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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE
- ---- ACT OF 1934
For the fiscal year ended December 31, 1995
or
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________ to _______________
Commision File No. 0-14517
TEXAS REGIONAL BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2294235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 North 10th Suite 301, McAllen, Texas 78501
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 210-631-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Class on Which Registered
-------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Class A Voting Common, $1.00 Per Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation 8-K (Sec. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 18, 1996 was $83,320,599.
The number of shares outstanding of each of the issuer's classes of common
stock, as of March 18, 1996 are as follows:
Class A Voting Common - 6,196,791 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting on May 20, 1996 Part III
PART I
ITEM 1. BUSINESS
GENERAL
Texas Regional Bancshares, Inc. ("Texas Regional" or the "Company"), a Texas
business corporation registered as a bank holding company under the Bank Holding
Company Act of 1956, was incorporated in 1983. Texas Regional commenced
operations as a bank holding company with the acquisition of Texas State
Bank, McAllen, Texas, and Harlingen State Bank, Harlingen, Texas ("Harlingen
State Bank") in May 1984. In March 1992, the Company acquired Mid Valley Bank,
Weslaco, Texas ("Mid Valley Bank") and merged Harlingen State Bank and Mid
Valley Bank into Texas State Bank (the "Bank"). In 1995, Texas State Bank
acquired the Rio Grande City and Roma branches of First National Bank of
South Texas (the "RGC/Roma Branch Acquisitions"). Texas State Bank, which is the
Company's sole subsidiary, operates nine banking locations in the Rio Grande
Valley: four banking locations in McAllen (including its main office), two
banking locations in Weslaco, and one banking location each in Harlingen, Rio
Grande City and Roma. At December 31, 1995, Texas Regional had consolidated
total assets of $646.8 million, loans outstanding (net of unearned discount) of
$450.9 million, total deposits of $579.7 million, and shareholders' equity of
$62.7 million.
The business strategy of Texas Regional is for the Bank to provide its
customers with the financial sophistication and breadth of products of a
regional bank, while retaining the local appeal and level of service of a
community bank. The Board of Directors and senior management of the Company have
maintained the Company's community orientation by tailoring products and
services to meet community and customer needs. Management believes that the
Company is well positioned in its market due to its responsive customer service,
the strong community involvement of Texas State Bank management and employees,
recent trends in the Texas banking environment in general and the economy of the
Rio Grande Valley in particular. Management's strategy is to provide a business
culture in which individual customers and small and medium sized businesses are
accorded the highest priority in all aspects of the Company's operations.
Management believes that individualized customer service will allow the Company
to increase its market share in lending volume and deposits. As part of its
operating and growth strategies, the Company is working to continue to attract
business from, and provide service to, small and medium sized businesses, and
expand operations in the Rio Grande Valley. Management believes that the Mergers
are consistent with this strategy.
By maximizing personal knowledge of and contact with customers and
endeavoring to understand the needs and preferences of its customers, the
Company is working to maintain and further enhance its reputation of providing
excellent customer service, allowing it to achieve its growth and earnings
goals. The Company has developed an organizational structure that allows it to
make credit and other banking decisions rapidly. Management believes that this
structure, when compared to competing financial institutions, enables the
Company to provide a higher degree of service and increased flexibility to
creditworthy customers.
The Bank continues to focus on small and medium sized businesses and
individual customers as its principal market, and seeks to provide services to
its customers across all product lines. Many financial institutions in the Rio
Grande Valley have become part of much larger state-wide or national
organizations. Management believes that the acquiring institutions in many cases
have shifted decision making and operations out of the Rio Grande Valley, and
therefore have decreased the level of personal service that the Company seeks to
provide to small and medium sized businesses that are the core of the
Company's existing business and marketing efforts. The Company intends to
continue to target its marketing efforts to those businesses and individuals who
prefer the personalized customer service emphasized by the Company.
1
Bank management and other employees participate actively in a wide variety
of civic and community activities and organizations, including local chambers of
commerce, industrial foundations and charitable and civic activities such as
educational institutions, health care organizations and the McAllen Affordable
Housing Corporation. Management has also been actively involved in organizations
to promote border trade and economic development. The Company believes that
these activities assist the Bank through increased visibility and through
development and maintenance of customer relationships.
For its business customers, Texas State Bank offers checking facilities,
certificates of deposit, short term loans for working capital purposes,
construction financing, mortgage loans, term loans for fixed asset and expansion
needs, and other commercial loans. The services provided for individuals by
Texas State Bank include checking accounts, savings accounts, certificates of
deposit, individual retirement accounts and consumer loan programs, including
installment loans for home repair and for purchases of consumer goods, including
automobiles, trucks and boats, and mortgage loans. Texas State Bank also
provides travelers checks, money orders and safe deposit facilities, and offers
trust services.
The Bank has also expanded the services which it provides to third party
correspondent banks. The Bank data processing center, for example, presently
serves three banks in addition to providing data processing services for all
Bank banking locations.
The Company has expanded its market area and increased its market share
through both internal growth and through acquisitions. In August 1995, the
Company completed the RGC/Roma Branch Acquisitions. In that transaction, which
was accounted for as a purchase, the Bank acquired substantially all of the
fixed assets associated with the banking locations, certain loans coded to the
banking locations, and certain other assets, in consideration of the
assumption of certain deposit accounts coded to the banking locations. The
RGC/Roma Branch Acquisitions increased loans and deposits of the Company by
$43.7 million and $79.7 million, respectively, at the time of the acquisition.
In addition to the pending Mergers, management believes there may be additional
opportunities to expand by acquiring financial institutions or by acquiring
assets and deposits that will allow the Company to enter adjacent markets or
further increase market share in existing markets. Management intends to pursue
acquisition opportunities in strategic markets in circumstances in which
management believes that its managerial, operational and capital resources will
enhance the performance of acquired institutions. Except for the Merger
Agreements, there are currently no agreements or understandings related to any
acquisition.
In January 1996, the Company entered into definitive agreements to acquire
through merger First State Bank & Trust Co., Mission, Texas ("First State Bank"
and The Border Bank, Hidalgo, Texas ("Border Bank") (the "Mergers"). First
State Bank and Border Bank had combined total assets of approximately $524.0
million at December 31, 1995. Assuming consummation of the Mergers, on a pro
forma basis at December 31, 1995, Texas State Bank would have had total
assets of $1.143 billion, which would have made Texas Regional the largest bank
holding company headquartered in the Rio Grande Valley. At December 31, 1995,
First State Bank had total assets of $404.5 million, loans outstanding (net of
unearned discount) of $188.1 million and stockholders' equity of $59.4 million.
At December 31, 1995, Border Bank had total assets of $119.5 million, loans
outstanding (net of unearned discount) of $47.3 million and stockholders' equity
of $17.1 million. Elliot B. Bottom is the Chairman of the Board of both First
State Bank and Border Bank, and the banks have substantial common ownership. The
purpose of the Mergers is to further strengthen Texas State Bank's branch
network and banking business in the Rio Grande Valley by adding six new banking
locations in Mission, Penhas, McAllen and Hidalgo, Texas. The purchase price for
the Mergers is estimated to be $99.5 million, approximately $40.0 million of
which will be paid from the proceeds of the offering made hereby. The Company
intends to fund the balance of the purchase price principally from liquidation
of cash equivalents and, to the extent necessary, selected investment securities
on a consolidated basis.
Management of Texas State Bank believes that the Mergers will expand the
Company's community banking network into contiguous markets, substantially
increasing its market share and enabling the Bank to compete more effectively
with other financial institutions in the Rio Grande Valley. Because of the
proximity of Mission to McAllen, there is a substantial overlap in the markets
served by Texas State Bank and First State Bank. For this reason and because the
banks serve a similar customer base, First State Bank is considered by Texas
State Bank management to be a direct competitor of Texas State Bank, particular
as to loan customers. The new or expanded services to be offered to First State
Bank and Border Bank customers include enhanced data processing services,
additional automated teller facilities and other services now offered to Texas
State Bank customers. Texas State Bank management believes that First State
Bank, Border Bank and Texas State Bank customers will benefit from the expansion
of Texas State Bank's branch network from nine to 15 banking locations. Texas
State Bank expect to realize certain operating and administrative efficiencies
as a result of the Mergers; however, because of the relatively low employee-to-
asset ratio at First State Bank and Border Bank, costs savings is not a
principal motivating factor for the Mergers. The operating efficiencies which
are expected include the use by all banking locations of the existing Texas
State Bank data processing facility, operation of a single human resources
department, and economics of a combined advertising program.
MARKET REGIONS
Texas Regional's operations are located in the Rio Grande Valley, which
consists of Cameron, Hidalgo, Willacy and Starr Counties. Cameron, Hidalgo and
Starr Counties are each directly adjacent to the Rio Grande River, which forms
part of the border between the United States and Mexico. Texas State Bank's
banking locations are located in Hidalgo County (McAllen and Weslaco), Cameron
County (Harlingen), and Starr County (Rio Grande City and Roma). The offices of
First State Bank and Border Bank are all located in Hidalgo County.
The ability of Texas Regional to continue its rate of growth and
profitability is closely linked to the economy of the Rio Grande Valley. The
economy of the Rio Grande Valley is based principally on retailing
(including trade with Mexico), government, agriculture, tourism, manufacturing,
health care and education. A large number of retirees spend all or part of the
year in the Rio Grande Valley. Many twin manufacturing plants, or
"maquiladoras", are located in the Rio Grande Valley or in cities located across
the border in Mexico, such as Reynosa and Matamoros.
2
The City of McAllen, which is the location of the Company's headquarters,
serves as the center of a 150 mile retail market area. A large part of this
trade area is composed of the Mexican states of Nuevo Leon and Tamaulipas, which
had estimated populations of 3.1 million and 2.2 million, respectively, in 1990.
The major industrial and commercial center of northern Mexico, the City of
Monterrey in the Mexican state of Nuevo Leon, is located approximately 150 miles
southwest of McAllen. Among the largest cities in the Mexican state of
Tamaulipas are Reynosa, located ten miles south of McAllen and estimated to have
a population in excess of 700,000 persons, and Ciudad Victoria, which is located
200 miles south of McAllen. The Rio Grande Valley market includes a U.S.
population of approximately 800,000, a population which increased 128.0% (or
3.5% annually) between 1970 and 1994. The market area served by Texas State Bank
has been recognized as among the fastest growing areas in the nation. The
McAllen-Edinburg-Mission area has a projected population growth rate of 23.8%
between 1994 and 2000, and the Brownsville-Harlingen area has a projected
population growth rate of 16.0% during that same period.
The Rio Grande Valley has also experienced significant recent growth in the
retail and construction industries. Retail sales in the Rio Grande Valley
totaled approximately $5.9 billion in 1994, representing an annual compound
growth rate of 7.9% since 1984. With respect to new construction activity,
building permits in the Rio Grande Valley have grown 89.8% between 1989 and
1994, representing an annual compound growth rate of 13.7%.
LENDING ACTIVITIES
The primary source of income generated by Texas State Bank is the interest
earned from its loan and investment portfolios. Texas State Bank maintains
diversification when considering investments and the granting of loan requests.
Emphasis is placed on the borrower's ability to generate cash flow to support
its debt obligations and other cash related expenses. Lending activities include
commercial loans, agricultural loans, consumer loans and real estate loans.
Commercial loans and agricultural loans are originated primarily for working
capital funding. Consumer loans include those for the purchase of automobiles,
mobile homes, home improvements and investments. Real estate loans include the
origination of loans for commercial property acquisition or remodeling, and also
include conventional mortgages for the purchase of single-family houses or lots.
A substantial proportion of the properties collateralizing Texas State Bank's
mortgage portfolio is located in the Company's primary market area.
During 1995, Frank A. Kavanagh, President of Texas State Bank's Weslaco
banking location, was appointed the Chief Lending Officer of Texas State Bank.
During 1995, Texas State Bank also further standardized documentation
requirements and centralized loan controls and supervision. Texas State Bank
management continues to seek to preserve and enhance the quality of the Bank's
loan portfolio.
At December 31, 1995, Texas Regional's total loan portfolio (net of unearned
discount) was $450.9 million, representing 77.8% and 69.7% of its total deposits
and total assets, respectively, at that date. Total loans increased $110.9
million, or 32.6%, during 1995 from December 31, 1994 levels of $339.9 million.
A significant portion of this increase was attributable to the RGC/Roma Branch
Acquisitions. The Company's legal lending limit to any one borrower was $11.5
million at December 31, 1995. However, the legal lending limit does not include
the portion of a loan collateralized by cash or cash equivalents and government
guaranties. All current loans fall well below applicable legal lending limits.
Texas Regional's lending policy generally limits loans to one borrower to $8.0
million, with exceptions allowed for selected customers. An example of an
exception is a $34.0 million loan made during 1995 to fund a leveraged employee
stock ownership trust, which was secured by, among other assets, cash and cash
equivalents of $27.5 million.
Assuming consummation of the Mergers, on a pro forma basis at December 31,
1995, Texas Regional's total loan portfolio (net of unearned discount) would
have been $685.3 million and its legal lending limit would have been $21.5
million.
3
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.
4
AGRICULTURAL LOANS
At December 31, 1995, the Company had $25.1 million of agricultural loans
outstanding, representing 5.6% of its total loans. Agricultural loan balances
increased $7.9 million, or 45.9%, during 1995 from December 31, 1994 levels of
$17.2 million. On a pro forma basis at December 31, 1995, the Company would have
had $34.0 million of agricultural loans outstanding, representing 5.0% of total
loans.
REAL ESTATE LOANS
At December 31, 1995, the Company had $236.0 million of real estate loans
outstanding. Real estate loan balances increased $45.9 million, or 24.1% during
1995 from December 31, 1994 levels of $190.2 million. Real estate loans
represented 52.3% and 55.9% of total loans outstanding at December 31, 1995 and
1994, respectively. On a pro forma basis at December 31, 1995, the Company would
have had $371.3 million of real estate loans outstanding, or 54.2% of total
loans.
A substantial portion of the Bank's real estate mortgage loans are secured
by non-farm, non-residential properties, which are loans to commercial customers
for purposes of providing working capital. In addition, some of the Bank's real
estate mortgage loans have been made to finance or refinance the acquisition and
holding of commercial real estate. The Bank offers a variety of mortgage loan
products which generally are (i) amortized over five to 15 years, (ii) payable
in monthly installments of principal and interest, and (iii) due and payable in
full within three to five years.
Finally, a small portion of the Bank's lending activity has consisted of the
origination of single-family residential mortgage loans collateralized by
owner-occupied property located in the Bank's primary market area. The Bank
intends to pursue increased originations of single-family residential mortgage
loans with respect to its existing customer base. Loans collateralized by single
family residential real estate generally have been originated in amounts of no
more than 85% of appraised value. The Bank requires mortgage title insurance and
hazard insurance in the amount of the loan. Although the contractual loan
payment periods for single family residential real estate loans are generally
amortized over five to 20 years, they are payable in monthly installments of
principal and interest and are typically due and payable in full within three to
five years. At December 31, 1995, approximately $13.0 million of the single
family residential mortgage loans at First State Bank and Border Bank consisted
of loans to low and moderate income borrowers. The characteristics of these
loans may contribute to a higher level of delinquencies. Management believes
that this component of the pro forma portfolio will not have an adverse impact
on the financial performance of the Company.
CONSUMER LOANS
At December 31, 1995, the Company had $43.3 million of consumer loans
outstanding, representing 9.6% of its total loans. Aggregate consumer loan
balances increased $12.6 million, or 40.9%, during 1995 from December 31, 1994
levels of $30.7 million. On a pro forma basis at December 31, 1995, the Company
would have had $64.7 million of consumer loans outstanding, or 9.4% of its total
loans.
Consumer loans made by the Bank have included automobile loans, recreational
vehicle loans, boat loans, second mortgage loans, home improvement loans,
personal loans (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans typically range from 12 to 60
months and vary based upon the nature of collateral and size of loan.
Consumer loans are attractive to the Bank because they typically have a
short term and carry higher interest rates than those charged on other types of
loans. Installment loans, however, do pose additional risks of collectability
when compared to traditional types of loans granted by commercial banks, such as
residential mortgage loans. In many instances, the Bank is required to rely on
the borrower's ability to repay since the collateral may be of reduced value at
the time of collection. Accordingly, the initial determination of the borrower's
ability to repay is of primary importance in the underwriting of consumer loans.
5
INVESTMENTS
At December 31, 1995 the Company had federal funds sold of $3.6 million and
investment securities of $131.6 million, including $63.1 million classified as
Available for Sale and $68.5 million classified as Held to Maturity. Investments
are managed to maintain adequate sources of liquidity and diversification and to
generate acceptable levels of tax-equivalent yield.
On a pro forma basis at December 31, 1995, after giving effect to the
Mergers and this offering at December 31, 1995, the Company would have had
federal funds sold of $4.9 million and investment securities of $328.1 million,
including $65.9 million classified as Available for Sale and $262.2 million
classified as Held to Maturity. The pro forma adjustments include assumptions
regarding the use of sources of liquidity including federal funds sold and sales
of certain investment securities to fund a portion of the purchase price.
Management believes that sources of liquidity will be adequate to fund the
required portion of consideration in the Mergers but will decide on specific
securities to be sold based on market conditions at the time of Closing.
The following table summarizes the investment portfolio of the Company by
investment category and amount at December 31, 1995 and on a pro forma basis at
December 31, 1995, assuming that the Mergers had been consummated at December
31, 1995:
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.
6
Texas State Bank acts as local depository for a number of local governmental
entities in its market area, including the City of McAllen, the South Texas
Community College District, the City of Weslaco, the Weslaco Independent School
District, the City of Rio Grande City, the City of Roma and Starr County. Local
government deposits are subject to competitive bid and in many cases must be
secured by government securities. Total deposits by or on behalf of governmental
entities at December 31, 1995, aggregated approximately $39.3 million, or 6.8%
of total deposits. On a pro forma basis at December 31, 1995, the Bank's total
deposits by or on behalf of government entities would have been $128.5 million,
or 12.6% of total deposits.
As with loan transactions, Texas State Bank has developed deposit relations
with depositors who are Mexican residents. At December 31, 1995, $56.5 million,
or 9.8% of the Bank's total demand and time deposits were deposited primarily by
or on behalf of residents of Mexico. On a pro forma basis at December 31, 1995,
$146.9 million, or 14.4% of the Bank's total demand and time deposits, would
have been deposited primarily by or on behalf of residents of Mexico. As with
loan transactions, management believes that Texas State Bank's percentage of
deposits by or on behalf of residents of Mexico, and the percentage of deposits
on a pro forma basis at December 31, 1995, on behalf of residents of Mexico, are
somewhat less than that of banks of comparable size located in the Rio Grande
Valley.
COMPETITION
The banking industry in the market area served by Texas State Bank is highly
competitive. Competition among financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans and other
credit and service charges, the quality and scope of the services rendered, the
convenience of banking facilities, and, in the case of loans to commercial
borrowers, relative lending limits. A substantial number of the commercial banks
in the Rio Grande Valley are branches of much larger organizations affiliated
with national, regional or state-wide banking companies, and as a result of
those affiliations have greater resources than Texas Regional or Texas State
Bank. However, as an independent community bank headquartered in Texas State
Bank's primary market area, management of the Company believes that Texas State
Bank's community commitment and involvement in its primary market area, as well
as its commitment to quality and personalized banking services, are factors that
contribute to the Company's competitiveness.
PERSONNEL
At December 31, 1995, Texas Regional employed 332 full-time equivalent
employees, and on a pro forma basis at December 31, 1995, would have employed
467 full-time equivalent employees. Substantially all of the present First State
Bank and Border Bank officers and employees are expected to be employed by Texas
State Bank. The Company's employees are not unionized, and management believes
employee relations to be favorable.
7
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing
businesses and employers, the Company and Texas State Bank are further
extensively regulated by special federal and state laws applicable only to
financial institutions and their parent companies. Virtually all aspects of the
Company's operations are subject to specific requirements or restrictions and
general regulatory oversight, from laws regulating consumer finance
transactions, such as the Truth In Lending Act, the Home Mortgage Disclosure Act
and the Equal Credit Opportunity Act, to laws regulating collections and
confidentiality, such as the Fair Debt Collections Practices Act, the Fair
Credit Reporting Act and the Right to Financial Privacy Act. With few
exceptions, state and federal banking laws have as their principal objective
either the maintenance of the safety and soundness of the federal deposit
insurance system or the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of the Company. To the extent the
following material describes statutory or regulatory provisions, it is qualified
in its entirety by reference to the particular statute or regulation.
REGULATION OF THE COMPANY
Texas Regional is a bank holding company within the meaning of the Bank
Holding Company Act of 1956 ("BHCA"), as amended, and therefore is subject to
regulation and supervision by the FRB. In addition, the Company is required to
file reports with and to furnish such other information as the FRB may require
pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB
has the authority to issue bank holding companies orders to cease and desist
from unsound practices and violations of conditions imposed by, or violation
of agreements with, the FRB. The FRB is also empowered to assess civil penalties
against companies or individuals who violate the BHCA or orders or regulations
thereunder in amounts up to $1.0 million per day, to order termination of
non-banking activities of non-banking subsidiaries of bank holding companies,
and to order termination of ownership and control of a non-banking subsidiary by
a bank holding company. Certain violations may also result in criminal
penalties. The FRB and the FDIC, as appropriate, are authorized to exercise
comparable authority, under the Federal Deposit Insurance Act (the "FDI Act")
and other statutes, with respect to subsidiary banks.
The FRB takes the position that a bank holding company is required to serve
as a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it is
the FRB's position that, in serving as a source of strength to its
8
subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the FRB to be an unsafe and unsound banking
practice or a violation of the FRB regulations or both. This doctrine has become
known as the "source of strength" doctrine. Although the United States Court of
Appeals for the Fifth Circuit found the FRB's source of strength doctrine
invalid in 1990, stating that the FRB had no authority to assert the doctrine
under the BHCA, the decision was reversed by the United States Supreme Court on
procedural grounds. Changes in the FDI Act made by the FDICIA now require
an undercapitalized institution to submit to the FRB a capital restoration plan
with a guaranty by each company having control of the bank of the bank's
compliance with the plan.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the FRB, require that, depending on the particular circumstances,
either FRB approval must be obtained or notice must be furnished to the FRB and
not disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for certain
transactions. Control is conclusively presumed to exist if an individual or
company acquires 25% or more of any class of voting securities of the bank
holding company. Control is rebuttably presumed to exist if a person acquires
10% or more but less than 25% of any class of voting securities and either the
company has registered securities under Section 12 of the Exchange Act or no
other person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure for
challenge of the rebuttable control presumption.
As a bank holding company, the Company is required to obtain approval prior
to merging or consolidating with any other bank holding company, acquiring all
or substantially all of the assets of any bank or acquiring ownership or control
of shares of a bank or bank holding company if, after the acquisition, the
Company would directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company.
The Company is also prohibited from acquiring a direct or indirect interest
in or control of more than 5% of the voting shares of any company which is not a
bank or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiary bank, except that it may engage in and may
own shares of companies engaged in certain activities found by the FRB to be so
closely related to banking or managing and controlling banks as to be a proper
incident thereto. These activities include, among others, operating a mortgage,
finance, credit card, or factoring company; performing certain data processing
operations; providing investment and financial advice; acting as an insurance
agent for certain types of credit-related insurance; leasing personal property
on a full-payout, non-operating basis; and providing certain stock brokerage and
investment advisory services. In approving acquisitions or the addition of
activities, the FRB considers whether the acquisition or the additional
activities can reasonably be expected to produce benefits to the public, such as
greater convenience, increased competition, or gains in efficiency, that
outweigh such possible adverse affects as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. In considering any application for approval of an acquisition or
merger, the FRB is also required to consider the financial and managerial
resources of the companies and the banks concerned, as well as the applicant's
record of compliance with the Community Reinvestment Act (the "CRA"). The CRA
generally requires a financial institution to take affirmative action to
ascertain and meet the credit needs of its entire community, including low and
moderate income neighborhoods.
The BHCA generally imposes certain limitations on extensions of credit and
other transactions by and between banks that are members of the Federal Reserve
System and other banks and non-bank companies in the same holding company. Under
the BHCA and the FRB's regulations, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
9
The Company, as an affiliate of the Bank, is subject to certain restrictions
regarding transactions between a bank and companies with which it is affiliated.
These provisions limit extensions of credit (including guarantees of loans) by
the Bank to affiliates, investments in the stock or other securities of the
Company by the Bank, and the nature and amount of collateral that the Bank may
accept from any affiliate to secure loans extended to the affiliate.
REGULATION OF THE BANK
Texas State Bank is a Texas state-chartered bank subject to regulation by
the Banking Department. Texas State Bank, the deposits of which are insured by
the Bank Insurance Fund (the "BIF") of the FDIC, is also a member of the Federal
Reserve System, and therefore the FRB is the primary federal regulator for Texas
State Bank.
The requirements and restrictions applicable to Texas State Bank under laws
of the United States and the State of Texas include (i) the requirement that
reserves be maintained, (ii) restrictions on the nature and amount of loans
which can be made, (iii) restrictions on the business activities in which the
Bank may engage, (iv) restrictions on the payment of dividends to shareholders,
and (v) the maintenance of minimum capital requirements.
Texas Regional is dependent upon dividends received from Texas State Bank
for discharge of Texas Regional's obligations and for payment of dividends to
the Company's shareholders. However, the application of minimum capital
requirements and other rules and regulations applicable to Texas State Bank
restrict dividend payments by Texas State Bank. The Banking Department and the
FRB can each further limit payment of dividends if the regulatory authority
finds that the payment of dividends would constitute an unsafe or unsound
practice. In addition, Texas law requires that, before declaring a dividend, not
less than 10% of the net profits of a bank earned since the last dividend was
declared be transferred to a "certified surplus" account. Except to absorb
losses in excess of undivided profits and uncertified surplus, such certified
surplus may not be reduced without the prior written consent of the Banking
Commissioner. However, state banks are not required to transfer any amount that
would increase the certified surplus account to more than the capital of the
bank. See "Texas Regional Bancshares, Inc. Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Interest rate limitations for Texas State Bank are primarily governed by the
laws of the State of Texas. The maximum annual interest rate that may be charged
on most loans made by Texas State Bank is based on doubling the average auction
rate, to the nearest 0.25%, for United States Treasury Bills, as computed by the
Office of Consumer Credit Commissioner of the State of Texas. However, the
maximum rate does not decline below 18% or rise above 24% (except for loans in
excess of $250,000 that are made for business, commercial, investment or other
similar purposes (excluding agricultural loans), in which case the maximum
annual rate may not rise above 28%, rather than 24%). On fixed rate closed-end
loans, the maximum non-usurious rate is to be determined at the time the rate is
contracted, while on floating rate and open-end loans (such as credit cards),
the rate varies over the term of the indebtedness. State usury laws (but not
late charge limitations) have been preempted by federal law for loans secured
by a first lien on residential real property.
Banks are affected by the credit policies of other monetary authorities,
including the FRB, which regulate the national supply of bank credit. Such
regulation influences overall growth of bank loans, investments, and deposits
and may also affect interest rates charged on loans and paid on deposits. The
monetary policies of the FRB have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future.
FDICIA
FDICIA requires that federal bank regulatory authorities take "prompt
corrective action" with respect to any depository institution which does not
meet specified minimum capital requirements. The applicable regulations
establish five capital levels which require or permit the FRB and other
regulatory authorities to take supervisory action. The relevant classifications
range from "well capitalized" to
10
"critically undercapitalized". Under these regulations, which became effective
December 19, 1992, an institution is considered well capitalized if it has
a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based
capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and
it is not subject to an order, written agreement, capital directive, or prompt
corrective action directive to meet and maintain a specific capital level for
any capital measure. An institution is considered adequately capitalized if it
has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based
capital ratio of 4.0% or greater and a leverage capital ratio of 3.0% or greater
(if the institution is rated composite 1 in its most recent report of examina-
tion, subject to appropriate federal banking agency guidelines), and the
institution does not meet the definition of a well capitalized institution.
An institution is considered undercapitalized if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that
is less than 4.0%, or a leverage ratio that is less than 4.0% (or a leverage
ratio that is less than 3.0% if the institution is rated composite 1 in its
most recent report of examination, subject to appropriate federal banking agency
guidelines). A significantly undercapitalized institution is one which has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0%, or a leverage ratio that is less than
3.0%. A critically undercapitalized institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2.0%.
The FRB is authorized by the legislation to take various enforcement actions
against any significantly undercapitalized institution and any undercapitalized
institution that fails to submit an acceptable capital restoration plan or fails
to implement a plan accepted by the appropriate agency. These powers include,
among other things, requiring the institution to be recapitalized, prohibiting
asset growth, restricting interest rates paid, requiring prior approval of
capital distributions by any bank holding company which controls the
institution, requiring divestiture by the institution of its subsidiaries or by
the holding company of the institution itself, requiring a new election of
directors, and requiring the dismissal of directors and officers. These
restrictions, either individually or in aggregate, could if imposed have a
significantly adverse impact on the operations of the Bank.
With certain exceptions, an institution will be prohibited from making
capital distributions or paying management fees if the payment of such
distributions or fees will cause the institution to become undercapitalized.
Furthermore, undercapitalized institutions will be required to file capital
restoration plans with the appropriate federal regulator. Pursuant to FDICIA,
undercapitalized institutions also will be subject to restrictions on growth,
acquisitions, branching and engaging in new lines of business unless they have
an approved capital plan that permits otherwise. The FRB also may, among other
things, require an undercapitalized institution to issue shares or obligations,
which could be voting stock, to recapitalize the institution or, under certain
circumstances to divest itself of any subsidiary.
Critically undercapitalized institutions may be subject to more extensive
control and supervision and the FRB may prohibit any critically undercapitalized
institution from, among other things, entering into any material transaction not
in the ordinary course of business, amending its charter or bylaws, or
engaging in certain transactions with affiliates. In addition, critically
undercapitalized institutions generally will be prohibited from making payments
of principal or interest on outstanding subordinated debt. Within 90 days of an
institution becoming critically undercapitalized, the FRB must appoint a
receiver or conservator unless certain findings are made with respect to the
prospect for the institution's continued operation.
Based on Texas State Bank's capital ratios at December 31, 1995, Texas State
Bank was classified as "well capitalized" under the applicable regulations. On a
pro forma basis at December 31, 1995, Texas State Bank would also have been
"well capitalized" under applicable regulations. As a result, the Company does
not believe that FDICIA's prompt corrective action regulations will have any
material effect on the activities or operations of Texas State Bank.
FDICIA also requires the FDIC to establish a schedule to increase (over a
period of not more than 15 years) the reserve ratio of the BIF, which insures
deposits of Texas State Bank, to 1.25% of insured deposits, and impose higher
deposit insurance premiums on BIF members, if necessary, to achieve that ratio.
FDICIA also requires a risk-based assessment system for deposit insurance
premiums commencing January 1, 1994. Since BIF reached its designated reserve
ratio in mid-1995, the FDIC adjusted the BIF
11
assessments, so that the assessment rate now in effect ranges from a minimum of
zero to a maximum of $0.27 per $100 of deposits. Institutions whose assessment
rate would be zero are required to pay a statutory minimum semiannual assessment
of $1,000. Based on the risk category applicable to Texas State Bank, the
premium paid by Texas State Bank is presently $2,000 per annum.
FDICIA contains numerous other provisions, including accounting, auditing
and reporting requirements, the termination (beginning in 1995) of the "too big
to fail" doctrine except in special cases, regulatory standards in areas such as
asset quality, earnings and compensation, and revised regulatory standards for
the powers of state chartered banks, real estate lending, bank closures and
capital adequacy.
COMMUNITY REINVESTMENT ACT
Under the CRA, a bank's applicable regulatory authority (the FDIC or the
FRB) is required to assess the record of each financial institution which it
regulates to determine if the institution meets the credit needs of its entire
community, including low- and moderate-income neighborhoods served by the
institution, and to take that record into account in its evaluation of any
application made by such institution for, among other things, approval of the
acquisition or establishment of a branch or other deposit facility, an office
relocation, a merger, or the acquisition or shares of capital stock of another
financial institution. The regulatory authority prepares a written evaluation of
an institution's record of meeting the credit needs of its entire community and
assigns a rating. The Bank received a "satisfactory" rating in its most recent
CRA review. Both the United States Congress and the banking regulatory
authorities have proposed substantial changes to the CRA and fair lending rules
and regulations which, if enacted, could have a material adverse effect on the
Company.
CAPITAL RESOURCES
Capital management, which is a continuous process at Texas Regional and
Texas State Bank, consists of providing equity to support both current and
future operations. The Company is subject to capital adequacy requirements of
various banking regulators, such as the FRB, the Banking Department and the
FDIC. At December 31, 1995, Texas Regional and its subsidiaries were in
compliance with minimum capital requirements of the respective regulatory
agencies and are expected to remain in compliance in the future.
The various federal bank regulatory agencies, including the FRB, have
adopted risk-based capital requirements for assessing bank holding company and
bank capital adequacy. These standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure as
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate risk weights. The resulting capital ratios
represent capital as a percentage of total risk-weighted assets and off-balance
sheet items.
The risk-based capital standards as established by the FRB apply to Texas
Regional and Texas State Bank. The minimum standard for the ratio of capital to
risk-weighted assets (including certain off-balance sheet obligations, such as
standby letters of credit) is 8.0%. At least half of the risk-based capital must
consist of common equity, retained earnings, and qualifying perpetual preferred
stock, less deductions for goodwill and various other intangibles ("Tier I
capital"). The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
preferred stock, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier I capital and Tier II capital is "total risk-based
capital."
The FRB also has adopted guidelines which supplement the risk-based
regulations to include a minimum leverage ratio of Tier I capital to average
total consolidated assets ("Leverage ratio") of 3.0%. The FRB has emphasized
that the foregoing standards are supervisory minimums and that a banking
organization will be permitted to maintain such minimum levels of capital only
if it has well diversified
12
risk, including no undue interest rate exposure; excellent asset quality; high
liquidity; good earnings; and is in general considered to be a strong banking
organization, rated composite 1 under applicable federal guidelines, and the
banking organization is not experiencing or anticipating significant growth. All
other banking organizations are required to maintain a Leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets. The FRB continues to consider a "tangible Tier I leverage ratio" in
evaluation proposals for expansion or new activities. The tangible Tier I
leverage ratio is the ratio of a banking organization's Tier I capital, less
deductions for intangibles otherwise includable in Tier I capital, to total
tangible assets.
Bank regulators continue to consider raising capital requirements applicable
to banking organizations beyond current levels. However, the Company is unable
to predict whether higher capital requirements will be imposed and, if so, at
what levels and on what schedules, and therefore cannot predict what effect such
higher requirements may have on the Company and the Bank.
13
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
----------- ----------- -----------
----------- ----------- -----------
14
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.
15
ITEM 2. PROPERTIES
Texas State Bank targets commercial customers by offering a broad range of
commercial banking services through a total of nine full service banking
locations in the Rio Grande Valley, as follows:
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.
16
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.
17
ITEM 3. LEGAL PROCEEDINGS
Texas State Bank is involved in routine litigation in the normal course of
its business, which in the opinion of management of Texas Regional will not have
a material adverse effect on the financial condition or results of operations of
Texas Regional.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since the public offering of the Common Stock in March 1994, the Common
Stock has traded in the Nasdaq National Market System under the symbol "TRBS."
The following table shows (i) high and low prices of the Common Stock as
reported in the Summary of Activity provided to the Company by The Nasdaq Stock
Market for transactions occurring on the Nasdaq National Market System during
the past two years, and (ii) the total number of shares involved in such
transactions. In addition, with respect to periods prior to March 16, 1994, the
information is based upon transactions with respect to which the management of
Texas Regional had knowledge of the transaction price, since during those
periods transactions were reported on an informal basis, and no independent
verification of the transaction prices was made. Therefore, during periods prior
to March 16, 1994, the prices reported may not be indicative of the actual or
market value of the Common Stock.
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
19
During the two years ended December 31, 1995, an aggregate of 58,500 shares
purchased by the KSOP are included in the foregoing table.
The Company paid no dividends on its Common Stock prior to June 1994.
Beginning in June 1994, the Company paid a quarterly dividend of $0.08 per share
of its Common Stock. During 1995, the Company increased its quarterly dividend
to $0.10 per share, and currently intends to continue to pay such dividend in
the foreseeable future. On March 12, 1996, the Company's Board of Directors
declared a dividend of $0.10 per share of Common Stock payable to shareholders
of record as of April 8, 1996.
The final determination of the timing, amount and payment of dividends on
the Common Stock is at the discretion of the Company's Board of Directors and
will depend on conditions then existing, including Texas Regional's
profitability, liquidity, financial condition, capital requirements and other
relevant factors, including regulatory restrictions applicable to the Company.
The Company's principal source of the funds to pay dividends on the Common Stock
is dividends from Texas State Bank. The payment of dividends by Texas State Bank
is subject to certain restrictions imposed by federal and state banking laws,
regulations and authorities. At December 31, 1995, an aggregate of $8.7 million
was available for payment of dividends by the Bank to the Company under the
applicable limitations and without regulatory approval.
20
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial information under the captions "Summary
of Operations" and "Period-End Balance Sheet Data" below for, and as of, each of
the years in the five-year period ended December 31, 1995 has been derived from
the consolidated financial statements of the Company, which financial statements
have been audited by KPMG Peat Marwick LLP, independent auditors.
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
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding the
financial condition and the results of operations for the Company for each of
the years ended December 31, 1995, 1994 and 1993. This discussion should be read
in conjunction with the consolidated financial statements of the Company and the
notes thereto appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Net income for the year ended December 31, 1995 was $8.7 million, reflecting
a net increase of $1.5 million or a 21.4% increase compared to net income of
$7.2 million for the year ended December 31, 1994. The earnings per share of
$1.40 for the year ended December 31, 1995 increased $0.24 or 20.7% compared to
the earnings per share of $1.16 for the year ended December 31, 1994. Earnings
performance for the year ended December 31, 1995 reflected gains in net interest
income and an increase in noninterest income. These positive factors were
partially offset by an increase in provision for loan losses and noninterest
expenses. A more detailed description of the results of operations is included
in the material that follows.
During August 1995, Texas State Bank completed the RGC/Roma Branch
Acquisitions which included the purchase of $43.7 million in loans and the
assumption of approximately $79.7 million in deposit liabilities of these
banking locations. This transaction was accounted for as a purchase; therefore,
the results of operations of the two banking locations are included in the
consolidated financial statements of the Company from the date of acquisition.
Purchase accounting adjustments for the purchase of loans and the assumption of
deposit liabilities of these banking locations were immaterial.
On March 31, 1992, the Company acquired, through merger, Mid Valley Bank,
Weslaco, Texas. Simultaneously with the acquisition of Mid Valley Bank, both the
surviving bank in that merger transaction and Harlingen State Bank, Harlingen,
Texas, a subsidiary of the Company, merged with and into Texas State Bank and
the former Weslaco and Harlingen banks became banking locations of Texas State
Bank. The Mid Valley Bank merger was accounted for under the purchase method of
accounting. Accordingly, certain income statement and balance sheet comparisons
during calendar 1991 and 1992 and at year-end 1991 and 1992, respectively, may
not be appropriate.
ANALYSIS OF RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between interest earned on assets and
interest expense incurred for the funds supporting those assets. The largest
category of earning assets consists of loans. The second largest category of
earning assets is investment securities, followed by federal funds sold. For
analytical purposes, income from tax-exempt assets, primarily securities issued
by state and local governments or authorities, is adjusted by an increment which
equates tax-exempt income to interest from taxable assets.
Earning assets are financed by consumer and commercial deposits and
short-term borrowings. In addition to these interest-bearing funds, assets also
are supported by interest-free funds, primarily demand deposits and
shareholders' equity. Variations in the volume and mix of assets and
liabilities, and their relative sensitivity to interest rate movements,
determine changes in net interest income.
Taxable-equivalent net interest income was $27.8 million for the year ended
December 31, 1995, an increase of $4.7 million or 20.3% compared to the year
ended December 31, 1994, and taxable-equivalent net interest income of $23.1
million for the year ended December 31, 1994, increased $3.7 million or 19.3%
compared to the year ended December 31, 1993. Both net interest income and the
yield on earning assets were reduced by interest foregone on nonaccrual and
renegotiated loans. If interest on
22
those loans had been accrued at the original contractual rates, additional
interest income would have approximated $247,000, $476,000, and $149,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
The net yield on total interest-earning assets, also referred to as interest
rate margin, represents net interest income divided by average interest-earning
assets. Since a significant portion of the Company's funding is derived from
interest-free sources, primarily demand deposits and shareholders' equity, the
effective rate paid for all funds is lower than the rate paid on
interest-bearing liabilities alone. As the following table illustrates, the
interest rate margin of 5.33% for the year ended December 31, 1995 increased 21
basis points compared to 5.12% for the year ended December 31, 1994 while the
interest rate margin of 5.12% for the year ended December 31, 1994 increased 28
basis points compared to 4.84% for the year ended December 31, 1993.
The increase in the interest rate margin for the year ended December 31,
1995 is reflective of the shift in the mix of interest-earning assets to loans
from lower yielding investment securities, including federal funds sold, which
contributed to an increase in yield on interest-earning assets during the year.
The mix of interest-earning assets was changed by total average loans of $370.3
million increasing $61.2 million or 19.8%, total average investment securities
of $131.0 million increasing $967,000 or 0.7% and average federal funds sold of
$19.8 million increasing $8.3 million or 72.4%. The increase in loan yield
reflects the general increase in average interest rates in 1995 compared to
1994. The increase in investment securities yield resulted from lower yielding
investment securities maturing and the reinvesting of the proceeds into higher
yields. The increase in interest on deposits during the year ended December 31,
1995 resulted primarily from increased volume and the higher average rate paid
compared to the previous year.
The following table presents for the last three calendar years the total
dollar amount of interest income from average interest-earning assets and the
resultant yields, as well as the average interest-bearing liabilities, expressed
both in dollars and rates. Average balances are derived from average daily
balances and the yields and costs are established by dividing income or expense
by the average balance of the asset or liability. Income and yield on
interest-earning assets include amounts to convert tax-exempt income to a
taxable-equivalent basis, assuming a 34% effective income tax rate.
23
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).
24
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).
25
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............. 22.4 399,295 426,691 407,217 393,264 370,008
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
26
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 Com