase the certified surplus account to more than the capital of the bank. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Interest rate limitations for Texas State Bank are primarily governed by the laws of the State of Texas. The maximum annual interest rate that may be charged on most loans made by Texas State Bank is based on doubling the average auction rate, to the nearest 0.25%, for United States Treasury Bills, as computed by the Office of Consumer Credit Commissioner of the State of Texas. However, the maximum rate does not decline below 18% or rise above 24% (except for loans in excess of $250,000 that are made for business, commercial, investment or other similar purposes (excluding agricultural loans), in which case the maximum annual rate may not rise above 28%, rather than 24%). On fixed rate closed-end loans, the maximum non-usurious rate is to be determined at the time the rate is contracted, while on floating rate and open-end loans (such as credit cards), the rate varies over the term of the indebtedness. State usury laws (but not late charge limitations) have been preempted by federal law for loans secured by a first lien on residential real property. Banks are affected by the credit policies of other monetary authorities, including the FRB, which regulate the national supply of bank credit. Such regulation influences overall growth of bank loans, investments, and deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. FDICIA FDICIA requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the FRB and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to 58 "critically undercapitalized". Under these regulations, which became effective December 19, 1992, an institution is considered well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. An institution is considered adequately capitalized if it has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater and a leverage capital ratio of 3.0% or greater (if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), and the institution does not meet the definition of a well capitalized institution. An institution is considered undercapitalized if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A significantly undercapitalized institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%. A critically undercapitalized institution is one which has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The FRB is authorized by the legislation to take various enforcement actions against any significantly undercapitalized institution and any undercapitalized institution that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the appropriate agency. These powers include, among other things, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring a new election of directors, and requiring the dismissal of directors and officers. These restrictions, either individually or in aggregate, could if imposed have a significantly adverse impact on the operations of the Bank. With certain exceptions, an institution will be prohibited from making capital distributions or paying management fees if the payment of such distributions or fees will cause the institution to become undercapitalized. Furthermore, undercapitalized institutions will be required to file capital restoration plans with the appropriate federal regulator. Pursuant to FDICIA, undercapitalized institutions also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The FRB also may, among other things, require an undercapitalized institution to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances to divest itself of any subsidiary. Critically undercapitalized institutions may be subject to more extensive control and supervision and the FRB may prohibit any critically undercapitalized institution from, among other things, entering into any material transaction not in the ordinary course of business, amending its charter or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of an institution becoming critically undercapitalized, the FRB must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued operation. Based on Texas State Bank's capital ratios at December 31, 1995, Texas State Bank was classified as "well capitalized" under the applicable regulations. On a pro forma basis at December 31, 1995, Texas State Bank would also have been "well capitalized" under applicable regulations. As a result, the Company does not believe that FDICIA's prompt corrective action regulations will have any material effect on the activities or operations of Texas State Bank. FDICIA also requires the FDIC to establish a schedule to increase (over a period of not more than 15 years) the reserve ratio of the BIF, which insures deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher deposit insurance premiums on BIF members, if necessary, to achieve that ratio. FDICIA also requires a risk-based assessment system for deposit insurance premiums commencing January 1, 1994. Since BIF reached its designated reserve ratio in mid-1995, the FDIC adjusted the BIF 59 assessments, so that the assessment rate now in effect ranges from a minimum of zero to a maximum of $0.27 per $100 of deposits. Institutions whose assessment rate would be zero are required to pay a statutory minimum semiannual assessment of $1,000. Based on the risk category applicable to Texas State Bank, the premium paid by Texas State Bank is presently $2,000 per annum. FDICIA contains numerous other provisions, including accounting, auditing and reporting requirements, the termination (beginning in 1995) of the "too big to fail" doctrine except in special cases, regulatory standards in areas such as asset quality, earnings and compensation, and revised regulatory standards for the powers of state chartered banks, real estate lending, bank closures and capital adequacy. COMMUNITY REINVESTMENT ACT Under the CRA, a bank's applicable regulatory authority (the FDIC or the FRB) is required to assess the record of each financial institution which it regulates to determine if the institution meets the credit needs of its entire community, including low- and moderate-income neighborhoods served by the institution, and to take that record into account in its evaluation of any application made by such institution for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger, or the acquisition or shares of capital stock of another financial institution. The regulatory authority prepares a written evaluation of an institution's record of meeting the credit needs of its entire community and assigns a rating. The Bank received a "satisfactory" rating in its most recent CRA review. Both the United States Congress and the banking regulatory authorities have proposed substantial changes to the CRA and fair lending rules and regulations which, if enacted, could have a material adverse effect on the Company. CAPITAL RESOURCES Capital management, which is a continuous process at Texas Regional and Texas State Bank, consists of providing equity to support both current and future operations. The Company is subject to capital adequacy requirements of various banking regulators, such as the FRB, the Banking Department and the FDIC. At December 31, 1995, Texas Regional and its subsidiaries were in compliance with minimum capital requirements of the respective regulatory agencies and are expected to remain in compliance in the future. The various federal bank regulatory agencies, including the FRB, have adopted risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital requirements in relation to assets and off-balance sheet exposure as adjusted for credit risk. The risk-based capital standards currently in effect are designed to make regulatory capital requirements more sensitive to differences in risk profile among bank holding companies and banks, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with appropriate risk weights. The resulting capital ratios represent capital as a percentage of total risk-weighted assets and off-balance sheet items. The risk-based capital standards as established by the FRB apply to Texas Regional and Texas State Bank. The minimum standard for the ratio of capital to risk-weighted assets (including certain off-balance sheet obligations, such as standby letters of credit) is 8.0%. At least half of the risk-based capital must consist of common equity, retained earnings, and qualifying perpetual preferred stock, less deductions for goodwill and various other intangibles ("Tier I capital"). The remainder ("Tier II capital") may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock, and a limited amount of the general valuation allowance for loan losses. The sum of Tier I capital and Tier II capital is "total risk-based capital." The FRB also has adopted guidelines which supplement the risk-based regulations to include a minimum leverage ratio of Tier I capital to average total consolidated assets ("Leverage ratio") of 3.0%. The FRB has emphasized that the foregoing standards are supervisory minimums and that a banking organization will be permitted to maintain such minimum levels of capital only if it has well diversified 60 risk, including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings; and is in general considered to be a strong banking organization, rated composite 1 under applicable federal guidelines, and the banking organization is not experiencing or anticipating significant growth. All other banking organizations are required to maintain a Leverage ratio of at least 4.0% to 5.0%. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The FRB continues to consider a "tangible Tier I leverage ratio" in evaluation proposals for expansion or new activities. The tangible Tier I leverage ratio is the ratio of a banking organization's Tier I capital, less deductions for intangibles otherwise includable in Tier I capital, to total tangible assets. Bank regulators continue to consider raising capital requirements applicable to banking organizations beyond current levels. However, the Company is unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules, and therefore cannot predict what effect such higher requirements may have on the Company and the Bank. 61 The following table presents an analysis of capital for Texas Regional and Texas State Bank at the end of each of the last three years:
DECEMBER 31, ------------------------------------- ANALYSIS OF CAPITAL 1995 1994 1993 - --------------------------------------------------------------------------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) TEXAS REGIONAL Tier I Capital Common Stock........................................................... $ 6,196 $ 6,193 $ 4,186 Capital surplus........................................................ 29,239 29,204 12,802 Retained earnings...................................................... 27,168 20,921 15,481 Preferred Stock........................................................ -- -- 7,335 Less: Goodwill......................................................... (5,711) (1,982) (2,205) ----------- ----------- ----------- Total Tier I capital............................................... 56,892 54,336 37,599 ----------- ----------- ----------- Tier II Capital Allowance for loan losses.............................................. 4,542 3,511 3,435 Unrealized gains and losses............................................ N/A N/A 179 ----------- ----------- ----------- Total Tier II capital.................................................. 4,542 3,511 3,614 ----------- ----------- ----------- Total risk-based capital........................................... $ 61,434 $ 57,847 $ 41,213 ----------- ----------- ----------- ----------- ----------- ----------- Risk-weighted assets....................................................... $ 485,645 $ 369,273 $ 311,992 ----------- ----------- ----------- ----------- ----------- ----------- Capital Ratios Tier I risk-based capital ratio........................................ 11.71% 14.71% 12.05% Total risk-based capital ratio......................................... 12.65 15.67 13.21 Leverage ratio (Tier I capital to average adjusted total assets)....... 8.96 10.37 7.88 ----------- ----------- ----------- ----------- ----------- ----------- TEXAS STATE BANK Tier I Capital Common Stock........................................................... $ 20,000 $ 16,000 $ 16,000 Capital surplus........................................................ 26,000 16,000 16,000 Retained earnings...................................................... 11,997 15,288 8,591 Less: Goodwill......................................................... (5,641) (1,909) (2,130) ----------- ----------- ----------- Total Tier I capital............................................... 52,356 45,379 38,461 ----------- ----------- ----------- Tier II Capital Allowance for loan losses.............................................. 4,542 3,511 3,435 Unrealized gains and losses............................................ N/A N/A 179 ----------- ----------- ----------- Total Tier II capital.............................................. 4,542 3,511 3,614 ----------- ----------- ----------- Total risk-based capital....................................... $ 56,898 $ 48,890 $ 42,075 ----------- ----------- ----------- ----------- ----------- ----------- Risk-weighted assets....................................................... $ 486,947 $ 370,558 $ 313,324 ----------- ----------- ----------- ----------- ----------- ----------- Capital Ratios Tier I risk-based capital ratio........................................ 10.75% 12.25% 12.28% Total risk-based capital ratio......................................... 11.68 13.19 13.43 Leverage ratio (Tier I capital to average adjusted total assets)......................................................... 8.24 8.64 8.05 ----------- ----------- ----------- ----------- ----------- -----------
62 The following table presents an analysis of capital for Texas Regional and Texas State Bank on a pro forma basis at December 31, 1995.
PRO FORMA ANALYSIS OF CAPITAL - ----------------------------------------------------------------------------------- DECEMBER 31, 1995 ----------------------------- (DOLLARS IN THOUSANDS) PRO FORMA TEXAS REGIONAL(1) Tier I Capital Common Stock..................................................................... $ 8,376 Capital surplus.................................................................. 69,592 Retained earnings................................................................ 27,168 Preferred Stock.................................................................. -- Less: Goodwill................................................................... (27,312) ---------- Total Tier I capital......................................................... 77,824 ---------- Tier II Capital Allowance for loan losses........................................................ 9,838 Unrealized gains and losses...................................................... N/A ---------- Total Tier II capital............................................................ 9,838 ---------- Total risk-based capital..................................................... $ 87,662 ---------- ---------- Risk-Weighted Assets............................................................... $ 793,602 ---------- ---------- Capital Ratios Tier I risk-based capital ratio.................................................. 9.81% Total risk-based capital ratio................................................... 11.05 Leverage ratio (Tier I capital to average adjusted total assets)................. 6.75 ---------- ---------- PRO FORMA TEXAS STATE BANK(1) Tier I Capital Common Stock..................................................................... $ 60,000 Capital stock.................................................................... 26,000 Retained earnings................................................................ 11,997 Less: Goodwill................................................................... (27,242) ---------- Total Tier I Capital......................................................... 70,755 ---------- Tier II Capital Allowance for loan losses........................................................ 9,838 Unrealized gains and losses...................................................... N/A ---------- Total Tier II Capital........................................................ 9,838 ---------- Total risk-based capital................................................... $ 80,593 ---------- ---------- Risk-Weighted Assets............................................................... $ 784,694 ---------- ---------- Capital Ratios Tier I risk-based capital ratio.................................................. 9.02% Total risk-based capital ratio................................................... 10.27 Leverage ratio (Tier I capital to average adjusted total assets)................. 6.13 ---------- ----------
- --------- (1) On a pro forma basis at December 31, 1995, and assuming completion of the Mergers and completion of the offering of Common Stock as described in this Prospectus at a price of $21.00 per share, net of estimated underwriting discounts, commissions and expenses of the offering of $3,247,000. 63 LEGAL PROCEEDINGS Texas State Bank is involved in routine litigation in the normal course of its business, which in the opinion of management of Texas Regional will not have a material adverse effect on the financial condition or results of operations of Texas Regional. MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Company's Board of Directors is composed of eight persons elected at each annual meeting of Texas Regional's shareholders to hold office for one year or until their respective successors are elected and qualified. Officers of Texas Regional are elected annually by the Company's Board of Directors at its first meeting after each annual meeting of shareholders, to hold office until their respective successors are elected and qualified. Officers may be removed by the Company's Board of Directors. The following table is a listing of all of the directors of the Company. Each director is also a director of Texas State Bank.
DIRECTOR NAME AGE PRINCIPAL OCCUPATION SINCE - --------------------------------------- --- ------------------------------------------------------- ----------- Morris Atlas(1)........................ 69 Managing Partner, Atlas & Hall, L.L.P. (law firm in McAllen, Texas) 1994 Frank N. Boggus(2)..................... 67 Chairman of the Board of Boggus Motor Company (retail auto dealer in McAllen and Harlingen) 1983 Robert G. Farris(3).................... 65 President of Valley Transit Company, Inc. (regional bus company) 1983 Joe M. Kilgore(4)...................... 77 Partner, McGinnis, Lochridge & Kilgore, L.L.P. (law firm in Austin, Texas) 1983 C. Kenneth Landrum, M.D.(5)............ 66 Retired 1994 Glen E. Roney(6)....................... 65 Chairman of the Board and Chief Executive Officer of the Company and Texas State Bank 1985 Julie G. Uhlhorn....................... 65 Chairman of the Board, Rio Grande Equipment Company, Inc. (farming and real estate management company) 1983 Paul G. Veale, Sr. .................... 74 Investments 1985 Jack Whetsel(7)........................ 75 Investments 1985
- --------- (1) Serves on the Stock Option and Compensation Committee of the Company, and serves as a Trustee of the Texas Regional Bancshares, Inc., Employee Stock Ownership Trust (the "KSOP Trust"). (2) Serves on the Audit and Stock Option and Compensation Committees of the Company, and serves as a Trustee of the KSOP Trust. (3) Serves on the Stock Option and Compensation Committee of the Company. (4) Serves on the Audit and Stock Option and Compensation Committees of the Company, and serves as a Trustee of the KSOP Trust. (5) Serves on the Audit Committee of the Company. (6) Serves as a Trustee of the KSOP Trust. (7) Serves on the Stock Option and Compensation Committee of the Company. Each of the foregoing persons has been engaged in the principal occupation indicated for the past five years, except that Mr. Whetsel's principal occupation was Chairman of the Board of Broadway Hardware, Inc. (a retail hardware, electronics and home improvements store located in McAllen) prior to his retirement in 1993, and Dr. Landrum's principal occupation was as a medical doctor practicing with Landrum-Chester OB-GYN Associates prior to his retirement in 1994. The Company has the following advisory directors: Paul S. Moxley, President of Texas State Bank; Danny L. Buttery, President of Texas State Bank's Harlingen banking location; and Frank A. Kavanagh, President of Texas State Bank's Weslaco banking location and Chief Lending Officer of the Company. 64 The Company pays directors and advisory directors $700 for each Texas Regional Board of Directors meeting, and reimburses all directors for out-of-pocket expenses incurred in attending meetings. In addition, during 1995, the Company paid each non-management director a bonus of $2,000 for service as a director of the Company and Texas State Bank. Each director of the Company's subsidiary, Texas State Bank (which includes each director of Texas Regional), receives $400 for each Texas State Bank Board of Directors meeting. Non-management directors, during 1995 also received bonuses aggregating $2,500 for service as a director of the Bank. Mr. Roney has been Chairman of the Board and Chief Executive Officer of the Company since joining the Company in 1985. In addition to his director compensation, Mr. Roney receives compensation as an executive officer of the Company and Texas State Bank, as indicated below. See "Executive Compensation." Mr. Kilgore is a director of other publicly-held corporations. He serves as a director of Reno Air, Inc. (a regional airline based in Reno, Nevada) and of Photo Control, Inc. (a supplier of photographic equipment). The following table is a listing of all executive officers of the Company.
OFFICER NAME AGE PRINCIPAL OCCUPATION POSITION WITH THE COMPANY SINCE - ------------------------------- --- ------------------------------- ------------------------------- ----------- Glen E. Roney.................. 65 Chief Executive Officer of the Chairman of the Board, 1985 Company President and Chief Executive Officer George R. Carruthers........... 45 Chief Financial Officer of the Executive Vice President and 1985 Company Chief Financial Officer Nancy F. Schultz............... 55 Senior Vice President of the Senior Vice President and 1985 Company Secretary-Treasurer
The Texas State Bank Board of Directors consists of all voting members of the Board of Directors of the Company and the following additional persons: Maj. Gen. Walter H. Baxter, III, USAF (Retired), Robert F. Boggus (Boggus Motor Sales), Douglas G. Bready (Texas State Bank), Danny L. Buttery (Texas State Bank), Antonio Falcon, M.D. (Medical Doctor), Robert R. Farris (Valley Transit Company), Frank A. Kavanagh (Texas State Bank), Jan M. Klinck (Klinck Drug Stores, Inc.), Roel Martinez (Pharmacist and Rancher), Paul S. Moxley (Texas State Bank), F. Neal Runnels (Valley Beverage, Inc.), James D. Russell (Russell Plantation) and Tudor G. Uhlhorn (Rio Grande Equipment Company). The following persons serve as advisory directors of Texas State Bank: Jack Abbott (Arroyo Farms and The Harlingen Gin Company), Joseph S. Bailes, M.D. (Oncologist, Valley Oncology Group), Maj. Gen. George S. Bowman, Jr., USMC (Ret.) (Investments), Vidala Gonzalez (Gonzalez Mercantile, Inc.), H.P. Guerra, III (attorney), Herman A. Henry (Agriculture), Jose A. Hinojosa (Certified Public Accountant), Archie L. Jenkines, D.D.S. (Retired), Clarence L. Johnstone (Retired), Marion R. Lawler, Jr., M.D. (Partner, Cardiovascular Associates), Fred S. Mattar (Merchant), W. A. McBride (Cicero Smith Lumber Company), William D. Parish (Retired), Fernando Pena (Pena Brothers Investments), Robert A. Peterson (Starr Produce Company), Dorothy Schmidt (Personal Financial Consultant), Sam F. Vale (Starr-Camargo Bridge Company), and Kenneth Weaver (Investments). Each advisory director receives $400 for each Texas State Bank Advisory Directors meeting attended. 65 The Bank has the following senior executive officers:
POSITION WITH OFFICER NAME AGE TEXAS STATE BANK SINCE - ----------------------------------------- --- ------------------------------------------------------- ----------- Glen E. Roney............................ 65 Chairman of the Board, Chief Executive Officer and 1985 Trust Officer Paul S. Moxley........................... 51 President and Secretary 1986 Danny L. Buttery......................... 48 President -- Harlingen banking location 1985 Frank A. Kavanagh........................ 49 President -- Weslaco banking location and Chief Lending 1992 Officer George R. Carruthers..................... 45 Executive Vice President and Chief Financial Officer 1985 Douglas G. Bready........................ 40 Executive Vice President 1985 Craig K. Lewis........................... 41 Executive Vice President and Chief Operations Officer 1992 Robert C. Norman......................... 32 Executive Vice President 1992 Craig A. Swann........................... 41 Executive Vice President and Director of Management 1994 Information Systems Larry C. Gonzalez........................ 34 Executive Vice President 1995
See "Proposed Mergers" regarding additional officers of Texas State Bank as a result of the consummation of the Mergers. Each of the executive officers listed above has been employed as a member of senior management of the Company or its subsidiary for the past five years, except: Frank Kavanagh served as president of Mid Valley Bank from August 1988 until its merger with Texas State Bank in 1992; Craig Lewis was a Senior Vice President with NationsBank of Texas N.A. (and its predecessors State National Bank in Robstown and NBC-South Texas) from 1984 until joining Texas State Bank in 1992; Robert Norman was an officer of Mid Valley Bank from 1982 until its merger with Texas State Bank in 1992; Craig A. Swann was Branch Sales Manager for the Financial Services Division of Unisys Corporation from 1977 until joining Texas State Bank in 1994; and Larry C. Gonzalez who was Executive Vice President in charge of the Rio Grande City and Roma banking locations of First National Bank of South Texas from June 1992 until joining Texas State Bank upon the RGC/Roma Branch Acquisitions in 1995. Prior to June 1992, Mr. Gonzalez was a national bank examiner with the Office of the Comptroller of the Currency. There is no family relationship between any director, executive officer or person nominated or chosen by the Company to become a director or executive officer; however, Glen E. Roney, the Chief Executive Officer of the Company and Texas State Bank and Chairman of the Board of Directors of the Company and Texas State Bank is the father-in-law of Douglas G. Bready, a Director and Executive Vice President of Texas State Bank; Tudor G. Uhlhorn, a Director of Texas State Bank, is the son of Julie G. Uhlhorn, a member of the Board of Directors of the Company and Texas State Bank; Robert R. Farris, a Director of Texas State Bank, is the son of Robert G. Farris, a member of the Board of Directors of the Company and Texas State Bank; and Robert F. Boggus, a Director of Texas State Bank, is the son of Frank N. Boggus, a Director of the Company and Texas State Bank. 66 EXECUTIVE COMPENSATION The following table sets forth information with respect to the Chief Executive Officer and the four most highly compensated executive officers of the Company as to whom the total annual salary and bonus for the year ended December 31, 1995 exceeded $100,000. Except for directors fees paid by Texas Regional and included in the Salary column, all executive compensation as reflected in the following table is paid by Texas State Bank.
LONG TERM COMPENSATION --------------- AWARDS ANNUAL COMPENSATION --------------- NAME AND ----------------------------------- OPTIONS ALL OTHER PRINCIPAL POSITION YEAR SALARY (1) BONUS /SARS COMPENSATION (2) - ------------------------------------------ --------- ----------- ----------- --------------- ------------------ Glen E. Roney............................. 1995 $ 406,273 $ 175,000 65,000 $ 99,430 Chairman of the Board and 1994 385,505 85,000 135,050 99,430 Chief Executive Officer of the Company 1993 357,742 100,000 -- 139,264 and the Bank Paul S. Moxley............................ 1995 154,001 28,000 4,000 13,014 President 1994 143,403 18,000 5,270 12,790 Texas State Bank 1993 134,440 23,200 -- 16,150 Danny L. Buttery.......................... 1995 152,448 23,000 4,000 12,000 President of the Bank's 1994 143,236 18,000 5,270 12,000 Harlingen banking location 1993 134,367 23,200 -- 15,284 Frank A. Kavanagh......................... 1995 154,408 25,000 4,000 13,500 President of the Bank's 1994 146,464 18,000 5,270 9,345 Weslaco banking location 1993 139,518 23,200 -- 17,576 and Chief Lending Officer Douglas G. Bready......................... 1995 99,170 20,000 3,500 10,429 Executive Vice President of the 1994 92,900 13,500 3,162 9,345 Bank 1993 86,546 17,200 -- 11,407
- --------- (1) The amounts indicated include wages, automobile allowances and director fees. (2) The amounts in this column represent the amount of the Company's optional and matching contribution for each listed executive officer under the KSOP. In addition, with regard to Mr. Roney, the amount indicated includes $87,000, $87,000 and $116,000 accrued during 1995, 1994 and 1993, respectively, pursuant to the Deferred Compensation Plan adopted by the Company for the benefit of Glen Roney, described below. The compensation upon which the KSOP contributions were determined does not differ substantially from that set forth under the annual compensation table, except for the 1993 contribution on behalf of Mr. Roney, which was limited to the maximum allowable under the KSOP, and the 1994 and 1995 contributions for Mr. Roney, Mr. Moxley, Mr. Buttery and Mr. Kavanagh, which were limited to the maximum allowable under the KSOP. The following table sets forth certain information concerning stock options/SARs granted during 1995 to the executive officers named above:
OPTIONS GRANTED IN LAST FISCAL YEAR ---------------------------------------------------------------------------------- INDIVIDUAL GRANTS POTENTIAL REALIZABLE -------------------------------------------------------- VALUE AT ASSUMED PERCENT OF ANNUAL RATES OF NUMBER OF TOTAL OPTIONS/ STOCK PRICE SECURITIES SARS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------ NAME GRANTED FISCAL YEAR ($/SH) DATE 5%($) 10%($) - ----------------------------- ------------- --------------- ----------- ----------- ----------- ----------- Glen E. Roney................ 65,000 72.22% $ 17.25 7/01/02 $ 422,653 $ 974,363 Paul S. Moxley............... 4,000 4.44 17.25 7/01/02 26,009 59,961 Danny L. Buttery............. 4,000 4.44 17.25 7/01/02 26,009 59,961 Frank A. Kavanagh............ 4,000 4.44 17.25 7/01/02 26,009 59,961 Douglas G. Bready............ 3,500 3.89 17.25 7/01/02 22,758 52,466
67 The following table sets forth certain information regarding aggregate options outstanding and held by the persons named above.
AGGREGATE OPTION EXERCISES IN LAST FISCAL AND FISCAL YEAR-END OPTION VALUE --------------------------------------------------------------------------------------------- NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY OPTIONS/ SARS VALUE REALIZED UNEXERCISED OPTIONS/SARS (MARKET PRICE AT AT FISCAL YEAR-END AT FISCAL YEAR-END (1) SHARES ACQUIRED EXERCISE LESS --------------------------- ---------------------------- NAME ON EXERCISE EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ------------------------- --------------- ----------------- ----------- -------------- ----------- --------------- Glen E. Roney............ -- $ -- 135,050 65,000 $ 709,013 $ -- Paul S. Moxley........... -- -- 5,270 4,000 27,668 -- Danny L. Buttery......... -- -- 5,270 4,000 27,668 -- Frank A. Kavanagh........ -- -- 5,270 4,000 27,668 -- Douglas G. Bready........ -- -- 3,162 3,500 16,601 --
- ------------ (1) Calculated on the basis of the closing sale price per share for the Common Stock of $17.25 as reported by the Nasdaq National Market System for December 31, 1995. The Company has three stock option plans. A fourth plan, the Company's employee stock bonus plan, was terminated during 1995. Texas Regional's Board of Directors has the authority to grant options to purchase up to an aggregate of 262,988 shares of Common Stock under the terms of the present stock option plans, in each case at the then present fair market value of the Common Stock. One of these plans, the Texas Regional Bancshares, Inc. 1995 Nonstatutory Stock Option Plan, was adopted in 1995 and is expected to be considered and voted upon by the shareholders of the Company at the 1996 annual meeting of the shareholders. As of the date of this Prospectus, options for the purchase of an aggregate of 262,988 shares of Common Stock have been granted under the plans, including the options included in the tables above, with the result that the Company's Board of Directors does not have the authority to grant any additional options to purchase Common Stock pursuant to the stock option plans, except to the extent that any outstanding options in the future lapse or otherwise terminate unexercised. In December 1993, the Company adopted a Deferred Compensation Plan (the "Deferred Compensation Plan") for the benefit of Mr. Roney, which provides for payments to be made to Mr. Roney (or in the event of his death during the period, to his designated beneficiary or his estate) in the amount of $100,000 per year commencing October 29, 2002, and continuing for fourteen years thereafter. The obligation to make such payments requires Mr. Roney to continue to be employed by the Company until October 29, 2002, unless his compensation is reduced from that paid in 1993, his duties are materially changed, his employment is terminated due to his disability or death, or he is discharged without cause. If Mr. Roney dies prior to October 29, 2002, the payments would commence immediately and be paid to his designated beneficiary, or his estate. At December 31, 1995, the Company had funded, pursuant to the Trust under Glen E. Roney Deferred Compensation Plan, an aggregate of $291,000. The Trust was set up for the purpose of payment of the deferred compensation benefit. The Company incurred expenses of approximately $87,000 during each of the years ended December 31, 1995 and 1994, with respect to the Deferred Compensation Plan. See "Business -- Personnel." In January 1996, the Company's Board of Directors amended the Deferred Compensation Plan and Trust to change the identity of the Trustee and to make other changes designed to assist in obtaining a favorable determination letter from the Internal Revenue Service as to the status of the Deferred Compensation Plan for federal income tax purposes. First State Bank has three separate deferred compensation plans for the benefit of three First State Bank employees, and Border Bank has a deferred compensation plan for the benefit of one Border Bank employee. The plans each provide for retirement benefits to be paid to the specified employee, a designated beneficiary or the employee's estate. One plan commenced payments to a retired employee of approximately $13,000 per year on January 4, 1988, continuing annually thereafter until June 2003. A second plan provides for payments of approximately $13,300 per year to commence in April 1990, and continuing until June 2005; however, the employee elected to receive a lesser amount payable over a longer period of time. The third plan, covering Elliott Bottom, provides for retirement benefit payment of 68 $50,000 per year commencing in March 1999 and continuing annually thereafter for 20 years. A fourth plan commenced payments to a retired employee of approximately $1,112.50 per month in March 1995, and provides for monthly payments thereafter for 180 months. First State Bank and Border Bank own and are beneficiaries of life insurance policies on the employees covered under the deferred compensation plans, with face values in amounts approximately equal to the total benefits paid or payable under the plans. Upon consummation of the Mergers, Texas State Bank will become obligated to make payments under the plans, and will own and become the beneficiary of the related life insurance policies. Beginning in 1991, the Bank established a discretionary incentive bonus pool for the benefit of employees and directors of the Bank. Contributions are made to the discretionary bonus pool based on projected year-end return on assets earned by the Bank, calculated as follows: in the event that the year-end return on average assets of the Bank, prior to any amount attributable to the discretionary bonus ("ROA") for the year is in excess of 1.00%, 2% of net income for the year is contributed; in the event that the ROA for the year exceeds 1.05%, in addition to the base contribution, 5% of net income in excess of 1.00% ROA is contributed; if the ROA for the year exceeds 1.10%, an additional contribution is made in the amount of 10% of net income in excess of 1.05% ROA. For each 0.05% increase in ROA, the proportion of the excess net income contributed is increased by 5% of net income, up to an ROA of 1.25%. A total of 25% of any amount of net income in excess of 1.25% ROA is contributed to the pool. Amounts are paid out of the discretionary bonus pool to individual employees and directors of the Bank as determined by the Stock Option and Compensation Committee. An aggregate of $574,000 was awarded to employees of the Bank out of the discretionary bonus pool during 1995, and $43,000 was awarded to directors of the Bank that are not employees of the Bank. An aggregate of $375,000 was awarded to employees and $43,000 to non-employee directors out of the discretionary bonus pool during 1994. EMPLOYEE STOCK OWNERSHIP PLAN In 1990, Texas Regional adopted the KSOP. Since adoption of the KSOP, Texas Regional has made contributions to the KSOP, on behalf of employees of the Company, in the aggregate amount of $2.8 million, and employees have in addition made salary deferral contributions to the KSOP in the aggregate amount of $512,000 through December 31, 1995. All Texas Regional contributions are used to purchase Common Stock, and employees have the option to direct that salary deferral contributions (and certain applicable target benefit plan rollover contributions) be invested either in a money market fund or in Common Stock. The aggregate number of shares of Common Stock held pursuant to the KSOP as of December 31, 1995, was 302,007 (about 4.9% of total outstanding shares of Common Stock). All assets in the KSOP, including Common Stock held pursuant to the KSOP, are held by the KSOP Trust, which holds the shares of stock on behalf of the employee participants in the KSOP. Trustees of the KSOP Trust, who are selected by, and all of whom are, directors of Texas Regional, are Morris Atlas, Frank N. Boggus, Joe M. Kilgore and Glen E. Roney. Employees are entitled to direct the voting of any shares allocated to their employee accounts, and the trustees of the KSOP Trust direct the voting of any unallocated shares held by the KSOP Trust. At December 31, 1995, there were no unallocated shares held by the KSOP Trust. During 1996, management of Texas Regional anticipates recommending to the Board of Directors of Texas Regional certain amendments to the KSOP to make available to plan participants more diverse investment options. CERTAIN TRANSACTIONS Texas State Bank has had, in the ordinary course of business, banking transactions with certain of its officers and directors and with certain officers and directors of Texas Regional. Loans by Texas State Bank to executive officers and directors of Texas State Bank and Texas Regional, in the aggregate, amounted to $4.0 million at December 31, 1995, or 0.9% of total loans outstanding and 6.3% of the shareholders' equity of the Bank. All loan transactions with officers and directors of Texas Regional and Texas State Bank, and their related and affiliated parties, have been on substantially the same terms as those 69 prevailing for comparable transactions with other loan customers of the Bank, and have not included more than the normal risk of collectibility associated with Texas State Bank's other banking transactions or other unfavorable features. Prior to 1993, the Company leased office facilities from Kerria Plaza, Ltd., a real estate limited partnership in which Mr. James W. Collins, former Director and former Secretary-Treasurer of the Company, is general partner and certain principals of the Company own an interest. Management of the Company believes that the terms of the leases were comparable to terms of leases between the partnership and third parties. Persons having a direct or indirect interest in Kerria Plaza, Ltd., their relationship to the Company and their interest in Kerria Plaza, Ltd., were: James W. Collins, individually and as Trustee for Carvan, Vanco and KVTC Trusts (of which Mr. Collins is not a beneficiary, but of which his spouse and children are beneficiaries), owned a 27% interest in Kerria Plaza, Ltd.; Glen E. Roney, Chairman of the Board and Chief Executive Officer of the Company, owned an 11% interest in Kerria Plaza, Ltd.; Frank N. Boggus, former President and a present Director of the Company, owned a 4% interest in Kerria Plaza, Ltd.; and Robert G. Farris, a Director of the Company, owned a 2% interest in Kerria Plaza, Ltd. Kerria Plaza, Ltd. purchased the Kerria Plaza building in 1984. In June 1992, the directors of Texas State Bank obtained an appraisal from an independent third party appraiser indicating that the market value of Kerria Plaza office building was $2.5 million. In January 1993, Texas State Bank purchased the Kerria Plaza office building from Kerria Plaza, Ltd. for the appraised value of $2.5 million. Mr. Collins is Chairman of the Board of Rioco Corporation, a real estate brokerage and property management company. During 1995 and 1994, Rioco Corporation received from Texas State Bank leasing commissions totaling $1,237 and $1,260, respectively, resulting from leases of office space in Kerria Plaza. Rioco Corporation continues to manage the Kerria Plaza building for Texas State Bank under a property management agreement which management of the Company believes is on terms comparable to terms available from other property management companies operating in the area, which management agreement, among other things, provides for payment of management and accounting fees at a minimum of $2,900 per month and payment of leasing commissions in the event of the lease of office space in the building to third party tenants. Texas State Bank, along with other banks in the Rio Grande Valley, sells credit life insurance for Texas State Life Insurance Company. Texas State Life Insurance Company is owned 50% by Mr. Roney and 50% by Mr. Collins. Commission fee income received by Texas State Bank from Texas State Life Insurance Company totaled $82,475 for the year ended December 31, 1995. Mr. Joe M. Kilgore, a Director of the Company, is a partner in the law firm of McGinnis, Lochridge & Kilgore, L.L.P. His firm received fees for legal services rendered to the Company and its subsidiary during 1995, but the amount of fees received did not exceed either 5% of his firm's gross revenues for 1995 or 5% of Texas Regional's total operating expenses for the year ended 1995. Mr. Morris Atlas, a Director of the Company, is a partner in the law firm of Atlas & Hall, L.L.P. His firm received fees for legal services rendered to the Company and its subsidiary during 1995, but the amount of fees received did not exceed either 5% of his firm's gross revenues for 1995 or 5% of Texas Regional's total operating expenses for the year ended 1995. During 1995, Texas State Bank purchased a tract of real estate from Scott & White Memorial Hospital and Scott, Sherwood & Brindley Foundation ("Scott & White"), a Texas non-profit corporation, for $227,000. Texas State Bank intends to hold the property for possible future development as a banking location. Mr. Roney and Mr. Kilgore each serve as members of the Board of Directors of Scott & White. 70 PRINCIPAL HOLDERS OF CAPITAL STOCK The following table sets forth at December 31, 1995 the beneficial ownership of the Common Stock by each person known by the Company to be the beneficial owner of more than 5% of the Common Stock, each director and executive officer of the Company, and all executive officers and directors as a group. The number of shares beneficially owned by each person as indicated in the table is determined under rules of the Commission and the information is not necessarily indicative of beneficial ownership for any other purpose. Except as otherwise noted, the indicated shareholders have sole voting and investment power over the number of shares shown. The information is based on data furnished by the respective persons named.
NAME OF BENEFICIAL OWNER NUMBER % - ------------------------------------------------------------------------------------------- ----------- --------- Morris Atlas(1)............................................................................ 67,835 1.09 Frank N. Boggus(2)......................................................................... 133,082 2.15 Douglas G. Bready(3)....................................................................... 16,321 .26 Danny L. Buttery(4)........................................................................ 18,168 .29 George R. Carruthers(5).................................................................... 12,652 .20 James W. Collins(6)........................................................................ 665,239 10.74 Individually and as Trustee of Vanco, Carvan, KVTC, Cook Memorial and Vannie Cook Trusts P.O. Box 1239 McAllen, Texas 78502 Robert G. Farris(7)........................................................................ 4,977 .08 Frank A. Kavanagh(8)....................................................................... 10,808 .17 Joe M. Kilgore(9).......................................................................... 184,756 2.98 C. Kenneth Landrum, M.D.(10)............................................................... 73,928 1.19 Paul S. Moxley(11)......................................................................... 21,467 .35 Glen E. Roney(12).......................................................................... 758,927 11.99 3700 North 10th, #301 McAllen, Texas 78501 Julie G. Uhlhorn(13)....................................................................... 77,828 1.26 Paul G. Veale, Sr.(14)..................................................................... 60,908 .98 Wanger Asset Management, L.P., of which Wanger Asset Management, Ltd., is the general partner, of which Ralph Wanger is the principal shareholder.............................. 411,600 6.64 227 West Monroe Street, Suite 300 Chicago, Illinois 60606 Jack Whetsel(15)........................................................................... 203,739 3.29 All Directors and Executive Officers as a group (14 persons) (16).......................... 1,541,389 24.26
- ------------ (1) The total includes 2,000 shares held by Mr. Atlas' wife. (2) The total includes 95,364 shares owned by companies controlled by Mr. Boggus. (3) The total includes 3,601 shares held by Mr. Bready's wife, 985 shares held by an independent trustee for Mr. and Mrs. Bready's individual retirement accounts, 8,573 shares allocated to Mr. Bready's account as a participant in the KSOP and 3,162 shares Mr. Bready has the right to acquire within 60 days through the exercise of options. Not included in the total are 3,500 shares which represent options granted in 1995 and not exercisable within 60 days. See "Management--Executive Compensation." (4) The total includes 12,898 shares allocated to Mr. Buttery's account as a participant in the KSOP and 5,270 shares Mr. Buttery has the right to acquire within 60 days through the exercise of options. Not included in the total are 4,000 shares which represent options granted in 1995 and not exercisable within 60 days. See "Management -- Executive Compensation." (5) The total includes 9,160 shares allocated to Mr. Carruthers' account as a participant in the KSOP and 3,162 shares Mr. Carruthers has the right to acquire within 60 days through the exercise of options. Not included in the total are 3,500 shares which represent options granted in 1995 and not exercisable within 60 days. 71 (6) The total includes 20,204 shares owned by a company controlled by Mr. Collins, 8,023 shares held by an independent trustee for Mr. and Mrs. Collins' individual retirement accounts and a money purchase pension plan, 4,854 shares owned by a company controlled 50% by Mr. Collins and 50% by Mr. Roney, 593,600 shares held by trusts for the benefit of Mr. Collins' wife, children and others, and 6,122 shares held by various family members who have given Mr. Collins power of attorney to act on their behalf. (7) The total includes 2,384 shares held by Mr. Farris' wife. Mr. Farris disclaims beneficial ownership of his wife's shares. (8) The total includes 5,538 shares allocated to Mr. Kavanagh's account as a participant in the KSOP and 5,270 shares Mr. Kavanagh has the right to acquire within 60 days through the exercise of options. Not included in the total are 4,000 which represent options granted in 1995 and not exercisable within 60 days. See "Management--Executive Compensation." (9) The total includes 8,333 shares held by Mr. Kilgore's wife, 1,156 shares held by Mr. Kilgore as custodian for his grandchildren and 34,511 shares held by an independent trustee for Mr. Kilgore's individual retirement account. (10)The total includes 14,258 shares held by a trust for the benefit of Dr. Landrum, 6,172 shares held by a trust for Dr. Landrum's pension plan and 53,498 shares held in a trust for the benefit of Dr. Landrum's wife. Dr. Landrum disclaims beneficial ownership of his wife's shares. (11)The total includes 406 shares held by Mr. Moxley's wife, 14,209 shares allocated to Mr. Moxley's account as a participant in the KSOP and 5,270 shares Mr. Moxley has the right to acquire within 60 days through the exercise of options. Not included in the total are 4,000 which represent options granted in 1995 and not exercisable within 60 days. See "Management--Executive Compensation." (12)The total includes 16,166 shares held by Mr. Roney's wife, 5,202 shares held by Mr. Roney's wife as trustee, 31,383 shares held by a trust for the benefit of Mr. Roney's wife, 68,604 shares held by trusts at Texas State Bank for which Mr. Roney and Mr. Whetsel serve as trustees along with other individuals who are not directors of the Company but in which they have no interest as beneficiaries, 4,854 shares owned by a company controlled 50% by Mr. Roney and 50% by Mr. Collins and 42,202 shares allocated to Mr. Roney's account as a participant in the KSOP. In addition, included in this total are 135,050 shares Mr. Roney has the right to acquire within 60 days through the exercise of options. Not included in the total are 65,000 shares which represent options granted in 1995 and not exercisable within 60 days. See "Management--Executive Compensation." (13)The total includes 27,016 shares which represent Mrs. Uhlhorn's beneficial interests in a trust and 26,854 shares held by a partnership owned 30% by Mrs. Uhlhorn. (14)The shares indicated are owned by a limited partnership controlled by Mr. Veale. (15)The total includes 99,987 shares held by trusts at Texas State Bank for which Mr. Whetsel and Mr. Roney serve as trustees along with other individuals who are not directors of the Company but in which they have no interest as beneficiaries and 103,752 shares held in a trust for the benefit of Mr. Whetsel. (16)The total includes 1,130,592 shares as to which directors and executive officers have sole voting power; 410,797 shares as to which directors and executive officers have shared voting power; 1,038,382 shares as to which directors and executive officers have sole investment power; and 503,007 shares as to which directors and executive officers have shared investment power. The total also includes 156,129 shares which officers have the right to acquire within 60 days upon exercise of stock options. SELLING SHAREHOLDER Of the shares offered pursuant to this Prospectus, 2,180,000 shares are being offered by the Company and 20,000 shares are being offered by the Selling Shareholder. The following table includes the name of the Selling Shareholder, the amount of Common Stock held by the Selling Shareholder prior to the offering, the amount of Common Stock to be offered for the account of the Selling Shareholder in this offering, and the amount and percentage of Common Stock to be owned by the Selling Shareholder after completion of the offering.
COMMON STOCK HELD FOLLOWING THIS COMMON STOCK OFFERING COMMON STOCK OFFERED IN THIS ---------------------- NAME PRESENTLY HELD OFFERING AMOUNT % - ------------------------------------------------------------ --------------- --------------- ----------- --------- Lindberg Limited Partnership(1)............................. 60,908 20,000 40,908 0.49%
- ------------ (1) The general partner of Lindberg Limited Partnership is Veale Family Management Trust, trustees of which are Paul G. Veale and his wife, Florence Veale. Mr. and Mrs. Veale are also individually limited partners of the Lindberg Limited Partnership. Mr. Veale is a Director of the Company. 72 DESCRIPTION OF CAPITAL STOCK GENERAL Texas Regional is authorized to issue 20,000,000 shares of Common Stock, and 10,000,000 shares of Preferred Stock with such preferences, limitations and relative rights as may be determined by the Board of Directors of the Company. Prior to April 1991, the Company had authority to issue Class B Non-Voting Common Stock as well. The Class B Non-Voting Common class was created to provide a mechanism for equalizing consideration to shareholders at the time of acquisition of Texas State Bank and Harlingen State Bank in 1983. All outstanding shares of Class B Non-Voting Common Stock were converted into Class A Voting Common shares in April 1991, and the class of shares referred to as Class B Non-Voting Common Stock was eliminated. As used herein, the term "Common Stock" refers to the Company's Class A Voting Common Stock. COMMON STOCK As of the date hereof, Texas Regional has issued and outstanding an aggregate of 6,196,791 shares of Common Stock and an aggregate of 262,988 shares of Common Stock are reserved for issuance pursuant to options previously granted by the Company. The only class of shares which Texas Regional has issued and outstanding is the Common Stock. The shares of First Series Convertible Preferred Stock, Series 1990 Convertible Preferred Stock and Series 1991 Convertible Preferred Stock outstanding prior to 1994 have been converted into Common Stock or redeemed by the Company. The Common Stock has a par value of $1.00 per share. Holders of Common Stock do not have preemptive rights for the acquisition of additional capital stock of the Company. Each holder of Common Stock is entitled to one vote for each share held on all matters submitted to shareholders, including election of directors. Holders of Common Stock do not have cumulative voting rights in the election of directors. The Texas Regional share certificates issued to purchasers of Common Stock in the offering described in this Prospectus will bear legends describing the fact that the Texas Regional Articles of Incorporation (the "Articles of Incorporation") deny preemptive rights and do not allow cumulative voting in the election of directors. Holders of Common Stock are entitled to dividends as and when declared by the Board of Directors of Texas Regional out of legally available funds. See "Price Range of Common Stock and Dividend Policy." PREFERRED STOCK The Company is authorized to issue up to 10,000,000 shares of Preferred Stock, $1.00 par value per share. The Company does not have any shares of preferred stock outstanding as of the date of this Prospectus and does not presently have plans to issue any shares of preferred stock. The Company's Board of Directors is authorized by the Articles of Incorporation to provide, without further shareholder action, for the issuance of one or more series of preferred stock. The Company's Board of Directors has the power to fix the various terms with respect to each such series, including voting powers, designations, preferences, dividend rates, conversion and exchange, redemption provisions, the amount holders are entitled to receive upon any liquidation, dissolution, or winding up of the Company, and voting rights to which the holders of Preferred Stock would be entitled. TRANSFER AGENT The transfer agent for the Common Stock is Texas Regional Bancshares, Inc., Kerria Plaza, Suite 301, 3700 North Tenth Street, McAllen, Texas 78501, Attention Ann M. Sefcik, Controller. SHARES ELIGIBLE FOR FUTURE SALE After completion of this offering, the Company will have outstanding 8,706,791 shares of Common Stock (assuming election by the Underwriters to purchase shares subject to the Underwriters' over-allotment option). Of these shares, the 2,510,000 shares of Common Stock sold in this offering (including such over-allotment shares) will be freely tradable without restriction or limitation under the Securities Act except to the extent such shares are subject to the agreement with the Underwriters described below, and except for any shares purchased by "affiliates" of the Company, as that term is defined in the Securities Act. In addition, an aggregate of 4,811,531 shares presently outstanding are also not restricted 73 and, under certain conditions, may be freely tradable without restriction or limitation under the Securities Act. The remaining 1,385,260 shares are "restricted" shares within the meaning of Rule 144 adopted under the Securities Act ("Rule 144"). Restricted shares outstanding on the date hereof owned by "affiliates" may only be sold if they are registered under the Securities Act or unless an exemption from registration, such as that provided by Rule 144, is available. The Company, its executive officers, its directors and the Selling Shareholder have agreed not, directly or indirectly, to offer, sell, offer to sell, contract to sell, grant any option to purchase or otherwise dispose of (or announce any offer, sale, offer of sale, contract of sale, grant of any option to purchase or any other disposition of), any shares of Common Stock or any securities convertible into or exchangeable, or exercisable for, shares of Common Stock for a period of 120 days after the date of the Underwriting Agreement without the prior written consent of the Underwriters (the "Lockup"). Following the Lockup, these shares will be eligible for sale in the public market, subject to the conditions and restrictions of Rules 144 and Rule 144A also adopted under the Securities Act ("Rule 144A"), as hereinafter described. See "Underwriting." No prediction can be made as to the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market after the lapse of the restrictions described above could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future at a time and price which it deems appropriate. In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated), including an affiliate, who has beneficially owned Restricted Shares for at least a two-year period (as computed under Rule 144) is entitled to sell within any three-month period a number of such shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 87,000 shares after giving effect to this offering, assuming the Underwriters exercise the available over-allotment option in full) and (ii) the average weekly trading volume in the Common Stock on the Nasdaq National Market System during the four calendar weeks immediately preceding such sale. Sales under Rule 144 are also subject to certain provisions relating to the manner and notice of sale and the availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed an affiliate of the Company at any time during the 90 days immediately preceding a sale, and who has beneficially owned Restricted Shares for at least a three-year period (as computed under Rule 144), would be entitled to sell shares under Rule 144(k) without regard to the volume limitation and other conditions described above. Restricted Shares and options to purchase Common Stock sold by the Company to, among others, its employees, officers and directors pursuant to written compensation plans or contracts and in reliance on Rule 701 under the Securities Act, may be resold in reliance on Rule 144 by such persons who are not affiliates subject only to the provisions of Rule 144 regarding manner of sale, and by such persons who are affiliates without complying with Rule 144's holding period requirements. Rule 144A permits the immediate sale by the current holders of Restricted Shares of all or a portion of their shares to certain qualified institutional buyers as defined in Rule 144A. 74 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, Alex. Brown & Sons Incorporated and First Southwest Company, have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES - ----------------------------------------------------------------------------------------------------- ----------- Alex. Brown & Sons Incorporated...................................................................... First Southwest Company.............................................................................. ----------- Total................................................................................................ 2,200,000 ----------- -----------
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all the shares of the Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 330,000 additional shares of Common Stock at the public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to 2,200,000 and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of Common Stock offered hereby. If purchased, the Underwriters will offer such additional shares on the same terms as those on which the 2,200,000 shares are being offered. The Company and the Selling Shareholder have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company and its executive officers, directors and the Selling Shareholder, holding in the aggregate 1,541,389 shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any of such Common Stock (except for shares of Common Stock offered hereby and other than shares offered pursuant to the KSOP or other employee benefit plans) for a period of 120 days after the date of this Prospectus without the prior written consent of the Representatives of the Underwriters. See "Shares Eligible for Future Sale." 75 Texas State Bank, both in its corporate capacity and on behalf of trust clients, maintains a substantial portfolio of investment securities. First Southwest Company, as a securities broker, has sold securities to Texas State Bank, and First Southwest Company has received compensation for its services as securities broker. First Southwest Company has also been engaged to provide an opinion to the Board of Directors of the Company as to the fairness, from a financial point of view, of the Mergers, for a total consideration of $125,000. LEGAL MATTERS McGinnis, Lochridge & Kilgore, Austin, Texas, will render an opinion to Texas Regional with respect to the legality of the securities being registered, and provides general legal services to Texas Regional. Joe M. Kilgore, a partner in the firm, serves as a director of Texas Regional and Texas State Bank, and beneficially owns 184,756 shares (2.98%) of the Common Stock. Certain legal matters will be passed upon for the Underwriters by Jones, Day, Reavis & Pogue, Dallas, Texas. EXPERTS The consolidated financial statements of Texas Regional Bancshares, Inc. at December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, included herein and elsewhere in the Registration Statement have been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included herein in reliance upon such reports and upon the authority of said firm as experts in accounting and auditing. The financial statements of First State Bank and Border Bank at December 31, 1995 and 1994, and for each of the years in the three-year period ended December 31, 1995, included herein and elsewhere in the Registration Statement have also been audited by KPMG Peat Marwick LLP, independent certified public accountants, and are included herein in reliance upon such reports and upon the authority of said firm as experts in accounting and auditing. 76 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL INFORMATION TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY FIRST STATE BANK & TRUST CO. THE BORDER BANK
PAGE --------- TEXAS REGIONAL BANCSHARES, INC. Independent Auditors' Report............................................................................ F-2 Consolidated Balance Sheets at December 31, 1995 and 1994............................................... F-3 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993.................. F-4 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993............................................................................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993.............. F-6 Notes to Consolidated Financial Statements.............................................................. F-7 FIRST STATE BANK & TRUST CO. Selected Financial Information.......................................................................... F-31 Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-32 Independent Auditors' Report............................................................................ F-52 Balance Sheets at December 31, 1995 and 1994............................................................ F-53 Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................. F-54 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993...... F-55 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993........................... F-56 Notes to Financial Statements........................................................................... F-57 THE BORDER BANK Selected Financial Information.......................................................................... F-66 Management's Discussion and Analysis of Financial Condition and Results of Operations................... F-67 Independent Auditors' Report............................................................................ F-87 Balance Sheets at December 31, 1995 and 1994............................................................ F-88 Statements of Earnings for the Years Ended December 31, 1995, 1994 and 1993............................. F-89 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1995, 1994 and 1993...... F-90 Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993........................... F-91 Notes to Financial Statements........................................................................... F-92
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Texas Regional Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Texas Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Texas Regional Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP Houston, Texas January 26, 1996 F-2 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Assets Cash and Due From Banks (Note 2).................................................... $ 30,933 $ 40,477 Federal Funds Sold.................................................................. 3,600 1,300 ----------- ----------- Total Cash and Cash Equivalents................................................. 34,533 41,777 Securities Available for Sale (Notes 1 and 3)....................................... 63,150 54,814 Securities Held to Maturity (Estimated Market Value of $68,962 and $69,626 for 1995 and 1994, Respectively) (Notes 1 and 3)............................................ 68,491 72,014 Loans, Net of Unearned Discount of $1,272 in 1995 and $774 in 1994.................. 450,854 339,939 Less: Allowance for Loan Losses..................................................... (4,542) (3,511) ----------- ----------- Net Loans (Note 4).............................................................. 446,312 336,428 Premises and Equipment, Net (Note 5)................................................ 18,374 15,268 Accrued Interest Receivable......................................................... 6,319 4,538 Other Real Estate................................................................... 1,273 2,342 Intangibles......................................................................... 5,711 1,982 Other Assets........................................................................ 2,606 2,671 ----------- ----------- Total Assets.................................................................... $ 646,769 $ 531,834 ----------- ----------- ----------- ----------- Liabilities Deposits Demand.......................................................................... $ 120,414 $ 99,643 Savings......................................................................... 36,133 28,689 Money Market Checking and Savings............................................... 127,687 140,750 Time Deposits (Note 6).......................................................... 295,497 203,026 ----------- ----------- Total Deposits.............................................................. 579,731 472,108 Federal Funds Purchased and Securities Sold Under Repurchase Agreements............. 757 1,149 Short-Term Borrowings............................................................... -- 429 Accounts Payable and Accrued Liabilities............................................ 3,561 2,417 ----------- ----------- Total Liabilities............................................................... 584,049 476,103 ----------- ----------- Commitments and Contingencies (Notes 11 and 12) Shareholders' Equity Preferred Stock; Cumulative, $1.00 Par Value, $100 Liquidation Value, 10,000,000 Shares Authorized; None Issued and Outstanding (Note 9)............................ -- -- Common Stock -- Class A; $1.00 Par Value, 20,000,000 Shares Authorized; Issued and Outstanding 6,196,791 Shares for 1995 and 6,193,629 for 1994 (Note 10)............. 6,196 6,193 Paid-In Capital..................................................................... 29,239 29,204 Retained Earnings (Notes 9 and 12).................................................. 27,168 20,921 Unrealized Gain (Loss) on Securities Available for Sale (Notes 1 and 3)............. 117 (587) ----------- ----------- Total Shareholders' Equity...................................................... 62,720 55,731 ----------- ----------- Total Liabilities and Shareholders' Equity...................................... $ 646,769 $ 531,834 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. F-3 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income Loans, Including Fees..................................................................... $ 37,131 $ 28,005 $ 23,674 Investment Securities Taxable............................................................................... 7,004 5,863 5,119 Tax-Exempt............................................................................ 285 244 275 Federal Funds Sold........................................................................ 1,172 519 623 --------- --------- --------- Total Interest Income............................................................. 45,592 34,631 29,691 --------- --------- --------- Interest Expense Deposits.................................................................................. 17,990 11,619 10,321 Federal Funds Purchased and Securities Sold Under Repurchase Agreements................... 46 23 1 Short-Term Borrowings..................................................................... 16 32 60 Note Payable.............................................................................. -- 16 112 --------- --------- --------- Total Interest Expense............................................................ 18,052 11,690 10,494 --------- --------- --------- Net Interest Income........................................................................... 27,540 22,941 19,197 Provision for Loan Losses (Note 4)............................................................ 1,685 1,085 392 --------- --------- --------- Net Interest Income After Provision for Loan Losses....................................... 25,855 21,856 18,805 --------- --------- --------- Noninterest Income Service Charges on Deposit Accounts....................................................... 3,472 3,035 2,718 Other Service Charges..................................................................... 859 904 575 Trust Service Fees........................................................................ 1,256 1,161 1,087 Net Investment Securities Gains (Losses).................................................. (111) 8 33 Data Processing Service Fees.............................................................. 441 255 237 Other Operating Income.................................................................... 601 409 382 --------- --------- --------- Total Noninterest Income.......................................................... 6,518 5,772 5,032 --------- --------- --------- Noninterest Expense Salaries and Employee Benefits (Note 11).................................................. 9,563 8,015 7,798 Net Occupancy Expense..................................................................... 1,069 961 820 Equipment Expense......................................................................... 2,028 1,648 1,366 Other Real Estate (Income) Expense, Net................................................... 107 75 (328) Other Noninterest Expense (Note 13)....................................................... 6,210 5,808 4,857 --------- --------- --------- Total Noninterest Expense......................................................... 18,977 16,507 14,513 --------- --------- --------- Income Before Income Tax Expense.............................................................. 13,396 11,121 9,324 Income Tax Expense (Note 8)................................................................... 4,671 3,936 3,345 --------- --------- --------- Income Before Cumulative Effect of Change in Accounting Principle............................. 8,725 7,185 5,979 Cumulative Effect of Change in Accounting Principle (Note 8).................................. -- -- 32 --------- --------- --------- Net Income.................................................................................... $ 8,725 $ 7,185 $ 6,011 --------- --------- --------- --------- --------- --------- Primary Earnings Per Common Share Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.19 $ 1.30 Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01 --------- --------- --------- Net Income................................................................................ $ 1.40 $ 1.19 $ 1.31 --------- --------- --------- --------- --------- --------- Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,218 5,791 4,186 --------- --------- --------- Fully Diluted Earnings Per Common Share Income Per Share Before Cumulative Effect of Change in Accounting Principle............... $ 1.40 $ 1.16 $ 1.15 Cumulative Effect of Change in Accounting Principle....................................... -- -- 0.01 --------- --------- --------- Net Income................................................................................ $ 1.40 $ 1.16 $ 1.16 --------- --------- --------- --------- --------- --------- Weighted Average Number of Common Shares Outstanding (In Thousands)....................... 6,227 6,035 5,170 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-4 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED GAIN (LOSS) CLASS A ON CONVERTIBLE VOTING SECURITIES TOTAL PREFERRED COMMON PAID-IN RETAINED AVAILABLE SHAREHOLDERS' STOCK STOCK CAPITAL EARNINGS FOR SALE EQUITY ----------- ------- -------- ---------- ------------ ------------ (DOLLARS IN THOUSANDS) Balance, December 31, 1992.............. $ 74 $3,489 $ 20,063 $ 10,692 $ -- $34,318 Stock Split Effected as a 20.00% Stock Dividend............................... -- 697 -- (700) -- (3) Preferred Stock Dividends............... -- -- -- (522) -- (522) Change in Unrealized Gain (Loss) on Securities Available for Sale.......... -- -- -- -- 179 179 Net Income.............................. -- -- -- 6,011 -- 6,011 ----- ------- -------- ---------- ------ ------------ Balance, December 31, 1993.............. 74 4,186 20,063 15,481 179 39,983 Conversion of 74,172 shares of Preferred Stock into 979,009 shares of Class A Voting Common Stock (Note 9)........... (74) 979 (905) -- -- -- Redemption of 356 shares of Preferred Stock at $104.00 per share (Note 9).... -- -- (36) (1) -- (37) Change in Unrealized Gain (Loss) on Securities Available for Sale.......... -- -- -- -- (766) (766) Sale of 1,028,291 shares of Class A Voting Common Stock.................... -- 1,028 10,082 -- -- 11,110 Preferred Stock Dividends............... -- -- -- (258) -- (258) Class A Voting Common Stock Cash Dividends.............................. -- -- -- (1,486) -- (1,486) Net Income.............................. -- -- -- 7,185 -- 7,185 ----- ------- -------- ---------- ------ ------------ Balance, December 31, 1994.............. -- 6,193 29,204 20,921 (587) 55,731 Exercise of stock options, 3,162 shares of Class A Voting Common Stock......... -- 3 35 -- -- 38 Change in Unrealized Gain (Loss) on Securities Available for Sale.......... -- -- -- -- 704 704 Class A Voting Common Stock Cash Dividends.............................. -- -- -- (2,478) -- (2,478) Net Income.............................. -- -- -- 8,725 -- 8,725 ----- ------- -------- ---------- ------ ------------ Balance, December 31, 1995.............. $ -- $6,196 $ 29,239 $ 27,168 $ 117 $62,720 ----- ------- -------- ---------- ------ ------------ ----- ------- -------- ---------- ------ ------------
The accompanying notes are an integral part of the consolidated financial statements. F-5 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities Net Income................................................................................ $ 8,725 $ 7,185 $ 6,011 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation, Amortization and Accretion, Net......................................... 2,013 2,089 1,381 Provision for Loan Losses............................................................. 1,685 1,085 392 Provision for Estimated Losses on Other Real Estate and Other Assets.................. 119 112 358 Gain on Sale of Securities Held for Sale.............................................. -- -- (33) (Gain) Loss on Sale of Securities Available for Sale.................................. 111 (8) -- (Gain) Loss on Sale of Other Assets................................................... (3) 4 (10) (Gain) Loss on Sale of Other Real Estate.............................................. 3 2 (507) (Gain) Loss on Sale of Fixed Assets................................................... 14 8 (3) (Increase) Decrease in Deferred Income Taxes.......................................... (336) 60 430 Increase in Accrued Interest Receivable and Other Assets.............................. (159) (1,304) (867) Increase in Accounts Payable and Accrued Liabilities.................................. 613 135 9 --------- --------- --------- Net Cash Provided by Operating Activities..................................................... 12,785 9,368 7,161 --------- --------- --------- Cash Flows from Investing Activities Proceeds from Sales of Securities Held for Sale........................................... -- -- 5,629 Proceeds from Sales of Securities Available for Sale...................................... 12,610 12,404 -- Proceeds from Maturing Securities Available for Sale...................................... 45,000 51,600 -- Proceeds from Maturing Securities Held to Maturity........................................ 17,460 952 63,228 Purchases of Securities Available for Sale................................................ (64,961) (34,728) -- Purchases of Securities Held to Maturity.................................................. (14,390) (31,442) (96,068) Proceeds from Sale of Loans............................................................... 5,731 1,119 105 Purchases of Loans........................................................................ (1,159) (2,151) (5,671) Loan Originations and Advances............................................................ (74,068) (50,619) (33,178) Recoveries of Charged-Off Loans........................................................... 536 226 360 Proceeds from Sale of Fixed Assets........................................................ 2 -- 8 Proceeds from Sale of Other Assets........................................................ 25 116 60 Proceeds from Sale of Other Real Estate................................................... 1,409 970 2,407 Purchases of Premises and Equipment....................................................... (3,597) (1,862) (6,027) Proceeds from the Acquisition of Two Branch Bank Locations, Net of Cash Acquired.......... 30,606 -- -- --------- --------- --------- Net Cash Used in Investing Activities......................................................... (44,796) (53,415) (69,147) --------- --------- --------- Cash Flows from Financing Activities Net Increase (Decrease) in Demand Deposits, Money Market Checking and Savings Accounts.... (24,518) 17,600 45,621 Net Increase in Time Deposits............................................................. 52,421 24,987 8,884 Net Increase (Decrease) in Federal Funds Purchased and Securities Sold Under Repurchase Agreements............................................................................... (392) 1,149 -- Net Decrease in Short-Term Borrowings..................................................... (429) (60) (319) Repayment of Note Payable................................................................. -- (1,150) (1,450) Proceeds from Sale of Class A Voting Common Stock......................................... 38 11,110 -- Cash Dividends Paid on Fractional Common Shares........................................... -- -- (3) Cash Dividends Paid on Preferred Stock.................................................... -- (258) (522) Cash Dividends Paid on Class A Voting Common Stock........................................ (2,353) (991) -- Redemption of Preferred Stock............................................................. -- (37) -- --------- --------- --------- Net Cash Provided by Financing Activities..................................................... 24,767 52,350 52,211 --------- --------- --------- Increase (Decrease) in Cash and Cash Equivalents.............................................. (7,244) 8,303 (9,775) Cash and Cash Equivalents at Beginning of Year................................................ 41,777 33,474 43,249 --------- --------- --------- Cash and Cash Equivalents at End of Year...................................................... $ 34,533 $ 41,777 $ 33,474 --------- --------- --------- --------- --------- --------- Supplemental Disclosures of Cash Flow Information Interest Paid............................................................................. $ 17,248 $ 11,518 $ 10,562 Income Taxes Paid......................................................................... 4,752 3,799 2,986 Supplemental Schedule of Noncash Investing and Financing Activities Cost of Securities Transferred to Available for Sale...................................... 1,455 N/A 85,181 Foreclosure and Repossession in Partial Satisfaction of Loans Receivable.................. 679 977 451 Loans Originated to Facilitate Sale of Other Real Estate.................................. N/A N/A N/A Stock Split Effected as a Stock Dividend (Note 10)........................................ N/A N/A 697 The Company Acquired Two Branch Bank Locations, One in Rio Grande City, Texas and the other in Roma, Texas during August 1995. Assets Acquired are as follows: Fair Value of Assets Acquired......................................................... 75,850 N/A N/A Cash Paid for the Two Bank Branch Locations........................................... 4,250 N/A N/A Liabilities Assumed................................................................... 80,100 N/A N/A --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. F-6 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Texas Regional Bancshares, Inc. (the "Parent" or "Corporation") and subsidiary (collectively, the "Company") conform to generally accepted accounting principles and to prevailing practices within the banking industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A summary of the more significant accounting policies follows: FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of Texas Regional Bancshares, Inc. (the "Corporation") and its wholly owned subsidiary, Texas State Bank (the "Bank"), collectively (the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Investments in the subsidiary are accounted for on the equity method in the Parent's financial statements. TRUST ASSETS Assets held by the trust department of the subsidiary bank in fiduciary or agency capacities are not assets of Texas Regional Bancshares, Inc. or its subsidiary and are not included in the consolidated balance sheets. INVESTMENT SECURITIES In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities." Statement 115 establishes standards of financial accounting and reporting for investments in equity securities that have a readily determinable fair value and for all investments in debt securities. At acquisition, a bank is required to classify debt and equity securities into one of three categories: Held to Maturity, Trading or Available for Sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as Held to Maturity and measured at amortized cost in the balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as Trading and measured at fair value in the balance sheet with unrealized holding gains and losses included in net income. Investments not classified as Held to Maturity nor Trading are classified as Available for Sale and measured at fair value in the balance sheet with unrealized holding gains and losses reported in a separate component of shareholders' equity until realized. Effective December 31, 1993, the Company adopted Statement 115, which caused various investment securities to be reclassified from Held to Maturity to Available for Sale. All treasury and agency bonds with a maturity of two years or less from December 31, 1993, all floating rate bonds and two small equity securities were reclassified to Available for Sale. As a result, at December 31, 1993 the Company recorded an increase in shareholders' equity of $179,000, as unrealized holding gains. Future purchases of investment securities will be classified as Available for Sale or Held to Maturity at time of purchase as determined by the investment committee. At December 31, 1995 and 1994 no securities were classified as Trading. On October 18, 1995, the FASB decided to grant to all entities a one-time opportunity during the period from approximately mid November to December 31, 1995, to reconsider their intent and ability to hold securities accounted for as Held to Maturity under Statement 115. This allowed entities to transfer F-7 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) securities from the Held to Maturity category to Available for Sale or trading without calling into question their intent to hold other debt securities to maturity. On December 31, 1995, the Bank transferred approximately $1.5 million in Held to Maturity securities to the Available for Sale category resulting in no change to stock equity per share. As a result of this transfer, all other securities are classified as Available for Sale. LOANS Loans are stated at the principal amount outstanding, net of unearned discount. Interest income on discounted loans is recognized on the sum-of-the-months-digits method which approximates the interest method, while interest income on other loans is calculated using applicable interest rates and the daily amount of outstanding principal. LOAN FEES Loan origination fees and certain direct loan origination costs are deferred and recognized over the lives of the related loans as an adjustment of the loan yields. NONPERFORMING ASSETS Nonperforming assets are comprised of (a) loans for which the accrual of interest has been discontinued, (b) loans for which the interest rate has been reduced to less than originally contracted rates due to a serious weakening in the borrower's financial condition and (c) other assets which consist of real estate and other property which have been acquired in lieu of loan balances due and which are awaiting disposition. A loan is generally placed on nonaccrual status when principal or interest is past due 90 days or more, and the loan is not both well-secured and in the process of collection. A loan is also placed on nonaccrual status immediately if, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. Real estate and other assets acquired in lieu of loan balances due are recorded at the lesser of cost basis or estimated fair value less estimated closing costs. Valuation losses are charged to the allowance for loan losses on foreclosure. Write-downs of real estate and other assets are charged to noninterest expense if the estimated fair value subsequently declines below its carrying value. Realized gains and losses on sales of other real estate are included in noninterest expense. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan" and the amendment thereof, Statement of Financial Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". Under Statement 114, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Statement 114 requires that an impaired loan be valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. Statement 118 amended Statement 114 by expanding the related disclosure requirements and permitting use of existing methods for recognizing interest income on impaired loans. Loans which were restructured prior to the adoption of Statement 114 and which are performing in accordance with the renegotiated terms are not required to be reported as impaired. Loans restructured F-8 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) subsequent to the adoption of Statement 114 are required to be reported as impaired in the year of restructuring. Thereafter, such loans can be removed from the impaired loan disclosure if the loans were paying a market rate of interest at the time of restructuring and are performing in accordance with their renegotiated terms. For loans covered by this statement, the Company makes an assessment for impairment when and while such loans are on nonaccrual or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by the Company using discounted cash flows, except when it is determined that the sole (remaining) source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. The adoption of Statement 114 and Statement 118 did not have a material effect on the Company's financial position or results of operations. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established by a charge to operations (provision for loan losses). Actual loan losses or recoveries are charged or credited directly to this allowance. The provision for loan losses is based on management's estimate of the amount required to maintain an allowance adequate to absorb potential losses in the loan portfolio. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, net of accumulated depreciation. Depreciable assets are depreciated over their estimated useful lives. For financial reporting, depreciation is computed using the straight-line method; in computing federal income tax, both the straight-line and accelerated methods are used. Maintenance and repairs which do not extend the life of premises and equipment are charged to noninterest expense. INCOME TAX The Company files a consolidated federal income tax return. The Company establishes a deferred tax asset or liability for the recognition of future deductions or taxable amounts and operating loss and tax credit carry-forwards. Deferred tax expense or benefit is recognized as a result of the change in the asset or liability during the year. EARNINGS PER SHARE COMPUTATIONS Primary earnings per share are computed by dividing net income less preferred stock dividends, if any, by the weighted average number of common stock and common stock equivalents outstanding during the period, retroactively adjusted for stock splits effected as a stock dividend. The convertible preferred stock did not satisfy the criteria for consideration as common stock equivalents. Fully diluted earnings per share is computed as if all convertible preferred stock had been converted to common stock. CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. F-9 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) RESERVE REQUIREMENTS Cash of approximately $16.2 million and $14.6 million at December 31, 1995 and 1994, respectively, was maintained to satisfy regulatory reserve requirements. (3) INVESTMENT SECURITIES The amortized cost and estimated market value of investments in Securities Available for Sale at December 31, 1995 and December 31, 1994 follows: SECURITIES AVAILABLE FOR SALE
1995 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $ 6,000 $ 19 $ 7 $ 6,012 U.S. Government Agency Securities....... 55,502 205 39 55,668 Other Securities........................ 1,471 2 3 1,470 --------- ----- --- --------- Total............................... $62,973 $ 226 $49 $63,150 --------- ----- --- --------- --------- ----- --- ---------
SECURITIES AVAILABLE FOR SALE
1994 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $27,485 $ 1 $354 $27,132 U.S. Government Agency Securities....... 27,707 1 541 27,167 Mortgage-Backed Security................ 500 -- 2 498 Other Securities........................ 17 -- -- 17 --------- ----- ----- --------- Total............................... $55,709 $ 2 $897 $54,814 --------- ----- ----- --------- --------- ----- ----- ---------
The amortized cost and estimated market value of investments in Securities Held to Maturity at December 31, 1995 and December 31, 1994 follows: SECURITIES HELD TO MATURITY
1995 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $28,787 $104 $115 $28,776 U.S. Government Agencies Securities..... 34,230 245 50 34,425 Obligations of States and Political Subdivisions Securities................ 5,474 287 -- 5,761 --------- ----- ----- --------- Total............................... $68,491 $636 $165 $68,962 --------- ----- ----- --------- --------- ----- ----- ---------
F-10 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) INVESTMENT SECURITIES (CONTINUED) SECURITIES HELD TO MATURITY
1994 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $29,270 $-- $ 1,244 $28,026 U.S. Government Agencies Securities..... 35,973 5 1,160 34,818 Obligations of States and Political Subdivisions Securities................ 5,736 126 104 5,758 Other Securities........................ 1,035 -- 11 1,024 --------- ----- ---------- --------- Total............................... $72,014 $ 131 $ 2,519 $69,626 --------- ----- ---------- --------- --------- ----- ---------- ---------
The amortized cost and estimated market value of debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
SECURITIES -------------------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY ------------------------ ------------------------ ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Due in One Year or Less............................... $ 24,183 $ 24,218 $ 25,832 $ 25,751 Due After One Year Through Five Years................. 37,319 37,462 39,209 39,599 Due After Five Years Through Ten Years................ 75 74 3,253 3,394 Due After Ten Years................................... 1,396 1,396 197 218 ----------- ----------- ----------- ----------- Total............................................. $ 62,973 $ 63,150 $ 68,491 $ 68,962 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Proceeds from sales of Securities Available for Sale for the year ended December 31, 1995 were $12.6 million. Gross losses of $111,000 and no gross gains were realized on sales for the year ended December 31, 1995. Proceeds from sales of Securities Available for Sale for the year ended December 31, 1994 were $12.4 million. Cost was determined on a specific identification basis for determining realized gain or loss. Net unrealized holding gain of $117,000 and net unrealized holding loss of $587,000 at December 31, 1995 and 1994, respectively, on Securities Available for Sale are included as a separate component of shareholders' equity for each respective year. There were no sales from the Held to Maturity category in 1995 and 1994. Investment securities having a carrying value of $99.6 million at December 31, 1995 and $99.8 million at December 31, 1994 are pledged to secure public funds and trust assets on deposit and for other purposes required or permitted by law. F-11 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) LOANS AND ALLOWANCE FOR LOAN LOSSES An analysis of loans at December 31, 1995 and December 31, 1994 follows:
1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Commercial.................................................................... $ 146,461 $ 101,866 Agricultural.................................................................. 25,097 17,199 Real Estate Construction.............................................................. 29,967 18,809 Commercial Mortgage....................................................... 129,953 113,677 Agricultural Mortgage..................................................... 17,057 10,263 1-4 Family Mortgage....................................................... 59,052 47,425 Consumer...................................................................... 43,267 30,700 ----------- ----------- Total................................................................. $ 450,854 $ 339,939 ----------- ----------- ----------- -----------
In the ordinary course of business, the Company's subsidiary bank made loans to its officers and directors, including entities related to those individuals. These loans are made on substantially the same terms and conditions as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. An analysis of these loans for the years ended December 31, 1995 and December 31, 1994 follows:
1995 1994 --------- --------- (DOLLARS IN THOUSANDS) Balance at Beginning of Year...................................................... $ 8,174 $ 14,644 Additions......................................................................... 1,613 4,071 Reductions Collections................................................................... 3,083 4,702 Changes to Unrelated Status................................................... 2,730 5,839 Charge-Offs................................................................... -- -- --------- --------- Balance at End of Year............................................................ $ 3,974 $ 8,174 --------- --------- --------- ---------
A summary of the transactions in the allowance for loan losses for years ended December 31, 1995, 1994 and 1993 follows:
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at Beginning of Year............................................. $ 3,511 $ 3,435 $ 2,929 Balance of Purchased Branches............................................ 450 -- -- Provision Charged to Expense............................................. 1,685 1,085 392 Recovery of Amounts Previously Charged to Allowance...................... 536 226 360 Losses Charged to Allowance.............................................. (1,640) (1,235) (246) --------- --------- --------- Balance at End of Year................................................... $ 4,542 $ 3,511 $ 3,435 --------- --------- --------- --------- --------- ---------
Nonaccrual loans and renegotiated loans were $2.1 million, $2.4 million and $2.4 million at December 31, 1995, 1994 and 1993, respectively. If interest on these nonaccrual and renegotiated loans had been accrued at the original contractual rates, interest income would have been increased by approximately $247,000, $476,000 and $149,000 for the years ended December 31, 1995, 1994 and 1993, respectively. F-12 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED) At December 31, 1995, the Company had a $2.0 million recorded investment in impaired loans for which there was a related allowance for loan losses of $172,000. At December 31, 1995, there were no impaired loans for which there was no related allowance for loan losses. The average level of impaired loans during the year ended December 31, 1995 was $1.9 million. The Company recorded interest income of $91,000 on its impaired loans during the year ended December 31, 1995. (5) PREMISES AND EQUIPMENT A summary of premises and equipment and related accumulated depreciation and amortization as of December 31, 1995 and December 31, 1994 follows:
ESTIMATED USEFUL LIVES 1995 1994 ------------ --------- --------- (DOLLARS IN THOUSANDS) Land.............................................................. $ 4,526 $ 3,504 Buildings and Leasehold Improvements.............................. 2-40 years 12,440 10,663 Furniture and Equipment........................................... 3-10 years 9,581 8,007 --------- --------- Subtotal.......................................................... 26,547 22,174 Less Accumulated Depreciation and Amortization.................... (8,173) (6,906) --------- --------- Total......................................................... $ 18,374 $ 15,268 --------- --------- --------- ---------
Depreciation and amortization expense for the years ended December 31, 1995, 1994 and 1993 was approximately $1.6 million, $1.3 million and $1.1 million, respectively. (6) TIME DEPOSITS Time deposits of $100,000 or more totaled $126.4 million and $91.1 million at December 31, 1995 and 1994, respectively. Interest expense for the years ended December 31, 1995, 1994 and 1993 on time deposits of $100,000 or more was approximately $5.7 million, $3.5 million and $2.8 million, respectively. (7) FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS The following table summarizes selected information regarding federal funds purchased and securities sold under repurchase agreements as of and for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at End of Year................................................... $ 758 $ 1,149 $ -- Rate on Balance at End of Year........................................... 3.60% 4.07% N/A Average Daily Balance.................................................... $ 1,093 $ 652 $ 1 Average Interest Rate.................................................... 4.20% 3.57% 4.94% Maximum Month-End Balance................................................ $ 1,349 $ 2,550 $ -- --------- --------- --------- --------- --------- ---------
Securities sold under agreements to repurchase are comprised of customer deposit agreements with maturities ranging from overnight to six months. These obligations are not federally insured but are collateralized by a security interest in various investment securities. These pledged securities are segregated and maintained by a third party bank. F-13 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAX The components of income tax expense for the years ended December 31, 1995, 1994 and 1993 consisted of the following:
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Current Income Tax Expense Federal.............................................................. $ 4,790 $ 3,667 $ 3,145 State................................................................ 217 207 149 --------- --------- --------- Total Current Income Tax Expense................................. 5,007 3,874 3,294 --------- --------- --------- Deferred Income Tax Expense (Benefit) Federal.............................................................. (320) 57 29 State................................................................ (16) 5 22 --------- --------- --------- Total Deferred Income Tax Expense (Benefit)...................... (336) 62 51 --------- --------- --------- Total Income Tax Expense......................................... $ 4,671 $ 3,936 $ 3,345 --------- --------- --------- --------- --------- ---------
Following is a reconciliation between the amount of reported income tax expense for the years ended December 31, 1995, 1994 and 1993 and the amount computed by multiplying the income before tax by the federal statutory tax rate:
1995 1994 1993 ------------ ------------ ------------ AMOUNT RATE AMOUNT RATE AMOUNT RATE ------ ---- ------ ---- ------ ---- (DOLLARS IN THOUSANDS) Tax at Statutory Rate............................. $4,689 35% $3,781 34% $3,170 34% (Reductions) Additions State Earned Surplus Tax, Net of Federal Income Tax Effect............................ 130 1 140 1 113 2 Tax-Exempt Interest........................... (152 ) (1) (89 ) (1) (100 ) (1) Other -- Net.................................. 4 -- 104 1 162 1 ------ ---- ------ ---- ------ ---- Total Income Tax Expense.................. $4,671 35% $3,936 35% $3,345 36% ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes", which requires establishment of deferred tax liabilities and assets, as appropriate, for the recognition of future deductions or taxable amounts caused when the tax basis of an asset or liability differs from that reported in the financial statements. The cumulative effect of the accounting change on years prior to January 1, 1993, of $32,000 is included for the year ended December 31, 1993 as an increase to income. F-14 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAX (CONTINUED) The net deferred tax liability included with accounts payable and accrued expenses in the accompanying consolidated balance sheets is comprised of the following deferred tax assets and liabilities as of December 31, 1995 and December 31, 1994.
1995 1994 --------- --------- (DOLLARS IN THOUSANDS) Deferred Tax Liability Premises and Equipment................................................................... $ 1,071 $ 925 Intangibles.............................................................................. 392 417 Unrealized Gain on Securities Available for Sale......................................... 60 -- Other.................................................................................... 135 135 --------- --------- Total Deferred Tax Liability......................................................... 1,658 1,477 --------- --------- Deferred Tax Asset Allowance for Loan Losses................................................................ 1,034 637 Other Real Estate........................................................................ 237 227 Unrealized Loss on Securities Available for Sale......................................... -- 302 Other.................................................................................... 208 158 --------- --------- Total Deferred Tax Assets Before Valuation Allowance......................................... 1,479 1,324 Valuation Allowance.......................................................................... (36) (36) --------- --------- Total Deferred Tax Assets less Valuation Allowance........................................... 1,443 1,288 --------- --------- Net Deferred Tax Liability........................................................... $ 215 $ 189 --------- --------- --------- ---------
For the years ended December 31, 1995 and December 31, 1994, the deferred tax liability results primarily from the use of accelerated methods of depreciation of equipment for tax purposes and the write-off of core deposits for book purposes. The deferred tax asset results from differences in the bad debts written-off for financial purposes and the amount allowed under tax law, and a difference in other real estate basis due to write-downs for financial statement purposes for both years ended December 31, 1995 and 1994, respectively. The valuation allowance was established to reduce the amount that will more likely than not be realized due to increased recoveries in allowance for loan losses. F-15 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) PREFERRED STOCK The Corporation has 10,000,000 authorized shares of $1 par value Preferred Stock. The Articles of Incorporation of the Corporation grant discretion to the Board of Directors to establish series of Preferred Stock with such rights, preferences and limitations as may be determined by resolution of the Board. Series of Preferred Stock outstanding at December 31, 1995, 1994 and 1993 were as follows:
FIRST SERIES SERIES TOTAL SERIES 1990 1991 PREFERRED ------ ------ ------ --------- (DOLLARS IN THOUSANDS) Balance December 31, 1992............... $ 10 $ 1 $ 63 $ 74 ------ ------ ------ --------- Balance December 31, 1993............... 10 1 63 74 Conversion of 74,172 shares of Preferred Stock into 979,009 shares of Class A Voting Common Stock and redemption of 356 shares of Preferred Stock for $37,000 cash........................... (10) (1) (63) (74) ------ ------ ------ --------- Balance December 31, 1994............... $-- $-- $-- $-- ------ ------ ------ --------- Balance December 31, 1995............... $-- $-- $-- $-- ------ ------ ------ --------- ------ ------ ------ ---------
The Corporation's First Series Convertible Preferred Stock and Series 1990 Convertible Preferred Stock were issued in 1989 and 1990, respectively, for cash equal to the stated value of $100.00 per share. The Series 1991 Convertible Preferred Stock was issued in 1991 in connection with the Company's acquisition of Mid Valley Bank of Weslaco, Texas. The shares of First Series, Series 1990 and Series 1991 Preferred Stock ranked on a parity with each other, and superior to the Class A Voting Common Stock of the Corporation, as to dividends and liquidation preference. Shares of each series of Preferred Stock were convertible into shares of Class A Voting Common Stock of the Corporation. On March 21, 1994, the Board of Directors adopted a resolution calling for the redemption on April 22, 1994, of all issued and outstanding Preferred Stock at a redemption price of $104.00 per share plus all accrued and unpaid dividends through the date fixed for redemption. At that time, the Preferred Stock was convertible into 13.2 shares of Class A Voting Common Stock for each share of Preferred Stock held. Effective April 22, 1994, 356 shares of Preferred Stock were redeemed for cash and 74,172 shares of Preferred Stock were converted into 979,009 shares of Class A Voting Common Stock. As a result, as of December 31, 1994, there were no shares of Preferred Stock outstanding. Pursuant to the Texas Business Corporation Act, the Board of Directors of the Corporation has the authority to eliminate any series of shares which the Board has authority to establish, if there are no shares outstanding or held as treasury shares. Upon adoption of a resolution eliminating the series and all references to the series, the shares resume status as authorized but unissued shares of Preferred Stock for which the Board has the authority to determine the designations, preferences, limitations and relative rights. On February 14, 1995, the Board of Directors of the Corporation approved a resolution to eliminate the series of shares known as the First Series Convertible Preferred, the Series 1990 Convertible Preferred and the Series 1991 Convertible Preferred shares of the Corporation, and further provided for the elimination of all references thereto from the Articles of Incorporation. As a result of the elimination of the series of Preferred shares, the shares resume status as authorized but unissued shares of Preferred Stock for which the Board has the authority to determine the designations, preferences, limitations and relative rights. F-16 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) (10) COMMON STOCK On March 16, 1994, the Corporation completed a public offering of 1.2 million shares of the Corporation's Class A Voting Common Stock at an offering price of $12.00 per share, and contemporaneously listed the Common Stock for trading in the NASDAQ Stock Market's National Market System under the trading symbol "TRBS." In the offering, the Corporation sold one million newly issued shares and an aggregate of 200,000 shares were sold on behalf of certain selling shareholders of the Corporation. As a part of the offering, the Corporation granted the Underwriters an option, exercisable within 30 days following the date of the Underwriting Agreement, to purchase up to 180,000 additional shares of Corporation Class A Voting Common Stock solely to cover over-allotments. On April 15, 1994, the Underwriters exercised this option and purchased 28,291 additional shares of Class A Voting Common Stock. On May 11, 1993, the Board of Directors approved a 20% stock split effected as a stock dividend to Class A Voting Common Stock shareholders of record on May 11, 1993, with any fractional shares resulting from such stock split to be paid in cash based on a value of $10.00 per share. (11) EMPLOYEE BENEFITS In 1984, the Company adopted a target benefit pension plan covering substantially all of their employees. In December, 1990, the Company restated its target benefit pension plan as an Employee Stock Ownership Plan (with section 401(k) provisions) (the "KSOP"). The Company received a favorable determination letter on July 29, 1993, in which the Internal Revenue Service stated that the plan, as designed, was in compliance with the applicable requirements of the Internal Revenue Code. Employer contributions to the KSOP are discretionary, and as such, determined at the sole discretion of the Board of Directors. The KSOP covers employees who have completed twelve consecutive months of credited service, as defined in the plan, and attained age 21. A participant's account balance will be fully vested after six years of credited service. The purpose of the restatement is to permit employees to acquire an equity interest in the Company through the KSOP's purchase of common stock. Pension expense, which includes Employer matching as discussed below, for the years ended December 31, 1995, 1994 and 1993 was $526,000, $462,000, and $570,000, respectively. A Participant of the KSOP may authorize the Company to contribute to the Trust on his behalf Salary Reduction Contributions. Such Salary Reduction Contributions shall be stated as a whole percentage and shall not be less than 1% or more than 15% of the Participant's compensation. The total amount of Salary Reduction Contributions for any Plan Year shall not exceed $7,000, multiplied by any cost of living adjustment factor prescribed by the Secretary of the Treasury under Section 415(d) of the Code. Such contributions are matched at the discretion of the Board of Directors up to a maximum of 100% of the Participant's Salary Reduction Contribution and shall be based on a Participant's Salary Reduction Contribution of up to 4% of such Participant's compensation. The Participant's and Employer matching contributions are vested immediately. In March 1986, the shareholders of the Company approved three separate stock plans involving the Class A Voting Common Stock, providing for the issuance of up to 253,434 shares to certain key employees for their purchase and 10,000 shares as part of a bonus plan for employees of the Company. One option plan provides for sale of up to 126,717 shares to the chief executive officer at a price to be determined by a committee of directors on the date of grant; another provides for sale of up to 126,717 shares at fair market value at the date the options are granted to key employees of the Company, excluding the chief executive officer. The third plan provides for up to 10,000 shares to be distributed as employee bonuses without payment of consideration by the employees. The third plan was terminated effective January 9, 1996. F-17 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) EMPLOYEE BENEFITS (CONTINUED) On May 10, 1994, options to acquire up to 126,717 Class A Voting Common shares at $12.00 per share were granted to Glen E. Roney, Chief Executive Officer and a member of the Board of Directors of Texas Regional, pursuant to the Texas Regional Bancshares, Inc. 1985 Non-Statutory Stock Option Plan exercisable commencing May 10, 1995. In addition, options to acquire up to 49,433 Class A Voting Common shares at $12.00 per share were granted to certain key employees of the Company pursuant to the Texas Regional Bancshares, Inc. Incentive Stock Option Plan exercisable commencing May 10, 1995 including options to acquire 8,333 shares granted to Glen E. Roney. The Incentive Stock Option Plan expired in September 1995. Any options outstanding under this Plan, at the time of its termination, remain in effect until the options shall have been exercised or the expiration date of the option, whichever is earlier. The options to acquire 49,433 Class A Voting Common Stock were awarded May 10, 1994, and expire on May 10, 2000. During 1995, options to acquire 3,162 Class A Voting Common Stock were exercised at a price of $12.00 per share. Effective December 12, 1995, the Company adopted the 1995 Nonstatutory Stock Option Plan of Texas Regional Bancshares, Inc. (the "Plan"), which provides for granting to key employees of the Company options to acquire up to an aggregate maximum of 90,000 shares of the Class A Voting Common Stock of the Corporation, subject to adjustment for stock dividends, stock splits and upon the occurrence of other events as specified in the Plan. The Board of Directors has recommended the Plan to the shareholders of the Corporation and has authorized and directed the officers of the Corporation to submit the Plan to the shareholders for approval at the next regular or special meeting of the shareholders of the Corporation. In addition, options to acquire up to 90,000 Class A Voting Common shares at $17.25 per share were granted to certain key employees of the Company pursuant to the Plan including options to acquire 65,000 shares granted to Glen E. Roney. Options to purchase one-fourth of the shares as granted shall be exercisable commencing on the later of July 1, 1996, or the date of approval of the Plan by the shareholders of the Corporation, and (provided that the Plan has received the approval of the shareholders of the Corporation) options to purchase an additional one-fourth of the shares as granted pursuant to these resolutions shall be exercisable beginning July 1 of each year thereafter, and in each case options to purchase shares granted pursuant to these resolutions shall thereafter be exercisable at any time prior to July 1, 2002, subject to other provisions applicable to such options as specified in the Plan. Effective as of December 14, 1993, the Company adopted a Deferred Compensation Plan for the benefit of Glen E. Roney. The Deferred Compensation Plan provides for a retirement benefit payable to Mr. Roney (or his designated beneficiary or his estate if Mr. Roney dies prior to payment of the full amount of deferred compensation) of $100,000 per year commencing October 29, 2002, and continuing annually thereafter for fourteen years. If Mr. Roney dies prior to commencement of the retirement benefit, payments would commence immediately and be paid to his designated beneficiary or his estate. The Company also adopted the Trust Under Glen E. Roney Deferred Compensation Plan, in the form prescribed by applicable regulations adopted by the Internal Revenue Service for nonqualified deferred compensation plans. Among other things, the Plan and Trust provide for an initial deposit into the Trust by the Company and subsequent deposits in the discretion of the Board of Directors, and further provide for full funding of the amount necessary to discharge the retirement benefit in the event of a change of control, as that term is defined in the Trust. The Company has incurred Deferred Compensation expense and has funded into the Trust $87,000, $87,000 and $116,000 respectively, for the years ended December 31, 1995, 1994 and 1993, respectively. (12) COMMITMENTS AND CONTINGENCIES In the normal course of business, the Company enters into various transactions which, in accordance with generally accepted accounting principles, are not included on the consolidated balance F-18 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) COMMITMENTS AND CONTINGENCIES (CONTINUED) sheets. These transactions are referred to as "off-balance sheet commitments." The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company attempts to minimize its exposure to loss under these commitments by subjecting them to the same credit approval and monitoring procedures as its other credit facilities. The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company's commitments to extend credit are contingent on customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for possible loan losses. Letters of credit are written for conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company's policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements. At December 31, 1995, the Company had outstanding commitments to extend credit of approximately $79.0 million which included standby letters of credit of approximately $2.6 million. Management does not anticipate any losses as a result of these commitments. Future minimum lease payments on operating leases as of December 31, 1995 are as follows:
OFFICE OFFICE SPACE EQUIPMENT TOTAL ------ --------- ----- (DOLLARS IN THOUSANDS) 1996.................................... $ 22 $16 $ 38 1997.................................... 22 16 38 1998.................................... 22 17 39 1999.................................... 20 17 37 2000.................................... 15 17 32 ------ --- ----- Total............................... $101 $83 $ 184 ------ --- ----- ------ --- -----
The Company is a defendant in various legal proceedings arising in connection with its ordinary course of business. In the opinion of management, the financial position of the Company will not be materially affected by the final outcome of these legal proceedings. F-19 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) OTHER NONINTEREST EXPENSE Other noninterest expense for the years ended December 31, 1995, 1994 and 1993 consisted of the following:
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Advertising and Public Relations................................................... $ 772 $ 693 $ 394 Amortization of Intangibles........................................................ 323 224 235 Data Processing and Check Clearing................................................. 491 360 304 Director Fees...................................................................... 284 267 291 Franchise Tax...................................................................... 198 159 145 Insurance.......................................................................... 228 314 320 FDIC Insurance..................................................................... 540 973 831 Legal and Professional............................................................. 870 1,006 704 Stationery and Supplies............................................................ 658 538 477 Telephone.......................................................................... 250 202 195 Other Losses....................................................................... 624 177 117 Other.............................................................................. 972 895 844 --------- --------- --------- Total.......................................................................... $ 6,210 $ 5,808 $ 4,857 --------- --------- --------- --------- --------- ---------
(14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS CONDENSED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 --------- --------- (DOLLARS IN THOUSANDS) Assets Cash in Subsidiary Bank................................................................ $ 99 $ 172 Time Deposits in Subsidiary Bank....................................................... 4,979 9,225 --------- --------- Total Cash and Cash Equivalents.................................................... 5,078 9,397 Investments in Consolidated Subsidiary................................................. 58,114 46,701 Furniture and Equipment................................................................ 80 4 Other Assets........................................................................... 103 158 --------- --------- Total Assets....................................................................... $ 63,375 $ 56,260 --------- --------- --------- --------- Liabilities Accounts Payable and Accrued Liabilities............................................... $ 35 $ 34 Dividends Payable...................................................................... 620 495 --------- --------- Total Liabilities.................................................................. 655 529 Shareholders' Equity....................................................................... 62,720 55,731 --------- --------- Total Liabilities and Shareholders' Equity......................................... $ 63,375 $ 56,260 --------- --------- --------- ---------
F-20 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Income Dividends Received from Subsidiary Bank........................................ $ -- $ 456 $ 2,382 Interest Income................................................................ 338 330 4 --------- --------- --------- Total Income............................................................... 338 786 2,386 --------- --------- --------- Expense Interest on Note Payable....................................................... -- 16 112 Salaries and Employee Benefits................................................. -- 7 1 Occupancy Expense.............................................................. 4 4 4 Director Fees.................................................................. 119 83 72 Equipment Expense.............................................................. 3 3 3 Franchise Tax.................................................................. 80 57 53 Legal and Professional......................................................... 24 30 32 Other.......................................................................... 77 90 42 --------- --------- --------- Total Expense.............................................................. 307 290 319 --------- --------- --------- Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiary........................................................................ 31 496 2,067 Income Tax (Benefit) Expense....................................................... 15 7 (123) --------- --------- --------- Income Before Equity in Undistributed Income of Subsidiary......................... 16 489 2,190 Equity in Undistributed Net Income of Subsidiary................................... 8,709 6,696 3,821 --------- --------- --------- Net Income................................................................. $ 8,725 $ 7,185 $ 6,011 --------- --------- --------- --------- --------- ---------
F-21 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) TEXAS REGIONAL BANCSHARES, INC. (PARENT ONLY) CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------- --------- --------- (DOLLARS IN THOUSANDS) Cash Flows from Operating Activities Net Income.................................................................. $ 8,725 $ 7,185 $ 6,011 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities Depreciation and Amortization........................................... 5 4 6 Undistributed Net Income of Subsidiary.................................. (8,709) (6,697) (3,820) (Increase) Decrease in Other Assets..................................... 52 (85) 80 Increase (Decrease) in Income Taxes Payable............................. (1) (3) 4 Decrease in Deferred Income Taxes....................................... -- (1) (19) Increase (Decrease) in Accounts Payable and Accrued Liabilities......... 2 (6) (21) --------- --------- --------- Net Cash Provided by Operating Activities........................... 74 397 2,241 --------- --------- --------- Cash Flows from Investing Activities Purchase of Equipment....................................................... (78) (3) -- Investment in Subsidiary.................................................... (2,000) -- -- --------- --------- --------- Net Cash Used In Investing Activities............................... (2,078) (3) -- --------- --------- --------- Cash Flows from Financing Activities Repayment of Note Payable................................................... -- (1,150) (1,450) Proceeds from Issuance of Common Stock...................................... 38 11,110 -- Cash Dividends Paid on Fractional Shares.................................... -- -- (3) Cash Dividends Paid on Preferred Stock...................................... -- (258) (522) Cash Dividends Paid on Common Stock......................................... (2,353) (991) -- Redemption of Preferred Stock............................................... -- (37) -- --------- --------- --------- Net Cash Provided by (Used in) Financing Activities................. (2,315) 8,674 (1,975) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents............................ (4,319) 9,068 266 Cash and Cash Equivalents at Beginning of Year.................................. 9,397 329 63 --------- --------- --------- Cash and Cash Equivalents at End of Year........................................ $ 5,078 $ 9,397 $ 329 --------- --------- --------- --------- --------- --------- Supplemental Disclosures of Cash Flow Information Interest Paid............................................................... $ -- $ 25 $ 132 Income Taxes Paid........................................................... 4,752 3,799 2,986 Supplemental Schedule of Noncash Investing and Financing Activities Stock Split Effected as a Stock Dividend (Note 10).......................... N/A N/A 697 --------- --------- --------- --------- --------- ---------
The amount of retained earnings in the Bank at December 31, 1995 was $12.0 million. On December 31, 1995, the aggregate amount of dividends which legally could be paid to the Corporation without prior approval of various regulatory agencies was approximately $8.7 million. F-22 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) FAIR VALUE OF FINANCIAL INSTRUMENTS DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 ("Statement 107"), "Disclosures about Fair Value Instruments", requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments. DEBT SECURITIES For securities held as investments, fair market value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for a similar security. Investments not classified as Held to Maturity or Trading are classified as Available for Sale and measured at fair value in the consolidated balance sheets with unrealized holding gains and losses reported as a separate component of shareholders' equity until realized. The following table presents the amortized cost and estimated fair value of securities classified as Available for Sale at December 31, 1995:
AMORTIZED ESTIMATED COST FAIR VALUE ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities....................................................... $ 6,000 $ 6,012 U.S. Government Agency Securities.............................................. 55,502 55,668 Other Securities............................................................... 1,471 1,470 ----------- ----------- Total...................................................................... $ 62,973 $ 63,150 ----------- ----------- ----------- -----------
The following table presents the carrying value and estimated fair value of securities classified as Held to Maturity at December 31, 1995:
CARRYING ESTIMATED AMOUNT FAIR VALUE --------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities........................................................ $ 28,787 $ 28,776 U.S. Government Agency Securities............................................... 34,230 34,425 States and Political Subdivisions Securities.................................... 5,474 5,761 --------- ----------- Total....................................................................... $ 68,491 $ 68,962 --------- ----------- --------- -----------
LOANS The Company does not consider its loan portfolio to have the homogeneous categories of loans for which the fair value could be estimated by using quoted market prices for securities backed by similar loans. Therefore, the fair value of all loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. F-23 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents information for loans at or for the year ended December 31, 1995:
CARRYING AVERAGE CALCULATED AMOUNT YIELD FAIR VALUE ----------- ---------- ----------- (DOLLARS IN THOUSANDS) Commercial and Agriculture Adjustable..................................................... $ 136,213 9.50% $ 137,308 Fixed.......................................................... 35,298 9.33 34,083 Real Estate Adjustable..................................................... 128,406 10.13 127,039 Fixed.......................................................... 106,791 9.89 106,483 Consumer........................................................... 44,146 10.61 43,929 ----------- ----------- Total Loans, Net of Unearned Discount.............................. 450,854 9.87 448,842 ----------- ----------- Allowance for Loan Losses.......................................... (4,542) -- ----------- ----------- Total Loans, Net................................................... $ 446,312 $ 448,842 ----------- ----------- ----------- -----------
DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The following table presents the carrying value and estimated fair value of deposit liabilities at December 31, 1995:
CARRYING ESTIMATED AMOUNT FAIR VALUE ----------- ----------- (DOLLARS IN THOUSANDS) Noninterest Bearing Demand Deposits........................................... $ 120,414 $ 120,414 Savings....................................................................... 36,133 36,133 Money Market Checking and Savings Accounts.................................... 127,687 127,687 Time Deposits................................................................. 295,497 297,200 ----------- ----------- Total Deposits............................................................ $ 579,731 $ 581,434 ----------- ----------- ----------- -----------
The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The Company has not attempted to determine the amount of increase in net assets that would result from the benefit of considering the low-cost funding provided by deposit liabilities. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES WRITTEN These financial instruments are not sold or traded, and estimated fair values are not readily available. The carrying amount of commitments to extend credit and standby letters of credit is the net unamortized deferred cost or income arising from these unrecognized financial instruments. The estimated fair value of these commitments is considered to be the carrying value. Financial guarantees written consist of obligations for credit cards issued to certain customers. Substantially all of the liability for financial guarantees written is collateralized by deposits pledged to the Company. F-24 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following table presents the contract amount, carrying amount and estimated fair value for commitments to extend credit, standby letters of credit and financial guarantees written at December 31, 1995:
CONTRACT CARRYING ESTIMATED AMOUNT AMOUNT FAIR VALUE --------- ----------- ----------- (DOLLARS IN THOUSANDS) Commitments to Extend Credit......................................... $ 75,930 $ (157) $ (157) Standby Letters of Credit............................................ 2,611 10 10 Financial Guarantees Written......................................... 439 -- -- --------- ----------- ----------- --------- ----------- -----------
LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that contributes net fee income annually. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax liabilities, property, plant, equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. (16) ACQUISITION ACTIVITY On January 10, 1996, the Company announced definitive agreements have been signed under which Texas State Bank, the principal operating subsidiary of the Corporation, will acquire through merger the First State Bank & Trust Co., Mission, Texas, and The Border Bank, Hidalgo, Texas (the "Mergers"). The definitive agreements have been approved by the appropriate Boards of Directors of the Corporation, Texas State Bank, First State Bank & Trust Co. and The Border Bank. Under the terms of the definitive agreements, Texas State Bank will acquire First State Bank & Trust Co. for a total cash consideration of $79.0 million and will acquire The Border Bank for a total cash consideration of $20.5 million. The following pro forma combined condensed balance sheet was based on the assumption that the acquisition had been consummated on December 31, 1995. The Mergers will be accounted for using the purchase method of accounting. The Mergers are subject to completion of satisfactory due diligence by the Corporation and must be approved by the shareholders of First State Bank & Trust Co. and The Border Bank. The Mergers must also be approved by the appropriate regulators. Closing is also contingent upon the Corporation having successfully raised $40.0 million of additional capital to partially fund these transactions on terms and conditions acceptable to the Corporation. F-25 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) ACQUISITION ACTIVITY (CONTINUED) During August 1995, the Bank acquired two branch bank locations, one in Rio Grande City, Texas, and the other in Roma, Texas (the "RGC/Roma Branch Acquisitions"). The transaction included the purchase of $43.7 million in loans and the assumption of approximately $79.7 million in deposit liabilities of these branches. Investment securities were not acquired. Purchase accounting adjustments for the purchase of loans and the assumption of deposit liabilities of the RGC/Roma Branch Acquisitions were immaterial. This transaction was accounted for as a purchase. The Company's consolidated balance sheets at December 31, 1995 reflected the assets and liabilities of the RGC/Roma Branch Acquisitions. The results of operations of the RGC/Roma Branch Acquisitions were included in the Company's consolidated financial statements of income from the date of acquisition. The following unaudited pro forma combined condensed statements of income for the years ended December 31, 1995 and 1994, assume the Mergers and the RGC/Roma Branch Acquisitions occurred January 1, 1994. Intangibles arising from the Mergers and RGC/Roma Branch Acquisitions are approximately $21.6 million and $4.1 million, respectively. The pro forma adjustments reflect the amortization of the core deposit premium over a 10-year period, the fixed maturity deposit premium over a 3-year period and the goodwill intangible over a 15-year period. The pro forma results do not necessarily represent the actual results that would have occurred and should not be considered indicative of future results of operations. F-26 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) ACQUISITION ACTIVITY (CONTINUED) PRO FORMA COMBINED CONDENSED BALANCE SHEET DECEMBER 31, 1995 (UNAUDITED)
FIRST TEXAS STATE BORDER PRO FORMA PRO FORMA REGIONAL BANK BANK ADJUSTMENTS BALANCE ------------ --------- --------- ------------ ----------- (IN THOUSANDS) Assets Cash and Due From Banks.......................... $ 30,933 $ 16,270 $ 3,982 $ 42,533A $ 51,831 (41,172)F (715)B Federal Funds Sold............................... 3,600 23,350 8,750 (30,850)F 4,850 ------------ --------- --------- ------------ ----------- Total Cash and Cash Equivalents.............. 34,533 39,620 12,732 (30,204) 56,681 Securities Available for Sale.................... 63,150 23,478 6,779 (27,478)F 65,929 Securities Held to Maturity...................... 68,491 143,283 47,457 2,937C 262,168 Loans, Net of Unearned Discount.................. 450,854 188,424 47,345 (1,337)G 685,286 Less: Allowance for Loan Losses.................. (4,542) (4,196) (1,100) -- (9,838) ------------ --------- --------- ------------ ----------- Net Loans.................................... 446,312 184,228 46,245 (1,337) 675,448 Premises and Equipment, Net...................... 18,374 5,487 3,297 7,000D 34,158 Accrued Interest Receivable...................... 6,319 7,172 2,242 -- 15,733 Other Real Estate................................ 1,273 431 237 -- 1,941 Goodwill......................................... 4,641 -- -- 7,250F 11,891 Core Deposit..................................... 1,000 -- -- 14,351H 15,351 Organization Cost................................ 70 -- -- -- 70 Other Assets..................................... 2,606 771 515 (137)J 3,755 ------------ --------- --------- ------------ ----------- Total Assets............................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125 ------------ --------- --------- ------------ ----------- ------------ --------- --------- ------------ ----------- Liabilities Deposits Noninterest-Bearing.......................... $ 120,414 $ 39,810 $ 7,137 $ (715)B $ 166,646 Interest-Bearing............................. 459,317 303,800 94,858 (394)I 857,581 ------------ --------- --------- ------------ ----------- Total Deposits........................... 579,731 343,610 101,995 (1,109) 1,024,227 Federal Funds Purchased and Securities Sold Under Repurchase Agreements........................... 757 -- -- -- 757 Other Borrowings................................. -- 157 -- -- 157 Accounts Payable and Accrued Liabilities......... 3,561 1,316 434 (137)J 12,731 7,557E ------------ --------- --------- ------------ ----------- Total Liabilities........................ 584,049 345,083 102,429 6,311 1,037,872 ------------ --------- --------- ------------ ----------- Shareholders' Equity Preferred Stock.................................. -- -- -- -- -- Common Stock..................................... 6,196 4,000 2,000 2,180A 8,376 (6,000)F Paid-In Capital.................................. 29,239 21,000 9,000 40,353A 69,592 (30,000)F Retained Earnings................................ 27,168 34,405 6,078 (40,483)F 27,168 Unrealized Gain (Loss) on Securities Available for Sale........................................ 117 (18) (3) 21F 117 ------------ --------- --------- ------------ ----------- Total Shareholders' Equity............... 62,720 59,387 17,075 (33,929) 105,253 ------------ --------- --------- ------------ ----------- Total Liabilities and Shareholders' Equity.................................. $ 646,769 $ 404,470 $ 119,504 $ (27,618) $1,143,125 ------------ --------- --------- ------------ ----------- ------------ --------- --------- ------------ -----------
F-27 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) ACQUISITION ACTIVITY (CONTINUED) PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
FIRST TEXAS RGC/ ROMA STATE BORDER PRO FORMA REGIONAL BRANCHES BANK BANK ADJUSTMENTS ----------- ----------- ----------- ----------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income...................................... $ 43,505 $ 6,337 $ 32,472 $ 9,016 $ (4,059)K Interest Expense..................................... 17,041 2,817 13,103 4,415 131L ----------- ----------- ----------- ----------- ------------- Net Interest Income.................................. 26,464 3,520 19,369 4,601 (4,190) Provision for Loan Losses............................ 1,666 19 2,425 485 -- ----------- ----------- ----------- ----------- ------------- Net Interest Income After Provision for Loan Losses.......................................... 24,798 3,501 16,944 4,116 (4,190) ----------- ----------- ----------- ----------- ------------- Noninterest Income Service Charges on Deposit Accounts.............. 3,312 469 1,146 255 -- Other Service Charges............................ 825 97 151 33 -- Trust Service Fees............................... 1,256 -- 24 -- -- Other Operating Income........................... 926 24 81 28 -- ----------- ----------- ----------- ----------- ------------- Total Noninterest Income..................... 6,319 590 1,402 316 -- ----------- ----------- ----------- ----------- ------------- Noninterest Expense Salaries and Employee Benefits................... 9,247 1,334 2,824 1,056 -- Net Occupancy Expense............................ 1,010 176 568 234 294M Equipment Expense................................ 1,959 217 341 148 -- Other Noninterest Expense........................ 5,631 1,281 2,531 729 2,189N ----------- ----------- ----------- ----------- ------------- Total Noninterest Expense.................... 17,847 3,008 6,264 2,167 2,483 ----------- ----------- ----------- ----------- ------------- Income Before Income Tax Expense..................... 13,270 1,083 12,082 2,265 (6,673) Income Tax Expense................................... 4,630 367 3,436 381 (2,105) ----------- ----------- ----------- ----------- ------------- Net Income........................................... $ 8,640 $ 716 $ 8,646 $ 1,884 $ (4,568) ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- Primary Earnings Per Common Share Net Income....................................... $ 1.39 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 6,218 ----------- Fully Diluted Earnings Per Common Share Net Income....................................... $ 1.39 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 6,227 ----------- ----------- PRO FORMA BALANCE ----------- Interest Income...................................... $ 87,271 Interest Expense..................................... 37,507 ----------- Net Interest Income.................................. 49,764 Provision for Loan Losses............................ 4,595 ----------- Net Interest Income After Provision for Loan Losses.......................................... 45,169 ----------- Noninterest Income Service Charges on Deposit Accounts.............. 5,182 Other Service Charges............................ 1,106 Trust Service Fees............................... 1,280 Other Operating Income........................... 1,059 ----------- Total Noninterest Income..................... 8,627 ----------- Noninterest Expense Salaries and Employee Benefits................... 14,461 Net Occupancy Expense............................ 2,282 Equipment Expense................................ 2,665 Other Noninterest Expense........................ 12,361 ----------- Total Noninterest Expense.................... 31,769 ----------- Income Before Income Tax Expense..................... 22,027 Income Tax Expense................................... 6,709 ----------- Net Income........................................... $ 15,318 ----------- ----------- Primary Earnings Per Common Share Net Income....................................... $ 1.82 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 8,398 ----------- Fully Diluted Earnings Per Common Share Net Income....................................... $ 1.82 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 8,407 ----------- -----------
F-28 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) ACQUISITION ACTIVITY (CONTINUED) PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
FIRST TEXAS RGC/ ROMA STATE BORDER PRO FORMA REGIONAL BRANCHES BANK BANK ADJUSTMENTS ----------- ----------- ----------- ----------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income...................................... $ 34,631 $ 6,429 $ 30,831 $ 8,879 $ (3,202)K Interest Expense..................................... 11,690 2,244 11,767 3,771 131L ----------- ----------- ----------- ----------- ------------- Net Interest Income.................................. 22,941 4,185 19,064 5,108 (3,333) Provision for Loan Losses............................ 1,085 218 2,189 397 -- ----------- ----------- ----------- ----------- ------------- Net Interest Income After Provision for Loan Losses.......................................... 21,856 3,967 16,875 4,711 (3,333) ----------- ----------- ----------- ----------- ------------- Noninterest Income Service Charges on Deposit Accounts.............. 3,035 555 1,078 238 -- Other Service Charges............................ 904 151 141 30 -- Trust Service Fees............................... 1,161 -- 37 -- -- Other Operating Income........................... 672 (39) 45 135 -- ----------- ----------- ----------- ----------- ------------- Total Noninterest Income..................... 5,772 667 1,301 403 -- ----------- ----------- ----------- ----------- ------------- Noninterest Expense Salaries and Employee Benefits................... 8,015 1,929 2,562 1,061 -- Net Occupancy Expense............................ 961 191 555 228 294M Equipment Expense................................ 1,648 310 278 139 -- Other Noninterest Expense........................ 5,883 1,579 2,747 757 2,189N ----------- ----------- ----------- ----------- ------------- Total Noninterest Expense.................... 16,507 4,009 6,142 2,185 2,483 ----------- ----------- ----------- ----------- ------------- Income Before Income Tax Expense..................... 11,121 625 12,034 2,929 (5,816) Income Tax Expense................................... 3,936 198 3,192 604 (1,813) ----------- ----------- ----------- ----------- ------------- Net Income........................................... $ 7,185 $ 427 $ 8,842 $ 2,325 $ (4,003) ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- Primary Earnings Per Common Share Net Income....................................... $ 1.19 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 5,791 ----------- Fully Diluted Earnings Per Common Share Net Income....................................... $ 1.16 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 6,035 ----------- ----------- PRO FORMA BALANCE ----------- Interest Income...................................... $ 77,568 Interest Expense..................................... 29,603 ----------- Net Interest Income.................................. 47,965 Provision for Loan Losses............................ 3,889 ----------- Net Interest Income After Provision for Loan Losses.......................................... 44,076 ----------- Noninterest Income Service Charges on Deposit Accounts.............. 4,906 Other Service Charges............................ 1,226 Trust Service Fees............................... 1,198 Other Operating Income........................... 813 ----------- Total Noninterest Income..................... 8,143 ----------- Noninterest Expense Salaries and Employee Benefits................... 13,567 Net Occupancy Expense............................ 2,229 Equipment Expense................................ 2,375 Other Noninterest Expense........................ 13,155 ----------- Total Noninterest Expense.................... 31,326 ----------- Income Before Income Tax Expense..................... 20,893 Income Tax Expense................................... 6,117 ----------- Net Income........................................... $ 14,776 ----------- ----------- Primary Earnings Per Common Share Net Income....................................... $ 1.82 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 7,971 ----------- Fully Diluted Earnings Per Common Share Net Income....................................... $ 1.80 Weighted Average Number of Common Shares Outstanding (In Thousands)...................... 8,215 ----------- -----------
F-29 TEXAS REGIONAL BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (16) ACQUISITION ACTIVITY (CONTINUED) The unaudited pro forma combined condensed balance sheet combines the three entities at December 31, 1995. In combining the entities, the following adjustments were made: (A) To record the estimated proceeds of the $42.5 million net capital raised through the offering based on an assumed sale by Texas Regional of 2,180,000 shares of Class A Voting Common Stock at a price of $21.00 per share, the closing price as of February 20, 1996 net of underwriting discounts, commissions and other estimated offering expenses. (B) To record the elimination of an intercompany demand deposit account. (C) To adjust securities purchased to fair value at December 31, 1995. (D) To record estimated $7.0 million increase in fair value of fixed assets. (E) To record estimated deferred federal income tax on the net fair value increases. (F) To record the payment of $99.5 million to the First State Bank and Border Bank shareholders for 100% of their outstanding stock, elimination of all the First State Bank and Border Bank equity accounts and the recording of goodwill. (G) To adjust loan carrying value to estimated fair value. (H) To record estimated fair value of core deposits. (I) To record estimated fair value of fixed maturity deposit premium. (J) To reclassify deferred federal income taxes. The unaudited pro forma combined condensed statements of income combine the three entities for the years ended December 31, 1995 and 1994. In combining the entities, the following adjustments were made: (K) To record a reduction in interest income on the $57.0 million net purchase price ($99.5 million less $42.5 million) of the Mergers and $4.25 million purchase price of the RGC/Roma Branch Acquisitions at the Company's average federal funds rate of 5.92% and 4.52% for the years ended December 31, 1995 and 1994, respectively and the tax effect of the prior two transactions using an effective tax rate of 34%. (L) To amortize the fixed maturity deposit premium. (M) To record depreciation on fair market value increases of depreciable fixed assets acquired in the Mergers. (N) To record amortization of the goodwill and core deposit premium recorded in connection with the Mergers and the RGC/Roma Branch Acquisitions. F-30 FIRST STATE BANK & TRUST CO. SELECTED FINANCIAL INFORMATION The selected financial information under the captions "Summary of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of the years in the three year period ended December 31, 1995 has been derived from the financial statements of First State Bank & Trust Co. ("First State Bank"), which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The financial statements of First State Bank at December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest Income........................................................ $ 32,472 $ 30,831 $ 31,623 Interest Expense....................................................... 13,103 11,767 12,968 ----------- ----------- ----------- Net Interest Income.................................................... 19,369 19,064 18,654 Provision for Loan Losses.............................................. 2,425 2,189 2,287 Noninterest Income..................................................... 1,402 1,301 1,326 Noninterest Expense.................................................... 6,264 6,142 7,335 ----------- ----------- ----------- Income before Income Tax Expense....................................... 12,082 12,034 10,358 Income Tax Expense..................................................... 3,436 3,192 2,260 ----------- ----------- ----------- Net Income............................................................. $ 8,646 $ 8,842 $ 8,098 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA Net Income............................................................. $ 43.23 $ 44.21 $ 40.49 Book Value............................................................. 296.94 276.32 249.59 Cash Dividends Paid on Common Stock.................................... 25.00 15.00 10.00 Average Shares Outstanding (in thousands)........................................................ 200 200 200 PERIOD-END BALANCE SHEET DATA Total Assets........................................................... $ 404,470 $ 403,098 $ 402,895 Loans.................................................................. 188,424 194,306 194,853 Investment Securities.................................................. 166,761 179,153 170,588 Interest-Earning Assets................................................ 378,535 375,659 377,247 Deposits............................................................... 343,610 345,680 350,243 Stockholders' Equity................................................... 59,387 55,264 49,918 PERFORMANCE RATIOS Return on Average Assets............................................... 2.12% 2.15% 1.99% Return on Average Stockholders' Equity................................. 15.28 17.13 17.20 Net Interest Margin.................................................... 5.40 5.34 5.40 Loan to Deposit Ratio.................................................. 54.84 56.21 55.63 Demand Deposit to Total Deposit Ratio.................................. 11.59 10.84 10.28 ASSET QUALITY RATIOS Nonperforming Assets to Loans and Other Nonperforming Assets........... 1.67% 1.62% 1.86% Net Charge-Offs to Average Loans....................................... 1.14 1.14 1.23 Allowance for Loan Losses as a Percentage of: Loans................................................................ 2.22 2.01 2.00 Nonperforming Loans.................................................. 154.04 152.81 134.26 Nonperforming Assets................................................. 133.00 124.13 107.55 CAPITAL RATIOS Period-End Stockholders' Equity to Total Assets........................ 14.68% 13.71% 12.39% Tier 1 Risk-Based Capital.............................................. 18.47 17.99 15.22 Total Risk-Based Capital............................................... 19.78 19.26 16.74 Leverage Capital Ratio................................................. 14.88 13.98 12.49 ----------- ----------- ----------- ----------- ----------- -----------
F-31 FIRST STATE BANK & TRUST CO. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides additional information regarding the financial condition and the results of operations for First State Bank for each of the years ended December 31, 1995, 1994 and 1993. This discussion should be read in conjunction with the financial statements of First State Bank and the notes thereto appearing elsewhere in this prospectus. SELECTED FINANCIAL INFORMATION Net income for the year ended December 31, 1995 was $8.6 million, a decrease of 2.2% compared to net income of $8.8 million for the year ended December 31, 1994. The earnings per share of $43.23 for the year ended December 31, 1995 decreased $0.98 or 2.2% compared to earnings per share of $44.21 for the year ended December 31, 1994. Return on average assets for 1995 was 2.12%, compared to 2.15% for 1994 and 1.99% for 1993. Return on average stockholders' equity was 15.28% for 1995, compared to 17.13% for 1994 and 17.20% for 1993. Earnings performance for the year ended December 31, 1995 reflected a small increase in net interest income offset by an increase in provision for loan losses. The increase in net interest income for 1995 resulted primarily from higher interest rates. ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME Taxable-equivalent net interest income was $20.7 million for the year ended December 31, 1995, an increase of $101 thousand or 0.5% compared to the year ended December 31, 1994 and taxable-equivalent net interest income of $20.6 million for the year ended December 31, 1994 increased $204 thousand or 1.0% compared to the year ended December 31, 1993. The net yield on interest-earning assets, also referred to as interest rate margin, represents net interest income divided by average interest-earning assets. The net interest margin of 5.40% for the year ended December 31, 1995 increased 6 basis points compared to 5.34% for the year ended December 31, 1994. The net interest rate margin for the year ended December 31, 1994 reflects a decrease of 6 basis points from the 5.40% for the year ended December 31, 1993. Average interest-earnings assets declined $2.1 million or 0.6% to $383.1 million for the year ended December 31, 1995. Small declines in commercial and consumer loans and federal funds sold were partially offset by increases in real estate loans and investments. Average interest-earning assets increased $8.0 million or 2.1% to $385.3 million for the year ended December 31, 1994. The increase in average interest-earning assets for 1994 resulted primarily from increases in investment securities of $11.5 million and loans of $4.2 million offset by a decline in federal funds sold. Average interest-earning assets comprised 93.8% of average total assets in 1995, compared to 93.8% in 1994 and 92.9% in 1993. Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6 million for the year ended December 31, 1995 compared to a decrease of $979 thousand or 0.3% to $318.5 million for the year ended December 31, 1994. These changes in the mix of interest-earning assets and interest-bearing deposits caused the ratio of interest-bearing deposits to interest-earning assets to decline to 80.5% in 1995, compared to 82.7% in 1994 and 84.7% in 1993. Average noninterest-bearing deposits increased $2.3 million or 6.0% to $40.2 million in 1995 compared to an increase of $1.1 million or 2.9% to $38.0 million in 1994. The ratio of average noninterest-bearing deposits to average total deposits was 11.5% for 1995, compared to 10.6% for 1994 and 10.3% for 1993. The following table presents for the last three calendar years the total dollar amount of interest income from average interest-earning assets and the resultant yields, reported on a taxable-equivalent F-32 basis, as well as the average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from weekly balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective federal income tax rate.
THREE-YEAR FINANCIAL SUMMARY YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------ 1995 1994 1993 ----------------------------------- ----------------------------------- ---------------------- AVERAGE AVERAGE AVERAGE TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE INTEREST - ------------------------------- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) ASSETS Interest-Earning Assets Loans Commercial................. $ 60,410 $ 6,849 11.34% $ 63,494 $ 7,076 11.14% $ 61,898 $ 6,636 Real Estate................ 107,183 11,599 10.82 104,954 10,473 9.98 100,860 11,059 Consumer................... 20,436 2,361 11.55 21,884 2,583 11.80 23,400 2,846 --------- ----------- --------- ----------- --------- ----------- Total Loans.............. 188,029 20,809 11.07 190,332 20,132 10.58 186,158 20,541 --------- ----------- --------- ----------- --------- ----------- Investment Securities Taxable...................... 138,125 8,129 5.89 134,258 7,204 5.37 117,736 7,117 Tax-exempt................... 35,905 3,632 10.12 38,657 4,159 10.76 43,717 4,818 --------- ----------- --------- ----------- --------- ----------- Total Investment Securities.............. 174,030 11,761 6.76 172,915 11,363 6.57 161,453 11,935 --------- ----------- --------- ----------- --------- ----------- Federal Funds Sold............. 21,079 1,217 5.77 22,018 855 3.88 29,606 871 --------- ----------- --------- ----------- --------- ----------- Total Interest-Earning Assets.................... 383,138 33,787 8.82 385,265 32,350 8.40 377,217 33,347 --------- ----------- --------- ----------- --------- ----------- Cash and Due from Banks........ 15,274 15,496 19,072 Premises and Equipment, Net.... 5,474 5,492 5,198 Other Assets................... 8,319 8,540 8,617 Less Allowance for Loan Losses...................... (3,911) (3,904) (3,905) --------- --------- --------- Total Assets............. $ 408,294 $ 410,889 $ 406,199 --------- --------- --------- --------- --------- --------- LIABILITIES Interest-Bearing Liabilities Savings...................... $ 51,495 2,008 3.90 $ 62,046 2,476 3.99 $ 29,901 1,182 Money Market and NOW......... 96,428 2,616 2.71 108,458 3,028 2.79 126,593 4,262 Time Deposits................ 160,629 8,436 5.25 148,041 6,235 4.21 163,030 7,503 --------- ----------- --------- ----------- --------- ----------- Total Savings and Time Deposits................ 308,552 13,060 4.23 318,545 11,739 3.68 319,524 12,947 --------- ----------- --------- ----------- --------- ----------- Federal Funds Purchased and Other Borrowings............ 837 43 5.14 767 28 3.65 820 21 --------- ----------- --------- ----------- --------- ----------- Total Interest-Bearing Liabilities............. 309,389 13,103 4.24 319,312 11,767 3.68 320,344 12,968 --------- ----------- --------- ----------- --------- ----------- Demand Deposits................ 40,239 37,958 36,888 Other Liabilities.............. 2,076 2,001 1,889 --------- --------- --------- Total Liabilities........ 351,704 359,271 359,121 --------- --------- --------- STOCKHOLDERS' EQUITY........... 56,590 51,618 47,078 --------- --------- --------- Total Liabilities and Stockholders' Equity.... $ 408,294 $ 410,889 $ 406,199 --------- --------- --------- --------- --------- --------- Net Interest Income............ $ 20,684 $ 20,583 $ 20,379 ----------- ----------- ----------- ----------- ----------- ----------- Net Yield on Total Interest- Earning Assets................ 5.40% 5.34% ----- ----- ----- ----- TAXABLE-EQUIVALENT BASIS (1) YIELD/ RATE - ------------------------------- ----------- ASSETS Interest-Earning Assets Loans Commercial................. 10.72% Real Estate................ 10.96 Consumer................... 12.16 Total Loans.............. 11.03 Investment Securities Taxable...................... 6.04 Tax-exempt................... 11.02 Total Investment Securities.............. 7.39 Federal Funds Sold............. 2.94 Total Interest-Earning Assets.................... 8.84 Cash and Due from Banks........ Premises and Equipment, Net.... Other Assets................... Less Allowance for Loan Losses...................... Total Assets............. LIABILITIES Interest-Bearing Liabilities Savings...................... 3.95 Money Market and NOW......... 3.37 Time Deposits................ 4.60 Total Savings and Time Deposits................ 4.05 Federal Funds Purchased and Other Borrowings............ 2.56 Total Interest-Bearing Liabilities............. 4.05 Demand Deposits................ Other Liabilities.............. Total Liabilities........ STOCKHOLDERS' EQUITY........... Total Liabilities and Stockholders' Equity.... Net Interest Income............ Net Yield on Total Interest- Earning Assets................ 5.40% ----- -----
- ------------ (1) For analytical purposes, income from tax-exempt assets, primarily issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). F-33 The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category.
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEARS ENDED DECEMBER 31, 1995 NET ----------------------------- COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------- ------ ------- ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ 677 $(244) $ 921 $-- Investment Securities Taxable..................................................................... 925 208 718 (1) Tax-Exempt.................................................................. (527) (296) (230) (1) Federal Funds Sold............................................................ 362 (36) 398 -- ------- ------ ------- ----- Total Interest Income..................................................... 1,437 (368) 1,807 (2) ------- ------ ------- ----- Interest Expense Deposits...................................................................... 1,321 (368) 1,697 (8) Other Borrowings.............................................................. 15 3 12 -- ------- ------ ------- ----- Total Interest Expense.................................................... 1,336 (365) 1,709 (8) ------- ------ ------- ----- Net Interest Income Before Allocation Rate/Volume............................... 101 (3) 98 6 ------- ------ ------- ----- Allocation of Rate/Volume....................................................... -- -- 6 (6) ------- ------ ------- ----- Changes in Net Interest Income.................................................. $ 101 $ (3) $ 104 $-- ------- ------ ------- ----- ------- ------ ------- ----- TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEARS ENDED DECEMBER 31, 1994 NET ----------------------------- COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------- ------ ------- ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ (409) $ 460 $ (856) $ (13) Investment Securities Taxable..................................................................... 87 998 (900) (11) Tax-Exempt.................................................................. (659) (558) (101) -- Federal Funds Sold............................................................ (16) (223) 207 -- ------- ------ ------- ----- Total Interest Income..................................................... (997) 677 (1,650) (24) ------- ------ ------- ----- Interest Expense Deposits...................................................................... (1,208) (39) (1,179) 10 Other Borrowings.............................................................. 7 (1) 8 -- ------- ------ ------- ----- Total Interest Expense.................................................... (1,201) (40) (1,171) 10 ------- ------ ------- ----- Net Interest Income Before Allocation Rate/Volume............................... 204 717 (479) (34) ------- ------ ------- ----- Allocation of Rate/Volume....................................................... -- (20) (14) 34 ------- ------ ------- ----- Changes in Net Interest Income.................................................. $ 204 $ 697 $ (493) $-- ------- ------ ------- ----- ------- ------ ------- -----
- --------- (1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). F-34 NET YIELD ON EARNING ASSETS The following table presents net interest income, average earning assets and the net yield by quarter for the past three years. Income and yield on earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective federal income tax rate.
NET YIELD ON QUARTER EARNING ASSETS % CHANGE -------------------------------------------------- TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST - ------------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) 1995 Net Interest Income................. 0.5% $ 20,684 $ 5,065 $ 4,833 $ 5,484 $ 5,303 Average Earning Assets.............. (0.6) 383,138 376,061 386,085 388,399 382,005 Net Yield........................... 5.40% 5.34% 4.97% 5.66% 5.63% 1994 Net Interest Income................. 1.0% $ 20,583 $ 4,842 $ 5,029 $ 5,149 $ 5,563 Average Earning Assets.............. 2.1 385,265 374,776 383,327 394,337 388,623 Net Yield........................... 5.34% 5.13% 5.21% 5.24% 5.81% 1993 Net Interest Income................. 15.1% $ 20,379 $ 5,359 $ 4,788 $ 5,237 $ 4,995 Average Earning Assets.............. 16.4 377,217 373,468 384,155 387,205 364,036 Net Yield........................... 5.40% 5.69% 4.95% 5.42% 5.56% ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
PROVISION FOR LOAN LOSSES The provision for loan losses for the year ended December 31, 1995 was $2.4 million an increase of $236 thousand or 10.8% from the year ended December 31, 1994. The provision for loan losses for the year ended December 31, 1994 of $2.2 million reflects a decrease of $98 thousand or 4.3% from the $2.3 million provision for loan losses for the year ended December 31,1993. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based upon such factors as historical experience, the volume and type of lending conducted by First State Bank, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, particularly as they relate to First State Bank's lending area, and other factors related to the collectibility of First State Bank's loan portfolio. See "Allowance for Loan Losses." In January 1995, First State Bank adopted Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan" and the amendment thereof, Statement of Financial Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". In management's opinion, the adoption of Statement 114 and Statement 118 did not have a material effect on First State Bank's results of operations. NONINTEREST INCOME Noninterest income of $1.4 million for the year ended December 31, 1995 increased $101 thousand or 7.8% compared to the year ended December 31, 1994, and noninterest income of $1.3 million for the year ended December 31, 1994 decreased $25 thousand or 1.9% compared to $1.3 million for the year ended December 31, 1993. First State Bank offers trust services, but does not actively pursue this type of business. Trust service fees were $24 thousand, $37 thousand and $3 thousand for the years ended December 31, 1995, 1994 and 1993, respectively. The book value of assets managed at December 31, 1995 was approximately $11.5 million. Assets held by the trust department of First State Bank in fiduciary or agency capacities are not assets of First State Bank and are not included in the balance sheet. F-35 A detailed summary of noninterest income during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- % CHANGE FROM % CHANGE FROM NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------------------- --------- --------------- --------- --------------- --------- (DOLLARS IN THOUSANDS) Service Charges on Deposit Accounts................ $ 1,146 6.3% $ 1,078 0.1% $ 1,077 Other Service Charges.............................. 151 7.1 141 64.0 86 --------- ----- --------- ----- --------- Total Service Charges............................ 1,297 6.4 1,219 4.8 1,163 Trust Service Fees................................. 24 (35.1) 37 * 3 Other Operating Income............................. 81 80.0 45 71.7 159 --------- ----- --------- ----- --------- Total............................................ $ 1,402 7.8% $ 1,301 (1.8)% $ 1,325 --------- ----- --------- ----- --------- --------- ----- --------- ----- ---------
- --------- * Not meaningful. NONINTEREST EXPENSE Noninterest expense of $6.3 million for the year ended December 31, 1995 increased $122 thousand or 2.0% compared to the year ended December 31, 1994, and noninterest expense of $6.1 million for the year ended December 31,1994 decreased $1.2 million or 16.3% compared with $7.3 million for the year ended December 31, 1993. The largest category of noninterest expense, Total Salaries and Employee Benefits ("Personnel"), of $2.8 million for the year ended December 31, 1995 increased $262 thousand or 10.2% compared to year ended December 31, 1994 levels. Personnel expenses of $2.6 million for the year ended December 31, 1994 increased $224 thousand or 9.6% compared to year ended December 31, 1993 levels of $2.3 million. Personnel expense increased primarily due to an increase in compensation levels. Occupancy expense of $568 thousand for the year ended December 31, 1995 increased $13 thousand or 2.3% compared to the year ended December 31,1994, and occupancy expense of $555 thousand for the year ended December 31, 1994 decreased $85 thousand or 13.3% when compared to occupancy expense of $640 thousand for the year ended December 31, 1993. Equipment expense was $341 thousand, $278 thousand and $261 thousand for the years ended December 31, 1995, 1994 and 1993, respectively. Other noninterest expense of $2.4 million for the year ended December 31, 1995 decreased $114 thousand or 4.5% compared to the year ended December 31, 1994 and other noninterest expense of $2.5 million for the year ended December 31, 1994 decreased $1.5 million or 36.8% when compared with the $4.0 million for the year ended December 31, 1993. The increase in other noninterest expense in 1995 resulted from an increase in legal and professional, caused primarily from audit fees incurred in 1995, and increases in stationery, supplies and postage, all of which were offset by a reduction in FDIC insurance premiums. The principal factor attributable to the decrease in other noninterest expense for the year ended December 31, 1994 was a cost to settle litigation which was recorded in 1993 and is included in other losses in the detailed summary. In 1993, First State Bank settled a lender liability claim by a former borrower. F-36 A detailed summary of noninterest expense during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- % % CHANGE FROM CHANGE FROM NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------------------- --------- --------------- --------- --------------- --------- (DOLLARS IN THOUSANDS) Salaries and Wages................................. $ 2,390 11.9% $ 2,136 10.2% $ 1,939 Employee Benefits.................................. 434 1.9 426 6.8 399 --------- ----- --------- ----- --------- Total Salaries and Employee Benefits........... 2,824 10.2 2,562 9.6 2,338 --------- ----- --------- ----- --------- Net Occupancy Expense.............................. 568 2.3 555 (13.3) 640 --------- ----- --------- ----- --------- Equipment Expense.................................. 341 22.7 278 6.5 261 --------- ----- --------- ----- --------- Other Real Estate (Income) Expense, Net............ 96 (51.5) 198 204.6 65 --------- ----- --------- ----- --------- Other Noninterest Expense Advertising and Public Relations................. 202 (5.2) 213 (17.4) 258 Data Processing and Check Clearing............... 372 2.5 363 30.1 279 Director Fees.................................... 62 1.6 61 (7.6) 66 Franchise Tax.................................... 131 3.1 127 49.4 85 FDIC Insurance................................... 397 (50.5) 802 4.0 771 Legal and Professional........................... 526 66.5 316 (33.2) 473 Stationery and Supplies.......................... 203 17.3 173 8.1 160 Telephone........................................ 39 8.3 36 33.3 27 Postage.......................................... 138 30.2 106 (3.6) 110 Other Losses..................................... 83 53.7 54 (96.5) 1,556 Other............................................ 282 (5.4) 298 21.1 246 --------- ----- --------- ----- --------- Total Other Noninterest Expense................ 2,435 (4.5) 2,549 (36.8) 4,031 --------- ----- --------- ----- --------- Total.......................................... $ 6,264 2.0% $ 6,142 (16.3)% $ 7,335 --------- ----- --------- ----- --------- --------- ----- --------- ----- ---------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 106 ("Statement 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions", which is effective for fiscal years beginning after December 15, 1992. Statement 106 requires companies that have postretirement benefit plans to accrue the estimated cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. First State Bank does not provide postretirement benefits other than nonqualified deferred compensation plans for the benefit of the President and two other former officers of First State Bank. INCOME TAX Income tax expense amounted to $3.4 million for the year ended December 31, 1995 compared to $3.2 million for the year ended December 31, 1994. Tax expense varies from one year to the next with changes in the level of income before taxes, changes in the amount of tax-exempt interest income, and the relationship of these changes to each other. First State Bank's effective tax rate for 1995 was 28.4% compared with 26.5% in 1994. Income tax expense differs from the amount computed at statutory rates primarily due to tax-exempt interest from certain investment securities and loans. Effective January 1, 1993, First State Bank adopted Statement of Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes". Through December 31, 1992, First State Bank accounted for income taxes under Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed First State Bank's method of accounting for income taxes from the deferred method required under APB 11 to the asset and liability method. Under the deferred method, annual F-37 income tax expense is matched with pretax accounting income by providing deferred taxes at current tax rates for timing differences between the determination of net income for financial reporting and tax purposes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the recognition of future deductions or taxable amounts. Deferred tax expense or benefit is recognized as a result of the change in the asset or liability during the year. NET INCOME Net income was $8.6 million, $8.8 million, and $8.1 million for the years ended December 31, 1995, 1994, and 1993, respectively. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET COMPOSITION The average assets and liabilities of First State Bank have remained stable over the last three years. Average interest-earning assets of $383.1 million declined $2.1 million or 0.6% for the year ended December 31, 1995 compared to the year ended December 31, 1994. Average interest-earning assets of $385.3 million increased $8.0 million or 2.1% for the year ended December 31, 1994 compared to $377.2 million for the year ended December 31, 1993. Average loans to average interest-earning assets was 49.1% in 1995, compared to 49.4% in 1994 and 49.4% in 1993. Average investment securities amounted to $174.0 million, $172.9 million and $161.5 million in 1995, 1994 and 1993 respectively. Average interest-bearing deposits declined $10.0 million or 3.1% to $308.6 million for the year ended December 31, 1995 and declined $979 thousand or 0.3% to $318.5 million for the year ended December 31, 1994. The ratio of average demand deposits to average total deposits for the years ended December 31, 1995, 1994 and 1993 was 11.5%, 10.6%, and 10.3%, respectively. F-38 The following table presents First State Bank's average balance sheets during the last three years:
YEARS ENDED DECEMBER 31, ------------------------------------- AVERAGE BALANCE SHEETS 1995 1994 1993 - --------------------------------------------------------------------------- ----------- ----------- ----------- (IN THOUSANDS) ASSETS Loans...................................................................... $ 188,029 $ 190,332 $ 186,158 Investment Securities Taxable.................................................................. 138,125 134,258 117,736 Tax-Exempt............................................................... 35,905 38,657 43,717 Federal Funds Sold......................................................... 21,079 22,018 29,606 ----------- ----------- ----------- Total Interest-Earning Assets.......................................... 383,138 385,265 377,217 Cash and Due From Banks.................................................... 15,274 15,496 19,072 Bank Premises and Equipment, Net........................................... 5,474 5,492 5,198 Other Assets............................................................... 8,319 8,540 8,617 Allowance for Loan Losses.................................................. (3,911) (3,904) (3,905) ----------- ----------- ----------- Total.................................................................. $ 408,294 $ 410,889 $ 406,199 ----------- ----------- ----------- LIABILITIES Demand Deposits Commercial and Individual................................................ $ 40,239 $ 37,958 $ 36,888 ----------- ----------- ----------- Total Demand Deposits.................................................. 40,239 37,958 36,888 ----------- ----------- ----------- Savings.................................................................... 51,495 62,046 29,901 Money Market Checking and Savings.......................................... 96,428 108,458 126,593 Time Deposits.............................................................. 160,629 148,041 163,030 ----------- ----------- ----------- Total Interest-Bearing Deposits........................................ 308,552 318,545 319,524 ----------- ----------- ----------- Total Deposits............................................................. 348,791 356,503 356,412 ----------- ----------- ----------- Short-Term Borrowings...................................................... 837 767 820 Other Liabilities.......................................................... 2,076 2,001 1,889 STOCKHOLDERS' EQUITY....................................................... 56,590 51,618 47,078 ----------- ----------- ----------- Total.................................................................. $ 408,294 $ 410,889 $ 406,199 ----------- ----------- ----------- ----------- ----------- -----------
CASH AND DUE FROM BANKS First State Bank offers a broad range of commercial banking services to individuals and businesses. The amount of cash and due from banks held on any one day is significantly influenced by changes in cash items in the process of collection. At December 31, 1995, cash and due from banks was $16.3 million, $1.7 million less than at December 31, 1994. INVESTMENT SECURITIES Investment securities consist of two categories: Available for Sale and Held to Maturity. Securities classified as Held to Maturity are those securities First State Bank has both the positive intent and ability to hold to maturity and are carried at amortized cost. Securities classified as Available for Sale are those securities which First State Bank intends to hold for an indefinite period of time but not necessarily to maturity. These securities may be sold as part of asset/liability management strategy, or in response to significant movements in interest rates, liquidity needs, regulatory capital considerations, and other similar factors. These securities are carried at fair value in the accompanying balance sheet. The percentage of the investment portfolio allocated to Available for Sale and Held to Maturity was 14.1% and 85.9%, respectively at December 31, 1995 compared with 18.5% and 81.5%, respectively at December 31, 1994. F-39 The following table presents the estimated market value of Securities Available for Sale at December 31, 1995 and 1994. No securities were classified as Securities Available for Sale in years prior to 1994 as management of First State Bank adopted Statement 115 in January 1994.
% CHANGE FROM PRIOR SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994 - ------------------------------------------------------------------------------ --------- ------------ --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities...................................................... $ 8,504 16.9% $ 7,274 U.S. Government Agency Securities............................................. 14,974 (42.1) 25,879 --------- ----- --------- Total....................................................................... $ 23,478 (29.2)% $ 33,153 --------- ----- --------- --------- ----- ---------
The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Available for Sale at December 31, 1995:
AMORTIZED COST (1) MATURING ------------------------------------------------ AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE - ---------------------------------------- --------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $ 6,497 $ 2,007 $ -- $ -- $ 8,504 $ 8,504 U.S. Government Agency Securities............................. 10,470 4,531 -- -- 15,001 14,974 --------- ----------- ----------- ----------- ----------- ----------- Total................................. $ 16,967 $ 6,538 $ -- $ -- $ 23,505 $ 23,478 --------- ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - ---------------------------------------- U.S. Treasury Securities................ 4.79% 5.58% -- -- 4.97% U.S. Government Agency Securities............................. 4.87 6.22 -- -- 5.28 Total................................. 4.84 6.03 -- -- 5.17 --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
- --------- (1) Amortized cost for Securities Available for Sale is stated at par plus any remaining unamortized premium paid less any remaining unamortized discount received. The following table presents amortized cost of Securities Held to Maturity at December 31, 1995, 1994 and 1993:
% CHANGE FROM % CHANGE FROM SECURITIES HELD TO MATURITY 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------- ----------- ----------------- ----------- ----------------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities............... $ 6,921 0.6% $ 6,879 (59.4)% $ 16,931 U.S. Government Agency Securities...... 96,074 1.0 95,139 (10.9) 106,739 States and Political Subdivisions Securities............................ 39,145 (8.6) 42,814 (1.1) 43,297 Mortgage-Backed Securities............. 118 (17.5) 143 -- -- Other Securities....................... 1,025 -- 1,025 (71.7) 3,621 ----------- ----- ----------- ----- ----------- Total................................ $ 143,283 (1.9)% $ 146,000 (14.4)% $ 170,588 ----------- ----- ----------- ----- ----------- ----------- ----- ----------- ----- -----------
Investments in entities within the State of Texas comprised 91.2% of the total investment in states and political subdivisions. No single issue accounted for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the obligations of states and political subdivisions held by First State Bank at December 31, 1995, 52.5% were rated A or better by Moody's Investor Services, Inc. F-40 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Held to Maturity at December 31, 1995:
AMORTIZED COST (1) MATURING ------------------------------------------------ AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET SECURITIES HELD TO MATURITY OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE - --------------------------------------- --------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities............... $ 4,483 $ 2,438 $ -- $ -- $ 6,921 $ 7,070 U.S. Government Agency Securities...... 11,701 82,381 1,992 -- 96,074 95,490 States and Political Subdivisions Securities............................ 5,267 16,246 13,203 4,429 39,145 41,377 Mortgage-Backed Securities............. -- 118 -- -- 118 121 Other Securities....................... -- 1,000 -- 25 1,025 940 --------- ----------- ----------- ----------- ----------- ----------- Total................................ $ 21,451 $ 102,183 $ 15,195 $ 4,454 $ 143,283 $ 144,998 --------- ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - --------------------------------------- U.S. Treasury Securities............... 7.83% 6.60% -- % -- % 7.40% U.S. Government Agency Securities...... 4.05 5.83 6.48 -- 5.63 States and Political Subdivisions Securities............................ 10.06 10.03 9.61 9.08 9.78 Mortgaged-Backed Securities............ -- 8.47 -- -- 8.47 Other Securities....................... -- -- -- 4.00 4.00 Total................................ 6.32 6.46 9.20 9.05 6.81 --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
At December 31, 1995, U.S. Government Agency securities with a carrying value of approximately $11.4 million contained interest features which adjust according to various dual indices and/or which could adjust to zero. These features relate only to the interest payments and do not affect the principal amount due. At December 31, 1995, the weighted average coupon of these securities equalled 3.00%. One issue with a book value of $3.5 million has adjusted to zero percent and will mature in May 1996. The following table presents the maturities, amortized cost and estimated market value of such securities at December 31, 1995:
AMORTIZED COST (1) MATURING -------------------------------------------------- AFTER ONE AFTER FIVE ESTIMATED ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET LESS FIVE YEARS YEARS YEARS COST (1) VALUE ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Available for Sale....................... $ 3,500 $ -- $ -- $ -- $ 3,500 $ 3,448 Held to Maturity......................... 5,950 2,000 -- -- 7,950 7,782 ----------- ----------- ----------- ----------- ----------- ----------- Total.................................. $ 9,450 $ 2,000 $ -- $ -- $ 11,450 $ 11,230 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------- (1) Amortized cost for Securities Held to Maturity is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discount received. LOANS First State Bank closely monitors the markets in which it conducts its lending. A certain degree of risk is inherent in the extension of credit. Management has instituted credit policies designed to monitor and control the level of losses and nonperforming assets. These policies require evaluation of new credit requests and continuing review of existing credits to identify, monitor and quantify any evidence of deterioration of quality or potential loss. F-41 First State Bank attempts to diversify risk with the objective of achieving optimum rates of return while minimizing losses for the benefit of stockholders and protection of depositors. Diversification of the loan portfolio by type of loan, industry concentration and type of borrower also tends to reduce risk by minimizing the adverse impact of any single event or set of occurrences. Total loans at December 31, 1995 decreased $5.9 million or 3.0% to $188.4 million compared to the year-end balance at December 31, 1994. Total loans at December 31, 1994 of $194.3 million decreased $547 thousand or 0.3% compared to the year-end balance of $194.9 million at December 31, 1993. The principal reason for the decrease in total loans at year-end 1995 was reductions in agricultural and agricultural mortgage loans outstanding. Real estate loans, including construction, commercial mortgage, agricultural mortgage and 1-4 family mortgage, continue to represent the largest component of First State Bank's loan portfolio. The percent of real estate loans to total loans was 56.2%, 53.2% and 53.0%, at December 31, 1995, 1994 and 1993, respectively. The decline in agricultural and agricultural mortgage loans resulted primarily from reduced borrowing by certain customers and several large borrowers who discontinued farming and paid off their loans. This was offset by increases in other lines which are normally paid down at this time of the year. See "Nonperforming Assets." The following table presents the composition of the loan portfolio at the end of each of the last five years:
DECEMBER 31, --------------------------------------------------------------- LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991 - ------------------------------------------------ ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Commercial...................................... $ 52,390 $ 54,550 $ 54,758 $ 57,822 $ 50,655 Commercial-Tax Exempt........................... 2,044 2,353 1,969 1,954 1,570 ----------- ----------- ----------- ----------- ----------- Total Commercial Loans........................ 54,434 56,903 56,727 59,776 52,225 Agricultural.................................... 8,893 12,183 11,539 15,082 14,913 Real Estate Construction.................................. 23,949 21,001 13,852 12,016 11,050 Commercial Mortgage........................... 40,123 37,031 50,477 45,486 41,223 Agricultural Mortgage......................... 9,673 11,356 8,788 9,989 7,960 1-4 Family Mortgage........................... 32,221 34,072 30,058 28,774 29,922 Consumer........................................ 19,131 21,760 23,412 21,872 19,997 ----------- ----------- ----------- ----------- ----------- Total Loans................................... $ 188,424 $ 194,306 $ 194,853 $ 192,995 $ 177,290 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
F-42 The contractual maturity schedule of the loan portfolio at December 31, 1995 is presented in the following table:
LOAN MATURITIES DECEMBER 31, 1995 ---------------------------------------------------- AFTER ONE YEAR ONE YEAR THROUGH AFTER FIVE OR LESS FIVE YEARS YEARS TOTAL --------- --------------- ----------- ----------- (IN THOUSANDS) Commercial.................................................. $ 37,448 $ 16,073 $ 913 $ 54,434 Agricultural................................................ 8,149 691 53 8,893 Real Estate................................................. 36,431 58,626 10,909 105,966 Consumer.................................................... 12,615 6,403 113 19,131 --------- --------------- ----------- ----------- Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424 --------- --------------- ----------- ----------- --------- --------------- ----------- ----------- Variable-Rate Loans......................................... $ 17,920 $ 23,592 $ 5,704 $ 47,216 Fixed-Rate Loans............................................ 76,723 58,201 6,284 141,208 --------- --------------- ----------- ----------- Total..................................................... $ 94,643 $ 81,793 $ 11,988 $ 188,424 --------- --------------- ----------- ----------- --------- --------------- ----------- -----------
As shown in the preceding table, loans maturing within one year totaled $94.6 million or 50.2% of total loans at December 31, 1995. First State Bank may renew or extend a loan on maturity based on management's assessment of individual loans. Extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless loans are fully secured, or are revolving lines of credit subject to annual analysis and renewal. NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. First State Bank's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. At December 31, 1995, three of the loans on nonaccrual status totaling approximately $1.8 million had balances in excess of $100 thousand. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more for the years ended December 31, 1995, 1994 and 1993 that are not classified as nonaccrual totaled $4.9 million, $3.2 million and $3.4 million, respectively. Included in this classification at December 31, 1995 were agricultural loans of $2.4 million which represent carryovers from the 1995 crop year and for which borrowers are awaiting disaster payments and/or insurance proceeds. Nonperforming assets of $3.2 million at December 31, 1995 increased $1 thousand compared to December 31, 1994 levels of $3.2 million and decreased $475 thousand or 13.1% for the year ended December 31, 1994 compared to December 31, 1993 levels of $3.6 million. First State Bank's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. F-43 An analysis of the components of nonperforming assets for the last five years is presented in the following table:
DECEMBER 31, ----------------------------------------------------- NONPERFORMING ASSETS 1995 1994 1993 1992 1991 - -------------------------------------------------------------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual Loans.............................................. $ 2,724 $ 2,562 $ 2,907 $ 993 $ 4,376 Renegotiated Loans............................................ -- -- -- -- -- --------- --------- --------- --------- --------- Nonperforming Loans......................................... 2,724 2,562 2,907 993 4,376 Other Nonperforming Assets (Primarily Other Real Estate)...... 431 592 722 671 1,519 --------- --------- --------- --------- --------- Total Nonperforming Assets.................................. 3,155 3,154 3,629 1,664 5,895 Accruing Loans 90 Days or More Past Due....................... 4,859 3,173 3,439 3,351 3,890 --------- --------- --------- --------- --------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due.............................................. $ 8,014 $ 6,327 $ 7,068 $ 5,015 $ 9,785 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Nonperforming Loans as a % of Total Loans..................... 1.45% 1.32% 1.49% 0.51% 2.47% Nonperforming Assets as a % of Total Loans and Other Nonperforming Assets......................................... 1.67 1.62 1.86 0.86 3.30 Nonperforming Assets as a % of Total Assets................... 0.78 0.78 0.90 0.44 1.84 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Other Nonperforming Assets..... 4.24 3.25 3.61 2.59 5.47 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Interest income that would have been recorded for the years ended December 31, 1995, 1994 and 1993 on nonaccrual loans had such loans performed in accordance with their original contract terms was approximately $531 thousand, $820 thousand and $232 thousand, respectively. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged off. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at December 31, 1995 was $4.2 million, which represents an increase of $281 thousand or 7.2% as compared to the allowance for loan losses at December 31, 1994. Management believes that the allowance for loan losses at December 31, 1995 adequately reflects the risks in the loan portfolio. However, various regulatory agencies, as an integral part of their examination process, periodically review First State Bank's allowance for loan losses. Such agencies may require First State Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. As a result of criticisms reflected in the October 4, 1993 Report of Examination by the Texas Department of Banking, a Memorandum of Understanding (the "Memorandum") was entered into between the Board of Directors of First State Bank and the Banking Commissioner of Texas on December 14, 1993. The Memorandum required that First State Bank, among other provisions, increase Board of Directors supervision over loan activities, revise the existing loan policy, increase the allowance for loan losses and reduce criticized assets. Additionally, First State Bank's Board of Directors is required to F-44 submit to the Commissioner and Regional Director of the FDIC a written report of the actions taken to comply with the Memorandum. Management has made efforts to comply with the requirements of the Memorandum. The following table summarizes the activity in the allowance for loan losses for the last five years:
YEARS ENDED DECEMBER 31, ----------------------------------------------------- ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991 - -------------------------------------------------------------- --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at Beginning of Year.................................. $ 3,915 $ 3,903 $ 3,903 $ 3,905 $ 3,503 Provision for Loan Losses..................................... 2,425 2,189 2,287 5,179 4,015 Charge-Offs Commercial.................................................. 184 213 265 1,036 3,021 Agricultural................................................ 173 -- 18 790 -- Real Estate................................................. 1,518 1,405 1,397 3,042 90 Consumer.................................................... 390 704 720 388 602 --------- --------- --------- --------- --------- Total Charge-Offs......................................... 2,265 2,322 2,400 5,256 3,713 --------- --------- --------- --------- --------- Recoveries Commercial.................................................. 32 45 33 9 37 Agricultural................................................ -- -- 10 4 -- Real Estate................................................. 10 11 4 25 15 Consumer.................................................... 79 89 66 37 48 --------- --------- --------- --------- --------- Total Recoveries.......................................... 121 145 113 75 100 --------- --------- --------- --------- --------- Net Charge-Offs (Recoveries).................................. 2,144 2,177 2,287 5,181 3,613 --------- --------- --------- --------- --------- Balance at End of Year........................................ $ 4,196 $ 3,915 $ 3,903 $ 3,903 $ 3,905 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount......................................... 2.22% 2.01% 2.00% 2.02% 2.20% Ratio of Allowance for Loan Losses to Nonperforming Assets.... 133.00 124.13 107.55 234.56 66.24 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount........................ 1.14 1.14 1.23 2.82 2.16 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 ------------------------- ------------------------- ------------------------- ------------------------- % OF % OF % OF % OF LOANS LOANS LOANS LOANS IN EACH IN EACH IN EACH IN EACH CATEGORY CATEGORY CATEGORY CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS) Commercial.............. $ 645 28.9% $ 741 29.3% $ 717 29.1% $ 698 31.0% Agricultural............ 279 4.7 108 6.3 107 5.9 142 7.8 Real Estate............. 1,469 56.2 1,855 53.2 2,325 53.0 1,713 49.9 Consumer................ 254 10.2 278 11.2 328 12.0 354 11.3 Unallocated............. 1,549 -- 933 -- 426 -- 996 -- ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total............... $ 4,196 100.0% $ 3,915 100.0% $ 3,903 100.0% $ 3,903 100.0% ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- ----------- ----- 1991 ------------------------- % OF LOANS IN EACH CATEGORY TO TOTAL AMOUNT LOANS ----------- ------------ Commercial.............. $ 1,420 29.4% Agricultural............ 127 8.4 Real Estate............. 1,617 50.9 Consumer................ 400 11.3 Unallocated............. 341 -- ----------- ----- Total............... $ 3,905 100.0% ----------- ----- ----------- -----
F-45 PREMISES AND EQUIPMENT Bank premises and equipment of $5.5 million at December 31,1995 increased $37 thousand or 0.7% compared to $5.4 million at December 31, 1994. The net increase for the year ended December 31, 1995 is primarily attributable to the completion of a branch facility of First State Bank begun in 1994. DEPOSITS Total deposits of $343.6 million at December 31, 1995 decreased $2.1 million or 0.6% compared to December 31, 1994 levels and total deposits of $345.7 million at the December 31, 1994 decreased $4.6 million or 1.3% compared to December 31, 1993 levels of $350.2 million. Total public funds (including public funds demand deposits, public funds money market and NOW account and public funds time deposits) were $79.2 million, $66.2 million, and $61.7 million. First State Bank actively seeks consumer and commercial deposits. The following table presents the composition of total deposits at the end of the last three years:
DECEMBER 31, --------------------------------------------------------------------------- % CHANGE FROM % CHANGE FROM TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------- ----------- ----------------- ----------- ----------------- ----------- (DOLLARS IN THOUSANDS) Demand Deposits Commercial and Individual............ $ 39,238 6.9% $ 36,707 5.1% $ 34,934 Public Funds......................... 573 (26.1) 775 (29.3) 1,096 ----------- ----- ----------- ----- ----------- Total Demand Deposits.............. 39,811 6.2 37,482 4.0 36,030 ----------- ----- ----------- ----- ----------- Interest-Bearing Deposits Savings.............................. 46,623 (26.4) 63,322 36.4 46,422 Money Market Checking and Savings Commercial and Individual.......... 68,407 (13.6) 79,137 (18.3) 96,821 Public Funds....................... 36,041 15.8 31,116 15.3 26,993 Time Deposits Commercial and Individual.......... 110,126 9.8 100,277 (9.2) 110,376 Public Funds....................... 42,602 24.0 34,346 2.2 33,601 ----------- ----- ----------- ----- ----------- Total Interest-Bearing Deposits.... 303,799 (1.4) 308,198 (1.9) 314,213 ----------- ----- ----------- ----- ----------- Total Deposits................... $ 343,610 (0.6)% $ 345,680 (1.3)% $ 350,243 ----------- ----- ----------- ----- ----------- ----------- ----- ----------- ----- ----------- Weighted Average Rate on Interest-Bearing Deposits............. 4.05% 3.77% 3.60% ----------- ----------- ----------- ----------- ----------- -----------
Time deposits of $100,000 or more are solicited from markets served by First State Bank and are not sought through brokered sources. Time deposits continue to be a significant source of funds. The following table presents the maturities of time deposits of $100,000 or more at December 31, 1995 and 1994:
DECEMBER 31, -------------------- MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994 - ---------------------------------------------------------------------------------------- --------- --------- (DOLLARS IN THOUSANDS) Three Months or Less.................................................................... $ 59,695 $ 57,110 After Three through Six Months.......................................................... 22,434 17,152 After Six through Twelve Months......................................................... 11,212 8,929 After Twelve Months..................................................................... 1,116 653 --------- --------- Total............................................................................... $ 94,457 $ 83,844 --------- --------- --------- --------- Weighted Average Rate on Time Deposits of $100,000 or More.............................. 5.37% 4.81% --------- --------- --------- ---------
F-46 Mexico is a part of the trade territory of First State Bank and foreign deposits from Mexican sources have traditionally been a source of funding. Although First State Bank experienced a short term negative impact on its Mexican deposits due to the recent devaluation of the peso, First State Bank's Mexican deposit levels have since recovered. The following table presents foreign deposits, primarily from Mexican sources, at December 31, 1995:
FOREIGN DEPOSITS - ----------------------------------------------------------------------------------------- DECEMBER 31, 1995 ----------------------- (DOLLARS IN THOUSANDS) Demand Deposits.......................................................................... $ 674 -------- Interest-Bearing Deposits Savings................................................................................ 1,267 Money Market Checking and Savings...................................................... 5,106 Time Deposits Under $100,000........................................................... 3,261 Time Deposits of $100,000 or More...................................................... 13,587 -------- Total Interest-Bearing Deposits...................................................... 23,221 -------- Total Foreign Deposits............................................................... $ 23,895 -------- -------- Percentage of Total Deposits............................................................. 7.0% -------- -------- Weighted Average Rate on Foreign Deposits................................................ 4.80% -------- --------
LIQUIDITY Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew or acquire additional deposit liabilities is a major source of liquidity. First State Bank's principal sources of funds are primarily within the local markets of First State Bank and consist of deposits, interest and principal payments on loans and investment securities. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. These include cash, federal funds sold and U.S. Government-backed securities. At December 31, 1995, First State Bank's liquidity ratio, defined as cash, U.S. Government-backed securities, and federal funds sold as a percentage of deposits was 48.1% compared to 45.2% at December 31, 1994. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in the First State Bank's trade area. During 1995, funds for $34.3 million of investment purchases and the $2.1 million net decrease in deposits came from various sources, including $3.4 million net repayments on loans, $47.8 million proceeds from maturing or called securities and $8.6 million of net income. The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the Federal Deposit Insurance Corporation (the "FDIC") and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically capitalized." The classifications are generally determined by applicable ratios of the institution, including Tier I capital to risk-weighted assets, total capital to risk-weighted assets and leverage ratios. Based on First State Bank's capital ratios at December 31, 1995, First State Bank was classified as "well capitalized" under the applicable regulations. As a result, First State Bank does not believe that the prompt corrective action regulations have any material effect on its activities or operations. F-47 The funds management policy of First State Bank is to maintain a liability sensitive position. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. Rate sensitive liabilities maturing within one year exceeded rate sensitive assets with comparable maturities at December 31, 1995 by $83.3 million. The following table summarizes interest rate sensitive assets and liabilities by maturity at December 31, 1995:
DECEMBER 31, 1995 --------------------------------------------------------------------------- 1-3 4-6 7-12 1-5 OVER INTEREST RATE SENSITIVITY ANALYSIS MONTHS MONTHS MONTHS YEARS 5 YEARS TOTAL - ----------------------------------- ------------ ------------ ---------- ----------- --------- ----------- (DOLLARS IN THOUSANDS) Loans.............................. $ 73,015 $ 19,222 $ 31,702 $ 58,201 $ 6,284 $ 188,424 Investment Securities Available for Sale............... 8,962 1,499 6,932 6,085 -- 23,478 Held to Maturity................. 23,359 4,278 17,763 78,260 19,623 143,283 Federal Funds Sold................. 23,350 -- -- -- -- 23,350 ------------ ------------ ---------- ----------- --------- ----------- Total Interest-Earning Assets........................ 128,686 24,999 56,397 142,546 25,907 378,535 ------------ ------------ ---------- ----------- --------- ----------- Savings............................ 46,623 -- -- -- -- 46,623 Money Market Checking and Savings Accounts.......................... 104,448 -- -- -- -- 104,448 Time Deposits...................... 78,974 36,017 27,155 10,580 -- 152,726 Other Borrowings................... 157 -- -- -- -- 157 ------------ ------------ ---------- ----------- --------- ----------- Total Interest-Bearing Liabilities................... 230,202 36,017 27,155 10,580 -- 303,954 ------------ ------------ ---------- ----------- --------- ----------- Rate Sensitivity GAP (1)........... $ (101,516) $ (11,018) $ 29,242 $ 131,966 $ 25,907 $ 74,581 ------------ ------------ ---------- ----------- --------- ----------- ------------ ------------ ---------- ----------- --------- ----------- Cumulative Rate Sensitivity GAP............................... $ (101,516) $ (112,534) $ (83,292) $ 48,674 $ 74,581 ------------ ------------ ---------- ----------- --------- ------------ ------------ ---------- ----------- --------- Ratio of Cumulative Rate Sensitivity GAP to Total Assets... (25.10)% (27.82)% (20.59)% ------------ ------------ ---------- ------------ ------------ ---------- Ratio of Cumulative Rate Sensitive Interest-Earning Assets to Cumulative Rate Sensitive Interest-Bearing Liabilities...... 0.56:1 0.58:1 0.72:1 ------------ ------------ ---------- ------------ ------------ ----------
- --------- (1) Rate sensitive interest-earning assets less rate sensitive interest-bearing liabilities. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring F-48 the spread between interest costs and yields through adjustments to maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. CAPITAL RESOURCES Stockholders' equity of $59.4 million at December 31, 1995 reflects a net increase of $4.1 million or 7.5% compared to stockholders' equity of $55.3 million at December 31,1994. This net increase was primarily attributable to earnings for 1995 of $8.6 million. The net increase in stockholders' equity reflects dividends paid on common stock of $5.0 million in 1995. The risk-based capital standards as established by the FDIC apply to First State Bank. The numerator of the risk-based capital ratio for banks includes Tier I capital, consisting of common stockholders' equity and qualifying cumulative and noncumulative perpetual preferred stock; and Tier II capital, consisting of other preferred stock, reserve for possible loan losses and certain subordinated and term-debt securities. Beginning on December 31, 1993, goodwill is deducted from Tier I capital. At no time is Tier II capital allowed to exceed Tier I capital in the calculation of total capital. The denominator or asset portion of the risk-based capital ratio aggregates generic classes of balance sheet and off-balance sheet exposures, each weighted by one of four factors, ranging from 0% to 100%, based on the relative risk of the exposure class. Ratio targets are set for both Tier I and Total Capital (Tier I plus Tier II capital). The minimum level of Tier I capital to total assets is 4.0% and the minimum Total Capital ratio is 8.0%. The FDIC has guidelines for a leverage capital ratio that is an additional evaluation of capital adequacy of banks. The leverage ratio is defined to be First State Bank's Tier I capital divided by its risk adjusted total assets. An insured depository institution is "well capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio is equal to or greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to or grater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater than 5.0%. Based on capital ratios, First State Bank is within the definition of "well capitalized" for FDIC purposes at December 31, 1995. First State Bank's Tier I Risk-Based Capital Ratio was approximately 18.47% and 17.99% at December 31, 1995 and 1994, respectively. First State Bank's Total Risk-Based Capital Ratio was approximately 19.78% and 19.26% at December 31, 1995 and 1994, respectively. First State Bank's Tier I Leverage Capital Ratio was approximately 14.88% and 13.98% at December 31, 1995 and 1994, respectively. The following table presents First State Bank's risk-based capital calculation:
DECEMBER 31, ---------------------------- RISK-BASED CAPITAL 1995 1994 - ------------------------------------------------------------------------------------ ------------- ------------- (DOLLARS IN THOUSANDS) Total Stockholders' Equity, before unrealized gains or losses on Securities Available for Sale................................................................. $ 59,405 $ 55,760 Less-Goodwill and Other Deductions.................................................. -- -- ------------- ------------- Total Tier I Capital................................................................ 59,405 55,760 Total Tier II Capital............................................................... 4,196 3,915 ------------- ------------- Total Qualifying Capital............................................................ $ 63,601 $ 59,675 ------------- ------------- ------------- ------------- Risk Adjusted Assets (Including Off-Balance Sheet Exposure)......................... $ 321,575 $ 309,874 ------------- ------------- ------------- ------------- Tier I Risk-Based Capital Ratio..................................................... 18.47% 17.99% Total Risk-Based Capital Ratio...................................................... 19.78 19.26 Leverage Capital Ratio.............................................................. 14.88 13.98 ------------- ------------- ------------- -------------
F-49 CURRENT ACCOUNTING ISSUES Effective January 1, 1995, First State Bank adopted Statement 114 and the amendment thereof, Statement 118. Under Statement 114, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Statement 114 requires that an impaired loan be valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. Statement 118 amended Statement 114 by expanding the related disclosure requirements and permitting use of existing methods for recognizing interest income on impaired loans. Loans which were restructured prior to the adoption of Statement 114 and which are performing in accordance with the renegotiated terms are not required to be reported as impaired. Loans restructured subsequent to the adoption of Statement 114 are required to be reported as impaired in the year of restructuring. Thereafter, such loans can be removed from the impaired loan disclosure if the loans were paying a market rate of interest at the time of restructuring and are performing in accordance with their renegotiated terms. For loans covered by Statement 114, First State Bank makes an assessment for impairment when and while such loans are on nonaccrual status or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by First State Bank using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. In management's opinion, the adoption of Statement 114 and Statement 118 did not have a material effect on First State Bank's results of operations. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Statement 123 encourages entities to adopt a "fair value" based method of accounting for stock-based compensation plans which requires an estimate of the fair value of stock options or other equity instruments which employees become entitled to when they have rendered requisite service or satisfied other conditions necessary to earn the right to benefit from the instruments. Compensation cost is then determined based on the fair value estimate and is recognized over the service period, which is usually the vesting period. Statement 123 also requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of Statement 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. In management's opinion, implementation of Statement 123 should have no material effect on First State Bank's financial statements. F-50 FOURTH QUARTER RESULTS The following table presents a summary of operations for the last five quarters:
1995 1994 ------------------------------------------ --------- CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------- --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Interest Income............................................... $ 8,284 $ 8,197 $ 8,891 $ 8,414 $ 7,714 Interest Expense.............................................. 3,219 3,364 3,407 3,111 2,873 --------- --------- --------- --------- --------- Net Interest Income........................................... 5,065 4,833 5,484 5,303 4,841 Provision for Loan Losses..................................... 1,625 583 136 81 1,359 Noninterest Income............................................ 77 552 385 388 190 Noninterest Expense........................................... 1,656 1,506 1,629 1,473 1,516 --------- --------- --------- --------- --------- Income Before Taxable-Equivalent Adjustment and Income Tax.... 1,861 3,296 4,104 4,137 2,156 Taxable-Equivalent Adjustment................................. 308 330 335 341 340 Applicable Income Tax Expense................................. 483 800 1,067 1,088 423 --------- --------- --------- --------- --------- Net Income.................................................... $ 1,070 $ 2,166 $ 2,702 $ 2,708 $ 1,393 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Income Per Common Share................................... $ 5.35 $ 10.83 $ 13.51 $ 13.54 $ 6.97 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-51 INDEPENDENT AUDITORS' REPORT The Board of Directors First State Bank & Trust Co.: We have audited the accompanying balance sheets of First State Bank & Trust Co. (the "Bank") as of December 31, 1995 and 1994, and the related statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First State Bank & Trust Co. as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in note 1 to the financial statements, the Bank changed its method of accounting for investment securities in 1994 to adopt the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." /s/ KPMG PEAT MARWICK LLP Houston, Texas January 31, 1996 F-52 FIRST STATE BANK & TRUST CO. BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ---------------- ---------------- Assets Cash and due from banks (note 2).......................................... $ 16,269,484 $ 18,007,420 Federal funds sold........................................................ 23,350,000 2,200,000 ---------------- ---------------- Total cash and cash equivalents............................... 39,619,484 20,207,420 ---------------- ---------------- Investment securities available for sale (note 3)......................... 23,478,011 33,153,515 Investment securities held to maturity (note 3)........................... 143,282,719 145,999,757 Loans, net of unearned discount (note 4).................................. 188,424,300 194,305,658 Less allowance for loan losses (note 5)................................... 4,196,028 3,914,948 ---------------- ---------------- Net loans..................................................... 184,228,272 190,390,710 ---------------- ---------------- Bank premises and equipment, net of accumulated depreciation and amortization (note 6).................................................... 5,487,065 5,449,897 Accrued interest receivable............................................... 7,172,017 6,232,652 Other real estate owned................................................... 431,160 591,781 Other assets.............................................................. 743,615 857,724 Deferred federal income taxes (note 8).................................... 27,162 214,498 ---------------- ---------------- $ 404,469,505 $ 403,097,954 ---------------- ---------------- ---------------- ---------------- Liabilities and Stockholders' Equity Liabilities: Deposits: Noninterest-bearing............................................... $ 39,810,680 $ 37,481,439 Interest-bearing (note 7)......................................... 303,799,742 308,198,878 ---------------- ---------------- Total deposits................................................ 343,610,422 345,680,317 Other borrowings.................................................. 156,553 1,092,000 Accrued interest payable.......................................... 718,652 547,157 Deferred compensation payable (note 9)............................ 529,430 506,389 Other liabilities................................................. 67,069 8,497 ---------------- ---------------- Total liabilities............................................. 345,082,126 347,834,360 ---------------- ---------------- Stockholders' equity: Common stock, $20 par value, 200,000 shares authorized, issued and outstanding.......................................................... 4,000,000 4,000,000 Certified surplus..................................................... 21,000,000 21,000,000 Undivided profits..................................................... 34,405,357 30,759,829 Unrealized loss on securities available for sale (note 3)............. (17,978) (496,235) ---------------- ---------------- Total stockholders' equity.................................... 59,387,379 55,263,594 Commitments and contingent liabilities (notes 4 and 10) ---------------- ---------------- $ 404,469,505 $ 403,097,954 ---------------- ---------------- ---------------- ----------------
See accompanying notes to financial statements. F-53 FIRST STATE BANK & TRUST CO. STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 -------------- -------------- -------------- Interest income: Loans........................................................ $ 20,728,570 $ 20,026,524 $ 20,454,890 Investment securities........................................ 10,526,478 9,949,080 10,297,111 Federal funds sold........................................... 1,217,370 855,109 870,640 -------------- -------------- -------------- Total interest income.................................... 32,472,418 30,830,713 31,622,641 -------------- -------------- -------------- Interest expense: Savings, NOW and money market deposits....................... 4,623,914 5,503,762 5,443,720 Time deposits................................................ 8,436,377 6,235,155 7,502,979 Other borrowings............................................. 42,689 27,874 21,444 -------------- -------------- -------------- Total interest expense................................... 13,102,980 11,766,791 12,968,143 -------------- -------------- -------------- Net interest income...................................... 19,369,438 19,063,922 18,654,498 Provision for loan losses (note 5)............................... 2,425,323 2,188,960 2,287,000 -------------- -------------- -------------- Net interest income after provision for loan losses...... 16,944,115 16,874,962 16,367,498 Noninterest income: Service charges on deposit accounts.......................... 1,145,720 1,078,481 1,076,729 Other service charges and fees............................... 151,991 141,083 85,742 Other........................................................ 104,403 81,598 163,325 -------------- -------------- -------------- Total noninterest income................................. 1,402,114 1,301,162 1,325,796 -------------- -------------- -------------- Noninterest expense: Salaries and employee benefits............................... 2,823,641 2,562,973 2,338,022 Net occupancy expense........................................ 568,673 554,942 639,994 Equipment expense............................................ 340,948 278,082 260,962 Legal and professional fees.................................. 526,025 316,080 473,455 Data processing fees......................................... 372,130 363,596 279,119 Other real estate and repossessed asset expense, net......... 96,377 197,856 65,072 FDIC assessment.............................................. 397,282 801,740 770,595 Other........................................................ 1,139,267 1,067,232 2,507,707 -------------- -------------- -------------- Total noninterest expense................................ 6,264,343 6,142,501 7,334,926 -------------- -------------- -------------- Income before income tax expense......................... 12,081,886 12,033,623 10,358,368 Income tax expense (note 8)...................................... 3,436,358 3,191,573 2,260,025 -------------- -------------- -------------- Net income............................................... $ 8,645,528 $ 8,842,050 $ 8,098,343 -------------- -------------- -------------- -------------- -------------- -------------- Net income per share............................................. $ 43.23 $ 44.21 $ 40.49 -------------- -------------- -------------- -------------- -------------- --------------
See accompanying notes to financial statements. F-54 FIRST STATE BANK & TRUST CO. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED GAIN (LOSS) ON SECURITIES TOTAL CERTIFIED UNDIVIDED AVAILABLE FOR STOCKHOLDERS' COMMON STOCK SURPLUS PROFITS SALE EQUITY ------------- -------------- -------------- ------------- -------------- Balance at December 31, 1992............ $ 4,000,000 $ 21,000,000 $ 18,819,436 $ -- $ 43,819,436 Cash dividends on common stock.................................. -- -- (2,000,000) -- (2,000,000) Net income for 1993..................... -- -- 8,098,343 -- 8,098,343 ------------- -------------- -------------- ------------- -------------- Balance at December 31, 1993............ 4,000,000 21,000,000 24,917,779 -- 49,917,779 Effect of change to adopt an accounting principle -- accounting for unrealized gain (loss) on securities available for sale (note 3).......................... -- -- -- 137,434 137,434 Cash dividends on common stock.................................. -- -- (3,000,000) -- (3,000,000) Change in unrealized gain (loss) on securities available for sale (note 3)..................................... -- -- -- (633,669) (633,669) Net income for 1994..................... -- -- 8,842,050 -- 8,842,050 ------------- -------------- -------------- ------------- -------------- Balance at December 31, 1994............ 4,000,000 21,000,000 30,759,829 (496,235) 55,263,594 Cash dividends on common stock.................................. -- -- (5,000,000) -- (5,000,000) Change in unrealized gain (loss) on securities available for sale (note 3)..................................... -- -- -- 478,257 478,257 Net income for 1995..................... -- -- 8,645,528 -- 8,645,528 ------------- -------------- -------------- ------------- -------------- Balance at December 31, 1995............ $ 4,000,000 $ 21,000,000 $ 34,405,357 $ (17,978) $ 59,387,379 ------------- -------------- -------------- ------------- -------------- ------------- -------------- -------------- ------------- --------------
See accompanying notes to financial statements. F-55 FIRST STATE BANK & TRUST CO. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ---------------- ---------------- ---------------- Cash flows from operating activities: Net income.............................................. $ 8,645,528 $ 8,842,050 $ 8,098,343 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of bank premises and equipment.......................................... 370,813 363,443 327,355 Net discount accretion on investment securities..... (428,999) (138,022) (22,619) Provision for loan losses........................... 2,425,323 2,188,960 2,287,000 Losses on sales of other real estate owned.......... 96,377 197,856 68,774 (Increase) decrease in accrued interest receivable, federal income tax refundable and other assets..... (884,298) 788,385 294,713 Increase (decrease) in accrued interest payable and other liabilities.................................. 253,108 (13,207) (294,201) ---------------- ---------------- ---------------- Total adjustments............................... 1,832,324 3,387,415 2,661,022 ---------------- ---------------- ---------------- Net cash provided by operating activities....... 10,477,852 12,229,465 10,759,365 ---------------- ---------------- ---------------- Cash flows from investing activities: Proceeds from investment security maturities and principal repayments................................... 20,161,980 19,455,000 22,464,681 Proceeds from called investment securities.............. 27,685,000 15,066,415 13,736,583 Purchase of investment securities....................... (34,300,805) (43,700,191) (74,882,531) Net decrease (increase) in loans........................ 3,260,671 (2,886,642) (4,867,463) Recoveries on loans charged off......................... 120,104 143,405 114,571 Purchases of bank premises and equipment................ (407,981) (150,048) (1,268,904) Proceeds from sales of other real estate owned.......... 420,585 1,106,919 489,939 ---------------- ---------------- ---------------- Net cash provided by (used in) investing activities..................................... 16,939,554 (10,965,142) (44,213,124) ---------------- ---------------- ---------------- Cash flows from financing activities: (Decrease) increase in deposits......................... (2,069,895) (4,569,866) 17,679,043 (Decrease) increase in other borrowings................. (935,447) (559,288) 76,333 Dividends paid on common stock.......................... (5,000,000) (3,000,000) (2,000,000) ---------------- ---------------- ---------------- Net cash (used in) provided by financing activities..................................... (8,005,342) (8,129,154) 15,755,376 ---------------- ---------------- ---------------- Net increase (decrease) in cash and cash equivalents.................................... 19,412,064 (6,864,831) (17,698,383) Cash and cash equivalents at beginning of year.............. 20,207,420 27,072,251 44,770,634 ---------------- ---------------- ---------------- Cash and cash equivalents at end of year.................... $ 39,619,484 $ 20,207,420 $ 27,072,251 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Supplemental disclosure of cash flow information: Interest paid........................................... $ 12,931,485 $ 11,779,735 $ 13,259,963 Taxes paid.............................................. 3,815,113 3,243,371 2,304,000 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- Supplemental schedule of noncash investing and financing activities -- foreclosure of assets in partial satisfaction of loans receivable........................................ $ 357,000 $ 1,174,000 $ 611,000 ---------------- ---------------- ---------------- ---------------- ---------------- ----------------
See accompanying notes to financial statements. F-56 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Bank conform to generally accepted accounting principles and to prevailing practices within the banking industry. A summary of the more significant accounting policies follows: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and due from banks and federal funds sold are considered to be cash equivalents. Federal funds sold generally have one-day maturities. TRUST ASSETS Assets held by the trust department in fiduciary or agency capacities are not assets of the Bank and are not included in the balance sheets. Trust assets at December 31, 1995 and 1994 are approximately $11,542,000 and $11,400,000 respectively. INVESTMENT SECURITIES In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities." Statement 115 establishes standards of financial accounting and reporting for investments in equity securities that have a readily determinable fair value and for all investments in debt securities. At acquisition, a bank is required to classify debt and equity securities into one of three categories: held to maturity, trading or available for sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held to maturity and measured at amortized cost in the balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the balance sheet with unrealized holding gains and losses included in earnings. Investments not classified as held to maturity nor trading are classified as available for sale and measured at fair value in the balance sheet with unrealized holding gains and losses, net of applicable income taxes, reported in a separate component of stockholders' equity until realized. Effective January 1, 1994, the Bank adopted Statement 115, which had no impact on the Bank's income statement as all securities were classified as either held to maturity or available for sale. Accounting for securities classified as held to maturity will continue on the basis of amortized cost. Securities classified as available for sale will be measured at market value with the net unrealized holding gains and losses reported in a separate component of stockholders' equity until realized. Purchases of investment securities are classified as available for sale or held to maturity at time of purchase as determined by management. Premiums and discounts are amortized and accreted using a method which approximates level yield. Gains and losses on available for sale investment securities sold are recognized in operations at the time of sale based on the specific identification method. Security purchases and sales are recorded on the trade date. F-57 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOANS Management continually reviews the loan portfolio to identify loans which, with respect to principal or interest, have or may become collection problems. A loan is generally placed on nonaccrual status when principal or interest is past due 90 days or more, and the loan is not both well-secured and in the process of collection. A loan is also placed on nonaccrual status immediately if, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending on management's assessment of the ultimate collectibility of principal. Unearned interest on installment loans is recognized as income over the terms of the related loans on a basis which results in approximately level rates of return over the terms of the loans. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which addresses the accounting by creditors for impairment of certain loans, as defined. In October 1994, Statement 114 was amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures." Implementation of these pronouncements in the first quarter of 1995 did not have a material effect on the Bank's financial statements. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established by a charge to operations as deemed necessary by management to maintain the allowance for loan losses at an amount considered adequate to absorb known or possible loan losses in the Bank's loan portfolio. The provision is determined based on management's evaluation of the loan portfolio, giving consideration to existing economic conditions, changes in the loan portfolio, historical loan loss factors and other relevant information. Management believes that the allowance for loan losses is adequate. Loans are charged against the allowance for loan losses when management believes the collection of principal is unlikely. Recoveries of amounts previously charged off are credited to the allowance. BANK PREMISES AND EQUIPMENT Bank premises and equipment are recorded at cost. Expenditures for improvements are capitalized. Repairs and maintenance which do not extend the life of bank premises and equipment are charged to expense as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Any gain or loss resulting from disposition of premises and equipment is reflected in earnings. OTHER REAL ESTATE OWNED Other real estate owned is recorded at fair value at the date of foreclosure which is subsequently considered cost. At subsequent dates, other real estate is carried at the lower of fair value less estimated costs to sell or cost. Fair values are determined generally by reference to appraisals. Rental income earned and expenses incurred related to real estate owned are recognized during the period earned or incurred and are included in noninterest expense at their net amount. FEDERAL INCOME TAXES Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities F-58 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is recognized as a result of the change in the asset or liability during the year. (2) RESERVE REQUIREMENTS The Bank is required to maintain certain daily reserve balances on hand or on deposit with the Federal Reserve Bank in accordance with Federal Reserve Board requirements. These deposits are noninterest bearing and not available for investment purposes. Cash and due from bank balances maintained in accordance with such requirements at December 31, 1995 was approximately $5,611,000. (3) INVESTMENT SECURITIES The amortized cost and estimated market value, which is the carrying value, of investment securities available for sale at December 31, 1995 and December 31, 1994 are as follows:
1995 --------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE - ----------------------------------------------- -------------- ----------- ------------ -------------- U.S. treasuries................................ $ 8,505,399 $ 7,907 $ (9,156) $ 8,504,150 U.S. government agencies....................... 14,999,852 43,818 (69,809) 14,973,861 -------------- ----------- ------------ -------------- $ 23,505,251 $ 51,725 $ (78,965) $ 23,478,011 -------------- ----------- ------------ -------------- -------------- ----------- ------------ -------------- 1994 --------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED AVAILABLE FOR SALE AMORTIZED COST GAINS LOSSES MARKET VALUE - ----------------------------------------------- -------------- ----------- ------------ -------------- U.S. treasuries................................ $ 7,485,019 $ -- $ (210,769) $ 7,274,250 U.S. government agencies....................... 26,420,372 33,482 (574,589) 25,879,265 -------------- ----------- ------------ -------------- $ 33,905,391 $ 33,482 $ (785,358) $ 33,153,515 -------------- ----------- ------------ -------------- -------------- ----------- ------------ --------------
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding losses on securities available for sale, net of income tax, as a decrease in stockholders' equity of $17,978 and $496,235, respectively. The amortized cost, which is the carrying value, and estimated market value of investment securities held to maturity at December 31, 1995 and December 31, 1994 are as follows:
1995 --------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED HELD TO MATURITY COST GAINS LOSSES MARKET VALUE ------------ ---------- ----------- ------------ U.S. treasuries............................................................ $ 6,921,316 $ 148,684 $ -- $ 7,070,000 U.S. government agencies................................................... 96,073,990 580,034 (1,163,653) 95,490,371 Mortgage-backed securities................................................. 117,931 3,131 -- 121,062 Obligations of state and political subdivisions............................ 39,144,482 2,273,531 (41,554) 41,376,459 Other...................................................................... 1,025,000 -- (85,000) 940,000 ------------ ---------- ----------- ------------ $143,282,719 $3,005,380 $(1,290,207) $144,997,892 ------------ ---------- ----------- ------------ ------------ ---------- ----------- ------------
F-59
FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) INVESTMENT SECURITIES (CONTINUED)
1994 --------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED HELD TO MATURITY COST GAINS LOSSES MARKET VALUE ------------ ---------- ----------- ------------ U.S. treasuries............................................................ $ 6,878,988 $ 14,614 $ (67,051) $ 6,826,551 U.S. government agencies................................................... 95,138,721 46,299 (4,281,522) 90,903,498 Mortgage-backed securities................................................. 143,244 716 -- 143,960 Obligations of state and political subdivisions............................ 42,813,804 1,181,413 (794,410) 43,200,807 Other...................................................................... 1,025,000 -- (145,000) 880,000 ------------ ---------- ----------- ------------ $145,999,757 $1,243,042 $(5,287,983) $141,954,816 ------------ ---------- ----------- ------------ ------------ ---------- ----------- ------------
The amortized cost and estimated market value of investment securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED MARKET AVAILABLE FOR SALE AMORTIZED COST VALUE - -------------------------------------------------------------------- ---------------- ---------------- Due in one year or less............................................. $ 16,967,383 $ 16,896,451 Due after one year through five years............................... 6,537,868 6,581,560 ---------------- ---------------- $ 23,505,251 $ 23,478,011 ---------------- ---------------- ---------------- ---------------- HELD TO MATURITY - -------------------------------------------------------------------- Due in one year or less............................................. $ 21,450,361 $ 21,517,429 Due after one year through five years............................... 102,176,590 102,449,356 Due after five years through ten years.............................. 15,109,876 16,169,479 Due after ten years................................................. 4,427,961 4,740,566 Mortgage-backed securities.......................................... 117,931 121,062 ---------------- ---------------- $ 143,282,719 $ 144,997,892 ---------------- ---------------- ---------------- ----------------
Included in held to maturity and available for sale securities at December 31, 1995 are approximately $7,950,000 and $3,447,000, respectively, of investment securities that pay interest based on a set coupon rate with a foreign exchange rate adjustment or based directly on a foreign index. The held to maturity securities have a market value of $7,681,000. All of the securities mature during 1996 and 1997, with the exception of one security maturing in the year 2000. The securities are paying interest at a rate of approximately 3.00%. One security of approximately $500,000 has an interest rate floor of 3.00%. The interest rate on the other securities could reset to zero. No loss of principal is anticipated by management on any of the aforementioned securities. There were no sales for the year ended December 31, 1995 and December 31, 1994 from either the available for sale or held to maturity categories. Securities with a carrying value of approximately $88,016,000 and $84,645,000 were pledged to secure public deposits of $79,216,000 and $66,238,000 at December 31, 1995 and 1994, respectively. F-60 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (4) LOANS Loans at December 31, 1995 and 1994 are as follows:
1995 1994 ---------------- ---------------- Commercial.......................................................... $ 54,365,622 $ 56,890,953 Real estate: Construction.................................................... 23,949,363 21,001,841 Commercial...................................................... 40,123,334 37,030,742 Agriculture..................................................... 9,673,106 11,356,403 1-4 single family residential................................... 32,220,920 34,072,308 Agriculture......................................................... 8,892,678 12,182,994 Consumer............................................................ 19,207,770 21,862,891 Overdraft and other................................................. 68,549 11,737 ---------------- ---------------- 188,501,342 194,409,769 Less unearned discount.............................................. (77,042) (104,111) ---------------- ---------------- $ 188,424,300 $ 194,305,658 ---------------- ---------------- ---------------- ----------------
The majority of the Bank's loans are to companies and individuals which are headquartered or are employed in the Rio Grande Valley, but may conduct business on a statewide, national, or international scale. Repayment of those loans may be dependent on the economy in the Rio Grande Valley which is impacted by the economic situation in Mexico and surrounding areas. All loans to officers, directors and stockholders of the Bank and associates of such persons are, in the opinion of management, made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of like quality and risk of collectibility. The outstanding balance of total personal borrowings of executive officers and directors of the Bank at December 31, 1995 and 1994 were approximately $2,032,000 and $1,446,000, respectively. At December 31, 1995, the Bank had a $1,736,000 recorded investment in impaired loans, all of which are nonaccrual loans, for which there was a related allowance of $836,000. All loans considered impaired at December 31, 1995 had a related allowance for loan losses. The average level of impaired loans during the year ended December 31, 1995 was $2,536,000. The Bank recorded interest income of $41,500 on its impaired loans during the year ended December 31, 1995. Nonaccrual loans approximated $2,724,000 and $2,562,000 at December 31, 1995 and 1994, respectively. If interest on these loans had been accrued at the original contractual rates, interest income would have been increased by approximately $531,000, $820,000 and $232,000 for the years ended December 31, 1995, 1994 and 1993. There were no renegotiated loans outstanding at December 31, 1995, 1994 and 1993, respectively. In the normal course of business, the Bank enters into various transactions which, in accordance with generally accepted accounting principles, are not included on the balance sheets. These transactions are referred to as "off-balance sheet commitments." The Bank enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. F-61 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (4) LOANS (CONTINUED) Outstanding commitments and letters of credit at December 31, 1995 and 1994 are approximately as follows:
1995 1994 -------------- -------------- Commitments to extend credit........................................... $ 18,465,000 $ 16,276,000 Letters of credit...................................................... 3,916,000 3,932,000 -------------- -------------- -------------- --------------
(5) ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses for the years ended December 31, 1995 and 1994 is as follows:
1995 1994 -------------- -------------- Balance at beginning of year............................................ $ 3,914,948 $ 3,903,420 Provision for loan losses............................................... 2,425,323 2,188,960 Loans charged off....................................................... (2,264,347) (2,320,837) Recoveries.............................................................. 120,104 143,405 -------------- -------------- Balance at end of year.................................................. $ 4,196,028 $ 3,914,948 -------------- -------------- -------------- --------------
(6) BANK PREMISES AND EQUIPMENT Bank premises and equipment and related accumulated depreciation and amortization at December 31, 1995 and 1994 are as follows:
ESTIMATED USEFUL LIVES 1995 1994 ------------ -------------- -------------- Land..................................................... -- $ 636,397 $ 636,397 Premises................................................. 40 years 5,085,032 4,896,758 Furniture, fixtures and equipment........................ 10 years 2,930,492 2,759,784 Automobiles.............................................. 3 years 147,605 98,605 -------------- -------------- 8,799,526 8,391,544 Less accumulated depreciation and amortization........... (3,312,461) (2,941,647) -------------- -------------- $ 5,487,065 $ 5,449,897 -------------- -------------- -------------- --------------
Depreciation expense was approximately $371,000, $360,000 and $327,000 for the years ended December 31, 1995, 1994 and 1993, respectively. (7) INTEREST-BEARING DEPOSITS Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
1995 1994 ---------------- ---------------- Savings, money market and NOW accounts.............................. $ 151,071,040 $ 173,575,728 Certificates of deposit less than $100,000.......................... 58,271,834 50,780,305 Certificates of deposit of $100,000 or more......................... 94,456,868 83,842,845 ---------------- ---------------- $ 303,799,742 $ 308,198,878 ---------------- ---------------- ---------------- ----------------
Interest expense for certificates of deposit of $100,000 or more for the years ended December 31, 1995, 1994 and 1993 was approximately $5,544,000, $4,148,000 and $4,850,000, respectively. F-62 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAXES The components of income tax expense for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 ------------- ------------- ------------- Federal: Current tax expense.................................... $ 3,495,399 $ 3,331,309 $ 2,190,957 Deferred tax (benefit) expense......................... (59,041) (139,736) 69,068 ------------- ------------- ------------- Income tax expense................................. $ 3,436,358 $ 3,191,573 $ 2,260,025 ------------- ------------- ------------- ------------- ------------- -------------
The income tax expense for the years ended December 31, 1995, 1994 and 1993 differs from the amount computed by applying the federal income tax rate of 34% to income before income tax expense as follows:
1995 1994 1993 ------------- -------------- -------------- Computed "expected" tax expense.......................... $ 4,107,841 $ 4,091,432 $ 3,521,845 Increase (reduction) in tax resulting from: Tax-exempt interest, net............................. (799,767) (1,002,634) (1,092,876) Utilization of alternative minimum tax credit........ -- -- (229,267) Other, net........................................... 128,284 102,775 60,323 ------------- -------------- -------------- $ 3,436,358 $ 3,191,573 $ 2,260,025 ------------- -------------- -------------- ------------- -------------- --------------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 ----------- ----------- Deferred tax assets: Allowance for loan losses................................................. $ 269,552 $ 228,920 Deferred compensation..................................................... 180,006 172,172 Other real estate......................................................... 2,833 2,369 Unrealized losses on investment securities................................ 9,261 255,638 ----------- ----------- 461,652 659,099 ----------- ----------- Deferred tax liabilities -- premises and equipment............................ 434,490 444,601 ----------- ----------- Net deferred tax asset................................................ $ 27,162 $ 214,498 ----------- ----------- ----------- -----------
Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. (9) EMPLOYEE BENEFITS The Bank has three separate deferred compensation plans for the benefit of certain Bank employees. The plans provide for retirement benefits to be paid to the specific employee (or a designated beneficiary or estate if death occurs prior to payment of the full amount of deferred compensation) on reaching age 65. One plan entered into on December 10, 1963, commenced payments of approximately $13,000 each year on January 4, 1988, continuing annually thereafter through June 2003. A second plan, entered into on September 1, 1979, provides for payments of approximately $13,000 each year which was scheduled to commence on April 1, 1990, continuing annually thereafter through June 2005; however, the employee elected to receive an amount less than that provided for in the plan over a longer period of time. The third plan provides for a retirement benefit payable of $50,000 per year commencing in March F-63 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (9) EMPLOYEE BENEFITS (CONTINUED) 1999 and continuing annually thereafter for 20 years. The amounts charged to compensation expense related to the deferred compensation plans for the years ended December 31, 1995, 1994 and 1993 were $15,300, $13,600 and $11,800, respectively. The Bank owns and is the beneficiary of three life insurance policies on the employees or former employees covered by the deferred compensation plans. The life insurance policy face values are amounts approximately equal to the total benefits paid under the plans. (10) CONTINGENT LIABILITIES The Bank is involved in certain claims and suits occurring in the ordinary course of business. Management believes that the probable resolution of such claims and suits will not have a material adverse affect on the financial condition of the Bank. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values at December 31, 1995 and methods and assumptions used to determine the estimated fair values are set forth below for the Bank's financial instruments:
CARRYING OR NOTIONAL VALUE FAIR VALUE ---------------- ---------------- Financial assets: Cash and due from banks......................................... $ 16,269,484 $ 16,269,484 Federal funds sold.............................................. 23,350,000 23,350,000 Investment securities........................................... 166,760,730 168,475,903 Net loans....................................................... 184,228,272 184,165,336 Financial liabilities -- deposits................................... 343,610,422 343,872,059 Off-balance sheet instruments: Commitments to extend credit.................................... 18,465,000 18,465,000 Letters of credit............................................... 3,916,000 3,916,000 ---------------- ---------------- ---------------- ----------------
CASH AND DUE FROM BANKS Carrying value approximates fair value because of the short maturity of these instruments and no anticipated credit concerns. FEDERAL FUNDS SOLD Carrying value approximates fair value because of the short maturity of these instruments and no anticipated credit concerns. INVESTMENT SECURITIES The fair values of investment securities are estimated based on quoted market prices from investment dealers and companies. NET LOANS The fair value of loans is estimated for segregated groupings of loans with similar financial characteristics. Loans are segregated by type and the fair value of loans is estimated using current market rates for the type of loan. DEPOSITS The fair value of deposits with short-term or no stated maturity, such as checking, savings, NOW accounts and money market accounts, is equal to the amounts payable at December 31, 1995. The fair value of certificates of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. F-64 FIRST STATE BANK & TRUST CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (11) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT The fair value of commitments to extend credit and letters of credit are estimated using current interest rates and committed rates. (12) REGULATORY SUPERVISION As a result of criticisms reflected in the October 4, 1993 Report of Examination by the Texas Department of Banking, a Memorandum of Understanding (the "Memorandum") was entered into between the Board of Directors of the Bank and the Banking Commissioner of Texas on December 14, 1993. The Memorandum required that the Bank, among other provisions, increase Board of Director supervision over loan activities, revise the existing loan policy, increase the allowance for loan losses and reduce criticized assets. Additionally, the Bank's Board of Directors is required to submit to the Commissioner and Regional Director of the FDIC, a written report of the actions taken to comply with the Memorandum within fifteen days after the end of each calendar quarter. Failure to comply with the requirements of the Memorandum could subject the Bank to additional action by bank regulatory authorities. Management has made efforts to comply with the requirements of the Memorandum and believes such additional action will not be taken by regulatory authorities. (13) PENDING TRANSACTION On January 9, 1996, a definitive agreement was signed under which First State Bank & Trust Co. will be purchased by Texas State Bank, the principal operating subsidiary of Texas Regional Bancshares, Inc. The agreement has been approved by the Boards of Directors of First State Bank & Trust Co., Texas State Bank and Texas Regional Bancshares, Inc. The sale of the Bank is subject to approval by the appropriate regulatory agencies and contingent upon, among other things, Texas Regional Bancshares, Inc. having successfully raised additional capital to partially fund the transaction. F-65 THE BORDER BANK SELECTED FINANCIAL INFORMATION The selected financial information under the captions "Summary of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of the years in the three-year period ended December 31, 1995 has been derived from the financial statements of The Border Bank ("Border Bank"), which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The financial statements of Border Bank at December 31, 1995 and 1994 and for each of the years in the three-year period ended December 31, 1995 are included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SUMMARY OF OPERATIONS Interest Income.......................................................... $ 9,016 $ 8,879 $ 8,928 Interest Expense......................................................... 4,415 3,771 3,892 ----------- ----------- ----------- Net Interest Income...................................................... 4,601 5,108 5,036 Provision for Loan Losses................................................ 485 397 265 Noninterest Income....................................................... 316 403 286 Noninterest Expense...................................................... 2,167 2,185 2,481 ----------- ----------- ----------- Income before Income Tax Expense......................................... 2,265 2,929 2,576 Income Tax Expense....................................................... 381 604 501 ----------- ----------- ----------- Net Income............................................................... $ 1,884 $ 2,325 $ 2,075 ----------- ----------- ----------- ----------- ----------- ----------- PER SHARE DATA Net Income............................................................... $ 9.42 $ 11.62 $ 10.38 Book Value............................................................... 85.38 79.21 70.35 Cash Dividends Paid on Common Stock...................................... 4.00 2.00 2.00 Average Shares Outstanding (in thousands)................................ 200 200 200 PERIOD-END BALANCE SHEET DATA Total Assets............................................................. $ 119,505 $ 117,123 $ 114,874 Loans.................................................................... 47,345 45,859 48,382 Investment Securities.................................................... 54,236 58,720 54,438 Interest-Earning Assets.................................................. 110,331 109,079 105,520 Deposits................................................................. 101,995 100,865 100,521 Stockholders' Equity..................................................... 17,075 15,842 14,070 PERFORMANCE RATIOS Return on Average Assets................................................. 1.62% 1.98% 1.83% Return on Average Stockholders' Equity................................... 11.50 15.73 15.79 Net Interest Margin...................................................... 4.92 5.34 5.49 Loan to Deposit Ratio.................................................... 46.42 45.47 48.13 Demand Deposit to Total Deposit Ratio.................................... 7.00 6.95 6.79 ASSET QUALITY RATIOS Nonperforming Assets to Loans and Other Nonperforming Assets............. 0.91% 1.05% 1.64% Net Charge-Offs to Average Loans......................................... 0.62 0.25 0.53 Allowance for Loan Losses as a Percentage of: Loans.................................................................. 2.32 1.96 1.29 Nonperforming Loans.................................................... 582.01 398.67 106.30 Nonperforming Assets................................................... 254.04 186.93 78.10 CAPITAL RATIOS Period-End Stockholders' Equity to Total Assets.......................... 14.29% 13.53% 12.25% Tier 1 Risk-Based Capital................................................ 18.12 18.01 15.89 Total Risk-Based Capital................................................. 19.29 19.02 16.59 Leverage Capital Ratio................................................... 14.51 13.58 12.20 ----------- ----------- ----------- ----------- ----------- -----------
F-66 THE BORDER BANK MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion provides additional information regarding the financial condition and the results of operations for Border Bank for each of the years ended December 31, 1995, 1994 and 1993. This discussion should be read in conjunction with the financial statements of Border Bank and the notes thereto appearing elsewhere in this prospectus. SELECTED FINANCIAL INFORMATION Net income for the year ended December 31, 1995 was $1.9 million, a decrease of 19.0% compared to net income of $2.3 million for the year ended December 31, 1994. The earnings per share of $9.42 for the year ended December 31, 1995 decreased $2.20 or 18.9% compared to earnings per share of $11.62 for the year ended December 31, 1994. Return on average assets for 1995 was 1.62%, compared to 1.98% for 1994 and 1.83% for 1993. Return on average stockholders' equity was 11.50% for 1995, compared to 15.73% for 1994 and 15.79% for 1993. Earnings performance for the year ended December 31, 1995 reflected a decrease in net interest income, a decrease in noninterest income and an increase in provision for loan losses. The decrease in net interest income for 1995 resulted primarily from an increase in interest expense. ANALYSIS OF RESULTS OF OPERATIONS NET INTEREST INCOME Taxable-equivalent net interest income was $5.2 million for the year ended December 31, 1995, a decrease of $529 thousand or 9.2% compared to the year ended December 31, 1994 and taxable-equivalent net interest income of $5.8 million for the year ended December 31, 1994 increased $52 thousand or 0.9% compared to the year ended December 31, 1993. The net yield on interest-earning assets, also referred to as interest rate margin, represents net interest income divided by average interest-earning assets. The net interest rate margin of 4.92% for the year ended December 31, 1995 decreased 42 basis points compared to 5.34% for the year ended December 31, 1994. The decrease in net interest rate margin is due primarily to higher rates paid on time deposits. The net interest rate margin for the year ended December 31, 1994 reflects a decrease of 15 basis points from the 5.49% for the year ended December 31, 1993. Average interest-earning assets declined $1.5 million or 1.4% to $106.5 million for the year ended December 31, 1995. The decrease in interest-earning assets was consistent for all categories of interest-earning assets, including loans, investment securities and federal funds sold. Average interest-earning assets increased $3.8 million or 3.7% to $108.0 million for the year ended December 31, 1994. The increase in average interest-earning assets for 1994 resulted primarily from an increase in investment securities of $5.8 million offset by declines in loans and federal funds sold. Average interest-earning assets comprised 91.6% of average total assets in 1995, compared to 92.0% in 1994 and 91.8% in 1993. Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2 million for the year ended December 31, 1995 compared to an increase of $2.2 million or 2.4% to $95.3 million for the year ended December 31, 1994. These changes in the mix of interest-earning assets and interest-bearing deposits caused the ratio of interest-bearing deposits to interest-earning assets to decline to 86.6% in 1995, compared to 88.2% in 1994 and 89.3% in 1993. Average noninterest-bearing deposits increased $180 thousand or 2.6% to $7.1 million in 1995 compared to an increase of $113 thousand or 1.7% to $6.9 million in 1994. The ratio of average noninterest-bearing deposits to average total deposits was 7.2% for 1995, compared to 6.8% for each of 1994 and 1993. F-67 The following table presents for the last three calendar years the total dollar amount of interest income from average interest-earning assets and the resultant yields, reported on a taxable-equivalent basis, as well as the average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived from weekly balances and the yields and costs are established by dividing income or expense by the average balance of the asset or liability. Income and yield on interest-earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective federal income tax rate.
THREE-YEAR FINANCIAL SUMMARY YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1995 1994 1993 ---------------------------------- ---------------------------------- ---------------------- AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE TAXABLE-EQUIVALENT BASIS (1) BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST - ----------------------------------- --------- ----------- ---------- --------- ----------- ---------- --------- ----------- (DOLLARS IN THOUSANDS) ASSETS Interest-Earning Assets Loans Commercial..................... $ 16,289 $ 1,765 10.84% $ 18,858 $ 2,070 10.98% $ 17,074 $ 1,794 Real Estate.................... 27,452 3,159 11.51 25,051 2,761 11.02 27,868 3,115 Consumer....................... 2,748 402 14.63 3,229 497 15.39 3,131 502 --------- ----------- --------- ----------- --------- ----------- Total Loans.................. 46,489 5,326 11.46 47,138 5,328 11.30 48,073 5,411 --------- ----------- --------- ----------- --------- ----------- Investment Securities Taxable.......................... 36,837 2,185 5.93 36,735 2,053 5.59 31,911 2,046 Tax-exempt....................... 18,744 1,886 10.06 19,148 1,948 10.17 18,203 1,976 --------- ----------- --------- ----------- --------- ----------- Total Investment Securities.................. 55,581 4,071 7.32 55,883 4,001 7.16 50,114 4,022 --------- ----------- --------- ----------- --------- ----------- Federal Funds Sold................. 4,462 259 5.80 5,010 212 4.23 5,995 177 --------- ----------- --------- ----------- --------- ----------- Total Interest-Earning Assets........................ 106,532 9,656 9.06 108,031 9,541 8.83 104,182 9,610 --------- ----------- --------- ----------- --------- ----------- Cash and Due from Banks............ 4,568 5,146 5,473 Premises and Equipment, Net........ 3,456 2,841 1,945 Other Assets....................... 2,644 2,267 2,451 Less Allowance for Loan Losses... (901) (829) (614) --------- --------- --------- Total Assets................. $ 116,299 $ 117,456 $ 113,437 --------- --------- --------- --------- --------- --------- LIABILITIES Interest-Bearing Liabilities Savings.......................... $ 15,071 603 4.00 $ 15,320 612 4.00 $ 11,006 443 Money Market Checking and Savings......................... 11,843 344 2.90 14,158 395 2.79 14,994 530 Time Deposits.................... 65,335 3,468 5.31 65,801 2,764 4.20 67,069 2,919 --------- ----------- --------- ----------- --------- ----------- Total Savings and Time Deposits.................... 92,249 4,415 4.79 95,279 3,771 3.96 93,069 3,892 --------- ----------- --------- ----------- --------- ----------- Demand Deposits.................... 7,119 6,939 6,826 Other Liabilities.................. 548 459 398 --------- --------- --------- Total Liabilities............ 99,916 102,677 100,293 --------- --------- --------- STOCKHOLDERS' EQUITY............... 16,383 14,779 13,144 --------- --------- --------- Total Liabilities and Stockholders' Equity........ $ 116,299 $ 117,456 $ 113,437 --------- --------- --------- --------- --------- --------- Net Interest Income................ $ 5,241 $ 5,770 $ 5,718 ----------- ----------- ----------- ----------- ----------- ----------- Net Yield on Total Interest-Earning Assets............................ 4.92% 5.34% ----- ----- ----- ----- YIELD/ TAXABLE-EQUIVALENT BASIS (1) RATE - ----------------------------------- ---------- ASSETS Interest-Earning Assets Loans Commercial..................... 10.51% Real Estate.................... 11.18 Consumer....................... 16.03 Total Loans.................. 11.26 Investment Securities Taxable.......................... 6.41 Tax-exempt....................... 10.86 Total Investment Securities.................. 8.03 Federal Funds Sold................. 2.95 Total Interest-Earning Assets........................ 9.22 Cash and Due from Banks............ Premises and Equipment, Net........ Other Assets....................... Less Allowance for Loan Losses... Total Assets................. LIABILITIES Interest-Bearing Liabilities Savings.......................... 4.03 Money Market Checking and Savings......................... 3.53 Time Deposits.................... 4.35 Total Savings and Time Deposits.................... 4.18 Demand Deposits.................... Other Liabilities.................. Total Liabilities............ STOCKHOLDERS' EQUITY............... Total Liabilities and Stockholders' Equity........ Net Interest Income................ Net Yield on Total Interest-Earning Assets............................ 5.49% ----- -----
- --------- (1) For analytical purposes, income from tax-exempt assets, primarily issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). F-68 The following table presents the effects of changes in volume, rate and rate/volume on interest income and interest expense for major categories of interest-earning assets and interest-bearing liabilities. Nonaccrual loans are included in assets, thereby reducing yields (see "Nonperforming Assets"). The allocation of the rate/volume variance has been made pro-rata on the percentage that volume and rate variances produce in each category.
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEARS ENDED DECEMBER 31, NET --------------------------- 1995 COMPARED TO 1994 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------ ------ ----- ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ (2) $ (73) $ 74 $ (3) Investment Securities Taxable..................................................................... 132 6 125 1 Tax-Exempt.................................................................. (62) (41) (21) -- Federal Funds Sold............................................................ 47 (23) 70 -- ------ ------ ----- ----- Total Interest Income..................................................... 115 (131) 248 (2) ------ ------ ----- ----- Interest Expense - Deposits..................................................... 644 (120) 766 (2) ------ ------ ----- ----- Net Interest Income Before Allocation Rate/Volume............................... (529) (11) (518) -- ------ ------ ----- ----- Allocation of Rate/Volume....................................................... -- -- -- -- ------ ------ ----- ----- Changes in Net Interest Income.................................................. $(529) $ (11) $(518) $-- ------ ------ ----- ----- ------ ------ ----- -----
TAXABLE-EQUIVALENT BASIS(1) DUE TO CHANGE IN YEARS ENDED DECEMBER 31, NET --------------------------- 1994 COMPARED TO 1993 CHANGE VOLUME RATE RATE/VOLUME - -------------------------------------------------------------------------------- ------ ------ ----- ----------- (IN THOUSANDS) Interest Income Loans, Including Fees......................................................... $ (83) $(105) $ 19 $ 3 Investment Securities Taxable..................................................................... 7 309 (301) (1) Tax-Exempt.................................................................. (28) 103 (132) 1 Federal Funds Sold............................................................ 35 (29) 64 -- ------ ------ ----- ----- Total Interest Income..................................................... (69) 278 (350) 3 ------ ------ ----- ----- Interest Expense - Deposits..................................................... (121) 92 (210) (3) ------ ------ ----- ----- Net Interest Income Before Allocation Rate/Volume............................... 52 186 (140) 6 Allocation of Rate/Volume -- 3 3 (6) ------ ------ ----- ----- Changes in Net Interest Income.................................................. $ 52 $ 189 $(137) $-- ------ ------ ----- ----- ------ ------ ----- -----
- --------- (1) For analytical purposes, income from tax-exempt assets, primarily securities issued by state and local governments or authorities, is adjusted by an increment which equates tax-exempt income to interest from taxable assets (assuming a 34% effective federal income tax rate). F-69 NET YIELD ON EARNING ASSETS The following table presents net interest income, average earning assets and the net yield by quarter for the past three years. Income and yield on earning assets include amounts to convert tax-exempt income to a taxable-equivalent basis, assuming a 34% effective federal income tax rate.
NET YIELD ON QUARTER EARNING ASSETS % CHANGE ---------------------------------------------------------- TAXABLE-EQUIVALENT BASIS PRIOR YEAR YEAR FOURTH THIRD SECOND FIRST - ----------------------------------- ------------ ------------- ------------- ------------- ------------- ------------- (DOLLARS IN THOUSANDS) 1995 Net Interest Income................ (9.2)% $ 5,241 $ 1,253 $ 1,262 $ 1,326 $ 1,400 Average Earning Assets............. (1.4) 106,532 107,507 105,765 106,854 106,001 Net Yield.......................... 4.92% 4.62% 4.73% 4.98% 5.36% 1994 Net Interest Income................ 0.9% $ 5,770 $ 1,412 $ 1,438 $ 1,463 $ 1,457 Average Earning Assets............. 3.6 108,031 108,540 109,808 107,981 105,794 Net Yield.......................... 5.34% 5.16% 5.20% 5.43% 5.58% 1993 Net Interest Income................ 15.2% $ 5,718 $ 1,432 $ 1,414 $ 1,472 $ 1,400 Average Earning Assets............. 15.7 104,182 106,463 106,405 103,597 100,265 Net Yield.......................... 5.49% 5.34% 5.27% 5.70% 5.66% ----- ------------- ------------- ------------- ------------- ------------- ----- ------------- ------------- ------------- ------------- -------------
PROVISION FOR LOAN LOSSES The provision for loan losses for the year ended December 31, 1995 was $485 thousand, an increase of $88 thousand or 22.2% from $397 thousand for the year ended December 31, 1994. The provision for loan losses for the year ended December 31, 1994 reflects an increase of $132 thousand or 49.8% from the $265 thousand provision for loan losses for the year ended December 31,1993. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management based upon such factors as historical experience, the volume and type of lending conducted by Border Bank, the amount of nonperforming assets, regulatory policies, generally accepted accounting principles, general economic conditions, particularly as they relate to Border Bank's lending area, and other factors related to the collectibility of Border Bank's loan portfolio. See "Allowance for Loan Losses." In January 1995, Border Bank adopted Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan" and the amendment thereof, Statement of Financial Accounting Standards No. 118 ("Statement 118"), "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". In management's opinion, the adoption of Statement 114 and Statement 118 did not have a material effect on Border Bank's results of operations. NONINTEREST INCOME Noninterest income of $316 thousand for the year ended December 31, 1995 decreased $87 thousand or 21.6% compared to the year ended December 31, 1994, and noninterest income of $403 thousand for the year ended December 31, 1994 increased $117 thousand or 40.9% compared to $286 thousand for the year ended December 31, 1993. The principal factor affecting the level of noninterest income in 1994 was a reimbursement to Border Bank of $142 thousand by an insurance company in connection with the prior year settlement of a lawsuit (See "Noninterest Expense") which was partially offset by a payment by Border Bank of $48 thousand to resolve unrelated litigation. F-70 A detailed summary of noninterest income during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, ----------------------------------------------------------------- % % CHANGE FROM CHANGE FROM NONINTEREST INCOME 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------------------------- --------- --------------- --------- --------------- --------- (DOLLARS IN THOUSANDS) Service Charges on Deposit Accounts...................... $ 255 7.1% $ 238 27.3% $ 187 Other Service Charges.................................... 33 10.0 30 (21.1) 38 --------- ----- --------- ----- --------- Total Service Charges................................ 288 7.5 268 19.1 225 Other Operating Income................................... 28 (79.2) 135 121.3 61 --------- ----- --------- ----- --------- Total................................................ $ 316 (21.6)% $ 403 40.1% $ 286 --------- ----- --------- ----- --------- --------- ----- --------- ----- ---------
NONINTEREST EXPENSE Noninterest expense of $2.2 million for the year ended December 31, 1995 decreased $18 thousand or 0.8% compared to the year ended December 31, 1994, and noninterest expense of $2.2 million for the year ended December 31,1994 decreased $296 thousand or 11.9% compared with $2.5 million for the year ended December 31, 1993. The largest category of noninterest expense, Total Salaries and Employee Benefits ("Personnel") of $1.1 million for the year ended December 31, 1995 decreased $5 thousand or 0.5% compared to year ended December 31, 1994 levels. Personnel expense of $1.1 million for the year ended December 31, 1994 increased $116 thousand or 12.3% compared to year ended December 31, 1993 levels of $945 thousand. Personnel expense increased for the year ended December 31, 1994 primarily due to an increase in compensation levels. Occupancy expense of $234 thousand for the year ended December 31, 1995 increased $6 thousand or 2.6% compared to the year ended December 31,1994, and occupancy expense of $228 thousand for the year ended December 31, 1994 increased $57 thousand or 33.3% when compared to occupancy expense of $171 thousand for the year ended December 31, 1993. The increases in 1995 and 1994 are primarily attributable to an expansion to Border Bank which began in 1994. Equipment expense was $148 thousand, $139 thousand and $144 thousand for the years ended December 31, 1995, 1994 and 1993, respectively. Other noninterest expense of $729 thousand for the year ended December 31, 1995 decreased $15 thousand or 2.0% compared to the year ended December 31, 1994 and other noninterest expense of $744 thousand for the year ended December 31, 1994 decreased $474 thousand or 38.9% when compared with the $1.2 million for the year ended December 31, 1993. The principal factor attributable to the decrease in other noninterest expense for the year ended December 31, 1994 was a cost to settle litigation which was recorded in 1993. In 1993, Border Bank settled a lender liability claim by a former borrower. The increase in legal and professional fees in 1995 was primarily attributable to audit fees incurred in 1995. F-71 A detailed summary of noninterest expense during the last three years is presented in the following table:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- % % CHANGE FROM CHANGE FROM NONINTEREST EXPENSE 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - --------------------------------------------------- --------- ------------- --------- ------------- --------- (DOLLARS IN THOUSANDS) Salaries and Wages................................. $ 906 0.1% $ 905 14.3% $ 792 Employee Benefits.................................. 150 3.8 156 2.0 153 --------- ------ --------- ------ --------- Total Salaries and Employee Benefits........... 1,056 (0.5) 1,061 12.3 945 --------- ------ --------- ------ --------- Net Occupancy Expense.............................. 234 2.6 228 33.3 171 --------- ------ --------- ------ --------- Equipment Expense.................................. 148 6.5 139 (3.5) 144 --------- ------ --------- ------ --------- Other Real Estate (Income) Expense, Net Expenses......................................... -- -- -- (100.0) 3 Write-Downs...................................... -- (100.0) 13 -- -- --------- ------ --------- ------ --------- Total Other Real Estate (Income) Expense, Net........................................... -- (100.0) 13 333.3 3 --------- ------ --------- ------ --------- Other Noninterest Expense Advertising and Public Relations................. 31 (22.5) 40 185.7 14 Data Processing and Check Clearing............... 106 19.1 89 20.3 74 Director Fees.................................... 46 (4.2) 48 41.2 34 Franchise Tax.................................... 38 8.5 35 66.7 21 Insurance........................................ 17 13.3 15 (34.8) 23 FDIC Insurance................................... 124 (45.9) 229 11.2 206 Legal and Professional........................... 215 138.9 90 3.4 87 Stationery and Supplies.......................... 53 (38.4) 86 43.3 60 Telephone........................................ 25 25.0 20 -- 20 Other Losses..................................... -- -- -- (100.0) 604 Other............................................ 74 (19.6) 92 22.7 75 --------- ------ --------- ------ --------- Total Other Noninterest Expense................ 729 (2.0) 744 (38.9) 1,218 --------- ------ --------- ------ --------- Total.......................................... $ 2,167 (0.8)% $ 2,185 (11.9)% $ 2,481 --------- ------ --------- ------ --------- --------- ------ --------- ------ ---------
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS In December 1990, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 106 ("Statement 106"), "Employers' Accounting for Postretirement Benefits Other Than Pensions", which is effective for fiscal years beginning after December 15, 1992. Statement 106 requires companies that have postretirement benefit plans to accrue the estimated cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. Border Bank does not provide postretirement benefits other than a nonqualified deferred compensation plan for the benefit of a former President. INCOME TAX Income tax expense amounted to $381 thousand for the year ended December 31, 1995 compared to $604 thousand for the year ended December 31, 1994. Tax expense varies from one year to the next with changes in the level of income before taxes, changes in the amount of tax-exempt interest income, and the relationship of these changes to each other. Border Bank's effective tax rate for 1995 was 16.8% compared with 20.6% in 1994. Income tax expense differs from the amount computed at statutory rates primarily due to tax-exempt interest from certain investment securities. F-72 Effective January 1, 1993, Border Bank adopted Statement of Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes". Through December 31, 1992, Border Bank accounted for income taxes under Accounting Principles Board Opinion No. 11 ("APB 11"). Statement 109 has changed Border Bank's method of accounting for income taxes from the deferred method required under APB 11 to the asset and liability method. Under the deferred method, annual income tax expense is matched with pretax accounting income by providing deferred taxes at current tax rates for timing differences between the determination of net income for financial reporting and tax purposes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the recognition of future deductions or taxable amounts. Deferred tax expense or benefit is recognized as a result of the change in the asset or liability during the year. NET INCOME Net income was $1.9 million, $2.3 million and $2.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. ANALYSIS OF FINANCIAL CONDITION BALANCE SHEET COMPOSITION The average assets and liabilities of Border Bank have remained stable over the last three years. Average interest-earning assets of $106.5 million declined $1.5 million or 1.4% for the year ended December 31, 1995 compared to the year ended December 31, 1994. Average interest-earning assets of $108.0 million increased $3.8 million or 3.7% for the year ended December 31, 1994 compared to $104.2 million for the year ended December 31, 1993. Average loans to average interest-earning assets was 43.6% in 1995 and 1994 compared to 46.1% in 1993. Average investment securities amounted to $55.6 million, $55.9 million and $50.1 million in 1995, 1994 and 1993, respectively. Average interest-bearing deposits declined $3.0 million or 3.2% to $92.2 million for the year ended December 31, 1995 after increasing $2.2 million or 2.4% to $95.3 million for the year ended December 31, 1994. The ratio of average demand deposits to average total deposits for the years ended December 31, 1995, 1994 and 1993 was 7.2%, 6.8%, and 6.8%, respectively. F-73 The following table presents Border Bank's average balance sheets during the last three years:
YEARS ENDED DECEMBER 31, ------------------------------------- AVERAGE BALANCE SHEETS 1995 1994 1993 - --------------------------------------------------------------------------- ----------- ----------- ----------- (IN THOUSANDS) ASSETS Loans...................................................................... $ 46,489 $ 47,138 $ 48,073 Investment Securities Taxable.................................................................. 36,837 36,735 31,911 Tax-Exempt............................................................... 18,744 19,148 18,203 Federal Funds Sold......................................................... 4,462 5,010 5,995 ----------- ----------- ----------- Total Interest-Earning Assets............................................ 106,532 108,031 104,182 Cash and Due From Banks.................................................... 4,568 5,146 5,473 Bank Premises and Equipment, Net........................................... 3,456 2,841 1,945 Other Assets............................................................... 2,644 2,267 2,451 Allowance for Loan Losses.................................................. (901) (829) (614) ----------- ----------- ----------- Total.................................................................... $ 116,299 $ 117,456 $ 113,437 ----------- ----------- ----------- LIABILITIES Demand Deposits............................................................ $ 7,119 $ 6,939 $ 6,826 ----------- ----------- ----------- Savings.................................................................... 15,071 15,320 11,006 Money Market Checking and Savings.......................................... 11,843 14,158 14,994 Time Deposits.............................................................. 65,335 65,801 67,069 ----------- ----------- ----------- Total Interest-Bearing Deposits.......................................... 92,249 95,279 93,069 ----------- ----------- ----------- Total Deposits............................................................. 99,368 102,218 99,895 ----------- ----------- ----------- Other Liabilities.......................................................... 548 459 398 STOCKHOLDERS' EQUITY....................................................... 16,383 14,779 13,144 ----------- ----------- ----------- Total.................................................................... $ 116,299 $ 117,456 $ 113,437 ----------- ----------- ----------- ----------- ----------- -----------
CASH AND DUE FROM BANKS Border Bank offers a broad range of commercial banking services to individuals and businesses. The amount of cash and due from banks held on any one day is significantly influenced by changes in cash items in process of collection. At December 31, 1995, cash and due from banks was $4.0 million, $0.9 million more than at December 31, 1994. INVESTMENT SECURITIES Investment securities consist of two categories: Available for Sale and Held to Maturity. Securities classified as Held to Maturity are those securities Border Bank has both the positive intent and ability to hold to maturity and are carried at amortized cost. Securities classified as Available for Sale are those securities which Border Bank intends to hold for an indefinite period of time but not necessarily to maturity. These securities may be sold as part of asset/liability management strategy, or in response to significant movements in interest rates, liquidity needs, regulatory capital considerations, and other similar factors. These securities are carried at fair value in the accompanying balance sheet. The percentage of the investment portfolio allocated to Available for Sale and Held to Maturity was 12.5% and 87.5%, respectively at December 31, 1995 compared with 14.9% and 85.1%, respectively at December 31, 1994. F-74 The following table presents the estimated market value of Securities Available for Sale at December 31, 1995 and 1994. No securities were classified as Securities Available for Sale in years prior to 1994 as management of Border Bank adopted Statement 115 in January 1994:
% CHANGE FROM PRIOR SECURITIES AVAILABLE FOR SALE 1995 YEAR 1994 - --------------------------------------------------------------------------------- --------- ------------ --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities......................................................... $ 3,007 55.2% $ 1,937 U.S. Government Agency Securities................................................ 3,772 (44.4) 6,788 --------- ----- --------- Total.......................................................................... $ 6,779 22.3% $ 8,725 --------- ----- --------- --------- ----- ---------
The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Available for Sale at December 31, 1995:
AMORTIZED COST (1) MATURING ------------------------------------------------ AFTER ONE AFTER FIVE ESTIMATED ONE YEAR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET SECURITIES AVAILABLE FOR SALE OR LESS FIVE YEARS YEARS YEARS COST (1) VALUE - ---------------------------------------- --------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities................ $ 1,499 $ 1,506 $ -- $ -- $ 3,005 $ 3,007 U.S. Government Agency Securities............................. 1,994 1,785 -- -- 3,779 3,772 --------- ----------- ----------- ----------- ----------- ----------- Total................................. $ 3,493 $ 3,291 $ -- $ -- $ 6,784 $ 6,779 --------- ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - ---------------------------------------- U.S. Treasury Securities................ 5.13% 5.60% -- % -- % 5.37% U.S. Government Agency Securities............................. 4.97 7.19 -- -- 6.02 Total................................. 5.04 6.46 -- -- 5.73 --------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- -----------
- --------- (1) Amortized cost for Securities Available for Sale is stated at par plus any remaining unamortized premium paid less any remaining unamortized discount received. The following table presents amortized cost of Securities Held to Maturity at December 31, 1995, 1994 and 1993:
% CHANGE % CHANGE FROM PRIOR FROM PRIOR SECURITIES HELD TO MATURITY 1995 YEAR 1994 YEAR 1993 - ------------------------------------------------------ --------- ------------ --------- ------------ --------- (DOLLARS IN THOUSANDS) U.S. Treasury Securities.............................. $ -- -- % $ -- (100)% $ 3,497 U.S. Government Agency Securities..................... 27,247 (1.6) 27,689 (11.0) 31,116 States and Political Subdivisions Securities.......... 18,633 (7.9) 20,233 4.7 19,326 Other Securities...................................... 1,577 (23.9) 2,073 315.4 499 --------- ----- --------- ----- --------- Total............................................... $ 47,457 (5.1)% $ 49,995 (8.2)% $ 54,438 --------- ----- --------- ----- --------- --------- ----- --------- ----- ---------
Investments in entities within the State of Texas comprised 92.6% of the total investment in states and political subdivisions. No single issue accounted for as much as 10.0% of total stockholders' equity at December 31, 1995. Of the obligations of states and political subdivisions held by Border Bank at December 31, 1995, 51.2% were rated A or better by Moody's Investor Services, Inc. F-75 The following table presents the maturities, amortized cost, estimated market value and weighted average yields of Securities Held to Maturity at December 31, 1995:
AMORTIZED COST (1) MATURING -------------------------------------------------- AFTER ONE AFTER FIVE ESTIMATED ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET SECURITIES HELD TO MATURITY LESS FIVE YEARS YEARS YEARS COST (1) VALUE - ----------------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) U.S. Government Agency Securities.............................. $ 2,500 $ 24,247 $ 500 $ -- $ 27,247 $ 27,058 States and Political Subdivisions Securities.............................. 1,054 6,694 7,176 3,709 18,633 19,895 Other Securities......................... -- 1,577 -- -- 1,577 1,644 ----------- ----------- ----------- ----------- ----------- ----------- Total.................................. $ 3,554 $ 32,518 $ 7,676 $ 3,709 $ 47,457 $ 48,597 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- WEIGHTED AVERAGE YIELDS (TAXABLE-EQUIVALENT BASIS) - ----------------------------------------- U.S. Government Agency Securities.............................. 3.00% 5.85% 6.51% -- % 5.60% States and Political Subdivisions Securities.............................. 10.24 11.12 9.30 8.73 9.89 Other Securities......................... -- 6.98 -- -- 6.98 Total.................................. 5.15 6.99 9.12 8.73 7.33 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
At December 31, 1995, U.S. Government Agency securities with a carrying value of approximately $4.0 million contained interest features which adjust according to various dual indices and/or which could adjust to zero. These features relate only to the interest payments and do not affect the principal amount due. At December 31, 1995, the weighted average coupon of these securities equalled 2.76%. One issue with a book value of $1.5 million has adjusted to zero percent and will mature in May 1996. The following table presents the maturities, amortized cost and estimated market value of such securities at December 31, 1995:
AMORTIZED COST (1) MATURING -------------------------------------------------- AFTER ONE AFTER FIVE ESTIMATED ONE YEAR OR THROUGH THROUGH TEN AFTER TEN AMORTIZED MARKET LESS FIVE YEARS YEARS YEARS COST (1) VALUE ----------- ----------- ----------- ----------- ----------- ----------- (IN THOUSANDS) Available for Sale....................... $ 1,000 $ -- $ -- $ -- $ 1,000 $ 987 Held to Maturity......................... 2,000 1,000 -- -- 3,000 2,922 ----------- ----------- ----------- ----------- ----------- ----------- Total.................................. $ 3,000 $ 1,000 $ -- $ -- $ 4,000 $ 3,908 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
- --------- (1) Amortized cost for Securities Held to Maturity is stated at par plus any remaining unamortized premium paid or less any remaining unamortized discount received. F-76 LOANS Border Bank closely monitors the markets in which it conducts its lending. A certain degree of risk is inherent in the extension of credit. Management has instituted credit policies designed to monitor and control the level of losses and nonperforming assets. These policies require evaluation of new credit requests and continuing review of existing credits in order to identify, monitor and quantify any evidence of deterioration of quality or potential loss. Border Bank attempts to diversify risk with the objective of achieving optimum rates of return while minimizing losses for the benefit of stockholders and protection of depositors. Diversification of the loan portfolio by type of loan, industry concentration and type of borrower also tends to reduce risk by minimizing the adverse impact of any single event or set of occurrences. Total loans of $47.3 million for the year ended December 31, 1995 increased $1.5 million or 3.2% compared to the year ended December 31,1994 levels of $45.9 million and decreased $2.5 million or 5.2% for the year ended December 31,1994 compared to levels of $48.4 million at December 31, 1993. The increase in loans outstanding at December 31, 1995 compared to December 31, 1994 was the result of increases in real estate loans which were offset by small declines in commercial and consumer loans. The largest component of the portfolio continues to be commercial mortgages. At December 31, 1995, commercial mortgages totaled $20.2 million or 42.7% of the total loan portfolio. At December 31, 1994 commercial mortgages were $15.9 million or 34.7% of the total loan portfolio. Border Bank has made loans to individuals or companies that are residents of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured loans include loans secured by deposits in Border Bank, real estate loans secured by properties located within the United States and loans on real estate and equipment where the collateral is located in Mexico. Following is a summary of loans to individuals and companies that are residents of, or domiciled in, Mexico at the end of each of the last three years:
DECEMBER 31, ------------------------------- 1995 1994 1993 --------- --------- --------- (IN THOUSANDS) Cash secured................................................................... $ 3,715 $ 3,084 $ 6,890 Secured by U.S. real estate.................................................... 867 979 741 Secured by assets located outside U.S.......................................... 5,935 6,609 3,493 Other.......................................................................... 1,309 1,506 1,312 --------- --------- --------- $ 11,826 $ 12,178 $ 12,436 --------- --------- --------- --------- --------- ---------
The following table presents the composition of the loan portfolio at the end of each of the last five years:
DECEMBER 31, ----------------------------------------------------- LOAN PORTFOLIO COMPOSITION 1995 1994 1993 1992 1991 - ------------------------------------------------------- --------- --------- --------- --------- --------- (IN THOUSANDS) Commercial............................................. $ 15,721 $ 16,954 $ 17,839 $ 12,650 $ 13,782 Agricultural........................................... 1 2 54 16 120 Real estate Construction......................................... 751 957 1,445 703 703 Commercial Mortgage.................................. 20,217 15,903 15,430 16,880 14,663 Agricultural Mortgage................................ 1,131 629 1,543 1,827 2,026 1-4 Family Mortgage.................................. 7,207 8,362 8,765 7,661 6,050 Consumer............................................... 2,317 3,052 3,306 3,058 2,644 --------- --------- --------- --------- --------- Total Loans.......................................... $ 47,345 $ 45,859 $ 48,382 $ 42,795 $ 39,988 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-77 The contractual maturity schedule of the loan portfolio at December 31, 1995 is presented in the following table:
LOAN MATURITIES DECEMBER 31, 1995 ------------------------------------------------ ONE AFTER ONE YEAR AFTER YEAR THROUGH FIVE OR LESS FIVE YEARS YEARS TOTAL --------- --------------- --------- --------- (IN THOUSANDS) Commercial..................................................... $ 12,527 $ 3,194 $ -- $ 15,721 Agricultural................................................... 1 -- -- 1 Real Estate.................................................... 13,921 13,970 1,415 29,306 Consumer....................................................... 1,480 837 -- 2,317 --------- --------------- --------- --------- Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345 --------- --------------- --------- --------- --------- --------------- --------- --------- Variable-Rate Loans............................................ $ 10,085 $ 8,660 $ 910 $ 19,655 Fixed-Rate Loans............................................... 17,844 9,341 505 27,690 --------- --------------- --------- --------- Total........................................................ $ 27,929 $ 18,001 $ 1,415 $ 47,345 --------- --------------- --------- --------- --------- --------------- --------- ---------
As shown in the preceding table, loans maturing within one year totaled $27.9 million or 59.0% of total loans at December 31, 1995. Border Bank may renew or extend a loan upon maturity based on management's assessment of individual loans. Extension or renewal of loans without reduction of principal for more than one twelve-month period are generally avoided, unless loans are fully secured, or are revolving lines of credit subject to at least annual analysis and renewal. NONPERFORMING ASSETS Nonperforming assets consist of nonaccrual loans, loans for which the interest rate has been renegotiated below originally contracted rates and real estate or other assets that have been acquired in partial or full satisfaction of loan obligations. At December 31, 1995, there were twelve loans totalling $189 thousand on nonaccrual status, none of which had a balance greater than $40 thousand. Border Bank's policy generally is to place a loan on nonaccrual status when payment of principal or interest is contractually past due 90 days, or earlier when concern exists as to ultimate collection of principal and interest. At the time a loan is placed on nonaccrual status, interest previously accrued but uncollected is reversed and charged against current income. Loans which are contractually past due 90 days or more, which are both well secured or guaranteed by financially responsible third parties and in the process of collection, generally are not placed on nonaccrual status. The amount of such loans past due 90 days or more for the years ended December 31, 1995, 1994 and 1993 that are not classified as nonaccrual totaled $1.1 million, $414 thousand, and $395 thousand, respectively. The increase for the year ended December 31, 1995 as compared to the year ended December 31, 1994 is partly attributable to two credits totaling $491 thousand included in that category, which are secured by real estate and in the process of collection. Nonperforming assets of $433 thousand at December 31, 1995 decreased $49 thousand or 10.2% compared to December 31, 1994 levels of $482 thousand and decreased $317 thousand or 39.7% for the year ended December 31, 1994 compared to December 31, 1993 levels of $799 thousand. Border Bank's classification of nonperforming loans includes those loans for which management believes collection is doubtful. Management is not aware of any specific borrower relationships that are not reported as nonperforming where management has serious doubts as to the ability of such borrowers to comply with the present loan repayment terms which would cause nonperforming assets to increase materially. F-78 An analysis of the components of nonperforming assets for the last five years is presented in the following table:
DECEMBER 31, ----------------------------------------------------- NONPERFORMING ASSETS 1995 1994 1993 1992 1991 - ------------------------------------------------------------------ --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Nonaccrual Loans.................................................. $ 189 $ 226 $ 587 $ 790 $ 844 Renegotiated Loans................................................ -- -- -- -- -- --------- --------- --------- --------- --------- Nonperforming Loans............................................. 189 226 587 790 844 Other Nonperforming Assets (Primarily Other Real Estate).................................... 244 256 212 62 124 --------- --------- --------- --------- --------- Total Nonperforming Assets...................................... 433 482 799 852 968 Accruing Loans 90 Days or More Past Due........................... 1,085 414 395 35 49 --------- --------- --------- --------- --------- Total Nonperforming Assets and Accruing Loans 90 Days or More Past Due....................................................... $ 1,518 $ 896 $ 1,194 $ 887 $ 1,017 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Nonperforming Loans as a % of Total Loans......................... 0.40% 0.49% 1.21% 1.85% 2.11% Nonperforming Assets as a % of Total Loans and Other Nonperforming Assets........................................................... 0.91 1.05 1.64 2.00 2.41 Nonperforming Assets as a % of Total Assets....................... 0.36 0.41 0.70 0.80 1.07 Nonperforming Assets Plus Accruing Loans 90 Days or More Past Due as a % of Total Loans and Other Nonperforming Assets........................................... 3.19 1.94 2.46 2.07 2.54 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Interest income that would have been recorded for the years ended December 31, 1995 and 1994 on nonaccrual loans had such loans performed in accordance with their original contract terms was approximately $2 thousand and $34 thousand, respectively. ALLOWANCE FOR LOAN LOSSES Management analyzes the loan portfolio to determine the adequacy of the allowance for loan losses and the appropriate provision required to maintain an adequate allowance. In assessing the adequacy of the allowance, management reviews the size, quality and risks of loans in the portfolio and considers factors such as specific known risks, past experience, the status and amount of nonperforming assets and economic conditions. A specific percentage is allocated to total loans in good standing and additional amounts are added for individual loans considered to have specific loss potential. Loans identified as losses are charged off. Based on total allocations, the provision is recorded to maintain the allowance at a level deemed appropriate by management. While management uses available information to recognize losses on loans, there can be no assurance that future additions to the allowance will not be necessary. The allowance for loan losses at December 31, 1995 was $1.1 million, which represents an increase of $199 thousand or 22.1% as compared to the allowance for loan losses at December 31, 1994. Management believes that the allowance for loan losses at December 31, 1995 adequately reflects the risks in the loan portfolio. However, various regulatory agencies, as an integral part of their examination process, periodically review Border Bank's allowance for loan losses. Such agencies may require Border Bank to recognize additions to the allowance based on their judgments of information available to them at the time of their examination. Management of Border Bank does not consider loans to residents of, and companies domiciled in, Mexico to present an unusual risk. Border Bank's net charge-offs from these loans has not been significant and it has not specifically allocated allowance for loan losses to these loans. As a result of criticisms reflected in the June 28, 1993 Report of Examination by the Texas Department of Banking, a Memorandum of Understanding (the "Memorandum") was entered into between the Board of Directors of Border Bank and the Banking Commissioner of Texas on October 8, 1993. The F-79 Memorandum required that Border Bank, among other provisions, increase Board of Directors supervision over loan activities, revise the existing loan policy, increase the allowance for loan losses and reduce criticized assets. Additionally, Border Bank's Board of Directors is required to submit to the Commissioner and Regional Director of the FDIC a written report of the actions taken to comply with the Memorandum. Management has made efforts to comply with the requirements of the Memorandum. The following table summarizes the activity in the allowance for loan losses for the last five years:
YEARS ENDED DECEMBER 31, ----------------------------------------------------- ALLOWANCE FOR LOAN LOSS ACTIVITY 1995 1994 1993 1992 1991 - ------------------------------------------------------------------ --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Balance at Beginning of Year...................................... $ 901 $ 624 $ 612 $ 500 $ 490 Provision for Loan Losses......................................... 485 397 265 486 157 Charge-Offs Commercial...................................................... 135 40 38 206 48 Agricultural.................................................... -- -- -- -- Real Estate..................................................... -- 10 222 71 60 Consumer........................................................ 169 83 21 98 57 --------- --------- --------- --------- --------- Total Charge-Offs............................................. 304 133 281 375 165 --------- --------- --------- --------- --------- Recoveries Commercial...................................................... 6 11 7 -- 7 Agricultural.................................................... -- -- -- -- -- Real Estate..................................................... -- -- 17 -- -- Consumer........................................................ 12 2 4 1 11 --------- --------- --------- --------- --------- Total Recoveries.............................................. 18 13 28 1 18 --------- --------- --------- --------- --------- Net Charge-Offs (Recoveries)...................................... 286 120 253 374 147 --------- --------- --------- --------- --------- Balance at End of Year............................................ $ 1,100 $ 901 $ 624 $ 612 $ 500 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Ratio of Allowance for Loan Losses to Loans Outstanding, Net of Unearned Discount................................................ 2.32% 1.96% 1.29% 1.43% 1.25% Ratio of Allowance for Loan Losses to Nonperforming Assets........ 254.04 186.93 78.10 74.83 51.65 Ratio of Net Charge-Offs to Average Total Loans Outstanding, Net of Unearned Discount............................................. 0.62 0.25 0.53 0.86 0.45 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
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:
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 ------------------------- ------------------------- ------------------------- ------------------------- % OF % OF % OF % OF LOANS LOANS LOANS LOANS IN EACH IN EACH IN EACH IN EACH CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------ (DOLLARS IN THOUSANDS) Commercial......... $ 147 33.2% $ 66 37.0% $ 52 36.9% $ 41 29.6% Agricultural....... -- -- -- -- -- 0.1 -- -- Real Estate........ 293 61.9 129 56.4 279 56.2 245 63.3 Consumer........... 153 4.9 164 6.6 173 6.8 156 7.1 Unallocated........ 507 -- 542 -- 120 -- 170 -- ----------- ----- ----- ----- ----- ----- ----- ----- Total.......... $ 1,100 100.0% $ 901 100.0% $ 624 100.0% $ 612 100.0% ----------- ----- ----- ----- ----- ----- ----- ----- ----------- ----- ----- ----- ----- ----- ----- ----- 1991 ------------------------- % OF LOANS IN EACH CATEGORY TO TOTAL AMOUNT LOANS ----------- ------------ Commercial......... $ 42 34.5% Agricultural....... 1 0.3 Real Estate........ 225 58.6 Consumer........... 139 6.6 Unallocated........ 93 -- ----- ----- Total.......... $ 500 100.0% ----- ----- ----- -----
F-80 PREMISES AND EQUIPMENT Bank premises and equipment of $3.3 million at December 31,1995 increased $77 thousand or 2.4% compared to $3.2 million at December 31, 1994. The net increase for the year ended December 31, 1995 is primarily attributable to the completion of an expansion of Border Bank, which began in 1994, and the purchase of additional land for future expansion. DEPOSITS Total deposits of $102.0 million at December 31, 1995 increased $1.1 million or 1.1% compared to December 31, 1994 levels and total deposits of $100.9 million for the year ended December 31, 1994 increased $344 thousand or 0.3% compared to December 31, 1993 levels of $100.5 million. The relatively small changes in deposits are consistent in all categories of deposits including public funds and reflect the stable level of deposits at Border Bank. Total public funds (including public funds demand deposits, public funds money market and NOW accounts and public funds time deposits) were $10.0 million, $9.8 million and $10.6 million at December 31, 1995, 1994 and 1993, respectively. Border Bank actively seeks consumer and commercial deposits. The following table presents the composition of total deposits at the end of the last three years:
DECEMBER 31, -------------------------------------------------------- % % CHANGE FROM CHANGE FROM TOTAL DEPOSITS 1995 PRIOR YEAR 1994 PRIOR YEAR 1993 - ---------------------------------------------------------------------- -------- ----------- -------- ----------- -------- (DOLLARS IN THOUSANDS) Demand Deposits Commercial and Individual........................................... $ 5,639 0.9% $ 5,588 2.1% $ 5,475 Public Funds........................................................ 1,498 5.2 1,424 5.3 1,352 -------- --- -------- ----- -------- Total Demand Deposits........................................... 7,137 1.8 7,012 2.7 6,827 -------- --- -------- ----- -------- Interest-Bearing Deposits Savings............................................................. 16,365 -- 16,364 22.2 13,391 Money Market Checking and Savings Commercial and Individual......................................... 10,839 (5.6) 11,486 (13.4) 13,263 Public Funds...................................................... 1,464 2.4 1,430 (11.6) 1,617 Time Deposits Commercial and Individual......................................... 59,122 2.6 57,635 (0.2) 57,749 Public Funds...................................................... 7,068 1.9 6,938 (9.6) 7,674 -------- --- -------- ----- -------- Total Interest-Bearing Deposits................................... 94,858 1.1 93,853 0.2 93,694 -------- --- -------- ----- -------- Total Deposits.................................................. $101,995 1.1% $100,865 0.3% $100,521 -------- --- -------- ----- -------- -------- --- -------- ----- -------- Weighted Average Rate on Interest-Bearing Deposits.................... 4.81% 4.34% 3.93% -------- -------- -------- -------- -------- --------
Time deposits of $100,000 or more are solicited from markets served by Border Bank and are not sought through brokered sources. Time deposits continue to be a significant source of funds. F-81 The following table presents the maturities of time deposits of $100,000 or more at December 31, 1995 and 1994:
DECEMBER 31, -------------------- MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE 1995 1994 - ---------------------------------------------------------------------------------------- --------- --------- (DOLLARS IN THOUSANDS) Three Months or Less.................................................................... $ 29,084 $ 34,555 After Three through Six Months.......................................................... 10,348 7,017 After Six through Twelve Months......................................................... 4,813 3,240 After Twelve Months..................................................................... 425 303 --------- --------- Total............................................................................... $ 44,670 $ 45,115 --------- --------- --------- --------- Weighted Average Rate on Time Deposits of $100,000 or More.............................. 5.61% 4.96% --------- --------- --------- ---------
Based upon the location of Border Bank with regard to the international boundary with Mexico, foreign deposits from Mexican sources represent a major source of funding. Although Border Bank experienced some short-term negative impact on its Mexican deposits due to the recent devaluation of the peso, Border Bank's Mexican deposit levels have since recovered. The following table presents foreign deposits, primarily from Mexican sources, at December 31, 1995 and 1994:
DECEMBER 31, -------------------- FOREIGN DEPOSITS 1995 1994 - ------------------------------------------------------------------------------------------- --------- --------- (DOLLARS IN THOUSANDS) Demand Deposits............................................................................ $ 2,221 $ 2,600 --------- --------- Interest-Bearing Deposits Savings.................................................................................. 12,289 11,971 Money Market Checking and Savings........................................................ 7,880 8,604 Time Deposits Under $100,000............................................................. 14,997 13,075 Time Deposits of $100,000 or More........................................................ 29,148 27,240 --------- --------- Total Interest-Bearing Deposits........................................................ 64,314 60,890 --------- --------- Total Foreign Deposits................................................................. $ 66,535 $ 63,490 --------- --------- --------- --------- Percentage of Total Deposits............................................................... 65.2% 62.9% --------- --------- --------- --------- Weighted Average Rate on Foreign Deposits.................................................. 4.80% 4.16% --------- --------- --------- ---------
LIQUIDITY Liquidity management assures that adequate funds are available to meet deposit withdrawals, loan demand and maturing liabilities. Insufficient liquidity can result in higher costs of obtaining funds, while excessive liquidity can lead to a decline in earnings due to the cost of foregoing alternative investments. The ability to renew or acquire additional deposit liabilities is a major source of liquidity. Border Bank's principal sources of funds are primarily within the local markets of Border Bank and consist of deposits, interest and principal payments on loans and investment securities. Asset liquidity is provided by cash and assets which are readily marketable, or which can be pledged, or which will mature in the near future. These include cash, federal funds sold and U.S. Government-backed securities. At December 31, 1995, Border Bank's liquidity ratio, defined as cash, U.S. Government-backed securities, and federal funds sold as a percentage of deposits was 45.8% compared to 43.6% at December 31, 1994 and compared to 39.0% at December 31, 1993. Liability liquidity is provided by access to core funding sources, principally various customers' interest-bearing and noninterest-bearing deposit accounts in Border Bank's trade area. F-82 During 1995, funds for $10.7 million of investment purchases and $1.9 million of net loan growth came from various sources, including a net increase in deposits of $1.1 million, $15.6 million proceeds from maturing or called securities and $1.9 million of net income. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires that federal bank regulatory authorities take "prompt corrective action" with respect to any depository institution which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels which require or permit the Federal Deposit Insurance Corporation (the "FDIC") and other regulatory authorities to take supervisory action. The relevant classifications range from "well capitalized" to "critically capitalized." The classifications are generally determined by applicable ratios of the institution, including Tier I capital to risk-weighted assets, total capital to risk-weighted assets and leverage ratios. Based on Border Bank's capital ratios at December 31, 1995, Border Bank was classified as "well capitalized" under the applicable regulations. As a result, Border Bank does not believe that the prompt corrective action regulations have any material effect on its activities or operations. The funds management policy of Border Bank is to maintain a liability sensitive position. Changes in net interest income occur when interest rates on loans and investments change in a different time period from that of changes in interest rates on liabilities, or when the mix and volume of interest-earning assets and interest-bearing liabilities change. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities within a given time period ("GAP"). A GAP ratio is determined by dividing rate sensitive assets by rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest income due to interest rate movements would be zero. Rate sensitive liabilities maturing within one year exceeded rate sensitive assets with comparable maturities at December 31, 1995 by $33.2 million. F-83 The following table summarizes interest rate sensitive assets and liabilities by maturity at December 31, 1995:
DECEMBER 31, 1995 --------------------------------------------------------------------- 7-12 OVER INTEREST RATE SENSITIVITY ANALYSIS 1-3 MONTHS 4-6 MONTHS MONTHS 1-5 YEARS 5 YEARS TOTAL - --------------------------------------- ---------- ---------- ---------- --------- --------- ----------- (DOLLARS IN THOUSANDS) Loans.................................. $ 28,078 $ 3,383 $ 6,037 $ 9,341 $ 506 $ 47,345 Investment Securities Available for Sale................... 1,986 -- 1,488 3,305 -- 6,779 Held to Maturity..................... 4,374 4,944 1,060 25,693 11,386 47,457 Federal Funds Sold..................... 8,750 -- -- -- -- 8,750 ---------- ---------- ---------- --------- --------- ----------- Total Interest-Earning Assets...... 43,188 8,327 8,585 38,339 11,892 110,331 ---------- ---------- ---------- --------- --------- ----------- Savings................................ 16,365 -- -- -- -- 16,365 Money Market Checking and Savings Accounts.............................. 12,303 -- -- -- -- 12,303 Time Deposits.......................... 42,556 14,670 7,383 1,580 -- 66,189 ---------- ---------- ---------- --------- --------- ----------- Total Interest-Bearing Liabilities....................... 71,224 14,670 7,383 1,580 -- 94,857 ---------- ---------- ---------- --------- --------- ----------- Rate Sensitivity GAP (1)............... $ (28,036) $ (6,343) $ 1,202 $ 36,759 $ 11,892 $ 15,474 ---------- ---------- ---------- --------- --------- ----------- ---------- ---------- ---------- --------- --------- ----------- Cumulative Rate Sensitivity GAP........ $ (28,036) $ (34,379) $ (33,177) $ 3,582 $ 15,474 ---------- ---------- ---------- --------- --------- ---------- ---------- ---------- --------- --------- Ratio of Cumulative Rate Sensitivity GAP to Total Assets................... (23.46)% (28.77)% (27.76)% ---------- ---------- ---------- ---------- ---------- ---------- Ratio of Cumulative Rate Sensitive Interest-Earning Assets to Cumulative Rate Sensitive Interest-Bearing Liabilities........................... 0.61:1 0.60:1 0.64:1 ---------- ---------- ---------- ---------- ---------- ----------
- --------- (1) Rate sensitive interest-earning assets less rate sensitive interest-bearing liabilities. EFFECTS OF INFLATION Financial institutions are impacted differently by inflation than are industrial companies. While industrial and manufacturing companies generally have significant investments in inventories and fixed assets, financial institutions ordinarily do not have such investments. As a result, financial institutions are generally in a better position than industrial companies to respond to inflationary trends by monitoring the spread between interest costs and interest income yields through adjustments to maturities and interest rates of assets and liabilities. In addition, inflation tends to increase demand for loans from financial institutions as industrial companies attempt to maintain a constant level of goods in inventory and assets. As consumers of goods and services, financial institutions are affected by inflation as prices increase, causing an increase in costs of salaries, employee benefits, occupancy expense and similar items. CAPITAL RESOURCES Stockholders' equity of $17.1 million at December 31, 1995 reflects a net increase of $1.2 million or 7.8% compared to stockholders' equity of $15.8 million at December 31, 1994. This net increase was primarily attributable to earnings for 1995 of $1.9 million. The net increase in stockholders' equity reflects dividends paid on common stock of $800 thousand in 1995. Border Bank also declared and paid a $500 thousand dividend in January 1996. The risk-based capital standards as established by the FDIC apply to Border Bank. The numerator of the risk-based capital ratio for banks includes Tier I capital, consisting of common stockholders' equity and qualifying cumulative and noncumulative perpetual preferred stock; and Tier II capital, consisting of F-84 other preferred stock, reserve for possible loan losses and certain subordinated and term-debt securities. Beginning on December 31, 1993, goodwill is deducted from Tier I capital. At no time is Tier II capital allowed to exceed Tier I capital in the calculation of total capital. The denominator or asset portion of the risk-based capital ratio aggregates generic classes of balance sheet and off-balance sheet exposures, each weighted by one of four factors, ranging from 0% to 100%, based on the relative risk of the exposure class. Ratio targets are set for both Tier I capital and Total Capital (Tier I plus Tier II capital). The minimum level of Tier I capital to total assets is 4.0% and the minimum Total Capital ratio is 8.0%. The FDIC has guidelines for a leverage ratio that is an additional evaluation of capital adequacy of banks. The leverage ratio is defined to be Border Bank's Tier I capital divided by its risk adjusted total assets. An insured depository institution is "Well Capitalized" for purposes of FDICIA if its Total Risk-Based Capital Ratio is equal to or greater than 10.0%, and Tier I Risk-Based Capital Ratio is equal to or greater than 6.0%, and Tier I Leverage Capital Ratio is equal to or greater than 5.0%. Based on capital ratios, Border Bank is within the definition of "Well Capitalized" for FDIC purposes at December 31, 1995. Border Bank's Tier I Risk-Based Capital Ratio was approximately 18.12% and 18.01% at December 31, 1995 and 1994, respectively. Border Bank's Total Risk-Based Capital Ratio was approximately 19.29% and 19.02% at December 31, 1995 and 1994, respectively. Border Bank's Tier I Leverage Capital Ratio was approximately 14.51% and 13.58% at December 31, 1995 and 1994, respectively. The following table presents Border Bank's risk-based capital calculation:
DECEMBER 31, -------------------- RISK-BASED CAPITAL 1995 1994 - ----------------------------------------------------------------------------------------- --------- --------- (DOLLARS IN THOUSANDS) Total Stockholders' Equity, before unrealized gains or losses on Securities Available for Sale.................................................................................... $ 17,079 $ 15,994 Less -- Goodwill and Other Deductions.................................................... -- -- --------- --------- Total Tier I Capital..................................................................... 17,079 15,994 Total Tier II Capital.................................................................... 1,100 901 --------- --------- Total Qualifying Capital................................................................. $ 18,179 $ 16,895 --------- --------- --------- --------- Risk Adjusted Assets (Including Off-Balance Sheet Exposure).............................. $ 94,232 $ 88,822 --------- --------- --------- --------- Tier I Risk-Based Capital Ratio.......................................................... 18.12% 18.01% Total Risk-Based Capital Ratio........................................................... 19.29 19.02 Leverage Capital Ratio................................................................... 14.51 13.58 --------- --------- --------- ---------
CURRENT ACCOUNTING ISSUES Effective January 1, 1995, Border Bank adopted Statement 114 and the amendment thereof, Statement 118. Under Statement 114, a loan is considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Statement 114 requires that an impaired loan be valued utilizing (i) the present value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan. Statement 118 amended Statement 114 by expanding the related disclosure requirements and permitting use of existing methods for recognizing interest income on impaired loans. Loans which were restructured prior to the adoption of Statement 114 and which are performing in accordance with the renegotiated terms are not required to be reported as impaired. Loans restructured subsequent to the adoption of Statement 114 are required to be reported as impaired in the year of restructuring. Thereafter, such loans can be removed from the impaired loan disclosure if the loans were paying a market rate of interest at the time of restructuring and are performing in accordance with their renegotiated terms. F-85 For loans covered by Statement 114, Border Bank makes an assessment for impairment when and while such loans are on nonaccrual status or when the loan has been restructured. When a loan with unique risk characteristics has been identified as being impaired, the amount of impairment will be measured by Border Bank using discounted cash flows, except when it is determined that the sole source of repayment for the loan is the operation or liquidation of the underlying collateral. In such case, the current fair value of the collateral, reduced by costs to sell, will be used in place of discounted cash flows. At the time a loan is placed on nonaccrual status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending upon management's assessment of the ultimate collectibility of principal. In management's opinion, the adoption of Statement 114 and Statement 118 has not had, and is not anticipated to have, a material effect on Border Bank's results of operations. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation." Statement 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. Statement 123 encourages entities to adopt a "fair value" based method of accounting for stock-based compensation plans which requires an estimate of the fair value of stock options or other equity instruments which employees become entitled to when they have rendered requisite service or satisfied other conditions necessary to earn the right to benefit from the instruments. Compensation cost is then determined based on the fair value estimate and is recognized over the service period, which is usually the vesting period. Statement 123 also requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of Statement 123 are effective for transactions entered into in fiscal years that begin after December 15, 1995. In management's opinion, the implementation of Statement 123 should have no material effect on Border Bank's financial statements. FOURTH QUARTER RESULTS The following table presents a summary of operations for the last five quarters:
1995 1994 ------------------------------------------ --------- CONDENSED QUARTERLY INCOME STATEMENTS FOURTH THIRD SECOND FIRST FOURTH TAXABLE-EQUIVALENT BASIS QUARTER QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------- --------- --------- --------- --------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Interest Income............................................... $ 2,390 $ 2,379 $ 2,447 $ 2,441 $ 2,370 Interest Expense.............................................. 1,137 1,117 1,121 1,040 958 --------- --------- --------- --------- --------- Net Interest Income........................................... 1,253 1,262 1,326 1,401 1,412 Provision for Loan Losses..................................... 351 62 20 52 15 Noninterest Income............................................ 89 84 68 75 71 Noninterest Expense........................................... 595 485 567 520 657 --------- --------- --------- --------- --------- Income Before Taxable-Equivalent Adjustment and Income Tax.... 396 799 807 904 811 Taxable-Equivalent Adjustment................................. 155 156 164 166 157 Applicable Income Tax Expense................................. (5) 115 135 135 179 --------- --------- --------- --------- --------- Net Income.................................................... $ 246 $ 528 $ 508 $ 603 $ 475 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net Income Per Common Share................................... $ 1.23 $ 2.64 $ 2.54 $ 3.02 $ 2.38 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-86 INDEPENDENT AUDITORS' REPORT The Board of Directors The Border Bank: We have audited the accompanying balance sheets of The Border Bank (the "Bank") as of December 31, 1995 and 1994, and the related statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Border Bank as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in note 1 to the financial statements, the Bank changed its method of accounting for investment securities in 1994 to adopt the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." /s/ KPMG PEAT MARWICK LLP Houston, Texas January 31, 1996 F-87 THE BORDER BANK BALANCE SHEETS DECEMBER 31, 1995 AND 1994
1995 1994 ---------------- ---------------- Assets Cash and due from banks (note 2).......................................... $ 3,981,763 $ 3,079,938 Federal funds sold........................................................ 8,750,000 4,500,000 ---------------- ---------------- Total cash and cash equivalents............................... 12,731,763 7,579,938 ---------------- ---------------- Investment securities available for sale (note 3)......................... 6,778,515 8,725,350 Investment securities held to maturity (note 3)........................... 47,457,398 49,994,782 Loans, net of unearned discount (note 4).................................. 47,344,518 45,858,959 Less allowance for loan losses (note 5)................................... 1,100,100 900,663 ---------------- ---------------- Net loans..................................................... 46,244,418 44,958,296 ---------------- ---------------- Bank premises and equipment, net of accumulated depreciation and amortization (note 6).................................................... 3,297,249 3,220,156 Accrued interest receivable............................................... 2,242,370 1,726,997 Other real estate owned................................................... 237,149 220,790 Other assets.............................................................. 405,691 576,634 Deferred federal income taxes (note 8).................................... 110,156 120,395 ---------------- ---------------- $ 119,504,709 $ 117,123,338 ---------------- ---------------- ---------------- ---------------- Liabilities and Stockholders' Equity Liabilities: Deposits: Noninterest-bearing............................................... $ 7,137,218 $ 7,012,379 Interest-bearing (note 7)......................................... 94,858,120 93,852,472 ---------------- ---------------- Total deposits................................................ 101,995,338 100,864,851 Accrued interest payable.............................................. 246,702 207,772 Deferred compensation payable (note 9)................................ 107,600 107,600 Other liabilities..................................................... 79,851 100,734 ---------------- ---------------- Total liabilities............................................. 102,429,491 101,280,957 ---------------- ---------------- Stockholders' equity: Common stock, $10 par value, 200,000 shares authorized, issued and outstanding.......................................................... 2,000,000 2,000,000 Certified surplus..................................................... 9,000,000 9,000,000 Undivided profits..................................................... 6,078,518 4,994,409 Unrealized loss on securities available for sale (note 3)............. (3,300) (152,028) ---------------- ---------------- Total stockholders' equity.................................... 17,075,218 15,842,381 Commitments and contingent liabilities (notes 4 and 10) ---------------- ---------------- $ 119,504,709 $ 117,123,338 ---------------- ---------------- ---------------- ----------------
See accompanying notes to financial statements. F-88 THE BORDER BANK STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ------------- ------------- ------------- Interest income: Loans............................................................ $ 5,326,329 $ 5,328,325 $ 5,411,271 Investment securities............................................ 3,430,612 3,338,920 3,340,360 Federal funds sold............................................... 259,176 211,885 176,570 ------------- ------------- ------------- Total interest income........................................ 9,016,117 8,879,130 8,928,201 ------------- ------------- ------------- Interest expense: Savings, NOW and money market deposits........................... 947,113 1,023,946 987,085 Time deposits.................................................... 3,468,212 2,747,527 2,904,981 ------------- ------------- ------------- Total interest expense....................................... 4,415,325 3,771,473 3,892,066 ------------- ------------- ------------- Net interest income.......................................... 4,600,792 5,107,657 5,036,135 Provision for loan losses (note 5)................................... 485,283 396,523 265,219 ------------- ------------- ------------- Net interest income after provision for loan losses.......... 4,115,509 4,711,134 4,770,916 Noninterest income: Service charges on deposit accounts.............................. 255,241 237,979 186,743 Other service charges and fees................................... 32,554 29,644 38,678 Other............................................................ 28,385 135,260 60,629 ------------- ------------- ------------- Total noninterest income..................................... 316,180 402,883 286,050 ------------- ------------- ------------- Noninterest expense: Salaries and employee benefits................................... 1,055,597 1,060,701 945,165 Net occupancy expense............................................ 381,852 367,077 314,787 Legal and professional fees...................................... 215,052 89,935 86,781 Data processing fees............................................. 106,169 89,035 73,699 Directors' fees.................................................. 46,200 47,600 33,600 FDIC assessment.................................................. 121,269 229,312 205,873 Other............................................................ 241,051 301,428 820,777 ------------- ------------- ------------- Total noninterest expense.................................... 2,167,190 2,185,088 2,480,682 ------------- ------------- ------------- Income before income tax expense............................. 2,264,499 2,928,929 2,576,284 Income tax expense (note 8).......................................... 380,390 604,132 500,840 ------------- ------------- ------------- Net income................................................... $ 1,884,109 $ 2,324,797 $ 2,075,444 ------------- ------------- ------------- ------------- ------------- ------------- Net income per share................................................. $ 9.42 $ 11.62 $ 10.38 ------------- ------------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements. F-89 THE BORDER BANK STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
UNREALIZED GAIN (LOSS) ON SECURITIES TOTAL CERTIFIED UNDIVIDED AVAILABLE STOCKHOLDERS' COMMON STOCK SURPLUS PROFITS FOR SALE EQUITY ------------- ------------- -------------- ------------ -------------- Balance at December 31, 1992................... $ 2,000,000 $ 7,000,000 $ 3,394,168 $ -- $ 12,394,168 Cash dividends on common stock................. -- -- (400,000) -- (400,000) Transfer of Undivided profits to Certified surplus....................................... -- 2,000,000 (2,000,000) -- -- Net income for 1993............................ 2,075,444 -- 2,075,444 ------------- ------------- -------------- ------------ -------------- Balance at December 31, 1993................... 2,000,000 9,000,000 3,069,612 -- 14,069,612 Effect of change to adopt an accounting principle -- accounting for unrealized gain (loss) on securities available for sale (note 3)............................................ -- -- -- (37,546) (37,546) Cash dividends on common stock................. -- -- (400,000) -- (400,000) Change in unrealized gain (loss) on securities available for sale (note 3)................... -- -- (114,482) (114,482) Net income for 1994............................ -- -- 2,324,797 -- 2,324,797 ------------- ------------- -------------- ------------ -------------- Balance at December 31, 1994................... 2,000,000 9,000,000 4,994,409 (152,028) 15,842,381 Cash dividends on common stock................. -- -- (800,000) -- (800,000) Change in unrealized gain (loss) on securities available for sale (note 3)................... -- -- -- 148,728 148,728 Net income for 1995............................ -- -- 1,884,109 -- 1,884,109 ------------- ------------- -------------- ------------ -------------- Balance at December 31, 1995................... $ 2,000,000 $ 9,000,000 $ 6,078,518 $ (3,300) $ 17,075,218 ------------- ------------- -------------- ------------ -------------- ------------- ------------- -------------- ------------ --------------
See accompanying notes to financial statements. F-90 THE BORDER BANK STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 --------------- --------------- --------------- Cash flows from operating activities: Net income........................................................ $ 1,884,109 $ 2,324,797 $ 2,075,444 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of bank premises and equipment.................................................... 163,603 128,798 119,435 Net discount accretion on investment securities............... (131,534) (31,290) (7,677) Provision for loan losses..................................... 485,283 396,523 265,219 Losses on sales of other real estate owned.................... 6,029 11,192 6,256 (Increase) decrease in accrued interest receivable, other assets and deferred federal income taxes..................... (410,806) 337,241 (124,353) Increase in accrued interest payable and other liabilities.... 18,047 24,535 107,346 Write-downs of other real estate.............................. -- 12,509 -- --------------- --------------- --------------- Total adjustments......................................... 130,622 879,508 366,226 --------------- --------------- --------------- Net cash provided by investing activities................. 2,014,731 3,204,305 2,441,670 --------------- --------------- --------------- Cash flows from investing activities: Proceeds from investment security maturities and principal repayments....................................................... 8,678,114 5,115,000 7,595,000 Proceeds from called investment securities........................ 6,905,000 4,785,000 4,742,487 Purchase of investment securities................................. (1,964,429) (14,371,015) (20,153,723) Net (increase) decrease in loans.................................. (1,977,648) 2,179,765 (6,112,667) Recoveries on loans charged off................................... 18,507 12,537 33,104 Purchases of bank premises and equipment.......................... (240,696) (1,519,306) (229,354) Proceeds from sales of other real estate owned.................... 152,129 178,447 83,386 --------------- --------------- --------------- Net cash provided by (used in) investing activities............... 2,806,607 (3,619,572) (14,041,767) --------------- --------------- --------------- Cash flows from financing activities: Increase in deposits.............................................. 1,130,487 343,854 6,692,667 Dividends paid on common stock.................................... (800,000) (400,000) (400,000) --------------- --------------- --------------- Net cash provided by (used in) financing activities....... 330,487 (56,146) 6,292,667 --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents...... 5,151,825 (471,413) (5,307,430) Cash and cash equivalents at beginning of year........................ 7,579,938 8,051,351 13,358,781 --------------- --------------- --------------- Cash and cash equivalents at end of year.............................. $ 12,731,763 $ 7,579,938 $ 8,051,351 --------------- --------------- --------------- --------------- --------------- --------------- Supplemental disclosure of cash flow information: Interest paid..................................................... $ 4,415,325 $ 3,746,012 $ 3,922,076 Taxes paid........................................................ 437,000 506,666 497,572 --------------- --------------- --------------- --------------- --------------- --------------- Supplemental schedule of noncash investing and financing activities -- foreclosure of assets in partial satisfaction of loans receivable.... $ 174,517 $ 211,098 $ 238,534 --------------- --------------- --------------- --------------- --------------- ---------------
See accompanying notes to financial statements. F-91 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995, 1994 AND 1993 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of the Bank conform to generally accepted accounting principles and to prevailing practices within the banking industry. A summary of the more significant accounting policies follows: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and due from banks and federal funds sold are considered to be cash equivalents. Federal funds sold generally have one-day maturities. INVESTMENT SECURITIES In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities." Statement 115 establishes standards of financial accounting and reporting for investments in equity securities that have a readily determinable fair value and for all investments in debt securities. At acquisition, a bank is required to classify debt and equity securities into one of three categories: held to maturity, trading or available for sale. At each reporting date, the appropriateness of the classification is reassessed. Investments in debt securities are classified as held to maturity and measured at amortized cost in the balance sheet only if management has the positive intent and ability to hold those securities to maturity. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading and measured at fair value in the balance sheet with unrealized holding gains and losses included in earnings. Investments not classified as held to maturity nor trading are classified as available for sale and measured at fair value in the balance sheet with unrealized holding gains and losses, net of applicable income taxes, reported in a separate component of stockholders' equity until realized. Effective January 1, 1994, the Bank adopted Statement 115, which had no impact on the Bank's income statement as all securities were classified as either held to maturity or available for sale. Accounting for securities classified as held to maturity will continue on the basis of amortized cost. Securities classified as available for sale will be measured at market value with the net unrealized holding gains and losses reported in a separate component of stockholders' equity until realized. Purchases of investment securities are classified as available for sale or held to maturity at time of purchase as determined by management. Premiums and discounts are amortized and accreted using a method which approximates level yield. Gains and losses on available for sale investment securities sold are recognized in operations at the time of sale based on the specific identification method. Security purchases and sales are recorded on the trade date. LOANS Management continually reviews the loan portfolio to identify loans which, with respect to principal or interest, have or may become collection problems. A loan is generally placed on nonaccrual status when principal or interest is past due 90 days or more, and the loan is not both well-secured and in the process of collection. A loan is also placed on nonaccrual status immediately if, in the opinion of management, full collection of principal or interest is unlikely. At the time a loan is placed on nonaccrual F-92 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) status, interest previously recognized but uncollected is reversed and charged against current income. Subsequent interest payments received on nonaccrual loans are either applied against principal or reported as income, depending on management's assessment of the ultimate collectibility of principal. Unearned interest on installment loans is recognized as income over the terms of the related loans on a basis which results in approximately level rates of return over the terms of the loans. In May 1993, the FASB issued Statement of Financial Accounting Standards No. 114 ("Statement 114"), "Accounting by Creditors for Impairment of a Loan," which addresses the accounting by creditors for impairment of certain loans, as defined. In October 1994, Statement 114 was amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan, Income Recognition and Disclosures." Implementation of these pronouncements in the first quarter of 1995 did not have a material effect on the Bank's financial statements. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established by a charge to operations as deemed necessary by management to maintain the allowance for loan losses at an amount considered adequate to absorb known or possible loan losses in the Bank's loan portfolio. The provision is determined based on management's evaluation of the loan portfolio, giving consideration to existing economic conditions, changes in the loan portfolio, historical loan loss factors and other relevant information. Management believes that the allowance for loan losses is adequate. Loans are charged against the allowance for loan losses when management believes the collection of principal is unlikely. Recoveries of amounts previously charged off are credited to the allowance. BANK PREMISES AND EQUIPMENT Bank premises and equipment are recorded at cost. Expenditures for improvements are capitalized. Repairs and maintenance which do not extend the life of bank premises and equipment are charged to expense as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives of the assets. Any gain or loss resulting from disposition of premises and equipment is reflected in earnings. OTHER REAL ESTATE OWNED Other real estate owned is recorded at fair value at the date of foreclosure which is subsequently considered cost. At subsequent dates, other real estate is carried at the lower of fair value minus estimated costs to sell or cost. Fair values are determined generally by reference to appraisals. Rental income earned and expenses incurred related to real estate owned are recognized during the period earned or incurred and are included in noninterest expense at their net amount. FEDERAL INCOME TAXES Deferred tax assets and liabilities are recognized for estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense or benefit is recognized as a result of the change in the asset or liability during the year. F-93 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (2) RESERVE REQUIREMENTS The Bank is required to maintain certain daily reserve balances on hand or on deposit with the Federal Reserve Bank in accordance with Federal Reserve Board requirements. These deposits are noninterest bearing and not available for investment purposes. Cash and due from bank balances maintained in accordance with such requirements at December 31, 1995 was approximately $25,000. (3) INVESTMENT SECURITIES The amortized cost and estimated market value, which is the carrying value, of investment securities available for sale at December 31, 1995 and December 31, 1994 are as follows:
1995 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE - ---------------------------------------------- ------------- ----------- ------------ ------------- U.S. treasuries............................... $ 3,004,777 $ 5,927 $ (4,104) $ 3,006,600 U.S. government agencies...................... 3,778,740 9,186 (16,011) 3,771,915 ------------- ----------- ------------ ------------- $ 6,783,517 $ 15,113 $ (20,115) $ 6,778,515 ------------- ----------- ------------ ------------- ------------- ----------- ------------ ------------- 1994 ------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED AVAILABLE FOR SALE COST GAINS LOSSES MARKET VALUE - ---------------------------------------------- ------------- ----------- ------------ ------------- U.S. treasuries............................... $ 1,995,054 $ -- $ (58,304) $ 1,936,750 U.S. government agencies...................... 6,960,640 -- (172,040) 6,788,600 ------------- ----------- ------------ ------------- $ 8,955,694 $ -- $ (230,344) $ 8,725,350 ------------- ----------- ------------ ------------- ------------- ----------- ------------ -------------
At December 31, 1995 and 1994, the Bank has recorded net unrealized holding losses on securities available for sale, net of income tax, as a decrease in stockholders' equity of $3,300 and $152,028, respectively. The amortized cost, which is the carrying value, and estimated market value of investment securities held to maturity at December 31, 1995 and December 31, 1994 are as follows:
1995 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE - ---------------------------------------- -------------- ------------- -------------- -------------- U.S. government agencies................ $ 27,247,565 $ 156,236 $ (345,402) $ 27,058,399 Obligations of state and political subdivisions........................... 18,633,086 1,265,601 (3,361) 19,895,326 Other................................... 1,576,747 66,429 -- 1,643,176 -------------- ------------- -------------- -------------- $ 47,457,398 $ 1,488,266 $ (348,763) $ 48,596,901 -------------- ------------- -------------- -------------- -------------- ------------- -------------- -------------- 1994 ------------------------------------------------------------- GROSS GROSS UNREALIZED UNREALIZED ESTIMATED HELD TO MATURITY AMORTIZED COST GAINS LOSSES MARKET VALUE - ---------------------------------------- -------------- ------------- -------------- -------------- U.S. government agencies................ $ 27,689,133 $ 9,648 $ (1,176,060) $ 26,522,721 Obligations of state and political subdivisions........................... 20,232,429 527,174 (414,166) 20,345,437 Other................................... 2,073,220 12,341 (82,746) 2,002,815 -------------- ------------- -------------- -------------- $ 49,994,782 $ 549,163 $ (1,672,972) $ 48,870,973 -------------- ------------- -------------- -------------- -------------- ------------- -------------- --------------
F-94 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (3) INVESTMENT SECURITIES (CONTINUED) The amortized cost and estimated market value of investment securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
ESTIMATED AVAILABLE FOR SALE AMORTIZED COST MARKET VALUE - ----------------------------------------------------------------------- -------------- -------------- Due in one year or less................................................ $ 3,492,918 $ 3,474,200 Due after one year through five years 3,290,599 3,304,315 -------------- -------------- $ 6,783,517 $ 6,778,515 -------------- -------------- -------------- -------------- HELD TO MATURITY - ----------------------------------------------------------------------- Due in one year or less................................................ $ 3,552,921 $ 3,550,443 Due after one year through five years.................................. 32,518,814 32,856,305 Due after five years through ten years................................. 7,676,266 8,229,114 Due after ten years.................................................... 3,709,397 3,961,039 -------------- -------------- $ 47,457,398 $ 48,596,901 -------------- -------------- -------------- --------------
Included in held to maturity and available for sale securities at December 31, 1995 are approximately $2,500,000 and $987,000, respectively, of investment securities that pay interest based on a set coupon rate with a foreign exchange rate adjustment or based directly on a foreign index. The held to maturity securities have a market value of $2,472,000. All of the securities mature during 1996 and 1997, with the exception of one security maturing in the year 2000. The securities are paying interest at a rate of approximately 2.76%. One security of approximately $500,000 has an interest rate floor of 3.00%. The interest rate on the other securities could reset to zero. No loss of principal is anticipated by management on any of the aforementioned securities. There were no sales for the years ended December 31, 1995 and 1994 from either the available for sale or held to maturity categories. Securities with a carrying value of approximately $13,437,000 and $12,614,000 were pledged at December 31, 1995 and 1994, respectively, to secure public deposits of $10,049,000 and $9,796,000 (4) LOANS Loans at December 31, 1995 and 1994 are as follows:
1995 1994 -------------- -------------- Commercial............................................................. $ 15,452,457 $ 15,416,038 Real estate: Construction....................................................... 751,231 956,662 Commercial......................................................... 20,216,699 15,903,244 Agriculture........................................................ 1,130,755 629,500 1-4 single family residence........................................ 7,206,746 8,362,315 Consumer............................................................... 2,557,042 3,418,871 Overdraft and other.................................................... 270,000 1,537,503 -------------- -------------- 47,584,930 46,224,133 Less unearned discount................................................. (240,412) (365,174) -------------- -------------- $ 47,344,518 $ 45,858,959 -------------- -------------- -------------- --------------
F-95 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (4) LOANS (CONTINUED) The majority of the Bank's loans are to companies and individuals which are headquartered or are employed in the Rio Grande Valley, but may conduct business on a statewide national or international scale. Repayment of those loans is dependent on the economy in that area, the economic situation in Mexico and surrounding areas. The Border Bank makes loans to individuals or companies that are residents of, or domiciled in, Mexico. Such loans may be secured or unsecured. Secured loans include loans secured by deposits in the Bank, real estate in the United States or Mexico, or equipment. At December 31, 1995 and 1994, the Bank had outstanding approximately $11,826,000 and $12,178,000, respectively, of such loans. Interest income related to such loans for the years ended December 31, 1995, 1994 and 1993 was approximately $1,329,000, $732,000 and $1,110,000, respectively. All loans to officers, directors and stockholders of the Bank and associates of such persons are, in the opinion of management, made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of like quality and risk of collectibility. The outstanding balance of direct and indirect personal borrowings of executive officers and directors of the Bank at December 31, 1995 and 1994 was approximately $1,704,000 and $2,403,000, respectively. Nonaccrual loans approximated $189,000 and $226,000 at December 31, 1995 and 1994, respectively. If interest on these loans had been accrued at the original contractual rates, interest income would have been increased by approximately $2,400 and $34,000 for the years ended December 31, 1995 and 1994. There were no renegotiated loans outstanding at December 31, 1995 and 1994. In the normal course of business, the Bank enters into various transactions which, in accordance with generally accepted accounting principles, are not included on the balance sheets. These transactions are referred to as "off-balance sheet commitments." The Bank enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Outstanding commitments and letters of credit at December 31, 1995 and 1994 are approximately as follows:
1995 1994 ------------- ------------- Commitments to extend credit.............................................. $ 2,151,000 $ 1,663,000 Letters of credit......................................................... 470,000 279,000 ------------- ------------- ------------- -------------
(5) ALLOWANCE FOR LOAN LOSSES A summary of the activity in the allowance for loan losses for the years ended December 31, 1995 and 1994 is as follows:
1995 1994 ------------- ----------- Balance at beginning of year................................................ $ 900,663 $ 623,778 Provision for loan losses................................................... 485,283 396,523 Loans charged off........................................................... (304,353) (132,175) Recoveries.................................................................. 18,507 12,537 ------------- ----------- Balance at end of year...................................................... $ 1,100,100 $ 900,663 ------------- ----------- ------------- -----------
F-96 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (6) BANK PREMISES AND EQUIPMENT Bank premises and equipment and related accumulated depreciation and amortization at December 31, 1995 and 1994 are as follows:
ESTIMATED USEFUL LIVES 1995 1994 ------------ -------------- -------------- Land..................................................... -- $ 630,757 $ 500,785 Premises................................................. 40 years 2,990,006 2,914,459 Furniture, fixtures and equipment........................ 10 years 987,740 965,797 Automobiles.............................................. 3 years 52,230 46,636 Less accumulated depreciation and amortization........... (1,363,484) (1,207,521) -------------- -------------- $ 3,297,249 $ 3,220,156 -------------- -------------- -------------- --------------
Depreciation expense was approximately $164,000, $148,000 and $119,000 for the years ended December 31, 1995, 1994, and 1993, respectively. (7) INTEREST-BEARING DEPOSITS Interest-bearing deposits at December 31, 1995 and 1994 are as follows:
1995 1994 -------------- -------------- Savings, money market and NOW accounts................................. $ 28,668,215 $ 29,279,190 Certificates of deposit less than $100,000............................. 21,520,413 19,458,632 Certificates of deposit of $100,000 or more............................ 44,669,492 45,114,650 -------------- -------------- $ 94,858,120 $ 93,852,472 -------------- -------------- -------------- --------------
Interest expense for certificates of deposit of $100,000 or more for the years ended December 31, 1995, 1994 and 1993 was approximately $1,649,000, $1,980,000 and $1,476,000, respectively. (8) INCOME TAXES The components of income tax expense for the years ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993 ----------- ----------- ----------- Federal: Current tax expense.......................................... $ 446,766 $ 570,177 $ 460,787 Deferred tax (benefit) expense............................... (66,376) 33,955 40,053 ----------- ----------- ----------- Income tax expense....................................... $ 380,390 $ 604,132 $ 500,840 ----------- ----------- ----------- ----------- ----------- -----------
The income tax expense for the years ended December 31, 1995, 1994 and 1993 differs from the amount computed by applying the federal income tax rate of 34% to income before income tax expense as follows:
1995 1994 1993 ------------ ------------ ------------ Computed "expected" tax expense............................... $ 769,930 $ 995,836 $ 875,937 Increase (reduction) in tax resulting from: Tax-exempt interest, net.................................. (423,414) (405,528) (405,384) Other, net................................................ 33,874 13,824 30,287 ------------ ------------ ------------ $ 380,390 $ 604,132 $ 500,840 ------------ ------------ ------------ ------------ ------------ ------------
F-97 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (8) INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows:
1995 1994 ----------- ----------- Deferred tax assets: Allowance for loan losses................................................. $ 282,431 $ 215,392 Deferred compensation..................................................... 36,584 36,584 Other real estate......................................................... 4,250 4,250 Unrealized losses on investment securities................................ 1,701 78,317 Alternative minimum tax carryforward...................................... 94,831 94,831 ----------- ----------- 419,797 429,374 ----------- ----------- Deferred tax liabilities: Premises and equipment.................................................... 277,106 254,019 Other assets.............................................................. 32,535 54,960 ----------- ----------- 309,641 308,979 ----------- ----------- Net deferred tax asset................................................ $ 110,156 $ 120,395 ----------- ----------- ----------- -----------
Management believes that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. (9) EMPLOYEE BENEFITS The Bank has a deferred compensation plan for the benefit of one individual. The plan provides for a retirement benefit, payable to the individual (or designated beneficiary or estate if death occurs prior to payment of the full amount of deferred compensation), of $13,350 each year beginning March 15, 1995 and continuing thereafter for fourteen years. The Bank owns and is the beneficiary of a life insurance policy on the former employee covered by the deferred compensation plan. The face value of the life insurance policy is approximately equal to the total benefits to be paid under the plan. (10) CONTINGENT LIABILITIES The Bank is involved in certain claims and suits occurring in the ordinary course of business. Management believes that the probable resolution of such claims and suits will not have a material adverse affect on the financial condition of the Bank. F-98 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (11) FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values at December 31, 1995 and methods and assumptions used to determine the estimated fair values are set forth below for the Bank's financial instruments:
CARRYING OR NOTIONAL VALUE FAIR VALUE ---------------- ---------------- Financial assets: Cash and due from banks......................................... $ 3,981,763 $ 3,981,763 Federal funds sold.............................................. 8,750,000 8,750,000 Investment securities........................................... 54,235,913 55,375,416 Net loans....................................................... 46,244,418 46,121,036 Financial liabilities -- deposits................................... 101,995,338 102,134,065 Off-balance sheet instruments: Commitments to extend credit.................................... 2,151,000 2,151,000 Letters of credit............................................... 470,100 470,100 ---------------- ---------------- ---------------- ----------------
CASH AND DUE FROM BANKS Carrying value approximates fair value because of the short maturity of these instruments and no anticipated credit concerns. FEDERAL FUNDS SOLD Carrying value approximates fair value because of the short maturity of these instruments and no anticipated credit concerns. INVESTMENT SECURITIES The fair values of investment securities are estimated based on quoted market prices from investment dealers and companies. NET LOANS The fair value of loans is estimated for segregated groupings of loans with similar financial characteristics. Loans are segregated by type and the fair value of loans is estimated using current market rates for the type of loan. DEPOSITS The fair value of deposits with short-term or no stated maturity, such as checking, savings, NOW accounts and money market accounts, is equal to the amounts payable at December 31, 1995. The fair value of certificates of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT The fair value of commitments to extend credit and letters of credit are estimated using current interest rates and committed rates. (12) REGULATORY SUPERVISION As a result of criticisms reflected in the June 28, 1993 Report of Examination by the Texas Department of Banking, a Memorandum of Understanding (the "Memorandum") was entered into between the Board of Directors of the Bank and the Banking Commissioner of Texas on October 8, 1993. The Memorandum required that the Bank, among other provisions, increase Board of Director supervision over loan activities, revise the existing loan policy, increase the allowance for loan losses and reduce criticized assets. Additionally, the Bank's Board of Directors are required to submit to the Commissioner and Regional Director of the FDIC, a written report of the actions taken to comply with the Memorandum F-99 THE BORDER BANK NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (12) REGULATORY SUPERVISION (CONTINUED) within fifteen days after the end of each calendar quarter. Failure to comply with the requirements of the Memorandum could subject the Bank to additional action by bank regulatory authorities. Management has made efforts to comply with the requirements of the Memorandum and believes such additional action will not be taken by regulatory authorities. (13) PENDING TRANSACTION On January 9, 1996, a definitive agreement was signed under which the Border Bank will be purchased by Texas State Bank, the principal operating subsidiary of Texas Regional Bancshares, Inc. The agreement has been approved by the Boards of Directors of the Border Bank, Texas State Bank and Texas Regional Bancshares, Inc. The sale of the Bank is subject to approval by the appropriate regulatory agencies and contingent upon, among other things, Texas Regional Bancshares, Inc. having successfully raised additional capital to partially fund the transaction. (14) SUBSEQUENT EVENT On January 12, 1996, the Bank declared and paid a dividend of $2.50 per share, or $500,000 in the aggregate, to shareholders of record at that date. F-100 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE --------- Available Information.......................... 2 Prospectus Summary............................. 3 Risk Factors................................... 7 Use of Proceeds................................ 9 The Company.................................... 10 Proposed Mergers............................... 12 Price Range of Common Stock and Dividend Policy........................................ 15 Capitalization................................. 17 Texas Regional Bancshares, Inc. Selected Consolidated Financial Information............ 18 Texas Regional Bancshares, Inc. Pro Forma Combined Condensed Financial Information...... 19 Texas Regional Bancshares, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 23 Business....................................... 48 Management..................................... 64 Principal Holders of Capital Stock............. 71 Selling Shareholder............................ 72 Description of Capital Stock................... 73 Shares Eligible for Future Sale................ 73 Underwriting................................... 75 Legal Matters.................................. 76 Experts........................................ 76 Index to Financial Statements.................. F-1
2,200,000 SHARES [TEXAS REGIONAL BANCSHARES LOGO] TEXAS REGIONAL BANCSHARES, INC. COMMON STOCK ------------ PROSPECTUS ------------ ALEX. BROWN & SONS INCORPORATED FIRST SOUTHWEST COMPANY , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following is an itemized list of all expenses expected to be incurred with respect to the offering described in this Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee..................................................... $ 18,321 Other Filing and Listing Fees............................................ 23,313 Printing and Distribution Costs.......................................... 118,366 Accounting Fees.......................................................... 100,000 Legal Fees............................................................... 175,000 Miscellaneous............................................................ 65,000 --------- Total.................................................................. $ 500,000 --------- ---------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Articles 2.02A(16) and 2.02-1 of the Texas Business Corporation Act grants to each corporation organized thereunder the power to indemnify its directors and officers against liability, and to purchase and maintain liability insurance for those persons as, and to the extent, permitted by Article 2.02-1 of the Texas Business Corporation Act. In addition, reference is hereby made to Article V of the Bylaws of the Registrant incorporated herein by reference. The general effect of Articles 2.02.A.(16) and 2.02-1 of the Texas Business Corporation Act and Article V of the Bylaws of Texas Regional is that the person may be indemnified only if it is determined that the person conducted himself in good faith, reasonably believed that the conduct was in the corporation's best interests (or not opposed to its best interests), and in the case of criminal proceeding he had no reasonable cause to believe the conduct was unlawful. In any case, a person may not be indemnified if the basis for liability was a personal benefit improperly received by the person or if the person is found liable to the corporation. The indemnification may generally include judgments, penalties, fines, settlements and reasonable expenses incurred. Unless the indemnification has been made mandatory in the Articles of Incorporation or Bylaws of the company, a determination of indemnification must be made by a majority vote of a quorum of directors who at the time are not named defendants or respondents, or (if such a quorum can not be obtained) by a committee of the board composed of two or more directors who are not named defendants or respondents, or by special legal counsel selected in accordance with prescribed procedures, or by shareholders in a vote that excludes shares held by directors. Management of Texas Regional is taking the position that the indemnification under Art. 2.02-1.B has been made mandatory by Article V of Texas Regional's Bylaws. In addition Article 2.02-1 provides that the corporation shall indemnify a director or officer against reasonable expenses incurred by him in connection with a proceeding in which he is or was a defendant or respondent because he is or was a director or officer in which he has been wholly successful in his defense. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Not applicable. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. a. EXHIBITS: *1 Form of Underwriting Agreement. 2.1 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, First State Bank & Trust Co., Mission, Texas ("First State Bank"), Texas Regional Bancshares, Inc., and certain shareholders of First State Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 0-14517).
II-1 2.2 Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, The Border Bank, Hidalgo, Texas ("Border Bank"), Texas Regional Bancshares, Inc., and certain shareholders of Border Bank, dated as of January 9, 1996 (incorporated by reference from Form 8-K, Commission File No. 0-14517). **2.3 Amendment No. 1 to Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, First State Bank, Texas Regional Bancshares, Inc., and certain shareholders of First State Bank, dated as of , 1996. **2.4 Amendment No. 1 to Agreement and Plan of Reorganization by and between Texas State Bank, McAllen, Texas, Border Bank, Texas Regional Bancshares, Inc., and certain shareholders of Border Bank, dated as of , 1996. 3.1 Articles of Incorporation of Texas Regional Bancshares, Inc. (incorporated by reference from Form 10, Commission File No. 0-14517). 3.2 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed December 28, 1983 (incorporated by reference from Form 10, Commission File No. 0-14517). 3.3 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed June 25, 1986 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.4 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 4, 1988 (incorporated by reference from Form S-1, Commission File No. 33-28340). 3.5 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed April 12, 1991 (incorporated by reference from Form 10-K, Commission File No. 0-14517). 3.6 Amendment to Articles of Incorporation of Texas Regional Bancshares, Inc., filed March 2, 1992 (incorporated by reference from Form 10-K, Commission File No. 0-14517). 3.7 Resolution Eliminating from the Articles of Incorporation certain preferred series of shares of Texas Regional Bancshares, Inc., filed February 21, 1995 (incorporated by reference from 1994 Form 10-K, Commission File No. 0-14517). 3.8 Bylaws of Texas Regional Bancshares, Inc., as amended (incorporated by reference from Form S-1, Commission File No. 33-74992). 4 Relevant portions of Texas Regional Bancshares, Inc. Articles of Incorporation and Bylaws (incorporated by reference as Exhibit 3.1 through 3.8). *5 Opinion of McGinnis, Lochridge & Kilgore, L.L.P. 10.1 Incentive Stock Option Plan (incorporated by reference from Form 10, Commission File No. 0-14517). 10.2 1985 Non-Statutory Stock Option Plan (incorporated by reference from Form 10, Commission File No. 0-14517). *10.3 1995 Non-Statutory Stock Option Plan. 10.4 Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions) (incorporated by reference from Form S-8, Commission File No. 33-39386). 10.5 Amendment No. 1 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted July 9, 1991 (incorporated by reference from 1991 Form 10-K, Commission File No. 0-14517). 10.6 Amendment No. 2 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted May 12, 1992 (incorporated by reference from 1992 Form 10-K, Commission File No. 0-14517).
II-2 10.7 Amendment No. 3 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan, adopted September 8, 1992, effective January 1, 1992 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.8 Amendment No. 4 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from Form S-1, Commission File No. 33-74992). 10.9 Amendment No. 5 to Texas Regional Bancshares, Inc. Employees Stock Ownership Plan (with 401(k) provisions), adopted August 10, 1993 (incorporated by reference from 1994 Form 10-K, Commission File No. 0-14517). *10.10 Amendment No. 6 to Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provision), adopted as of August 8, 1995. *10.11 Glen E. Roney Amended and Restated Deferred Compensation Plan dated as of January 9, 1996. *21 Subsidiaries of the Registrant 23.1 Consent of McGinnis, Lochridge & Kilgore, L.L.P. (included in their opinion filed as Exhibit 5). *23.2 Consent of KPMG Peat Marwick LLP. *23.3 Consent of KPMG Peat Marwick, LLP. *23.4 Consent of KPMG Peat Marwick, LLP. *27 Financial Data Schedule
- ------------------------ * Filed herewith. ** To be filed by amendment. b. FINANCIAL STATEMENT SCHEDULES: Not applicable. ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel, the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of McAllen, State of Texas, on March 6, 1996. TEXAS REGIONAL BANCSHARES, INC. By: /s/ G. E. RONEY -------------------------------------- G. E. Roney CHAIRMAN OF THE BOARD Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ------------------------------------------------------ -------------------------------------- ----------------- /s/ G. E. RONEY Chairman of the Board, President and March 6, 1996 ------------------------------------------- Director (Principal Executive G. E. Roney Officer) /s/ GEORGE R. CARRUTHERS Chief Financial Officer (Principal March 6, 1996 ------------------------------------------- Financial Officer) George R. Carruthers /s/ ANN SEFCIK Controller (Principal Accounting March 6, 1996 ------------------------------------------- Officer) Ann Sefcik /s/ MORRIS ATLAS Director March 6, 1996 ------------------------------------------- Morris Atlas /s/ FRANK N. BOGGUS Director March 6, 1996 ------------------------------------------- Frank N. Boggus /s/ ROBERT G. FARRIS Director March 6, 1996 ------------------------------------------- Robert G. Farris /s/ JOE M. KILGORE Director March 6, 1996 ------------------------------------------- Joe M. Kilgore /s/ C. KENNETH LANDRUM, M.D. Director March 6, 1996 ------------------------------------------- C. Kenneth Landrum, M.D. /s/ JULIE G. UHLHORN Director March 6, 1996 ------------------------------------------- Julie G. Uhlhorn /s/ PAUL G. VEALE, SR. Director March 6, 1996 ------------------------------------------- Paul G. Veale, Sr. /s/ JACK WHETSEL Director March 6, 1996 ------------------------------------------- Jack Whetsel
II-4 EX-1 2 EXHIBIT 1 2,200,000 Shares TEXAS REGIONAL BANCSHARES, INC. Class A Voting Common Stock ($1.00 Par Value) UNDERWRITING AGREEMENT ______________________, 1996 Alex. Brown & Sons Incorporated First Southwest Company As Representatives of the Several Underwriters c/o Alex. Brown & Sons Incorporated 135 East Baltimore Street Baltimore, Maryland 21202 Gentlemen: Texas Regional Bancshares, Inc., a Texas corporation (the "Company") and the shareholder of the Company identified on Schedule II hereto (the "Selling Shareholder"), propose to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 2,200,000 shares of the Company's Class A Voting Common Stock, $1.00 par value (the "Firm Shares"), of which 2,180,000 shares will be sold by the Company and 20,000 shares will be sold by the Selling Shareholder. The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company and the Selling Shareholder are sometimes referred to herein collectively as the "Sellers." The Company also proposes to sell at the Underwriters' option an aggregate of up to 330,000 additional shares of the Company's Class A Voting Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company and the Selling Shareholder (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING SHAREHOLDER. (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-1 (File No. 33-_______) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with the term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Texas, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Texas State Bank (the "Bank") is the only subsidiary, direct or indirect, of the Company. The Bank has been duly organized and is validly existing either as a banking corporation under the laws of the State of Texas or as a corporation in good standing under the laws of the -2- jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Company and the Bank are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification. The outstanding shares of capital stock of the Bank have been duly authorized and validly issued, are fully paid and non-assessable and to the extent shown in Exhibit 21 to the Registration Statement, are owned by the Company free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Bank are outstanding. (iii) The outstanding shares of Class A Voting Common Stock of the Company, including all shares to be sold by the Selling Shareholder, have been duly authorized and validly issued and are fully paid and non- assessable; the portion of the Shares to be issued and sold by the Company has been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of shareholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Class A Voting Common Stock. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those that have been waived or satisfied, for or relating to the registration of any shares of Class A Voting Common Stock. Except as described in the Registration Statement, there are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Preliminary Prospectus or Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement -3- contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. No contract or document of a character required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement is not so described or filed as required. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact, and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of a material fact, and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The consolidated financial statements of the Company and the Bank, together with related notes and schedules as set forth or incorporated by reference in the Registration Statement, present fairly the consolidated financial position and the results of operations and cash flows of the Company and the Bank, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein, and all adjustments necessary for a fair presentation of results for such periods have been made. The pro forma financial statements and other pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) KPMG Peat Marwick LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (viii) Except as disclosed in the Prospectus, neither the -4- Company nor the Bank is in violation in any material respect of any directive or order from or agreement or understanding with the Banking Department of Texas (the "Department"), the Federal Deposit Insurance Corporation (the "FDIC"), the Board of Governors of the Federal Reserve System (the "FRB") or any other governmental authority to make any material change in the method of conducting or that restricts their respective businesses. (ix) Neither the Company nor the Bank is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its charter or by-laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which violation or default is of material significance in respect of the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Bank taken as a whole. The execution and delivery of this Agreement and the Agreements and Plans of Reorganization, dated January 9, 1996, as amended, among the Company, the Bank and each of First State Bank & Trust Co., Mission, Texas ("First State Bank") and The Border Bank, Hidalgo, Texas ("Border Bank") (the "Merger Agreements") and the consummation of the transactions herein and therein contemplated and the fulfillment of the terms hereof and thereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or the Bank or, to the best knowledge of the Company, First State Bank or Border Bank is a party, or of the charter or by-laws of the Company or the Bank or, to the best knowledge of the Company, First State Bank or Border Bank, or any order, rule or regulation applicable to the Company or the Bank or, to the best knowledge of the Company, First State Bank or Border Bank of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (x) There is no action or proceeding pending or, to the best knowledge of the Company, threatened against the Company, the Bank, First State Bank or Border Bank including but not limited to actions or proceedings related to environmental, discrimination or bank regulatory matters, before any court or administrative agency which might, individually or in the aggregate, prevent or adversely affect the transactions contemplated by this Agreement or the Merger Agreements or result in any material adverse change in the business, condition or prospects of the Company and the Bank taken as a whole, except as set forth in the Registration Statement. (xi) The Company and the Bank and, to the best knowledge of the Company, First State Bank and Border Bank have good and indefeasible title to all of the properties and assets reflected in their respective financial statements (or as described in the Registration Statement) hereinabove described, subject to no -5- lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Bank occupies its leased properties under valid and binding leases and, to the best knowledge of the Company, no default has occurred or is continuing thereunder that might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition or prospects of the Company and the Bank taken as a whole. (xii) The Company and the Bank and, to the best knowledge of the Company, First State Bank and Border Bank have filed all Federal, State and foreign income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities of the Company have been adequately provided for in the financial statements of the Company that have been included in the Registration Statement. To the best knowledge of the Company, all tax liabilities of First State Bank or Border Bank have been adequately provided for in the financial statements of First State Bank or Border Bank, as the case may be, that have been included in the Registration Statement. (xiii) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Bank taken as a whole or, to the best knowledge of the Company, First State Bank or Border Bank, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Bank or, to the best knowledge of the Company, First State Bank or Border Bank, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Bank and, to the best knowledge of the Company, First State Bank and Border Bank have no material contingent obligations which are not disclosed in their respective financial statements that have been included in the Registration Statement. (xiv) This Agreement has been duly authorized, executed and delivered by the Company. The Merger Agreements have been duly authorized, executed and delivered by the Company and, to the best knowledge of the Company, First State Bank and Border Bank. (xv) All material conditions precedent to the closing of the transactions contemplated in the Merger Agreements have been satisfied or waived by the Company as of the date of this Agreement, except for the consummation of the offering -6- contemplated hereby and the delivery by the Company of the purchase price to the shareholders of First State Bank and Border Bank. (xvi) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement, the execution and delivery by the Company and, to the best knowledge of the Company, First State Bank and Border Bank of the Merger Agreements and the consummation of the transactions herein and therein contemplated (including but not limited to the Department, the FDIC or the FRB but excluding such additional steps as may be required by the Commission, the National Association of Securities Dealers, Inc. (the "NASD") or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (xvii) The Company and the Bank and, to the best knowledge of the Company, First State Bank and Border Bank hold all material licenses, certificates and permits from governmental authorities which are necessary to the conduct of their businesses; and none of the Company, the Bank or, to the best knowledge of the Company, First State Bank or Border Bank has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Bank taken as a whole, First State Bank or Border Bank, respectively. (xviii) Neither the Company, nor to the Company's best knowledge, any of its affiliates (as defined in Rule 405 under the Act), has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Class A Voting Common Stock to facilitate the sale or resale of the Shares. The Company acknowledges that the Underwriters may engage in passive market making transactions in the Shares on The Nasdaq Stock Market in accordance with Rule 10b-6A under the Exchange Act. (xix) The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The deposit accounts of the Bank are insured by the FDIC up to the maximum amount permitted by law; the Bank has not received notice of any proceeding to be brought by the FDIC or any other regulatory agency for the purpose of terminating such deposit insurance, and the Bank is not the subject of any proceeding in which it is proposed that there be imposed any regulatory sanction or restriction on the Bank nor has the Company received any such notice in respect of such purpose. To the best knowledge of the Company, the deposit accounts of -7- First State Bank and Border Bank are insured by the FDIC up to the maximum amount permitted by law; neither First State Bank nor Border Bank has received notice of any proceeding to be brought by the FDIC or any other regulatory agency for the purpose of terminating such deposit insurance and neither First State Bank nor Border Bank is the subject of any proceeding in which it is proposed that there be imposed any regulatory sanction or restriction on First State Bank or Border Bank, nor has the Company received any such notice in respect of such purpose. (xx) The Company has not been advised, and has no reason to believe, that any of the Company, the Bank, First State Bank or Border Bank is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including but not limited to all applicable local, State and Federal environmental laws and regulations and all regulations, decisions, directives, orders and policies of the Department, the FDIC and the FRB; except where failure to be so in compliance would not materially adversely affect the condition (financial or otherwise) business, results of operations or prospects of the Company and the Bank taken as a whole, First State Bank or Border Bank. (xxi) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with management's general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxii) The Company and the Bank and, to the best knowledge of the Company, First State Bank and Border Bank carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. (xxiii) The Company and, to the best knowledge of the Company, First State Bank and Border Bank are in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (A) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or -8- (B) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (b) The Selling Shareholder represents and warrants as follows: (i) Such Selling Shareholder now has and at the Closing Date (as such date is hereinafter defined) will have good and indefeasible title to the Firm Shares to be sold by such Selling Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Firm Shares; and upon the delivery of, against payment for, such Firm Shares pursuant to this Agreement, the Underwriters will acquire good and indefeasible title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Selling Shareholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custodian Agreement referred to below and to perform its obligations under such agreements. The execution and delivery of this Agreement and the consummation by such Selling Shareholder of the transactions herein contemplated and the fulfillment by such Selling Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Shareholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Shareholder is a party, or of any order, rule or regulation applicable to such Selling Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (iii) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Class A Voting Common Stock of the Company to facilitate the sale or resale of the Shares and, other than as permitted by the Act, the Selling Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently -9- the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Selling Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or the Bank; and the sale of the Firm Shares by such Selling Shareholder pursuant hereto is not prompted by any information concerning the Company or the Bank which is not set forth in the Registration Statement or the documents incorporated by reference therein. The information pertaining to such Selling Shareholder under the caption "Selling Shareholder" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Sellers agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $______ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereto, subject to adjustments in accordance with Section 9 hereof. The number of Firm Shares to be purchased by each Underwriter from each Seller shall be as nearly as practicable in the same proportion to the total number of Firm Shares being sold by each Seller as the number of Firm Shares being purchased by each Underwriter bears to the total number of Firm Shares to be sold hereunder. The obligations of the Company and of the Selling Shareholder shall be several and not joint. (b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Shareholder have been placed in custody with ___________ as custodian (the "Custodian") pursuant to the Custodian Agreement executed by the Selling Shareholder for delivery of all Firm Shares to be sold hereunder by the Selling Shareholder for delivery of all Firm Shares to be sold hereunder by the Selling Shareholder. The Selling Shareholder specifically agrees that the Firm Shares represented by the certificates held in custody for the Selling Shareholder under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Shareholder for such custody are to that extent irrevocable, and that the obligations of the Selling Shareholder hereunder shall not be terminated by any act or deed of the Selling Shareholder (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Shareholder or the dissolution of a corporate Selling Shareholder) or by the occurrence of any other event or -10- events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Firm Shares hereunder, certificates for the Firm Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event had not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares. (c) Payment for the Firm Shares to be sold hereunder is to be made by wire transfer to the account of the Bank at the Federal Reserve Bank of Dallas (account number 114909013) for further credit to the Company for the shares to be sold by it and for further credit to _____________, as Custodian, for the shares to be sold by the Selling Shareholder, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Company, setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option -11- is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to the total number of Firm Shares, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over- allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in New York Clearing House funds by certified or bank cashier's check drawn to the order of the Company for the Option Shares to be sold by it against delivery of certificates therefor at the offices of Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland. (e) If on the Closing Date, the Selling Shareholder fails to sell the Firm Shares which the Selling Shareholder has agreed to sell on such date as set forth in SCHEDULE II hereto, the Company agrees that it will sell or arrange for the sale of that number of shares of Class A Voting Common Stock to the Underwriters which represents the Firm Shares which the Selling Shareholder has failed to so sell, as set forth in SCHEDULE II hereto, or such lesser number as may be requested by the Representatives. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the initial public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. -12- 4. COVENANTS OF THE COMPANY AND THE SELLING SHAREHOLDER. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations, and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus -13- is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its shareholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's -14- financial statements. (viii) No offering, sale, short sale or other disposition of any shares of Class A Voting Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Class A Voting Common Stock or derivative of Class A Voting Common Stock (or agreement for such) will be made for a period of 120 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated (except that the Company may, without such consent, offer Class A Voting Common Stock to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (including 401(k) provisions) (the "KSOP"), existing employee stock option plans or other employee benefit plans). (ix) The Company will use its best efforts to list, subject to notice of issuance, the Shares on the National Association of Securities Dealers Automated Quotation National Market System ("NASD-NMS"). (x) The Company has caused each officer and director of the Company and the Selling Shareholder to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person shall agree not to offer, sell, sell short or otherwise dispose of any shares of Class A Voting Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Class A Voting Common Stock or derivative of Class A Voting Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 120 days after the date of this Agreement, directly or indirectly, except with the prior written consent of Alex. Brown & Sons Incorporated ("Lockup Agreements"). (xi) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus. (xii) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or the Bank to register as an investment company under the Investment Company Act of 1940, as amended. (xiii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Class A Voting Common Stock. (xiv) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. -15- (b) The Selling Shareholder covenants and agrees with the several Underwriters that: (i) No offering, sale, short sale or other disposition of any shares of Class A Voting Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Class A Voting Common Stock of the Company or derivative of Class A Voting Common Stock of the Company owned by the Selling Shareholder or request for the registration for the offer or sale of any of the foregoing (or as to which the Selling Shareholder has the right to direct the disposition of) will be made for a period of 120 days after the date of this Agreement, directly or indirectly, by such Selling Shareholder otherwise than hereunder or with the prior written consent of Alex. Brown & Sons Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, the Selling Shareholder agrees to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) Such Selling Shareholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Selling Shareholder; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Prospectus, this Agreement, the Agreement Among Underwriters, the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the Underwriters' Invitation Letter, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees and expenses incident to securing any required review by the NASD of the terms of the sale of the Shares; the Listing Fee of the NASD-NMS; and the expenses, including but not limited to the fees and disbursements of counsel for the Underwriters, incurred in connection with the qualification of the Shares under State securities or Blue Sky laws. The Selling Shareholder also shall bear his pro rata portion of the Underwriters' discounts and -16- commissions. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by the Sellers pro rata. The Sellers shall not, however, be required to pay for the any of the Underwriters' expenses (other than those related to State securities or Blue Sky laws) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Company or the Selling Shareholder to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on their part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Company shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including but not limited to fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Company and the Selling Shareholder shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, to of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Selling Shareholder contained herein, and to the performance by the Company and the Selling Shareholder of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the best knowledge of the Company or the Selling Shareholder, shall be contemplated by the Commission and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. -17- (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinions of McGinnis Lochridge & Kilgore, L.L.P., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Texas, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Bank has been duly organized and is validly existing as a banking association in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and the Bank are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, or in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Bank taken as a whole; and the outstanding shares of capital stock of the Bank have been duly authorized and validly issued and are fully paid and non-assessable and, to the best knowledge of such counsel, are owned by the Company free and clear of all liens, encumbrances and equities and claims, and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Bank are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Class A Voting Common Stock have been duly authorized; the outstanding shares of the Company's Class A Voting Common Stock, including the Shares to be sold by the Selling Shareholder, have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares are in due and proper form; the Shares, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the best knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or -18- rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the best knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Shares or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Class A Voting Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules included therein). (vi) The statements under the captions "Proposed Mergers," "Business -- Supervision and Regulation," "Business -- Capital Resources," "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to such documents and matters. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus, including without limitation the Merger Agreements, which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) To such counsel's best knowledge, except as disclosed in the Prospectus or as disclosed in writing delivered to the Underwriters prior to the Closing Date, none of the Company, the Bank, First State Bank or Border Bank are in violation of any directive or order from or agreement or understanding with the Department, the FDIC, the FRB or any other governmental authority to make any material change in the method of -19- conducting or that restricts their respective businesses. Such counsel knows of no material legal proceedings pending or threatened against the Company, the Bank, First State Bank or Border Bank, including but not limited to actions or proceedings related to environmental, discrimination or bank regulatory matters, except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the Merger Agreements and the consummation of the transactions herein and therein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the charter or by-laws of the Company or the Bank, or any agreement or instrument known to such counsel to which the Company or the Bank is a party or by which the Company or the Bank may be bound or, so far as is known to such counsel, violate any statute, judgment, decree, order, rule or regulation of any court or governmental body having jurisdiction over the Company or the Bank, or any of its or their property; there is no regulatory cease and desist order or other order, memorandum or understanding or agreement between the Company, the Bank and the Department, the FDIC or the FRB that would govern, limit, or prohibit the Company from entering into and performing its obligations under this Agreement or the Merger Agreements. (x) This Agreement has been duly authorized, executed and delivered by the Company. The Merger Agreements have been duly authorized, executed and delivered by the Company. (xi) All material conditions precedent to the closing of the transactions contemplated by the Merger Agreements with respect to the obligations of the Company have been satisfied or waived by the Company as of the date of this Agreement, except for the consummation of the offering contemplated hereby and the delivery by the Company of the purchase price to the shareholders of First State Bank and Border Bank. (xii) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement or the Merger Agreements and the consummation of the transactions herein and therein contemplated (other than as may be required by the NASD or as required by State securities and Blue Sky laws as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xiii) The Company is duly registered as a bank holding company under the BHCA. The deposit accounts of the Bank are insured by the FDIC up to the maximum amount permitted by law; to counsel's best knowledge, the Bank has not received notice of any proceeding to be brought by the FDIC or any other regulatory agency for the purpose of terminating such deposit insurance or imposing any regulatory sanction or restriction on -20- the Bank, nor has the Company received any such notice in respect of such purpose. (xiv) To counsel's best knowledge, the Company has not been advised, and has no reason to believe, that either it or the Bank is not conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, including, without limitation, all applicable local, State and Federal environmental laws and regulations and all regulations, decisions, directives, orders and policies of the FDIC, the Department and the FRB; except where failure to be so in compliance would not materially adversely affect the condition (financial or otherwise), business, results of operations or prospects of the Company and the Bank taken as a whole. In rendering such opinion McGinnis, Lochridge & Kilgore, L.L.P. may rely as to matters governed by the laws of states other than Texas or Federal laws on local counsel in such jurisdictions, provided that McGinnis Lochridge & Kilgore, L.L.P. shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein), and (ii) the Prospectus, or any amendment or supplement thereto, on the date it was filed pursuant to Rule 424(b) under the Act and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). Such opinion shall also include a statement to the effect that such counsel has participated in the preparation of the Merger Agreements and, nothing has come to the attention of such counsel which leads them to believe that the representations and warranties of First State Bank and Border Bank contained in the Merger Agreements were not true, in all material respects, as of the date of the Merger Agreements and are not true, in all material respects, as of the date of this Agreement. With respect to such statements, McGinnis, Lochridge & Kilgore, L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. -21- (c) The Representatives shall have received from counsel for the Selling Shareholder, an opinion dated the Closing Date, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) This Agreement has been duly authorized, executed and delivered on behalf of the Selling Shareholder. (ii) The Selling Shareholder has full legal right, power and authority, and any approval required by law (other than as required by State securities and Blue Sky laws as to which such counsel need express no opinion), to sell, assign, transfer and deliver the portion of the Shares to be sold by the Selling Shareholder. (iii) The Custodian Agreement and the Power of Attorney executed and delivered by the Selling Shareholder are valid and binding. (iv) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and indefeasible title to the Shares being sold by the Selling Shareholder on the Closing Date, free and clear of all liens, encumbrances, equities and claims. (d) The Representatives shall have received from Jones, Day, Reavis & Pogue, counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (ix) of Paragraph (b) of this Section 6 (except that such counsel need express no view as to matters relating to First State Bank and Border Bank in subparagraph (ix) of Paragraph (b) of this Section 6), and that the Company is a duly organized and validly existing corporation under the laws of the State of Texas. In rendering such opinion, Jones, Day, Reavis & Pogue may rely as to all matters governed other than by the laws of the State of Texas or Federal laws on the opinion of counsel referred to in Paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein), and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and -22- Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Jones, Day, Reavis & Pogue may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (e) The Representatives shall have received at or prior to the Closing Date from Jones, Day, Reavis & Pogue a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Company. (f) The Representatives shall have received, on the Closing Date and the Option Closing Date, as the case may be, a letter dated the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to the Representatives of KPMG Peat Marwick LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules of the Company, First State Bank and Border Bank examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information of the Company, First State Bank and Border Bank contained in the Registration Statement and Prospectus. (g) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for such purpose have been taken or are, to his best knowledge, contemplated by the Commission; (ii) He does not know of any litigation instituted or threatened against the Company, First State Bank or Border Bank of a character required to be disclosed in the Registration -23- Statement which is not so disclosed; he does not know of any material contract required to be filed as an exhibit to the Registration Statement which is not so filed; (iii) The representations and warranties of the Company contained in Section 1 hereof (including without limitation those with respect to First State Bank and Border Bank) are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (iv) All filings required to have been made pursuant to Rule 424 or 430A under the Act have been made; (v) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred with respect to the Company, the Bank or, to the best of his knowledge, First State Bank or Border Bank which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (vi) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and the Bank taken as a whole or, to the best of his knowledge, First State Bank or Border Bank, or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Bank taken as a whole or, to the best of his knowledge, First State Bank or Border Bank, whether or not arising in the ordinary course of business. (h) The Company and the Selling Shareholder shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (i) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on the Nasdaq Stock Market. (j) The Lockup Agreements described in Section 4(a)(x) are in full force and effect. (k) All material conditions precedent to the closing of the -24- transactions contemplated by the Merger Agreements have been satisfied as of the Closing Date, except for the consummation of the offering contemplated hereby and the delivery by the Company of the purchase price to the shareholders of First State Bank and Border Bank. (l) The Representatives shall have received a letter addressed to the Underwriters and dated the date hereof from the Company or each of First State Bank and Border Bank, as determined by the Representatives, with respect to certain information supplied by First State Bank or Border Bank, as applicable, for use in the Registration Statement, and the Representatives shall have received a certificate, dated the Closing Date, or the Option Closing Date, as applicable, and signed by an authorized representative of the entity that delivered such letters, as to the accuracy of such information as of the Closing Date or Option Closing Date. Each such letter and certificate shall be in form and substance acceptable to the Representatives. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Jones, Day, Reavis & Pogue, counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Selling Shareholder of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company, the Selling Shareholder and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) Subject to the limitations in paragraph 8(d), the Company and the Selling Shareholder, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of -25- the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company and the Selling Shareholder will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. In no event, however, shall the liability of the Selling Shareholder for indemnification under this Section 8(a) exceed the proceeds received by the Selling Shareholder from the Underwriters in the offering. This indemnity agreement will be in addition to any liability which the Company or the Selling Shareholder may otherwise have. (b) Each Underwriter severally and not jointly will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Selling Shareholder and each person, if any, who controls the Company or the Selling Shareholder within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Selling Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Selling Shareholder or controlling -26- person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one -27- separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) and by the Company and the Selling Shareholder in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Selling Shareholder on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholder on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholder bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholder on the one hand or the Underwriters on -28- the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholder and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) the Selling Shareholder shall not be required to contribute any amount in excess of the lesser of (A) that proportion of the total of such losses, claims, damages or liabilities indemnified or contributed against equal to the proportion of the total Shares sold hereunder which is being sold by such Selling Shareholder, or (B) the proceeds received by such Selling Shareholder from the Underwriters in the offering. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set -29- forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers or any person controlling the Company shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. DEFAULT BY UNDERWRITERS. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or the Selling Shareholder, you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company and the Selling Shareholder such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Selling Shareholder or you, as the Representatives of the Underwriters, will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Company or of the Selling Shareholder except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or -30- in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:_________________; with a copy to Alex. Brown & Sons Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company or the Selling Shareholder, to Texas Regional Bancshares, Inc., Kerria Plaza, Suite 301, 3700 North 10th Street, McAllen, Texas 78501, Attention: Glen E. Roney, Chief Executive Officer. 11. TERMINATION. This Agreement may be terminated by you by notice to the Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on the first business day following the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and the Bank taken as a whole, First State Bank or Border Bank or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Bank taken as a whole, First State Bank or Border Bank, whether or not arising in the ordinary course of business, (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange, (iv) the enactment, publication, decree or other promulgation of any -31- statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) the suspension of trading of the Company's common stock by the Commission on the NASD-NMS or (vii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Selling Shareholder and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company, the Selling Shareholder and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), legends required by Item 502(d) of Regulation S-K under the Act, the information under the caption "Underwriting" in the Prospectus and [insert other relevant sections]. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Maryland. -32- If the foregoing letter is in accordance with you understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Selling Shareholder, the Company and the several Underwriters in accordance with its terms. Any person executing and delivering this Agreement as Attorney-in-Fact for the Selling Shareholder represents by so doing that he has been duly appointed as Attorney-in-Fact by the Selling Shareholder pursuant to a validly existing and binding Power of Attorney which authorizes such Attorney-in-Fact to take such action. Very truly yours, TEXAS REGIONAL BANCSHARES, INC. By ___________________________________ Glen E. Roney Chairman of the Board SELLING SHAREHOLDER By ___________________________________ ___________________________________ Attorney-in-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. ALEX. BROWN & SONS INCORPORATED FIRST SOUTHWEST COMPANY As Representatives of the several Underwriters listed on Schedule I By: Alex. Brown & Sons Incorporated By: _______________________________ Authorized Officer -33- SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased - ----------- --------------------- Alex. Brown & Sons Incorporated First Southwest Company --------- Total 2,200,000
-34- SCHEDULE II SCHEDULE OF SELLING SHAREHOLDER
Number of Firm Shares Selling Shareholder to be Sold - ------------------- --------------------- ------ Total 20,000
-35- EX-5 3 EXHIBIT 5 [LETTERHEAD] (512) 495-6033 March 6, 1996 Texas Regional Bancshares, Inc. Kerria Plaza, Suite 301 3700 N. 10th Street McAllen, Texas 78501 RE: Issuance of 2,180,000 shares of Class A Voting Common Stock of Texas Regional Bancshares, Inc. Gentlemen: We have acted as counsel for Texas Regional Bancshares, Inc. (the "Corporation"), a Texas corporation, in connection with a proposed registration by the Corporation with the Securities and Exchange Commission on a Form S-1 Registration Statement (the "Registration Statement") under the Securities Act of 1933, as amended, of up to 2,180,000 shares of newly issued shares of Class A Voting Common Stock of Texas Regional Bancshares, Inc. (the "Common Stock"). Before rendering this opinion, we have examined such corporate and other documents, and such questions of law, as we have considered necessary and appropriate for the purposes of this opinion, and have relied, as to factual matters, on certificates and other statements of officers of the Corporation and others. Based upon the foregoing, we are of the opinion that the shares of Common Stock of the Corporation which will be issued in the offering described in the Registration Statement will, upon full payment therefor in cash by the subscriber, be validly issued, fully paid and non-assessable. We hereby consent to the use of our name in the Registration Statement and the filing of this opinion as an exhibit to the Registration Statement, but we do not thereby admit that we are Texas Regional Bancshares, Inc. March 6, 1996 Page 2 within the class of persons whose consent is required under the terms of the Securities Act of 1933, as amended. Very truly yours, McGINNIS, LOCHRIDGE & KILGORE, L.L.P. /s/ WILLIAM A. ROGERS, JR. -------------------------------------- William A. Rogers, Jr., Partner WAR/dw EX-10.3 4 EXHIBIT 10.3 TEXAS REGIONAL BANCSHARES, INC. 1995 NONSTATUTORY STOCK OPTION PLAN PURPOSE. The purpose of the 1995 Nonstatutory Stock Option Plan (hereinafter "Plan") is to provide a special incentive to selected key employees of Texas Regional Bancshares, Inc. (hereinafter "Company") and its subsidiaries to promote the Company's business. The Plan is designed to accomplish this purpose by offering such employees an opportunity to purchase shares of the Class A voting common stock (hereinafter "Common Stock") of the Company. For purposes of the Plan a subsidiary is any corporation in which the Company owns, directly or indirectly, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock or over which the Company has effective operating control. II. ADMINISTRATION. The Plan shall be administered by a Nonstatutory Option Committee (hereinafter "Committee") to be established by the Board of Directors of the Company. The Committee shall consist of three or more members, one of whom shall be neither an officer nor an employee of the Company. The Committee shall have authority, consistent with the Plan, (a) to determine which of the key employees of the Company and its subsidiaries shall be granted options; (b) to determine the time or times when options shall be granted and the number of shares of Common Stock to be subject to each option; (c) to determine the option price of the shares subject to each option and the method of payment of such price; (d) to determine the time or times when each option becomes exercisable and the duration of the exercise period, subject to the limitations contained in Paragraph VI(b); (e) to prescribe the form or forms of the instruments evidencing any options granted under the Plan and of any other instruments required under the Plan and to change such forms from time to time; (f) to adopt, amend and rescind rules and regulations for the administration of the Plan and the options and for its own acts and proceedings; and (g) to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Committee shall be binding on all parties concerned. III. PARTICIPANTS. The participants in the Plan shall be key employees of the Company or of any of its subsidiaries, whether or not also officers or directors, as may be selected from time to time by the Committee in its discretion. Directors who are not employees shall not be eligible. In any grant of options after the initial grant, employees who were previously granted options or sold shares under the Plan may be included or excluded. IV. LIMITATIONS. No option shall be granted under the Plan after December 1, 2005, but options theretofore granted may extend beyond that date. Subject to adjustment as provided in Section VIII of the Plan, the number of shares of Common Stock of the Company which may be issued under the Plan shall not exceed 90,000 in the aggregate. To the extent that any option granted under the Plan shall expire or terminate unexercised or for any reason become unexercisable as to any shares subject thereto, such shares shall thereafter be available for further grants under the Plan, within the limit specified above. V. STOCK TO BE ISSUED. Stock to be issued under the Plan may constitute an original issue of authorized stock or may consist of previously issued stock acquired by the Company, as shall be determined by the Board of Directors. The Board of Directors and the proper officers of the Company shall take any appropriate action required for such issuance. VI. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan shall be subject to the following terms and conditions (except as provided in Section VII) and to such other terms and conditions as the Committee shall determine to be appropriate to accomplish the purposes of the Plan: (a) OPTION PRICE. The option price under each option shall be determined by the Committee and may be more, equal to or less than the then current fair market value of the -2- Company's Class A common stock as the Committee may deem to be appropriate, but in no event may such price be less than par value; provided, however, that in the event the Committee shall determine to grant an option at less than the then current fair market value of the Company's Class A common stock, such option shall not be granted without the prior approval of the Board of Directors. (b) PERIOD OF OPTIONS. The period of an option shall not exceed ten years from the date of grant. (c) EXERCISE OF OPTIONS. (i) Each option shall be made exercisable at such time or times, whether or not in installments, as the Committee shall prescribe at the time the option is granted. (ii) A person electing to exercise an option shall give written notice to the Company, as specified by the Committee, of his election and of the number of shares he has elected to purchase, such notice to be accompanied by such instruments or documents as may be required by the Committee, and unless otherwise directed by the Committee shall at the time of such exercise tender the purchase price of the shares he has elected to purchase. (d) PAYMENT FOR ISSUANCE OF SHARES. Upon exercise of any option granted hereunder, payment in full shall be made at the time of such exercise for all such shares then being purchased. The Company shall not be obligated to issue any shares unless and until, in the opinion of the Company's counsel, (i) all applicable laws and regulations have been complied with, (ii) in the event the outstanding Common Stock is at the time listed upon any stock exchange, the shares to be issued have been listed or authorized to be added to the list upon official notice of issuance upon such exchange, and (iii) all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel. Without limiting the generality of the foregoing, the Company may require from the participant such investment representation or such agreement, if any, as counsel for the Company may consider necessary in order to comply with the Securities Act of 1933 as then in effect, and may require that the participant agree that any sale of the shares will be made only in such manner as is permitted by the Committee and that he will notify the Company when he intends to make any disposition of the shares whether by sale, gift or otherwise. The participant shall take any action reasonably requested by the Company in such connection. A participant shall have the rights of a stockholder only as to shares actually acquired by him under the Plan. -3- (e) NONTRANSFERABILITY OF OPTIONS. No option may be transferred by the participant otherwise than by will or by the laws of descent and distribution, and during the participant's lifetime the option may be exercised only by him. (f) CONSIDERATION FOR OPTION. Each person receiving a stock option must agree that he will remain in the employ of the Company upon the terms of employment then existing (unless different terms are mutually agreed upon) for at least one (1) year from (i) the date of the granting of the option or (ii) the date of expiration of the then current employment contract, whichever is later, subject to the right of the Company to terminate his employment at any time. (g) TERMINATION OF EMPLOYMENT. If the employment of a participant terminates for any reason other than his death or permanent disability (as hereinafter defined), he may thereafter exercise his option as provided below, but only to the extent he was entitled to exercise the option on the date when his employment terminated. If such termination of employment is voluntary on the part of the participant, he may exercise his option only within ten days after the date of termination of his employment (unless a longer period not in excess of three months is allowed by the Committee). If such termination of employment is involuntary on the part of the participant, he may exercise his option only within three months after the date of termination of his employment. In no event, however, may such participant exercise his option at a time when the option would not be exercisable had the participant remained an employee. For purposes of this subsection (g), a participant's employment shall not be considered terminated in the case of sick leave or other bona fide leave of absence approved by the Company or a subsidiary, or in the case of a transfer to the employment of a subsidiary or to the employment of the Company. Anything herein to the contrary notwithstanding, an option may be exercised only to the extent exercisable on the date of termination of employment by death, disability or otherwise. (h) RETIREMENT. If prior to the expiration date of his option an optionee shall retire with the Company's consent, such option may be exercised in the same manner as if the optionee had continued in the Company's employ; provided however, the Committee may terminate all unexercised options if it shall determine that the retired optionee had engaged in any activity detrimental to the Company's interests. (i) DEATH OR PERMANENT DISABILITY. If a participant dies or becomes "permanently disabled" (as hereinafter defined) at a time when he is entitled to exercise an option, then at any time or times within one (1) year after his death or determination of permanent disability (or such further period as the Committee may allow) such option may be exercised, as to all or any of the shares which the participant was entitled to purchase immediately prior to -4- his death or determination of permanent disability, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution (in the case of death) or by his legal guardian (in the case of permanent disability), and except as so exercised such option shall expire at the end of such period. In no event, however, may an option be exercised after the expiration of the option period. For purposes of the Plan, the term "permanent disability" shall mean any physical and/or mental condition which, in the sole discretion of a majority of the Committee, renders the participant unable to discharge his duties in the employ of the Company or any subsidiary for a period of ninety (90) consecutive days. VII. REPLACEMENT OPTIONS. The Company may grant options under the Plan on terms differing from those provided for in Section VI where such options are granted in substitution for options held by employees of other corporations who concurrently become employees of the Company or a subsidiary as the result of a merger, consolidation or other reorganization of the employing corporation with the Company or subsidiary, or the acquisition by the Company or a subsidiary of the business, property or stock of the employing corporation. The Committee may direct that the substitute options be granted on such terms and conditions as the Committee considers appropriate in the circumstances. VIII. CHANGES IN STOCK. In the event of a stock dividend, stock split or recapitalization or merger in which the Company is the surviving corporation, or other similar capital change, the number and kind of shares of stock of the Company to be subject to the Plan and to options then outstanding or to be granted thereunder, the maximum number of shares which may be issued or sold under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors of the Company, the determination of which shall be binding on all persons. IX. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any employee of the Company or a subsidiary any right to continue employment with the Company or a subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a subsidiary to terminate the employment of any of its employees at any time. -5- X. AMENDMENTS. The Committee may at any time discontinue granting options under the Plan. The Board of Directors of the Company may at any time or times amend the Plan or amend any outstanding option or options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, provided that except to the extent required or permitted under Section VIII no such amendment shall, without the approval of the stockholders of the Company, increase the maximum number of shares available under the Plan, or without the consent of the participant void or diminish options previously granted, nor increase or accelerate the conditions and actions required for the exercise of the same, except that nothing herein shall limit the Company's right to call stock issued for deferred payment to be evidenced by promissory note, where the participant is in default of his obligations on such note. IN WITNESS whereof, this Plan shall be effective upon adoption by the Company's Board of Directors and shall continue in effect until its termination is recommended by said Board. -6- EX-10.10 5 EXHIBIT 10.10 AMENDMENT NUMBER 6 TO THE TEXAS REGIONAL BANCSHARES, INC. EMPLOYEE STOCK OWNERSHIP PLAN (WITH 401(K) PROVISIONS) Texas Regional Bancshares, Inc., a corporation organized and operating under the laws of the State of Texas, and registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, hereby adopts the following amendments to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) (the "Plan"), effective as of August 8, 1995: 1. The definition of "Service" in Section 2 of the Plan is hereby deleted and substituted therefor is the following language: SERVICE: Employment with (i) the Company, (ii) an Affiliated Company, (iii) Mid Valley Bank, as predecessor to the Company's subsidiary, Texas State Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pensions Plan), or (iv) First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch bank facilities by Texas State Bank)." 2. Section 13(a) is hereby amended in its entirety to read as follows: "(a) GENERAL RULE. For purpose of vesting, on Employee's Credited Service includes the number of Plan Years after January 1, 1984, in which he is credited with at least 1,000 Hours of Service. Credited Service shall include such Service with the Company, any other Employer, any Affiliated Company, Mid Valley Bank (with respect to those Employee participants that were formerly participants in the Mid Valley Bank Employees' Pension Plan), and First National Bank of South Texas (with respect to those Employees who were employed by First National Bank of South Texas as employees of the Rio Grande City and Roma branch bank facilities of First National Bank of South Texas as of the time of acquisition of such branch facilities by Texas State Bank)." 3. As a result of the amendments to the Plan pursuant to sections 1 and 2 of this Amendment Number 6, persons who are employees of First National Bank of South Texas as of the date of acquisition of First National Bank's Rio Grande City and Roma branch facilities by Texas State Bank, will become Participants (as that term is defined in the Plan) as of the date that such persons become employees of Texas State Bank upon acquisition of such branch facilities by Texas State Bank, without regard to the requirement of entry on January 1st or July 1st subsequent to his or her initial date of service, provided that they are otherwise qualified to be Participants as set forth in section 3 of the Plan. The Plan is hereby further amended to provide that such persons thus become Participants immediately upon commencement of employment by Texas State Bank as of the date of acquisition of the branch facilities, without regard to the requirement of entry on January 1st or July 1st subsequent to his or her initial date of service, provided that they are otherwise qualified under section 3 of the Plan. Notwithstanding the foregoing, each such employee shall only be credited (pursuant to and in accordance with the rules set forth in the Plan) with the amount of compensation paid by Texas State Bank, and shall not be credited with any part of such employee's compensation paid by First National Bank of South Texas, for purposes of determining allocations of Employer Contributions and Forfeitures and for all other purposes. 4. Defined terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Plan. IN WITNESS WHEREOF, the undersigned, a duly authorized officer of Texas Regional Bancshares, Inc., hereby adopts this Amendment Number 6 to the Texas Regional Bancshares, Inc. Employee Stock Ownership Plan (with 401(k) provisions) effective as of August 8, 1995. Texas Regional Bancshares, Inc. By: /s/ G.E. Roney ----------------------------------- Name: G.E. Roney ----------------------------------- Title: Chairman of the Board & President --------------------------------- 2 EX-10.11 6 EXHIBIT 10.11 GLEN E. RONEY AMENDED AND RESTATED DEFERRED COMPENSATION PLAN This Amended and Restated Deferred Compensation Plan, made and entered into as of January 9, 1996 between Texas State Bank of McAllen, a Texas banking corporation, having its principal office in McAllen, Texas (said Bank being hereinafter referred to as the "Company") and Glen E. Roney of McAllen, Texas (hereinafter referred to as the "Employee"), amends the Glen E. Roney Deferred Compensation Plan originally executed as of December 31, 1993, to incorporate changes necessary for a favorable private letter ruling from the IRS and restates the Plan, as amended, in its entirety. WHEREAS, the Employee serves as the Chief Executive Officer of the Company and in that capacity his services are valued by the Company, and it is the desire of the Company to have the benefit of the Employee's continued loyalty, service and counsel and also to assist him in providing for the contingencies of death and old age dependence; and WHEREAS, the Company has made a determination to provide the Employee certain retirement and death benefits as more particularly hereinafter described: NOW, THEREFORE, it is hereby agreed by and between the Employee and the Company that: 1. RETIREMENT BENEFIT. Provided that the Employee complies with the terms and provisions hereof (including the requirement of continued employment, subject to the exceptions provided in paragraph 6 hereof) the Company will pay to Employee $100,000 per year, beginning October 29, 2002, and continuing regularly on the same calendar day of each year thereafter, until the Employee has been paid the aggregate sum of $1,500,000. In the event that the Employee should die after said payments have commenced but before the aggregate amount herein provided is fully paid, the unpaid balance of payments due will continue to be paid by the Company to those beneficiaries designated in paragraph 2 below. 2. DEATH BENEFIT. Should the Employee die before October 29, 2002, while in the employ of the Company (subject to the exceptions provided in paragraph 3(a) hereof), the Company beginning at a date to be determined by the Company but within 30 days from the date of death, will pay $100,000 per year until the aggregate sum of $1,500,000 has been paid, to the following beneficiary or beneficiaries: Rita K. Roney, provided that if Rita K. Roney does not survive the Employee for a period of at least thirty (30) days, such sum shall be payable to the Employee's estate. The beneficiary or beneficiaries named herein may be changed (without the consent of any prior beneficiary) at any time by the Employee by written notification to the Company. 3. CONDITIONS. The obligations of the Company under the terms hereof are subject to the following conditions and requirements: a. The obligation of the Company to make payments as herein provided is conditioned upon, the employment of the Employee by the Company of one or more of its subsidiaries continuously until the earlier of the date of Employee's death or October 29, 2002, except that such requirement and limitation shall not be applicable (and the Employee shall not be required to be continuously employed by the Company) if, prior to such date, (i) the Employee's annual cash compensation paid by the Company is substantially reduced from the cash compensation paid by the Company to the Employee during 1993, or (ii) Employee's duties on behalf of the Company are modified such that Employee is no longer performing the function of Chief Executive Officer of the Company, or (iii) Employee ceases his employment as a result of a disability that makes it impossible for Employee to carry his duties as Chief Executive Officer of the Company, or (iv) Employee is discharged the Company without cause. b. The obligation of the Company to make payments as herein provided is further conditioned upon the requirement that, during the period that retirement payments are being, made, the Employee shall not engage in business activities which are in competition with the Company without first obtaining the written consent of the Company. 4. LEAVE OF ABSENCE. The Company may, in its sole discretion, permit the Employee to take a leave of absence for a period not to exceed one year. During this time, the Employee shall still be considered an employee of the Company for purposes of this Agreement. 5. ASSIGNABILITY. The Employee's rights to benefit payments under this Agreement are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Employee or the Employee's beneficiaries. 6. EMPLOYMENT RIGHTS. This Agreement creates no right in the Employee to continue in the Company's employ for any specified length of time, nor does it create any obligations on the part of the Company, except as expressly set forth in this Agreement. -2- 7. TRUST. The Employee acknowledges that he has the status of a general unsecured creditor of the Company, and the Plan constitutes a mere promise by the Company to make benefit payments in the future. Any trust created by the Company and any assets held by the trust to assist the Company in meeting its obligations under the Plan will conform to the terms of the model trust described in Revenue Procedure 92-64. It is the intention of the parties that this deferred compensation plan be unfunded for tax purposes and for purposes of Title I of ERISA. The Company has executed and made the initial funding of a trust in the form of that certain Amended and Restated Trust Under Glen E. Roney Amended and Restated Deferred Compensation Plan attached hereto as Annex A, which is intended to conform to the terms of the model trust described in Revenue Procedure 92-64. The amount of the initial funding was determined by the Company in its sole discretion. The purpose of the Trust is to receive contributions from the Company and make disbursements to the Employee pursuant to this Agreement. To the extent that the Company has funded the Trust, the payments to be made to Employee pursuant to this Agreement shall be paid out of assets of the Trust, provided that Employee acknowledges and agrees that notwithstanding the funding of such Trust, the Employee shall nonetheless have only an unsecured claim against the general assets of the Company. Employee acknowledges that any assets held by the Trust will be subject to the claims of the Company's general creditors under federal and state law in the event the Company becomes Insolvent, as described or defined in Section 3(a) of the Trust. In the event of a shortfall in funds available in the Trust, the deficit shall be paid by the Company. Notwithstanding anything herein to the contrary, upon a Change of Control (as defined in the Trust), the Company shall fully fund the Trust with funds adequate to fully discharge any then remaining obligation of the Company under the terms of this Agreement. 8. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Texas. 9. AMENDMENTS. This Agreement may be amended, but only by an instrument in writing executed by both the Company and the Employee. As soon as reasonably practicable, the Company will initiate a private letter ruling request with the Internal Revenue Service, on terms and provisions reasonably acceptable to the Company and the Employee to the effect that the benefits payable to the Employee under the terms of this Plan will not be taxable to the Employee until actual receipt thereof by the Employee. Notwithstanding the foregoing or anything herein to the contrary, the Company and the Employee covenant to mutually agree to amend this Plan, as and to the extent reasonably necessary to obtain such a favorable private letter ruling. Except as otherwise provided in this paragraph, Employee and the Company agree that the agreements and obligations herein set forth shall be binding upon the Company and the Employee and their respective successors, assigns, beneficiaries, heirs, executors and administrators. -3- EXECUTED as of the date first written above. TEXAS STATE BANK OF McALLEN By: /s/ GEORGE R. CARRUTHERS ------------------------------------- Name: George R. Carruthers ------------------------------ Title: EVP & CFO ------------------------------ /s/ GLEN E. RONEY ---------------------------------------- Glen E. Roney -4- EX-21 7 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Name Jurisdiction ---- ------------ Texas State Bank Texas EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Texas Regional Bancshares Inc.: We consent to the use of our report dated January 26, 1996 on the consolidated financial statements of Texas Regional Bancshares, Inc. included herein and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP Houston, Texas March 6, 1996 EX-23.3 9 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors First State Bank & Trust Co.: We consent to the use of our report dated January 31, 1996 on the financial statements of First State Bank & Trust Co. included herein and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP Houston, Texas March 6, 1996 EX-23.4 10 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors The Border Bank: We hereby consent to the use of our report dated January 31, 1996 on the financial statements of The Border Bank included herein and the reference to our firm under the heading "Experts" in the Prospectus. /s/ KPMG PEAT MARWICK LLP Houston, Texas March 6, 1996 EX-27 11 EXHIBIT 27
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, Consolidated Statements of Income, found on pages F-3 and F-4 of the Company's Form S-1 filed March 6, 1996, and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 30,933 0 3,600 0 63,150 68,491 68,962 450,854 4,542 646,769 579,731 0 3,561 0 0 0 6,196 56,524 646,769 37,131 7,289 1,172 45,592 17,990 18,052 27,540 1,685 (111) 18,977 13,396 13,396 0 0 8,725 1.40 1.40 5.33 2,092 642 6 0 3,511 1,640 536 4,542 3,966 0 576
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