ITEM 1 BUSINESS
GENERAL
Victoria Bankshares, Inc. (the "Company") is a bank holding company organized under the laws of the State of Texas in 1973 and registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company's primary subsidiary is Victoria Bank & Trust Company (the "Bank"), a commercial bank which commenced operations in 1875. The Company also conducts operations through four other nonbank subsidiaries (collectively referred to as the "Nonbank Subsidiaries"). At December 31, 1995, the Company and its subsidiaries had consolidated total assets of $1.96 billion, net loans outstanding of $703 million, total deposits of $1.66 billion, and stockholders' equity of $190.3 million.
A special meeting of the shareholders of the Company will be held on April 2, 1996, to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated November 12, 1995, between the Company and Norwest Corporation ("Norwest"). The Plan of Merger has been approved by the boards of both companies and is pending regulatory approval. Norwest will issue 1.05 shares of Norwest common stock in exchange for each share of the Company's common stock. The exchange will be tax-free for the Company's shareholders and will be accounted for by Norwest as a pooling- of-interests.
Norwest is a $72.1 billion company providing banking, mortgage, investments, insurance, and other financial services through 3,042 stores in all 50 states, Canada, the Caribbean, Central America, and elsewhere internationally.
During 1995, the Company made two acquisitions which increased the Company's assets by approximately $165 million. See "ACQUISITIONS."
The Bank offers a full range of banking services including checking and savings accounts, business loans, personal loans, residential mortgage loans, loans for education, health and similar expenditures, other consumer oriented financial services, safe deposit, and night depository facilities. In addition, a full-time depository service is available for checking and savings accounts whereby customers may make deposits and withdrawals from a network of automatic teller machines. As of March 1996, the Bank has 42 branch offices in 33 communities and 22 counties of South Central Texas (see "BUSINESS ACTIVITIES"). A total of 103 automated teller machines in 53 cities provide 24-hour "Transact" banking services to customers. Through the Bank's membership in the Pulse and Cirrus networks, customers have 24-hour access to their accounts throughout the United States. The Bank also offers correspondent
banking, trust, investment and custodial services. The Company's goal is to provide quality financial services to the communities within which the branch offices are located.
As a bank holding company, the Company owns the Bank and furnishes services for the Bank. The Company assists in the management of and coordinates the financial resources of the Bank. The Bank derives its sources of funds predominantly from deposits within its market area. The customer base for deposits is diversified between correspondent banks, individuals, partnerships, corporations and public entities, which assists the Company in avoiding dependence on large concentrations of funds. The principal office of the Bank located in Victoria provides assistance with respect to various aspects of the branch offices' operations, including business development, advertising, loan policies and procedures, loan review, data and item processing, auditing, budgetary planning, and legal and regulatory compliance.
As a holding company, the Company's principal sources of cash flow are the dividends it receives from its subsidiaries and the proceeds from the sales and maturities of investment securities. Other sources may include the Company's access to capital markets through equity offerings, borrowings, and similar traditional funding sources. It is the Company's current policy to provide additional capital funds, if necessary, to the Bank by direct financings at the Company level rather than at the Bank level. The Company was paid $6.9 million in dividends during 1995 from a subsidiary. At December 31, 1995, the Company held $179 thousand in the AIM Short-term Investment Company (U. S. Treasury) Fund and $8.7 million in securities available for sale, both of which are used for corporate purposes, including short-term liquidity requirements. For information as to legal restrictions on the ability of the subsidiaries to pay dividends to the Company, see "SUPERVISION AND REGULATION."
The Company continues to be well-capitalized. At December 31, 1995, the Company's leverage ratio of 8.8% substantially exceeded the 4.0% regulatory requirement. Additionally, the Company's risk-based capital ratio of 16.3% substantially exceeded the 8.0% regulatory requirement. See "SUPERVISION AND REGULATION."
Presented below are selected consolidated average balances of the Company and its subsidiaries (in thousands):
For certain financial information relating to the Company and its subsidiaries, please refer to Part II Item 7 "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY" on pages 17 through 48 herein and the financial statements of the Company included on pages 50 through 73 herein.
BUSINESS ACTIVITIES
GEOGRAPHIC SERVICE AREA The Company's principal office is located in the City of Victoria, Texas, which is situated between Houston and Corpus Christi, Texas, and has a population of approximately 61,000. The largest communities served by the Company are Corpus Christi with a population of approximately 272,000 and Bryan/College Station with a population of approximately 120,000. Other branch offices are generally located in smaller and mid-sized communities in Texas, within a region outlined by the cities of Houston, Bryan/College Station, Austin, San Antonio, and Corpus Christi.
COMMERCIAL BANKING The Bank provides commercial banking services and facilities to small and medium size commercial businesses, including loans, deposit facilities, certificates of deposit, lines of credit, letters of credit, and cash management services.
REAL ESTATE LENDING The Bank provides permanent financing for residential properties, including multifamily dwellings, commercial projects, and agricultural properties as well as the origination of mortgage loans for sale in the secondary market. The Bank also provides a source of financing for real estate developers and others engaged in construction and land development in central and southern Texas.
CONSUMER BANKING The Bank provides consumer banking services to individuals, including savings programs, installment lending services, financing of new cars through a network of auto dealers, investment services, checking accounts, money market deposit accounts, and safe deposit facilities. Most of the branch offices also participate in the Company's automated banking network. The branch offices also provide the "Money-In-The-Bank Loan Line" which provides customer access to preapproved credit lines through automated teller machines. The Bank's customers are provided with convenient, around-the-clock service through the use of Transact Infoline, a telephone service that allows customers to perform many banking transactions from the convenience of their own homes.
AGRICULTURAL LENDING
The Bank provides financing to a diversified group of agricultural businesses for working capital requirements, equipment purchases, and similar requirements.
CORRESPONDENT BANKING The Bank acts as a correspondent for banks in Texas which maintain deposits and receive from the Bank a full range of correspondent banking services, including check clearing, transfer of funds, loan participations, data processing, investment advice, safekeeping, and securities custody and clearance. The Bank also offers seminars on new developments in the banking industry.
TRUST AND ASSET MANAGEMENT
The Bank provides trust and fiduciary management and advisory services to businesses, individuals, and charitable trusts. These services include investment account management for employee benefit plans and individuals and the administration of personal estates and trusts. Estate administration services include helping individuals establish estate plans including wills, powers of attorney, and investment strategies, and serving as executor under their wills.
NONBANK SUBSIDIARIES
The Company has five wholly owned Nonbank Subsidiaries: Transact Financial Corporation (mortgage loans); Central Computers, Inc. (data processing for commercial banks); Victoria Capital Corporation (investments in small businesses); Victoria Securities Corporation (discount brokerage services); and Victoria Financial Services, Inc. (second tier holding company). Victoria Financial Services, Inc., owns 100% of the banking subsidiary, Victoria Bank & Trust Company. The Bank owns 100% of Central Computers, Inc., and Victoria Capital Corporation.
The Company has liquidated two of its inactive subsidiaries V.B.I., Inc. and Transact Financial Corporation as of October 31, 1995 and February 29, 1996, respectively.
ACQUISITIONS
On June 30, 1995, United Bancshares, Inc. ("United"), parent company of Rosenberg Bank & Trust ("Rosenberg"), merged with and into the Company. The merger was consummated through the exchange of 306,383 shares of the Company's common stock for all of the outstanding shares of common stock of United. This transaction increased consolidated assets by approximately $65 million and increased consolidated deposits by approximately $61 million. The acquisition was accounted for as a pooling-of-interests. The Company's prior period consolidated financial statements have been restated to include the accounts of United. All intercompany accounts have been eliminated.
On August 25, 1995, the Company acquired Cattlemen's Financial Services, Inc. The transaction was accounted for as a purchase. The Company acquired approximately $100 million in assets and assumed $93 million in liabilities, paying a premium of $6.7 million over the book value of the net assets. The principal subsidiary of Cattlemen's Financial Services, Inc., is Cattlemen's State Bank. Cattlemen's State Bank has two branches and a mortgage production office, all of which are located in Austin, Texas.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries had approximately 915 full-time employees and approximately 216 part-time employees. The Company considers its employee relations to be good and is not subject to any collective bargaining agreement.
COMPETITION
The banking business in Texas is highly competitive. The Bank is the ninth largest bank chartered to do business in the State of Texas and the Company is the second largest publicly traded bank holding company headquartered in Texas. Each activity engaged in and geographic market served involves competition with other banks, as well as with nonbanking financial institutions and nonfinancial enterprises. The Bank competes with other banks in its efforts to obtain deposits and make loans, in scope and type of services offered, in rates paid on deposits and charged on loans, and in other aspects of banking.
The Bank also competes with savings and loan associations, credit unions, insurance companies, small loan companies, consumer finance companies, mortgage companies, department stores, and credit card organizations. There is active competition for the provision of various types of fiduciary and investment advisory services from bank and trust companies, insurance companies, investment counseling firms, mutual funds, and other similar entities.
The Bank competes with other financial institutions for new depositors and loan customers through radio, newspaper, and television advertising and through individual contacts by bank employees. The participation of the Bank in community activities also aids in the promotion of the Bank. Customers of all of the branch offices are made aware of products and services in order to maintain customer relationships and service customer needs.
In addition to competition from other banks and financial institutions headquartered in central and southern Texas, the Bank competes, in the marketing of certain financial services to large customers, with banks located in the major urban areas of Texas and elsewhere. These competing urban banks are generally larger than the Company in terms of capital, services, and personnel.
REGIONAL ECONOMY
The economy of the market area served by the Company is characterized by petroleum and natural gas production and sales of related supplies and services, petrochemical operations, light and medium manufacturing operations, agribusinesses, and tourism. The agricultural businesses are highly diversified, including beef and dairy cattle, poultry, cotton, and a variety of grain crops. Also, through the acquisition of a bank in Bryan in 1993 and a bank in
Austin in 1995, the Company expanded into areas positively affected by major educational centers.
In general, real estate values, as well as real estate development and sales activities, tend to reflect a region's economic environment. The Texas real estate environment continues to show signs of improvement. Management believes that the loans in the real estate portfolio are adequately supported by market prices or other credit factors.
At December 31, 1995, the Company's loans secured primarily by real estate consisted of (i) loans for commercial and residential construction and land development (none of which are located in major Texas metropolitan areas) which constituted 2.8% of the total loan portfolio and (ii) other real estate loans (including loans for 1-4 family, multi-family, and nonfarm/nonresidential properties) which constituted 41.1% of the total loan portfolio. The remaining loan portfolio categories and the percentage of each to the total loan portfolio at December 31, 1995, consisted of the following: loans to oil and gas producers and related service businesses, 0.2%; agricultural loans (other than loans secured by agricultural real property), 5.7%; other commercial and industrial loans, 20.4%; consumer loans, 29.6%; and all other loans (including loans to financial institutions), 0.5%.
ECONOMIC ENVIRONMENT
General economic conditions impact the banking industry. The credit quality of the Company's loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which it conducts its business. The continued financial success of the Company depends to some extent on factors that are beyond the Company's control, including national and local economic conditions, the supply and demand for investment funds, interest rates, regulatory policies and federal, state and local laws affecting these matters. Improvement in general economic conditions that affects the region in which the Company operates could have a favorable effect on the Company's financial condition and results of operations. Conversely, a deterioration in general economic conditions could have an adverse effect.
The policies of regulatory authorities, including the monetary policy of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company cannot be predicted.
SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION
The Company and its second-tier holding company are bank holding companies registered under the BHCA and are subject to supervision by the Federal Reserve Board. As bank holding companies, they are required to file an annual report with the Federal Reserve Board and such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may make examinations of the Company or any of its nonbanking subsidiaries. The Federal Reserve Board has issued regulations under the BHCA that require a bank holding company to serve as a source of financial and management strength to its subsidiary banks. As a result, the Federal Reserve Board, pursuant to such regulations, may require the Company to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity.
Acquisitions by Bank Holding Companies
The BHCA prohibits the Company from acquiring direct or indirect control of more than 5.0% of the outstanding shares of any class of voting stock or substantially all of the assets of any bank or merging or consolidating with another bank holding company without prior approval of the Federal Reserve Board. Similar restrictions apply to acquisition of control of shares of stock of the Company or its second-tier holding company by other bank holding companies.
The Texas Banking Act permits out-of-state bank holding companies to acquire certain existing banks and bank holding companies in Texas. One of the conditions for such acquisitions is that after the acquisition, the out-of-state bank holding company may not control national or state banks in Texas whose aggregate deposits exceed 20% of the total deposits held by all national and state banks domiciled in Texas. Acquisitions of state and national banks by out-of-state bank holding companies have increased and likely will continue to increase the competition that the Company faces in acquiring depository institutions in Texas.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 provides for the acquisition of banks by out-of-state holding companies regardless of state laws concerning such acquisitions (except for certain age and deposit concentration limits) and permits interstate branching beginning on June 1, 1997. States have the ability to opt-out of the interstate branching, but
not the interstate banking provisions of the Act. Texas has passed legislation to opt out of interstate branching.
The BHCA prohibits the Company from engaging in, or from acquiring ownership or control of, more than 5.0% of the outstanding shares of any class of voting stock of any company engaged in a nonbanking activity unless such activity has been determined by the Federal Reserve Board to be so closely related to banking as to be a proper incident thereto. The BHCA does not place territorial restrictions on the activities of such nonbanking-related activities.
Capital Adequacy
The Federal Reserve Board has adopted a system using the internationally consistent risk-based capital adequacy guidelines to evaluate the capital adequacy of bank holding companies. In addition to the risk-based capital guidelines, the Federal Reserve Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation ("FDIC") have adopted the use of a leverage ratio as an additional tool to evaluate the capital adequacy of banks and bank holding companies.
Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items, which previously were not expressly considered in capital adequacy computations, are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning them to the appropriate risk weight. Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100 percent of "Tier 1." For bank holding companies, "Tier 1" capital includes, with certain restrictions, common stockholders' equity, qualifying perpetual preferred stock and minority interests in consolidated subsidiaries. "Tier 2" capital includes, with certain limitations, perpetual preferred stock, capital instruments, and the reserve for possible loan losses.
The guidelines require a minimum ratio of total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% should be in the form of "Tier 1" capital elements). At December 31, 1995, the Company's ratio of total capital-to-risk-weighted assets was approximately 16.3%, 15.3% of which was "Tier 1" capital. Both ratios significantly exceed regulatory minimums.
The leverage ratio is defined to be a company's "Tier 1" capital
divided by its adjusted average total assets. The leverage ratio adopted by the federal banking agencies requires a 3.0% "Tier 1" capital-to-adjusted-total-assets for institutions with a CAMEL rating of 1. All other institutions are expected to maintain a 100 to 200 basis point cushion; i.e., these institutions are expected
to maintain a leverage ratio of 4.0% to 5.0%. The Company's leverage ratio at December 31, 1995, was 8.8%, exceeding the regulatory minimum.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required the Federal Reserve Board to revise its risk-based capital standards to take into account interest rate risk, concentration of credit risk and the risks of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family mortgages.
Dividends
Federal Reserve Board policy discourages the payment of dividends by a bank holding company from borrowed funds as well as payments that would adversely affect capital adequacy. In addition, FDICIA provides that the appropriate federal banking agency may prohibit a bank holding company controlling a "significantly undercapitalized" institution (as referenced below) from paying dividends without prior approval by the Federal Reserve Board.
BANK REGULATION
Deposits in the Bank are insured by the FDIC. The Bank is not a member of the Federal Reserve system and is a state-chartered institution; therefore, the Bank is subject to supervision and regulation by both the FDIC and the Texas Department of Banking.
Capital Adequacy
The FDIC has adopted regulations establishing minimum requirements for the capital adequacy of insured institutions such as the Bank. The requirements address both risk-based capital and leverage ratios, and are essentially parallel to those for the Company.
The FDIC's risk-based capital guidelines require state banks to have a ratio of "Tier 1" or core capital-to-total risk-weighted assets of 4.0% and a ratio of total capital-to-total risk-weighted assets of 8.0%. As of December 31, 1995, the Bank's ratio of "Tier 1" capital-to-total risk-weighted assets was 15.26% and its ratio of total capital-to-total risk-weighted assets was 16.26%. These ratios have decreased from 17.45% and 18.58%, respectively, as of December 31, 1994.
The FDIC's leverage capital guidelines require that state banks maintain "Tier 1" capital of no less than 5.0% of total adjusted assets, except in the case of certain highly rated banks for which the requirement is 3.0% of total adjusted assets. As of December 31, 1995, the Bank's ratio of "Tier 1" capital-to-total adjusted assets was 8.76%. This ratio has increased from 8.67% as of December 31, 1993.
The FDIC may, in certain circumstances, establish higher minimum requirements than those described above; for example, when a bank has been receiving special regulatory attention or has a high susceptibility to interest rate risk. In any event, banks with capital ratios below the required minimums are subject to certain administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.
Prompt Corrective Action
Pursuant to FDICIA, each federal banking agency has specified by regulation the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." In addition, the applicable federal bank regulator for a depository institution could, under certain circumstances, reclassify a "well capitalized" institution as "adequately capitalized" or require an "adequately capitalized" or "undercapitalized" institution to comply with supervisory actions as if it were in the next lower category. Such a reclassification could be made if the regulatory agency determines that the institution is in an unsafe or unsound condition (which could include unsatisfactory examination ratings).
Undercapitalized institutions, as well as significantly and critically undercapitalized institutions, are required to submit capital restoration plans to their appropriate federal regulator and are subject to restrictions on operations, including prohibitions on branching, engaging in new activities, paying management fees, making capital distributions such as dividends, and growing without regulatory approval. Moreover, in order for an undercapitalized institution's capital restoration plan to be accepted by its federal regulator, a company controlling such undercapitalized depository institution will be required to guarantee its subsidiary's compliance with the capital restoration plan up to an amount equal to the lesser of 5.0% of such subsidiary institution's assets or the amount of the capital deficiency when such institution first fails to meet the plan. The Company is a controlling company of the Bank for these purposes. Increasingly stringent restrictions on operations are made applicable to an institution if it becomes significantly or critically undercapitalized, or if it does not submit, or comply with, an acceptable capital restoration plan.
The Bank is considered "well capitalized" for prompt corrective action purposes.
Bank Dividends
Dividends paid by the Bank provide substantially all of the Company's cash flow. Under Texas law, a state-chartered bank may pay dividends from undivided profits, the part of equity capital equal to the balance of its net profit, income, gains and losses since the date of formation minus subsequent distributions to shareholders, and transfer to surplus or capital under share dividends or by board resolution. At December 31, 1995, there was an aggregate of approximately $72.3 million available for the payment of dividends by all subsidiaries to the Company without prior regulatory approval.
The payment of dividends by the Bank may be affected by other regulatory requirements, such as the maintenance of adequate capital, FDICIA specifically prohibits the payment of dividends by an insured bank, if after the payment, the bank would be "undercapitalized."
Deposit Insurance Assessments
In 1993, the FDIC began implementing a risk-related assessment scheme for all insured depository institutions. Assessments are based on capital and supervisory measures, with the strongest institutions presently paying $.04 for every $100 of deposits and the weakest institutions paying $.27 for every $100 of deposits. In November 1995, the FDIC Board of Governors voted to reduce the insurance premiums paid on deposits covered by the Bank Insurance Fund for the highest rated institutions to an annual minimum of $2,000 effective for the first semiannual period of 1996.
Under the risk-related scheme, the FDIC assigns each institution to one of three capital groups (well capitalized, adequately capitalized or undercapitalized, in each case as these terms are defined for purposes of prompt corrective action rules described above) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of its strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only "well capitalized" institutions may be placed in the lowest assessment category. The Bank has been notified by the FDIC that its assessment rate for 1996 will remain at the lowest risk-based premium available.
STATISTICAL INFORMATION
The following statistical and other information is provided as part of the Management Discussion and Analysis of the Financial Condition and Results of Operations on the pages indicated.
ITEM 2

ITEM 2 PROPERTIES
The principal offices of the Bank are located in One O'Connor Plaza, which the Bank leases, and 120 Main Place, which the Bank owns free and clear of any mortgage. The Company's offices are located in One O'Connor Plaza. The Company and its subsidiaries occupy approximately 83% of the 134,000 square feet of rentable floor space contained in 120 Main Place. The balance of the space is leased to other tenants. The Company owns adequate facilities for each of its branch office locations.
The Bank leases all of One O'Connor Plaza, a twelve-story office building, under a net lease, with a remaining primary lease term of 15 years, from Plaza Associates, a Texas general partnership. The principal partners of Plaza Associates consist of seven children or grandchildren and three trusts for the benefit of children or grandchildren of certain principal shareholders of the Company. The lease commenced in 1985, and is a long-term triple net lease, with a primary term of 25 years and six renewal terms of five years each, exercisable at the option of the Bank, with annual rentals of approximately $2.5 million during the first 15 years and approximately $3.0 million during the next ten years and rentals for renewal terms at fair market value. The Bank has an option at the end of the primary term and each renewal term to purchase the property at its fair market value. The Bank occupies approximately 68% of the 157,000 rentable square feet in the building and subleases the remaining space to other tenants. A portion (21%) of the building is subleased to the principal shareholders of the Company. The Company believes that the terms of its lease from Plaza Associates, and the sublease to principal shareholders of the Company, are as favorable as those which could have been obtained from an unaffiliated third party.
The Bank provides both commercial and consumer lending services, banking services, including checking and savings
accounts, and safe deposit facilities. The Bank's facilities include parking garages adjacent to One O'Connor Plaza and 120 Main Place. The Bank's branch office located in north Victoria provides six drive-in banking lanes, which include one lane for commercial customers and one drive-up automatic teller machine. The fourth local branch office is located in northeast Victoria, and it has seven drive-in banking lanes, which include one lane for commercial customers and one drive-up automatic teller machine.
ITEM 3

ITEM 3 LEGAL PROCEEDINGS
The Company is involved in various legal actions that are in various stages of litigation and investigation by the Company and its legal counsel. Some of these actions allege various "lender liability" claims on a variety of theories and claim substantial actual and punitive damages. After reviewing all actions pending or threatened involving the Company, management believes that while the resolution of any matter may have an impact on the financial results of the period in which the matter is settled, their ultimate resolution will not have a material adverse effect upon the business or consolidated financial position of the Company. However, these matters are in various stages of proceedings and future developments could cause management to revise its assessment of these matters. No material legal actions were terminated during the fourth quarter of 1995.
ITEM 4

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5

ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Certain information concerning the Common Stock of the Company is included on page 74 herein.
ITEM 6

ITEM 6 SELECTED FINANCIAL DATA
Selected financial data is presented below. The selected financial data should be read in conjunction with Management's Discussion and Analysis of the Financial Condition and Results of Operations of the Company presented elsewhere herein.
SELECTED FINANCIAL DATA VICTORIA BANKSHARES, INC. AND SUBSIDIARIES - ------------------------------------------------------------------------------- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) (NOT COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS) - -------------------------------------------------------------------------------
ITEM 7

ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The following discussion highlights the major changes affecting the operations and financial condition of the Company for the two years ended December 31, 1995. Unless the context otherwise requires, the "Company" refers to Victoria Bankshares, Inc., and its subsidiaries. The discussion should be read in conjunction with the consolidated financial statements, accompanying notes, and selected financial data appearing elsewhere in this report.
OVERVIEW OF OPERATIONS
The Company reported net income of $15.1 million for the year ended 1995 compared to net income of $17.0 million reported for the year ended 1994. Earnings per share were $1.83 for 1995 compared to $2.05 for 1994. The decline in net income is primarily attributable to pressures on the net interest margin resulting from increased funding costs and higher noninterest expenses due to acquisition related expenses.
A special meeting of the shareholders of the Company will be held on April 2, 1996, to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated November 12, 1995, between the Company and Norwest. The Plan of Merger has been approved by the boards of both companies and is pending regulatory approval. Norwest will issue 1.05 shares of Norwest common stock in exchange for each share of the Company's common stock. The exchange will be tax-free for the Company's shareholders and will be accounted for by Norwest as a pooling-of-interests.
Norwest is a $72.1 billion company providing banking, mortgage, investments, insurance, and other financial services through 3,042 stores in all 50 states, Canada, the Caribbean, Central America, and elsewhere internationally.
The Company continues to be well capitalized. At December 31, 1995, the Company's ratio of total capital-to-risk-weighted-assets was 16.26% and its leverage ratio was 8.76%, both of which significantly exceed the minimum regulatory requirements.
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. The interest income on certain loans and investment securities is not subject to Federal income tax. For analytical purposes, at December 31, 1995 and December 31, 1994 and 1993, the interest income and rates on these types of assets are adjusted to a "fully taxable equivalent" basis, net of the
effect of any interest expense disallowed. The fully taxable equivalent adjustment was calculated using the Company's statutory Federal income tax rate of 35%. Adjusted interest income is as follows (in thousands):
The net interest spread is the difference between the average rates on interest-earning assets and the average rates on interest-bearing liabilities. The interest rate margin represents net interest income divided by average earning assets. These ratios can also be used to analyze net interest income. Since a significant portion of the Company's funding is derived from interest-free sources, primarily demand deposits and total stockholders' equity, the effective rate paid for all funding sources is lower than the rate paid on interest-bearing liabilities alone. As the following table illustrates, the interest rate spread decreased 16 basis points to 3.29% in 1995 from 3.45% in 1994 and the interest rate margin decreased 1 basis point to 4.15% in 1995 from 4.16% in 1994 (dollars in thousands).
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(1) Includes interest-bearing deposits with other banks. (2) Interest and rates on loans and securities which are nontaxable for Federal income tax purposes are presented on a taxable equivalent basis using a rate of 35%. (3) The 1995 and 1994 average balance has been adjusted to exclude the effect of Statement of Financial Accounting Standards No. 115.
The level of net interest income is the result of the relationship between the total volume and mix of interest-earning assets and the rates earned, and the total volume and mix of interest-bearing liabilities and the rates paid. The rate and volume components associated with interest-earning assets and interest-bearing liabilities can be segregated to analyze the year-to-year changes in net interest income. Changes due to rate/volume variances have been allocated between changes due to average volume and changes due to average rate based on the percentage of each to the total change of both categories. Because of changes in the mix of the components of interest-earning assets and interest-bearing liabilities, the computations for each of the components do not equal the calculation for interest-earning assets as a total and interest-bearing liabilities as a total. The following table analyzes the changes attributable to the rate and volume components of net interest income (in thousands):
CHANGES DUE TO VOLUME
The increase in net interest income due to the change in average volume is attributable primarily to the growth in loan volume from 36.3% of average interest-earning assets at December 31, 1994, to 38.9% at December 31, 1995. This increase was partially offset by the increase in the average volume of time deposits. Time deposits, typically the highest cost of the deposit category, increased from 39.7% of average interest-bearing liabilities at December 31, 1994, to 45.2% at December 31, 1995.
CHANGES DUE TO RATES
The increase in net interest income due to the change in average rates occurred even though the net interest spread
decreased as the effect of rates on interest income was larger than the effect of rates on interest expense. This is due to the average balance of interest-earning assets being proportionately larger than the average balance of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses is an amount added to the allowance against which loan losses are charged. Management determines an appropriate provision for loan losses based upon the size, quality, and concentration characteristics of the loan portfolio using both historical quantitative trends and Management's evaluation of qualitative factors including economic and industry outlooks. The provision for loan losses for 1995 was $165 thousand and for 1994 was $15 thousand. The increase over 1994 was primarily due to the increase in the size of the portfolio. Relatively low levels of nonperforming loans and net charge-offs should continue. However, the provision for loan losses may need to be increased in the future if loan growth continues as expected.
During 1995, the Company recorded net charge-offs to the allowance for loan losses of $557 thousand, up from a net recovery of $35 thousand in 1994. The allowance for loan losses at December 31, 1995, was 1.5% of loans, net of unearned discount, compared to 1.7% at December 31, 1994. The allowance as a percent of nonperforming loans was 125.2% at December 31, 1995, as compared to 98.4% a year earlier.
NONINTEREST INCOME
Noninterest income totaled $29.6 million in 1995, up $2.1 million or 7.7% from December 31, 1994. The following table presents a comparative analysis of the major components of noninterest income (in thousands):
Service charges and other fees increased 5.3% in 1995 resulting mainly from the acquisition of Cattlemen's during the second quarter of 1995 and income from a new ATM surcharge that began in the fourth quarter of 1994.
Trust services income increased 24.3% during 1995 as the assets under management increased $70.0 million to $1.1 billion. The increase in income can be attributed primarily to a full year's effect on income from the acquisition of the former Ameritrust Texas National Association office located in Corpus Christi from Texas Commerce Bank National Association ("Corpus Christi Trust") during the third quarter of 1994.
Data processing income decreased 14.2% as a result of a decrease in the level of customers serviced by the Company's data processing subsidiary.
Securities gains totaled $57 thousand during 1995 as compared to losses of $796 thousand in 1994. The gains in 1995 resulted from the sales of equity investments by the Company's Small Business Administration ("SBA") licensed subsidiary and in-substance maturities of securities held to maturity. The losses in 1994 were due mainly to losses of $446 thousand on dispositions of two equity investments held by the SBA licensed subsidiary. Also contributing to the 1994 losses were sales of securities held as available for sale in order to improve total return.
Other operating income, which includes investment product income, mortgage banking income, and safe deposit income, decreased 10.8% in the aggregate during 1995. The decrease in investment product income is attributable to decreases in total commissions from a lower level of sales of fixed income securities and mutual funds. Mortgage banking income decreased, even though mortgage origination increased, as fees from the sale of mortgage loans into secondary markets decreased. This occurred as the Company retained a higher percentage of the loans it originated mainly in a newly introduced three-year adjustable rate product. These decreases were partially offset by a slight increase in safe deposit income as a result of the acquisition of Cattlemen's.
NONINTEREST EXPENSE
Total noninterest expense increased $5.8 million or 8.5% to $74.2 million in 1995 from $68.4 million in 1994. This increase resulted primarily from acquisition expenses, including conversions of Cattlemen's in the second quarter of 1995 and a full year's expense related to the acquired Corpus Christi Trust in the third quarter of 1994. Excluding expenses related to acquisitions, total noninterest expense increased 4.2%. The following table presents a comparative analysis of the major components of noninterest expense (in thousands):
Salaries and wages increased 7.5% during 1995 as a result of the 1995 acquisition of Cattlemen's, the 1994 acquisition of Corpus Christi Trust, and normal merit increases.
Retirement and other employee benefits increased 19.4% during 1995 primarily due to increased health care expenses as a result of rising health care costs and increased claims, as well as the acquisitions mentioned above.
Net occupancy expense increased 2.9% during 1995 primarily as a result of the timing of the 1994 Corpus Christi Trust acquisition and the 1995 Cattlemen's acquisition.
Equipment rental, depreciation, and maintenance expense increased 4.2% during 1995 resulting primarily from the installation of a Platform system at branch offices in 1995 and increased expenses related to acquisitions.
FDIC insurance expense decreased $1.6 million or 47.6% during 1995 due to a partial refund received in September 1995 from the FDIC on assessments paid for the second quarter of 1995 and a reduction in the assessment rate paid for the third quarter of 1995. The Bank has been notified by the FDIC that its assessment rate for 1996 will remain at the lowest level risk-based premium available. This assessment level requires the Bank to be both well capitalized, as defined by the FDIC, and in good standing with its regulators. In November 1995, the FDIC Board of Directors voted to reduce the insurance premiums paid on deposits covered by the Bank Insurance Fund for the highest rated institutions to an annual minimum of $2,000 effective for the first semiannual period of 1996.
Taxes other than income, primarily Texas franchise tax, increased 43.0% during 1995 primarily as a result of increased
taxable capital (as defined by law) at the Company and the 1995 acquisition of Rosenberg.
Operating supplies, communication, and postage expenses all increased during 1995 as a result of the 1994 acquisition of Corpus Christi Trust and the 1995 acquisition of Cattlemen's.
Outside service expense increased 26.9% during 1995 primarily due to the 1995 expenses incurred as a result of the conversion relating to the 1995 acquisitions of Rosenberg, Cattlemen's, and the impending merger with Norwest.
Amortization of intangible assets increased 43.2% primarily as a result of the 1995 acquisition of Cattlemen's and the full year's effect of the 1994 acquisition of Corpus Christi Trust.
All other noninterest expense increased 14.3% due primarily to increases in software license and maintenance expenses and seminars and training expenses.
INCOME TAXES
For the year ended December 31, 1995, the Company's provision for federal income taxes was $7.6 million compared to $8.8 million for the year ended December 31, 1994.
The Company had a net deferred tax liability of $709 thousand as of December 31, 1995. This net deferred tax liability is composed of the expected tax payments from the reversal of the temporary differences between tax and book net income and the gross-up of core deposit intangibles acquired from Cattlemen's. The existing net temporary differences will reverse during future periods.
CAPITAL MANAGEMENT
The Federal Reserve Board has adopted a system using the internationally consistent risk-based capital adequacy guidelines to evaluate the capital adequacy of bank holding companies. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a "risk-weighted" asset base. Certain off-balance sheet items, which previously were not expressly considered in capital adequacy computations, are added to the risk-weighted asset base by converting them to a balance sheet equivalent and assigning them to the appropriate risk weight.
The guidelines require that banking organizations achieve minimum ratios of total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% should be in the form of certain "Tier 1"
elements). Total capital is defined as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being limited to 100 percent of "Tier 1." For bank holding companies, "Tier 1" capital includes, with certain restrictions, common stockholders' equity, perpetual preferred stock, and minority interests in consolidated subsidiaries. "Tier 2" capital includes, with certain limitations, certain forms of perpetual preferred stock, as well as maturing capital instruments and the allowance for loan losses.
At December 31, 1995, the Company's ratios of "Tier 1" and total capital to risk-weighted assets were 15.25% and 16.26%, respectively. Both ratios significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital (dollars in thousands):
In addition to the risk-based capital guidelines, the Federal Reserve Board and the FDIC use a "leverage ratio" as an additional tool to evaluate the capital adequacy of banks and bank holding companies. The "leverage ratio" is defined to be a company's "Tier 1" capital divided by its adjusted average total assets. The leverage ratio adopted by the federal banking agencies requires a ratio of 3.0% for banks with a CAMEL rating of 1. All other institutions will be expected to maintain a 100 to 200 basis point cushion, i.e., these institutions will be expected to maintain a leverage ratio of 4.0% to 5.0%. The Company's leverage ratio at December 31, 1995, was 8.8%, which also significantly exceeds the regulatory minimum.
The FDIC maintains final rules on capital adequacy ranging in five categories from critically undercapitalized to well-capitalized. A well-capitalized company is one that maintains total capital to risk-weighted assets of at least 10%, a "Tier 1" total capital to risk-weighted assets of at least 6%, and a leverage ratio of 5%. The Company's ratios substantially exceed the regulatory minimums required under the well-capitalized category.
LIQUIDITY MANAGEMENT
To a business enterprise, liquidity is the ability to generate cash to meet financial obligations and opportunities. For a banking organization, these obligations arise from a wide variety of sources, most prominent among them being withdrawals of deposits, repayment upon maturity of purchased funds, payment of operating expenses, and payment of dividends.
The Company's sources of liquidity as a whole include cash and cash equivalents, available for sale securities and federal funds sold ("liquid assets"), as well as new deposits, proceeds of additional borrowings, and proceeds from additional sales of stock.
Sources of liquidity are also maintained to enable the Company to take advantage of opportunities in loan and investment markets and to provide substantial flexibility against unforeseeable cash requirements that can occur in times of volatile financial markets. The Company believes it has adequate sources of liquidity.
The Company paid cash dividends of $6.0 million and $4.1 million to holders of common stock during 1995 and 1994, respectively. The Company has paid cash dividends for fifteen consecutive quarters. In March 1994, cash dividends were increased from $.10 per share to $.13 per share, representing a 30% increase. In January 1995, the Company declared a $.16 per share quarterly dividend, an increase of 23%, and a special $.09 per share dividend. In each subsequent quarter of 1995 the Company paid a $.16 per share quarterly dividend. In January 1996, the Company declared a $.16 per share dividend and a special $.09 per share dividend which was paid on February 22, 1996.
The Parent Company, as of December 31, 1995, has $13.7 million in short-term and medium-term securities which can be used to provide liquid resources as well as currently unanticipated capital needs of its subsidiaries.
An integral part of the Company's liquidity management is the funding of the Bank, which derives its source of fundings predominately from deposits within its marketing area. The customer base for deposits is diversified among correspondent banks, individuals, partnerships and corporations, and public entities. This diversification helps the Company avoid dependence on large concentrations of funds. The Company does not, as a matter of policy, place certificates of deposit through brokers. The Company's percentage of time certificates of deposit over $100,000 to time deposits increased to 20.2% in 1995 from 19.8% in 1994. This increase was the result of customers moving funds into time deposits as interest rates increased during 1995.
The table below sets forth the maturity distribution of certificates of deposit of $100,000 or more issued by the Bank (in thousands):
INTEREST RATE SENSITIVITY
The objectives of monitoring and managing the interest rate risk position of the balance sheet are to contribute to earnings and to minimize the adverse changes in net interest income. The potential for earnings to be affected by changes in interest rates is inherent in a financial institution.
Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. An asset sensitive position in a given period will result in more assets being subject to repricing; therefore, market interest rate changes will be reflected more quickly in asset rates. If interest rates rise, such a position will have a positive effect on net interest income. Conversely, in a liability sensitive position, where liabilities reprice more quickly than assets in a given period, a rise in rates will have an adverse effect on net interest income.
One way to analyze interest rate risk is to evaluate the balance of the interest rate sensitivity position. A mix of assets and liabilities that are roughly equal in volume and repricing represents a matched interest rate sensitivity position. Any excess of assets or liabilities in a particular period results in an interest rate sensitivity gap. The following table presents the interest rate sensitivity position of the Company at December 31, 1995 (dollars in thousands).
The Company had an asset sensitivity gap position in the 30-day period of $122.0 million. The cumulative rate sensitive gap position at one year was an asset sensitive position of $93.8 million, which indicates that the Company may benefit from rising interest rates; conversely falling interest rates may have a negative impact upon the Company.
The Company undertakes this interest rate sensitivity analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of assets and liabilities equally or at the same time.
The Company's Asset and Liability Committee reviews monthly the consolidated rate sensitivity positions along with simulation and duration models, and makes adjustments as needed to control the Company's interest rate risk position.
The Company's investment policy does not permit the use of derivative financial instruments or the purchase of structured notes.
LOAN PORTFOLIO
The Company's loans are widely diversified by borrower and industry group. The following summary shows the composition of the loan portfolio for the five years ended December 31, 1995 (dollars in thousands):
Maturities in the Company's loan portfolio at December 31, 1995, are summarized below (in thousands):
The maturities presented above are based upon contractual maturities. The Company has no set rollover policy. Many of these loans are made on a short-term basis with the possibility of renewal at time of maturity. All loans, however, are reviewed on a continuous basis for creditworthiness. The total amount of loans due after one year which have fixed, floating, or adjustable rates is as follows (in thousands):
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents Management's estimate necessary to provide for losses incurred in the loan portfolio. In making this determination, Management analyzes the ultimate collectibility of the Company's loan portfolio, incorporating feedback provided by the internal loan review staff and provided by examinations performed by regulatory agencies. Management makes an ongoing evaluation as to the adequacy of the allowance for loan losses. To establish the appropriate level of the allowance, all loans (including nonperforming loans), commitments to extend credit and standby letters of credit are reviewed and classified as to potential loss exposure. Specific allowances are then established for those loans, commitments to extend credit or standby letters of credit with identified loss exposure and an additional allowance is maintained based upon the size, quality, and concentration characteristics of the remaining loan portfolio using both historical quantitative trends and Management's evaluation of qualitative factors including future economic and industry outlooks.
The determination by Management of the appropriate level of the allowance amounted to $10.6 million at December 31, 1995. The allowance for loan losses is based on estimates, and ultimate losses will vary from the current estimates. These estimates are reviewed monthly and as adjustments, either positive or negative, become necessary they are reported in earnings in the periods in which they become known. A detailed analysis of the Company's allowance for loan losses for the past five years is shown below (in thousands):
The following table reflects certain historical statistics of the Company relating to the relationship among loans (net of unearned discount), net charge-offs, and the allowance for loan losses (dollars in thousands):
The table below shows an allocation of the allowance for loan losses by major categories of loans for the five years ended December 31, 1995. Definitions of types of loans are based on bank regulatory agency instructions for "Call Reports." Historically, the allowance for loan losses related to commitments to extend credit and standby letters of credit has not been material. Allocations as of year-end, which are not indicative of conditions at any other date and do not restrict or dictate allocations at future dates, are as follows (dollars in thousands):
All percentages are calculated using loans net of unearned discount.
NONPERFORMING ASSETS
The Company's nonperforming assets consist of nonperforming loans, other real estate, and other repossessed assets.
NONPERFORMING LOANS
The Company's nonperforming loans consist of impaired loans, nonaccrual loans, troubled debt restructurings, and loans 90 days past due and still accruing.
The Company adopted Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114") as amended by Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan/Income Recognition and Disclosure" ("SFAS 118") on January 1, 1995.
The Company's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is identified as impaired and/or placed on a nonaccrual basis. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company classifies loans as impaired when there are serious doubts regarding the collectibility of principal and interest or when payments become past due 90 days, except loans which are well secured and in the process of collection. The standards require that when a loan is impaired a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, on a loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company considers consumer loans with balances less than $50,000 to be smaller-balance homogeneous loans which are exempt from SFAS 114. The Company has measured the impairment related to all of its impaired loans using the fair value of the loan's collateral. Amounts received on impaired loans are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. When collection of an impaired loan is considered remote, the loan is charged-off against the allowances for loan losses.
Troubled debt restructurings are those for which concessions, including reduction of interest rates or deferral of interest or principal, have been granted, due to the borrower's weakened financial condition. Interest on restructured loans is generally accrued at the restructured rates when it is anticipated that no loss of original principal will occur. As of December 31, 1995, all restructured loans were performing in accordance with the restructured terms.
Loans 90 days past due and still accruing are well secured and in the process of collection.
OTHER NONPERFORMING ASSETS
Other nonperforming assets, which are carried at the lower of cost or fair value, less estimated costs to sell, consist of other real estate acquired through loan foreclosures and other workout situations and other assets acquired through repossession. In addition, other nonperforming assets include loans which the Company has not taken possession of the collateral, although not formally foreclosed, are unlikely to be repaid through means other than foreclosure and sale of the collateral. According to Company policy all other real estate and in-substance foreclosures valued over $100 thousand are appraised on an annual basis by an independent appraisal service.
In accordance with SFAS 114, as amended, loan balances and income/expense related to loans previously classified as in-substance foreclosure, but for which the Company had not taken possession of the collateral, have been reclassified to loans for all periods presented. As of the periods presented, there were no in-substance foreclosures for which the Company had taken possession of the collateral included in foreclosed assets.
The following table discloses information regarding nonperforming assets for each of the last five years (in thousands):
(1) See also Note 5 of Notes to Financial Statements for interest foregone. (2) For 1995, these loans are not considered impaired since they are part of a small balance homogeneous portfolio which are exempt from SFAS 114. (3) For 1995, these troubled debt restructurings were performing in accordance with their restated terms as of the date of adoption of SFAS 114.
Total nonperforming assets, which include nonperforming loans and other nonperforming assets, totaled $10.1 million or 1.4% of total loans and other nonperforming assets at December 31, 1995, as compared with $11.7 million or 2.0% of total loans and other nonperforming assets at December 31, 1994. Total nonperforming assets represented 0.5% and 0.6% of the total assets at December 31, 1995 and December 31, 1994, respectively. The total
amount of loans past due 90 days or more and still accruing, totaled $469 thousand at December 31, 1995, compared to $427 thousand at December 31, 1994.
LOAN CONCENTRATIONS AND REGIONAL ECONOMY
The economy of the market area served by the Company is characterized by petroleum and natural gas production and sales of related supplies and services, petrochemical operations, light and medium manufacturing operations, agribusiness, and tourism. The agricultural businesses are highly diversified, including beef and dairy cattle, poultry, cotton, and a variety of grain crops. Also, through the acquisition of the Bryan Bank in 1993 and Cattlemen's in 1995, the Company expanded into areas positively affected by a major educational centers. In general, real estate values, as well as real estate development and sales activities, tend to reflect a region's economic environment. The Texas real estate environment continues to show improvement. Management believes that the loans in the real estate portfolio are generally adequately supported by market prices or other credit factors. The Company has no foreign loans, and, therefore, is not directly affected by current international developments.
Real estate loans totaling $314.0 million comprised approximately 43.9% of the loan portfolio at December 31, 1995, of which 2.1% was nonperforming. At December 31, 1994, real estate loans totaled $263.7 million comprising 43.8% of the loan portfolio, of which 3.1% was nonperforming. The majority of the Company's real estate loans are secured by property located in the nonmetropolitan areas in which the Company operates. The Company's real estate loan portfolio is comprised of interim construction, residential, commercial building, farm acreage, vacant lot, and land development loans. Permanent residential loans make up approximately 44% of the total real estate loans.
Consumer loans totaled $211.6 million at December 31, 1995 (approximately 29.6% of the loan portfolio), 0.3% of which were nonperforming. These consumer loans include approximately $106.6 million in loans originated through automobile dealers. At December 31, 1994, consumer loans totaled $175.9 million (approximately 29.2% of the loan portfolio), 0.5% of which were nonperforming.
Agricultural loans, exclusive of loans secured by farm acreage which are categorized by the Company as real estate loans, totaled $40.4 million at December 31, 1995, or approximately 5.7% of the Company's loan portfolio, of which 0.5% were nonperforming. At December 31, 1994, agricultural loans totaled $38.1 million comprising approximately 6.3% of the Company's loan portfolio, of which 0.5% were nonperforming. Risks in this area revolve around price fluctuations and possible crop failures brought on by severe weather.
The Company's energy loans, included in the commercial and industrial loan category, were approximately $1.5 million at December 31, 1995, or 0.2% of the loan portfolio of which all were performing. At December 31, 1994, energy loans totaled $1.7 million comprising approximately .3% of the loan portfolio, of which 2.3% were nonperforming. The majority of the Company's energy loan portfolio are loans to energy service companies as opposed to loans secured by oil and gas reserves.
INVESTMENT SECURITIES
The book and market values of investment securities held by the Company as of the dates indicated are summarized as follows (in thousands):
_____________________
(1) Includes Federal Reserve Stock, other bonds, and corporate stocks.
The investment portfolio, which is the largest segment of the Company's earning asset base (48%), is being managed to minimize interest rate risk, maintain sufficient liquidity and maximize return. Investment securities held to maturity are purchased with the intent and ability of the Company to hold them to maturity as evidenced by the strong capital position of the Company and short maturity of the portfolio. The Company's financial planning anticipates income streams based on normal maturity and reinvestment. The short duration of the portfolio provides adequate liquidity through normal maturities. Investment securities available for sale are purchased with the intent to provide liquidity and to increase returns. The Company does not engage in trading in either the investment securities held to maturity or investment securities available for sale categories.
Held to maturity securities with unrealized gains at December 31, 1995, constituted 64.2% of the portfolio, securities with unrealized losses constituted 35.1% of the portfolio with the remaining portfolio consisting of securities with no unrealized gains or losses. At December 31, 1994, securities with unrealized gains constituted 13.8% of the portfolio, securities with unrealized losses constituted 86.1% of the portfolio, and the remaining portfolio consisted of securities with no unrealized
gains or losses. At December 31, 1995, available for sale securities had an aggregate unrealized holding loss of $431 thousand. The unrealized holding losses, net of tax, of $279 thousand are recorded in stockholders equity. At December 31, 1994, available for sale securities had an aggregate unrealized holding loss of $3.0 million. The unrealized holding losses, net of tax, of $2.0 million are recorded in stockholders' equity. See Note 4 to the Financial Statements.
The average maturity of the portfolio was 1.70 years at December 31, 1995, compared to 1.73 years at December 31, 1994. These average maturities take into consideration both expected prepayments and cash flows. The relative short duration of the portfolio improves the liquidity of the Company and minimizes the interest rate risk associated with a longer maturity portfolio. All of the securities are investment grade or better with over 84% of the portfolio being U.S. Government or Government Agency obligations.
The following table shows as of December 31, 1995, the distribution and yields of the Company's investment securities. These values represent contractual maturities, but actual repayments and yields are dependent upon monthly cash flows and prepayments. The yields have been calculated using weighted average amortized cost and are not presented on a fully taxable equivalent basis (dollars in thousands).
ACQUISITIONS
On June 30, 1995, United Bancshares, Inc., parent company of Rosenberg Bank & Trust, merged with and into the Company. The merger was consummated through the exchange of 306,383 shares of
the Company's common stock for all of the outstanding shares of common stock of United. This transaction increased consolidated assets by approximately $65 million and increased consolidated deposits by approximately $61 million. The acquisition was accounted for as a pooling-of-interests. The Company's prior period consolidated financial statements have been restated to include the accounts of United. All intercompany accounts have been eliminated.
On August 25, 1995, the Company acquired Cattlemen's Financial Services, Inc. The transaction was accounted for as a purchase. The Company acquired approximately $100 million in assets and assumed $93 million in liabilities, paying a premium of $6.7 million over the book value of the net assets. The principal subsidiary of Cattlemen's Financial Services, Inc., is Cattlemen's State Bank. Cattlemen's State Bank has two branches and a mortgage production office, all of which are located in Austin, Texas.
1994 COMPARED TO 1993
The following discussion highlights the major changes affecting the operations and financial condition of the Company for the two years ended December 31, 1994. Unless the context otherwise requires, the "Company" refers to Victoria Bankshares, Inc., and its subsidiaries. The discussion should be read in conjunction with the consolidated financial statements, accompanying notes, and selected financial data appearing elsewhere in this report.
OVERVIEW OF OPERATIONS
For the year ended December 31, 1994, the Company reported earnings of $17.0 million compared to $19.1 million for the year ended December 31, 1993, a decrease of 11.4%. Primary earnings per share were $2.05 for 1994 compared to $2.32 for 1993. Excluding the recognition of two nonrecurring items in 1993, core earnings for the year ended 1994 increased $1.1 million or 6.8% compared to 1993. The nonrecurring items in 1993 included the recognition of a $4.8 million benefit recorded as a result of the adoption of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" and a $2.8 million ($1.8 million after-tax) restructuring charge. The primary factors contributing to the 1994 core earnings were an increase in net interest income resulting from improved asset quality, loan growth, and the growth of noninterest income mainly as a result of the acquisition of a $365 million trust portfolio.
On February 28, 1993, the Company acquired from the Federal Deposit Insurance Corporation ("FDIC") the New First City Bryan/College Station ("Bryan Bank"). This acquisition, the largest in the Company's history, increased loans by approximately 32.6%, core deposits by approximately 17.9%, and trust assets under management by approximately 27.3%. Also, on October 8, 1993, the
Company acquired from another bank holding company a branch office in Richmond ("Richmond Branch"). Even though smaller in size ($41 million in deposits and $16 million in loans) the potential of this acquisition results from the expansion into Fort Bend County which has been one of the fastest growing counties in the United States during the 80's and 90's. The Bryan Bank acquisition had a greater effect on the financial results of 1993 than the Richmond Branch acquisition due to size and timing during the year.
The Company continues to be well-capitalized. At December 31, 1994, the Company's ratio of total capital-to-risk-weighted-assets was 18.58% and its leverage ratio was 8.7%, both of which significantly exceed the minimum regulatory requirements.
NET INTEREST INCOME
Net interest income and net interest spread is the difference between income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. For analytical purposes, net interest income for 1994 and 1993 is adjusted to a "fully taxable equivalent" basis to recognize the income tax savings on tax-exempt items. Net interest income increased to $66.6 million in 1994, an increase of 2.8% from the $64.7 million reported in 1993.
Interest income foregone on nonperforming loans declined to $82 thousand in 1994 as compared to $359 thousand in 1993.
As the table presented on page 19 illustrates, the interest rate margin increased 10 basis points to 4.16% in 1994 from 4.06% in 1993.
The table presented on page 20 analyzes the changes attributable to the rate and volume components of net interest income.
Changes Due to Volume
The increase in net interest income due to the change in average volume is attributable primarily to the growth in loan volume from 30.9% of average interest-earning assets at December 31, 1993, to 36.3% at December 31, 1994. This increase was partially offset by the decrease in the average volume of total investments and federal funds sold and short-term investments. Average interest-bearing transaction accounts, typically the lowest cost of the interest-bearing liability category, increased from 48.3% of average interest-bearing liabilities at December 31, 1993, to 51.8% at December 31, 1994. Overall, average interest-earning assets grew 0.3% from December 31, 1993, to December 31, 1994, while average interest-bearing liabilities decreased 1.2% for the same period. Average noninterest-bearing liabilities and stockholders' equity, by comparison, grew 4.7% from December 31, 1993, to December 31, 1994.
CHANGES DUE TO RATES
The decrease in net interest income due to the change in average rates results from the change in average rates on loans being more sensitive to the increase in market rates than was the change due to average rates on interest- bearing deposits. Additionally, the increase in interest income due to the change in average rates was reduced as a result of the decreasing investment portfolio yield as maturing securities were reinvested at lower rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $15 thousand in 1994 as compared to $155 thousand in 1993. This decrease was due to decreases in nonperforming loans and net charge-offs.
During 1994, the Company recorded net recoveries of $35 thousand, up from net charge-offs of $562 thousand in 1993. The ratio of net recoveries to average loans, net of unearned discount, for 1994 was .01%, up from .11% in net charge-offs to average loans net of unearned discount in 1993. Reflecting improved loan portfolio quality, the allowance for loan losses at December 31, 1994, was 1.7% of loans, net of unearned discount, compared to 1.8% at December 31, 1993. The allowance as a percent of nonperforming loans was 98.4% at December 31, 1994, as compared to 76.3% a year earlier.
NONINTEREST INCOME
Noninterest income totaled $27.5 million in 1994, up $0.5 million or 1.7% from December 31, 1993. The following table presents a comparative analysis of the major components of noninterest income (in thousands):
Service charges and other fees increased 4.8% in 1994 resulting mainly from a full year's effect on income from the acquisitions of the Richmond Branch on October 8, 1993, and the Bryan Bank on February 28, 1993. These acquisitions, therefore, only affected the income for three months and ten months, respectively, during 1993.
Trust services income increased 31.3% during 1994 as the assets under management increased $338.5 million to $1.0 billion. This increase can be attributed to the acquisition of the former Corpus Christi Trust which added approximately $365 million in trust assets during the third quarter of 1994 and $1.0 million in trust fees during 1994. Also contributing to the increase was the timing of the acquisition of the Bryan Bank as mentioned above.
Securities losses totaled $796 thousand during 1994 as compared to gains of $103 thousand in 1993 due mainly to losses of $446 thousand on dispositions of two equity investments held by the Company's SBA licensed subsidiary. Also contributing to the losses were sales of securities held as available for sale in order to improve total return.
Other operating income, which includes investment product income, safe deposit income, and mortgage banking income, decreased 8.4% in the aggregate during 1994. The decrease in investment product income was attributable to decreases in total commissions from a lower level of sales of fixed income securities and mutual funds due to the softness in the bond and equity markets offset partially by increased income from annuity sales to customers. Mortgage banking income decreased due to the decreased refinancings resulting from increases in interest rates. These decreases were partially offset by increased safe deposit income as a result of the timing of 1993 acquisitions.
NONINTEREST EXPENSE
Total noninterest expense decreased $1.7 million or 2.4% to $68.4 million in 1994 from $70.0 million in 1993. This decrease resulted primarily from the 1993 restructuring charge offset partially by a full year's effect in 1994 of expenses from the 1993 acquisition of the Bryan Bank and Richmond Branch and the 1994 acquisition of the Corpus Christi Trust. The 1993 restructuring charge consisted of $2.6 million in retirement and other employee benefits and $0.2 million in salaries and wages. This restructure resulted in excess of $2.0 million of expense growth savings in 1994. The following table presents a comparative analysis of the major components of noninterest expense (in thousands):
The previously mentioned restructuring resulted in expense growth savings in salaries and wages in 1994. These savings, however, were offset due to staffing increases related to the timing of the 1993 acquisitions, the 1994 acquisition, and normal merit increases.
Retirement and other employee benefits decreased 30.8% during 1994 primarily as a result of the nonrecurring restructuring charge in 1993 for expenses relating to an early retirement program and decreased employee health care expense as a result of an overfunding of the health care plan at year-end 1993.
Net occupancy expense increased 4.5% during 1994 primarily as a result of the timing of the 1993 acquisitions and the 1994 acquisition.
Equipment rental, depreciation, and maintenance expense increased 6.4% during 1994 resulting primarily from an increase in equipment rental expenses due to upgrades and increased capacity by the data processing subsidiary to accommodate the growth from acquisitions. The timing of the 1993 acquisitions and the 1994 acquisition also contributed to this increase.
FDIC insurance expense increased $193 thousand or 6.1% during 1994 due to increased deposits obtained in the 1993 acquisitions.
Taxes other than income decreased 11.8% during 1994 as a result of decreases in ad valorem taxes on premises and personal property due to a refund for prior year taxes and a reduction of current year taxes, both resulting from a correction of the appraised tax values on various bank assets.
Marketing, operating supplies, communication, and postage expenses all increase during 1994 as a result of the timing of acquisitions.
Outside service expense decreased 9.5% during 1994 primarily due to the 1993 expenses incurred as a result of the conversions relating to the 1993 acquisitions.
Amortization of intangible assets increased 38.9% primarily as a result of the 1994 acquisition of the Corpus Christi Trust and the full year's effect of the 1993 acquisitions.
All other noninterest expense decreased 5.0% due primarily to a reduction in expenses related to other loan related assets as a result of a decrease in the level of foreclosed property.
INCOME TAXES
For the year ended December 31, 1994, the Company's provision for federal income taxes was $8.8 million compared to $7.2 million for the year ended December 31, 1993. On January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," resulting in the Company recording a deferred tax asset of $4.8 million at the beginning of 1993. After recognition of these deferred tax assets, the Company returned to a statutory tax rate.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
During 1993, the Company recognized $4.8 million as the cumulative effect of change in accounting method as the result of the adoption of Financial Accounting Standards No. 109 discussed earlier.
CAPITAL MANAGEMENT
At December 31, 1994, the Company's ratios of "Tier 1" and total capital to risk-weighted assets were approximately 17.45% and 18.58%, respectively. Both ratios significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital (dollars in thousands):
The Company's leverage ratio at December 31, 1994, was 8.7%, which also significantly exceeds the regulatory minimum. The Company's ratios substantially exceed levels required under the well-capitalized category.
LIQUIDITY MANAGEMENT - CONSOLIDATED COMPANY
To a business enterprise, liquidity is the ability to generate cash to meet financial obligations and opportunities. For a banking organization, these obligations arise from a wide variety of sources, most prominent among them being withdrawals of deposits, repayment upon maturity of purchased funds, payment of operating expenses, and payment of dividends.
The Company's sources of liquidity as a whole include cash and cash equivalents, available for sale securities and federal funds sold ("liquid assets"), as well as new deposits, proceeds of additional borrowings, and proceeds from additional sales of stock.
Sources of liquidity are also maintained to enable the Company to take advantage of opportunities in loan, deposit, and securities markets and to provide substantial flexibility against unforeseeable cash requirements that can occur in times of volatile financial markets. The Company believes it has adequate sources of liquidity.
An integral part of the Company's liquidity management is the funding of the banking subsidiary. The banking subsidiary derives its source of fundings predominately from deposits within its marketing area. The customer base for deposits is diversified between correspondent banks, individuals, partnerships and corporations, and public entities. This diversification helps the Company avoid dependence on large concentrations of funds. The Company does not, as a matter of policy, place certificates of deposit through brokers. The Company's percentage of time certificates of deposit over $100,000 to time deposits decreased to 19.8% in 1994 from 18.8% in 1993. These decreases were the result of customers moving funds into more liquid interest-bearing demand deposit accounts or other forms of investments.
The table below sets forth the maturity distribution of certificates of deposit of $100,000 or more issued by the Bank (in thousands):
LIQUIDITY MANAGEMENT - PARENT COMPANY
The liquidity of a bank holding company is dependent upon the ability of its subsidiaries to pay dividends, intercompany charges for actual services rendered by the holding company, and the holding company's access to capital markets through equity offerings, borrowings, and similar traditional funding sources. The ability of a holding company's subsidiaries to pay such amounts is dependent upon their future earnings.
The Parent Company, as of December 31, 1994, has $12.4 million in short-term and medium-term government securities which can be used to provide liquid resources as well as currently unanticipated capital needs of its subsidiaries.
Dividends from subsidiaries are dependent on future earnings. The amount of retained earnings available to the Parent Company from subsidiaries for payment of dividends without prior regulatory approval was approximately $68,706,000 at December 31, 1994. The Parent Company received $5.5 million in dividends in 1994 from subsidiaries. Cash dividends of $4.1 million and $2.9 million were paid by the Parent Company to holders of common stock during 1994 and 1993, respectively. The Company has paid dividends for eleven consecutive quarters. During the first quarter of 1994, the Company declared a dividend of $.13 per share representing a 30% increase.
INTEREST RATE SENSITIVITY
The objectives of monitoring and managing the interest rate risk position of the balance sheet are to contribute to earnings and to minimize the adverse changes in net interest income. The potential for earnings to be affected by changes in interest rates is inherent in a financial institution.
Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. An asset sensitive position in a given period will result in more assets being subject to repricing; therefore, market interest rate changes will be reflected more quickly in asset rates. If interest rates decline, such a position will normally have an adverse effect on net interest income. Conversely, in a liability sensitive position, where liabilities reprice more quickly than assets in a given period, a decline in rates will benefit net interest income.
One way to analyze interest rate risk is to evaluate the balance of the interest rate sensitivity position. A mix of assets and liabilities that are roughly equal in volume and repricing represents a matched interest rate sensitivity position. Any excess of assets or liabilities results in an interest rate sensitivity gap.
The following table presents the interest rate sensitivity position of the Company at December 31, 1994 (dollars in thousands).
The Company had a negative interest rate sensitivity gap position in the 30-day period of $16.9 million. The cumulative rate sensitive gap position at one year was a positive $43.4 million, which indicates that the Company may benefit from rising interest rates; conversely falling interest rates may have a negative impact upon the Company.
The Company undertakes this analysis to monitor the potential risk on future earnings resulting from the impact of possible future changes in interest rates on currently existing net asset or net liability positions. However, this type of analysis is as of a point-in-time position, when in fact that position can quickly change as market conditions, customer needs, and management strategies change. Additionally, interest rate changes do not affect all categories of assets and liabilities equally or at the same time.
The Company's Asset and Liability Committee reviews monthly the Company's consolidated rate sensitivity positions, and makes adjustments as needed to control the amount of interest rate risk the Company is willing to bear during changing economic cycles and to improve its overall profit potential.
LOAN PORTFOLIO
The Company's loans are widely diversified by borrower and industry group. The summary presented on page 29 presents information on the composition of the loan portfolio.
Maturities in the Company's loan portfolio at December 31, 1994, are summarized below (in thousands):
The maturities presented above are based upon contractual maturities. The Company has no set rollover policy. Many of these loans are made on a short-term basis with the possibility of renewal at time of maturity. All loans, however, are reviewed on a continuous basis for creditworthiness. The total amount of loans due after one year which have fixed, floating, or adjustable rates is as follows (in thousands):
NONPERFORMING ASSETS
The Company's nonperforming assets consist of nonaccrual loans and troubled debt restructurings, other real estate, other assets which have been repossessed or acquired through workout situations, and loans foreclosed in- substance.
Total nonperforming assets, which include nonperforming loans and other nonperforming assets, totaled $11.7 million or 2.0% of total loans and other nonperforming assets at December 31, 1994, as compared with $18.9 million or 3.3% of total loans and other nonperforming assets at December 31, 1993. Total nonperforming assets represented 0.6% and 1.0% of the total assets at December 31, 1994 and December 31, 1993, respectively. The total amount of loans past due 90 days or more and still accruing, totaled $427 thousand at December 31, 1994, compared to $472 thousand at December 31, 1993.
LOAN CONCENTRATIONS
Real estate loans totaling $263.7 million comprised approximately 43.8% of the loan portfolio at December 31, 1994, of which 3.1% was nonperforming. At December 31, 1993, real estate loans totaled $246.4 million comprising 43.4% of the loan portfolio, of which 4.4% was nonperforming. The majority of the Company's real estate loans are secured by property located in the nonmetropolitan areas in which the Company operates. The Company's real estate loan portfolio is comprised of interim construction, residential, commercial building, farm acreage, vacant lot, and land development loans. Permanent residential loans make up approximately 40% of the total real estate loans.
Consumer loans totaled $175.9 million at December 31, 1994 (approximately 29.2% of the loan portfolio), .5% of which were nonperforming. These consumer loans include approximately $84.5 million in loans originated through automobile dealers. At December 31, 1993, consumer loans totaled $167.1 million (approximately 29.4% of the loan portfolio), 0.6% of which were nonperforming. Student loans were $2.7 million and loans originated through automobile dealers were approximately $72.1 million of this category in 1993.
Agricultural loans, exclusive of loans secured by farm acreage which are categorized by the Company as real estate loans, totaled $38.1 million at December 31, 1994, or approximately 6.3% of the Company's loan portfolio, of which 0.5% were nonperforming. At December 31, 1993, agricultural loans totaled $35.5 million comprising approximately 6.3% of the Company's loan portfolio, of which 1.6% were nonperforming. Risks in this area revolve around price fluctuations and possible crop failures brought on by severe weather.
The Company's energy loans, included in the commercial and industrial loan category, were approximately $1.7 million at December 31, 1994, or .3% of the loan portfolio, of which 2.3% were nonperforming. At December 31, 1993, energy loans totaled $1.6 million comprising approximately 0.3% of the loan portfolio, of which all were performing. The majority of the Company's energy loan portfolio are loans to energy service companies as opposed to loans on oil and gas reserves.
INVESTMENT SECURITIES
Securities with unrealized gains at December 31, 1994, constituted 13.8% of the portfolio, unrealized losses constituted 86.1% of the portfolio with the remaining portfolio consisting of securities with no unrealized gains or losses. The unrealized holding losses, net of tax, of $1.5 million are recorded in stockholders' equity. At December 31, 1993, unrealized gains constituted 62.5% of the portfolio, unrealized losses constituted
21.1% of the portfolio, and the remaining portfolio consisted of securities with no unrealized gains or losses.
The average maturity of the portfolio was 1.73 years at December 31, 1994, compared to 1.78 years at December 31, 1993. These average maturities take into consideration both expected prepayments and cash flows. The relative short duration of the portfolio improves the liquidity of the Company and minimizes the interest rate risk associated with a longer maturity portfolio. All of the securities are investment grade or better with over 83% of the portfolio being U.S. Government or Government Agency obligations.
The following table shows as of December 31, 1995, the distribution and yields of the Company's investment securities. These values represent contractual maturities, but actual repayments and yields are dependent upon monthly cash flows and prepayments. The yields have been calculated using weighted average amortized cost and are not presented on a fully taxable equivalent basis (dollars in thousands).
ITEM 8

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PART IV
(a) 1. Financial Statements
REPORT OF MANAGEMENT
The Management of Victoria Bankshares, Inc. is responsible for the preparation, integrity, and objectivity of the consolidated financial statements of the Company. The financial statements and notes have been prepared by the Company in accordance with generally accepted accounting principles and, in the judgment of Management, present fairly and consistently the Company's financial position and results of operations. The financial information contained elsewhere in this annual report is consistent with that in the financial statements. The financial statements and other financial information in this annual report include amounts that are based on Management's best estimates and judgments and give due consideration to materiality.
The Company maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and that transactions are executed in accordance with Management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles.
The Internal Audit Division of the Company reviews, evaluates, monitors, and makes recommendations on both administrative and accounting controls, which acts as an integral, but independent, part of the system of internal controls.
The Company's independent accountants were engaged to perform an audit of the consolidated financial statements. This audit provides an objective outside review of Management's responsibility to report operating results and financial condition. Working with the Company's internal auditors, they review and make tests as appropriate of the data included in the financial statements.
The Board of Directors discharges its responsibility for the Company's financial statements through its Audit Committee, which is composed solely of outside directors. The Audit Committee meets periodically with the independent accountants, internal auditors, and Management. Both the independent accountants and internal auditors have direct access to the Audit Committee to discuss the scope and results of their work, the adequacy of internal accounting controls, and the quality of financial reporting.
Charles R. Hrdlicka Gregory Sprawka Chairman of the Board Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of Victoria Bankshares, Inc.
We have audited the accompanying consolidated balance sheets of Victoria Bankshares, Inc. (a Texas corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Victoria Bankshares, Inc., and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109.
Houston, Texas Arthur Andersen LLP January 22, 1996
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------ VICTORIA BANKSHARES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)(NOTE 1) - ------------------------------------------------------------------------------
________________________________________________________________________________
The Accompanying Notes to Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------------------------------------------------- VICTORIA BANKSHARES, INC. AND SUBSIDIARIES (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)(NOTE 1) - -------------------------------------------------------------------------------
________________________________________________________________________________
The Accompanying Notes to Financial Statements are an integral part of these statements.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------- VICTORIA BANKSHARES, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)(NOTE 1)
The Accompanying Notes to Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- VICTORIA BANKSHARES, INC. AND SUBSIDIARIES (IN THOUSANDS)(NOTE 1) - -------------------------------------------------------------------------------
The Accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS VICTORIA BANKSHARES, INC. AND SUBSIDIARIES
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Victoria Bankshares, Inc. and its subsidiaries (the Company) conform to generally accepted accounting principles; the more significant of these policies are described below.
Principles of Consolidation--
The consolidated financial statements include the accounts of Victoria Bankshares, Inc., its subsidiary bank, and nonbanking subsidiaries consolidated in accordance with generally accepted accounting principles. All major items of income and expense are recorded on the accrual basis of accounting and all significant intercompany accounts and transactions have been eliminated.
In 1995, the Company recorded an acquisition accounted for as a pooling-of-interests. See Note 15. Acquisitions. All information in prior period consolidated financial statements has been restated to include this event.
Nature of Operations--
The Company operates 42 branch offices in 33 communities and 22 counties in south central Texas. The Company derives its sources of funds predominantly from deposits within its market area. The Company offers a full range of banking services including checking and savings accounts, business loans, personal loans, residential mortgage loans, other consumer oriented financial services, safe deposit, and night depository facilities.
Investment Securities--
On December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Under the Statement, securities are classified in one of three categories:
-- Held to Maturity
These securities are stated at cost adjusted for amortization of premium and accretion of discount on a level yield basis. Temporary changes in the market value of these investment securities are not recognized since it is Management's intention and the Company has the ability to hold these securities to maturity.
-- Available for Sale
These securities are stated at market value. Unrealized gains and losses created by changes in the market values of these securities are recognized as an adjustment to stockholders' equity, net of tax. The specific historical cost method is used in determining realized gains and losses from the sale of securities.
-- Trading Accounts
Trading account assets are carried at market value. Realized and unrealized gains and losses on trading account assets are recognized currently in other operating income.
Provision for Loan Losses--
A provision for loan losses is included in expense based upon Management's evaluation of the loan portfolio under existing economic conditions. The provision for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
Premises and Equipment--
Banking premises and equipment are stated at cost, less accumulated depreciation, computed on a straight-line basis over the estimated useful lives of the related assets, ranging from one to forty years. Upon the sale or retirement of banking premises and equipment, the cost and accumulated depreciation applicable thereto are removed from the accounts and the resulting profit or loss is reflected in income. Repairs, maintenance, and minor improvements are charged to operations as incurred.
Goodwill and Acquired Intangible Assets--
Assets and liabilities related to business combinations accounted for as purchase transactions are recorded at their respective fair values. Acquired intangible assets include core deposit and trust relationships. The excess of purchase price over such fair values (goodwill and acquired intangible assets) totaling $39,332,000 less accumulated amortization of $7,196,000 at December 31, 1995, and $30,927,000 less accumulated amortization of $4,809,000 at December 31, 1994, is included in other assets. The core deposit intangibles acquired from Cattlemen's Financial Services, Inc. ("Cattlemen's") is being amortized using the sum-of-the-years' digit method over eight years. Goodwill and other acquired intangible assets are being amortized using the straight-line method over periods which range from 15 to 20 years. The amortization expense of goodwill and identifiable intangibles was $2.4 million for 1995, $1.7 million for 1994, and $1.2 million for
1993. As of the end of each accounting period, the Company employs both quantitative and qualitative factors including current profitability, current economic conditions, and projected profitability in assessing the recoverability of goodwill.
Income Taxes--
The Company files a consolidated federal income tax return using the accrual basis of accounting. On January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes." As a result of this adoption, the Company recorded a deferred tax asset of $4.8 million in January 1993. Deferred taxes are provided for temporary differences in income and expense items that are recognized differently for tax purposes than for financial reporting purposes.
Nonperforming Loans--
On January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), as amended by Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" ("SFAS 118"). Together, these standards require that when a loan is impaired, a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, the fair value of the collateral if the loan is collateral dependent or the loan's observable market price. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of this accounting standard did not have a material effect on the Company's financial position or results of operations since the Company's previous recognition and measurement policies regarding nonperforming loans were materially consistent with the accounting requirements for impaired loans.
Other Real Estate--
Real estate acquired in settlement of loans is carried at the lower of fair value minus estimated costs to sell or cost. This determination is made on an individual asset basis. A valuation allowance is used to record deficiencies between cost and fair values minus estimated selling costs. Increases or decreases in the valuation allowance are charged to expense. As mentioned above, the Company adopted SFAS 114 as amended by SFAS 118 effective January 1, 1995. As a result, loans classified as "in-substance foreclosure" were reclassified to nonperforming loans at that time.
Statements of Cash Flows--
For purposes of the statements of cash flows, the Company defines cash and due from banks and interest-bearing deposits with banks as cash and cash equivalents. Investment securities classified as held to maturity sold within 90 days of the stated maturity have been treated as in-substance maturities. Also treated as in-substance maturities are the investment securities in which the Company has collected at least 85% of the principal outstanding at acquisition due either to prepayments on debt security or to scheduled payments on a debt security payable in installments over its term.
Reclassifications--
Certain reclassifications have been made to previously reported amounts to make them consistent with current reporting.
Use of Estimates--
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NOTE 2 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial information for Victoria Bankshares, Inc. (Parent Company only) was as follows:
CONDENSED BALANCE SHEETS (IN THOUSANDS) - -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS) - -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NOTE 3. RELATED PARTY TRANSACTIONS
Approximately 39% of the Company's outstanding stock was owned and controlled by officers, directors, and principal stockholders of the Company at December 31, 1995.
It has been, and is, the policy of the bank subsidiary to extend credit to executive officers, directors, principal stockholders and their affiliated entities to meet their business and personal requirements on terms and conditions comparable to other loans of like quality and risk. The aggregate amounts of such loans, including indirect amounts guaranteed by such persons and entities, totaled $6,293,000 and $2,008,000 at December 31, 1995 and 1994, respectively.
In 1984, Victoria Bank & Trust Company, the principal subsidiary of the Company, leased a twelve-story office building under a net lease, with a lease term of 25 years, from a general
partnership. The partners consist of individuals and three trusts related to principal stockholders of the Company. Presently, principal stockholders serve as trustees for the trusts. The lease rates are $2.5 million per annum through 1999 and $3.0 million per annum from 2000 through 2009. A portion of the building is subleased to the principal stockholders of the Company.
NOTE 4. INVESTMENT SECURITIES
Securities with an approximate par value of $220,116,000 and $162,125,000 at December 31, 1995 and 1994, respectively, were pledged to secure public and trust deposits and for other purposes as required or permitted by law.
The amortized cost and market values of the investment securities held to maturity and available for sale, by type, together with unrealized gains and losses, were as follows (in thousands): - ------------------------------------------------------------------------------
During 1995, the Company had proceeds from sales of investment securities available for sale of $113.4 million. There was $107.0 million in investment securities transferred from the held to maturity category to the available for sale category on December 27, 1995, as allowed by the Financial Accounting Standards Board. Also transferred from the held to maturity category to the available for sale category was approximately $10.4 million of securities acquired in 1995 subsidiary acquisitions. The securities were then subsequently sold because they did not fall within the Company's investment policy guidelines. There were no
significant gains or losses recognized on the sale of these securities. The Company recorded gross realized gains of $57 thousand resulting from the disposition of two equity investments by the Company's Small Business Administration ("SBA") licensed subsidiary and the loss on the sales of available for sale U.S. Treasury Notes that were sold in order to improve total return. During 1994, the Company had proceeds from sales of investment securities of $48.9 million, which included gross realized losses of $796 thousand which resulted from the sale of two equity securities held by the SBA licensed subsidiary.
The following table shows, as of December 31, 1995, the distribution of the Company's investment securities (in thousands):
The information provided above is based on contractual maturity. Expected maturities will differ from actual maturities because issuers may have the right to call or prepay obligations without penalty. There was no investment concentration of a single issuer, except the United States Government and its Agencies, that exceeded 10% of equity as of December 31, 1995 and 1994.
NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES AND ALLOWANCE FOR FORECLOSED ASSETS
On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS 118. These standards require that when a loan is impaired, a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, on a loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Company considers consumer loans with balances less than $50,000 to be smaller-balance homogeneous loans which are exempt from SFAS 114. The Company has measured the impairment related to all of its impaired loans using the fair value of the loan's collateral. The Company classifies loans as impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans which are 90 days or over past due are considered impaired loans unless they are well secured and are in the process of collection. Amounts received on impaired loans are applied, for financial accounting purposes, first to principal and then to interest after all principal has been collected. When collection of an impaired loan is considered remote, the loan is charged-off against the
allowance for loan losses. The Company had previously measured the allowance for loan losses using methods similar to the prescribed method in SFAS No. 114. As a result, no additional provision was required by the adoption of this pronouncement.
At December 31, 1995, the recorded investment in loans that are considered impaired was $6.8 million. Included in this amount were $1.9 million of impaired loans for which the related allowance for loan losses was $0.9 million. Impaired loans of $4.9 million were carried at the lower of cost or fair value and as a result do not have a related allowance for loan losses. The average recorded investment in impaired loans during the twelve months ended December 31, 1995, was approximately $8.4 million.
At December 31, 1995 and 1994, the Company had $569 thousand and $617 thousand, respectively, of loans that resulted from troubled debt restructurings.
An analysis of the loans outstanding follows (in thousands):
The Company's loan portfolio concentrations are described in this paragraph. At December 31, 1995, the Company's loans secured primarily by real estate consisted of (i) loans for commercial and residential construction and land development (none of which are located in major Texas metropolitan areas) which constituted 2.8% of the total loan portfolio and (ii) other real estate loans (including loans for 1-4 family, multi-family, and nonfarm/nonresidential properties) which constituted 41.1% of the total loan portfolio. The remaining loan portfolio categories and the percentage of each to the total loan portfolio at December 31, 1995, consisted of the following: loans to oil and gas producers and related service businesses, 0.2%; agricultural loans (other than loans secured by agricultural real property), 5.7%; other commercial and industrial loans, 20.4%; consumer loans, 29.6%; and all other loans (including loans to financial institutions), 0.5%.
An analysis of the allowance for loan losses follows (in thousands):
An analysis of the allowance for foreclosed assets follows (in thousands):
Foreclosed assets are comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. In accordance with SFAS 114 as amended, loan balances and income/expense related to loans previously classified as in-substance foreclosure, but for which the Company had not taken possession of the collateral, have been reclassified to loans for all periods presented. As of the periods presented, there were no in-substance foreclosures for which the Company had taken possession of the collateral included in foreclosed assets.
The balance and the effect on interest income of impaired loans for 1995, nonaccrual loans for 1994 and 1993, and restructured loans for all years are shown below. Due to the performing status in accordance with the restated terms of the troubled debt restructurings as of the adoption of SFAS 114, they are not considered impaired and, therefore, are presented separately.
NOTE 6. PREMISES AND EQUIPMENT Premises and equipment consisted of the following (in thousands):
NOTE 7. LEASE COMMITMENTS
In the normal course of business, the Company and its subsidiaries have entered into operating leases for real property and equipment. Management expects that, in the normal course of business, leases that expire will be renewed or replaced by other leases. The aggregate future minimum lease payments by year, under noncancelable operating leases with initial or remaining terms of one year or more, at December 31, 1995, are as follows (in thousands):
Total net rental expense on operating leases for the years ended December 31, 1995, 1994, and 1993 was $2,369,000, $2,149,000 and $2,000,000, respectively. See Note 3.
NOTE 8. TIME DEPOSITS
Time certificates of deposit of $100,000 and over aggregated $126,064,000 and $99,987,000 at December 31, 1995 and 1994, respectively. Interest expense on this type of deposit amounted to $2,447,000, $3,535,000, and $3,729,000 for the years ended December 31, 1995, 1994, and 1993, respectively.
NOTE 9. FEDERAL FUNDS PURCHASED AND SHORT-TERM BORROWINGS
Information with respect to federal funds purchased and short-term borrowings is as follows (in thousands):
NOTE 10. COMMON STOCK AND RETAINED EARNINGS
Per share information was computed using the weighted average number of shares of common stock outstanding. The weighted average number of shares was 8,274,085 for the year ended December 31, 1995, 8,244,358 for the year ended December 31, 1994, and 7,730,155 for the year ended December 31, 1993.
Primary earnings per share were computed using the weighted average number of shares of common stock outstanding. For the stock options (see Note 13), the amount of dilution to be included in earnings per share data is computed using the treasury stock method. The stock options did not have a material dilutive effect on the calculation of earnings per share and were, therefore, not included.
Preferred stock dividends of $22,000, $44,000, and $43,000 for 1995, 1994, and 1993, respectively, were deducted from net income in computing primary earnings per share.
The amount of undistributed retained earnings of the Company's subsidiaries was approximately $81,372,000 at December 31, 1995. Dividends paid by the Company's subsidiary bank are subject to restrictions by certain regulatory agencies. The amount of retained earnings available to the Parent Company from subsidiaries for payment of dividends without prior regulatory approval was approximately $72,396,000 at December 31, 1995.
During 1994, the Company's articles of incorporation were amended to increase the authorized number of shares of capital stock to 36,000,000, consisting of 1,000,000 shares of Preferred Stock and 35,000,000 shares of Common Stock, and to change the par value from $10 per share to $1 per share.
NOTE 11. FEDERAL INCOME TAX
The provision for Federal income tax was as follows (in thousands):
The significant temporary differences between tax and financial reporting include allowances for loan losses, provisions/write-downs of foreclosed property, accelerated depreciation and the core deposit intangible gross-up.
The amounts were different from the amounts computed by applying the U. S. Federal income tax statutory rate for the reasons noted below (in thousands):
The components of and changes in the net deferred tax asset (liability) were as follows (in thousands):
NOTE 12. COMMITMENTS AND CONTINGENCIES
In the normal course of the subsidiaries' business, there are various outstanding commitments and contingent liabilities, such as
commitments to extend credit, which are not reflected in the accompanying financial statements. These instruments involve elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets, but are limited to their notional amounts. At December 31, 1995, the Company had outstanding standby letters of credit of $4,247,000 and commitments to extend credit were $171,917,000, of which $67,750,000 included commitments to correspondent banks for federal fund lines. The credit risks involved in these instruments are similar to those involved in extending loan facilities to customers. The Company uses the same credit policies in making commitments and conditional obligations as it does for normal balance sheet instruments. The Company also has a contingent liability with respect to the remaining balance of $5.9 million in student loans that the Company sold with recourse in 1993. The Company has provided for possible credit risk in these transactions in its allowance for loan losses and does not anticipate losses in excess of such allowance as a result of these transactions.
The Company is involved in various legal actions that are in various stages of litigation and investigation by the Company and its legal counsel. Some of these actions allege various "lender liability" claims on a variety of theories and claim substantial actual and punitive damages. After reviewing all actions pending or threatened involving the Company, Management believes that, while the resolution of any matter may have an impact on the financial results of the period in which the matter is settled, the ultimate resolution of these matters will not have a material adverse effect upon the business or consolidated financial position of the Company. However, many of these matters are in various stages of proceedings and further developments could cause Management to revise their assessment of these matters.
NOTE 13. EMPLOYEE BENEFITS
The Company participates in a pension plan covering substantially all employees with one or more years of service. The benefits are based on years of service and the employee's compensation during the last five years of employment. The Company's funding policy is to contribute annually an amount to maintain the current minimum funding standard or higher. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. In 1992, the Company amended its pension plan to provide a fixed supplemental pension benefit payment to current retirees and future retirees in lieu of providing company-paid retiree health coverage. The formula provides a payment in addition to normal pension payments based on years of service and not on level of compensation. Benefits paid will have no relationship to the current or future costs of health insurance. Total pension cost was approximately $839,000, $623,000, and $808,000, respectively, for the years ended December 31, 1995, 1994, and 1993.
The following table sets forth the plan's funded status and amounts recognized in the Company's financial statements at December 31, 1995 and 1994 (in thousands):
Net periodic pension cost for the years ended December 31, 1995, 1994, and 1993, included the following components (in thousands):
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% at December 31, 1995 and 7.50% at December 31, 1994 and 6.75% at December 31, 1993. The rate of increase in future compensation levels was 5.0% at December 31, 1995, December 31, 1994 and December 31, 1993. The expected long-term rate of return on assets was 8.5% at December 31, 1995 and 1994 and 8.0% at December 31, 1993.
In 1990, the Company and its subsidiaries established a nonqualified supplemental executive retirement plan for certain executive officers to restore pension benefits to a pre-1986 Tax Reform Act level. The cost related to the plan was approximately $200,000 for 1995, $140,000 for 1994, and $49,000 for 1993.
The Company and its subsidiaries have a contributory, trusteed 401(k) plan and a noncontributory profit-sharing plan covering substantially all employees with one or more years of service. The
rate of employer contribution is 25% of the employee contribution up to 5% of eligible salaries, with additional incentive contributions based on earnings of the Company. Contributions to these plans by the Company during the three years ended December 31, 1995, 1994 and 1993 were $1,766,000, $1,868,000, and $2,050,000, respectively.
In addition to providing retirement benefits, the Company and its subsidiaries provide access to health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible to purchase health care benefits if they reach normal retirement age while working for the Company; life insurance coverage ceases at the age of 65. Those and similar benefits for active employees are provided through a self-insured fund which has reinsured individual and aggregate stop-loss amounts. Annual premium amounts are based on the claims experience of the plan and costs of reinsurance. The premiums for the three years ended December 31, 1995, 1994 and 1993, were $2,647,000, $1,740,000, and $2,095,000, respectively.
The Company maintains a 1991 Stock Option Plan, pursuant to which a total of 300,000 shares of the Company's common stock has been reserved for issuance. The option price is 100% of the fair market value of the Company's common stock on the date of grant. The Plan is administered by a Stock Option Committee comprised of nonparticipating outside directors of the Company. The following table shows the history of the plan:
NOTE 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH, SHORT-TERM INVESTMENTS, AND SHORT-TERM BORROWINGS
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES HELD TO MATURITY, INVESTMENT SECURITIES AVAILABLE FOR SALE, AND TRADING ACCOUNT ASSETS
For all types of securities, fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits and interest-bearing transactional accounts is the carrying amount payable at the reporting date. The fair value of fixed-maturity time deposits is estimated using the rates currently offered for deposits of similar remaining maturities.
LONG-TERM DEBT
The long-term debt of the Company is at a fixed rate. The fair value is estimated by the current redemption value of this debt.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN
The fair value of commitments is estimated using fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. Included in the commitment to extend credit are $67.8 million and $76.0 million at December 31, 1995 and December 31, 1994, respectively, of variable rate federal fund lines for which no fees are assessed as all are secured by U. S. Treasury securities. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The estimated fair values of the Company's financial instruments are as follows (in thousands):
NOTE 15. ACQUISITIONS
On June 30, 1995, United Bancshares, Inc. ("United"), parent company of Rosenberg Bank & Trust ("Rosenberg"), merged with and into the Company. The merger was consummated through the exchange of 306,383 shares of the Company's common stock for all of the outstanding shares of common stock of United. This transaction increased consolidated assets by approximately $65 million and increased consolidated deposits by approximately $61 million. The acquisition was accounted for as a pooling-of-interests. The Company's prior period consolidated financial statements have been restated to include the accounts of United. All intercompany accounts have been eliminated.
On August 25, 1995, the Company acquired Cattlemen's Financial Services, Inc. ("Cattlemen's"). The transaction was accounted for as a purchase. The Company acquired approximately $100 million in assets and assumed $93 million in liabilities, paying a premium of $6.7 million over the book value of the net assets. The principal subsidiary of Cattlemen's Financial Services, Inc., was Cattlemen's State Bank.
NOTE 16. PENDING MERGER
A special meeting of the shareholders of the Company will be held on April 2, 1996, to consider and vote upon a proposal to approve the Agreement and Plan of Merger dated November 12, 1995, between the Company and Norwest. The Plan of Merger has been
approved by the boards of both companies and is pending regulatory approval. Norwest will issue 1.05 shares of Norwest common stock in exchange for each share of the Company's common stock. The exchange will be accounted for by Norwest as a pooling-of-interests.
NOTE 17. SUMMARY OF QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Consolidated operating results for the Company for each quarter of 1995 and 1994 are summarized as follows (in thousands except per share amounts):
- ------------------------------------------------------------------------------- QUOTATIONS AND CASH DIVIDENDS ON CAPITAL STOCK (Not covered by Report of Independent Public Accountants)
The common stock, symbol VICT, of Victoria Bankshares, Inc. is traded in the over-the-counter market and is quoted in the National Market System (NMS) of NASDAQ, the nationwide network of the National Association of Securities Dealers Automated Quotations System. As of December 31, 1995, there were 2,983 holders of record of common stock.
The following table shows the range of high and low prices per share of common stock of the Company in the over-the-counter market, as reported by NASDAQ.
ITEM 9

ITEM 9 CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10

ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names of the directors, their present offices with the Company, the principal occupation or employment of each, the year each director first became a director of the Company or of the Bank, if earlier, and the number and percentage of shares of Common Stock of the Company beneficially owned by each director at March 15, 1996, are set forth below. Beneficial ownership of Common Stock is direct and the named director has sole voting and investment power with respect to the shares reflected as owned by him unless otherwise specified.
_______________ * Less than 1%.
(1) Messrs. Dennis O'Connor, Tom O'Connor, Jr., Braman, Hewitt and Gilster have various interests in a number of closely held partnerships, joint ventures and corporations engaged in either cattle-raising or oil and gas operations in which the O'Connor-Braman family interests are involved.
(2) Includes 106,949 shares owned by one trust for the benefit of Mr. Braman's child, of which Mr. Braman is trustee and with respect to which he exercises sole voting and investment power. Mr. Braman disclaims beneficial ownership of all such shares.
(3) Includes (i) 144 shares held by Mr. Hewitt as custodian for Mr. James N. Stofer's child, as to which Mr. Hewitt exercises sole voting and investment power, and (ii) 1,456 shares owned by Mr. Hewitt's wife. Mr. Hewitt disclaims beneficial ownership of all such shares.
(4) Includes 290 shares owned by Mr. Dentler's wife, as to which he disclaims beneficial ownership.
(5) Includes 230,327 shares owned by two trusts for the benefit of Mr. Gilster's two sisters, of which Mr. Gilster is co-trustee and with respect to which he exercises shared voting and investment power. Mr. Gilster disclaims beneficial ownership of these shares.
Each of the above-named directors has been engaged in the principal occupation or employment indicated above for more than the past five years. All directors have served continuously for more than five years, except for Mr. Gilster, who was elected a director during 1994, and Mr. Smith, who was elected in 1995.
Dennis O'Connor and Tom O'Connor, Jr. are brothers, Mr. Braman is their nephew, Mr. Hewitt is the son of Dennis O'Connor, and Mr. Gilster is the grandson of Tom O'Connor, Jr.
The Board of Directors of the Company held four regular meetings and eight special meetings during the last fiscal year. During the last fiscal year each of the incumbent directors of the Company, except for Dennis O'Connor and Tom O'Connor, Jr., attended at least seventy-five percent of the total number of Board meetings and the total number of meetings held by the committees of the Board on which he served.
The Company has an Audit Committee of the Board of Directors of which Messrs. Morrison (Chairman), Briggs and Hewitt are the members. The functions of the Audit Committee include reviewing the scope and results of the annual audit, annual FDICIA requirements, and making inquiries as to the adequacy of the Company's accounting, financial and operating controls. The Audit Committee met one time during the past fiscal year.
The Company has a Compensation Committee of the Board of Directors of which Messrs. Hewitt (Chairman), Briggs and Morrison are members. The Committee has the responsibility for reviewing overall compensation of the Company, including employee benefits and stock options. The Committee met three times during 1995.
The Company has a Nominating Committee of the Board of Directors of which Messrs. Hewitt (Chairman), Briggs and Morrison are members. The Committee met one time during 1995. The Committee is responsible for (i) considering and recommending to the shareholders directors for election as director, (ii) considering and recommending to the Board of Directors persons to fill director vacancies and newly created directorships, (iii) recruiting potential director candidates, (iv) recommending changes to the whole Board of Directors concerning the responsibilities and composition of the Board of Directors and its committees, and (v) reviewing shareholders' suggestions of directors that are submitted in accordance with the Bylaws of the Company.
EXECUTIVE OFFICERS OF THE COMPANY
The names, ages, and positions of the executive officers of the Company and its subsidiaries are set forth below.
Each executive officer has served for more than five years as an executive officer of the Company or the Bank except for Mr. Freeman. Mr. Freeman served as Senior Vice President and Regional Manager with Bank United in Houston prior to his election as Executive Vice President - General Banking Group in 1995.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based solely on a review of Forms 3 and 4 and amendments thereto furnished to the Company during its most recent fiscal year and Form 5 and amendments thereto furnished to the Company with respect to its most recent fiscal year, and written representations from reporting persons that no Form 5 was required, the Company believes that all reporting was done on a timely basis, except for a Form 4 for T. Michael O'Connor, a director of the Bank, which was filed eight days late.
ITEM 11

ITEM 11 EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
OVERVIEW AND COMPENSATION PHILOSOPHY
The Compensation Committee of the Board of Directors of the Company (the "Committee") is composed of R. J. Hewitt (who serves as the Chairman of the Committee), R. W. Briggs, Jr. and Jack R. Morrison. All three of these members are outside directors, and each has served on the Committee since its formation in 1988.
This Committee Report is intended to describe in general terms the process the Committee undertakes and the matters it considers in determining the appropriate compensation for the Company's executive officers, including the executive officers that are named in the enclosed Summary Compensation Table (the "Named Executives"). This Report also describes these processes and considerations in more detail with respect to the 1995 compensation of Charles R. Hrdlicka, the Chairman of the Board, President, and Chief Executive Officer of the Company.
The Company believes that compensation of its executive officers should reflect and support the Company's strategic goals, the primary goal being the creation of long-term value for the Company's shareholders, consistent with protecting the interests of Victoria's depositors. The Committee believes that these goals are best supported by:
* Rewarding individuals for outstanding contributions to the Company's success.
* Compensating its executive officers competitively with the compensation of similarly situated executive officers, in order to attract and retain well-qualified executive officers.
* More closely aligning the interest of the executive officers with those of the Company's shareholders, consistent with protecting the interests of Victoria's depositors.
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(1) Notwithstanding filings by the Company with the Securities and Exchange Commission ("SEC") that have incorporated or may incorporate by reference other SEC filings in their entirety, this Compensation Committee Report on Executive Compensation shall not be incorporated by reference into such filings and shall not be deemed to be "filed" with the SEC except as specifically provided otherwise or to the extent required by Item 402 of Regulation S-K.
COMPONENTS OF EXECUTIVE OFFICER COMPENSATION
The Committee regularly reviews the various components of the Company's executive compensation to ensure that they are consistent with the Company's objectives, as described above. The principal elements of the compensation program for executive officers are explained below:
BASE SALARY -- The Committee, in determining the appropriate base salaries of its executive officers, generally considers the recent performance of the Company and its long and short term outlook (taking into account general business and industry conditions, among other things), and the roles of the individual executive officers with respect to such performance and outlook. Aspects of the Company's performance that the Committee considers particularly important in setting compensation include earnings, earnings per share, expense control, regulatory compliance, operating efficiency, improved net interest margins, stock price and market share. The Committee also considers the particular executive officer's specific responsibilities, and the performance of such officer and the Company in those areas of responsibility. Also significant in the Committee's deliberations is the level of compensation paid by similarly situated financial institutions.
During the third quarter of 1994, the Committee, in conjunction with the full Board of Directors, increased the base salaries of Messrs. Jones, Smith, and Sprawka. These increases were in recognition of additional responsibilities assumed by these officers as a result of a Company management reorganization related to the retirement and resignations of three executive officers during 1994.
In setting 1995 executive officer compensation, the Committee requested that the Chairman of the Board of the Company make recommendations to the Committee regarding the advisability and proposed amount of adjustments to the base salaries for the Company's executive officers (other than the Chairman of the Board), including the Named Executives.
At the Committee meeting of December 20, 1994, the Committee considered the following in recommending base salary increases for the Company's executive officers, including the Named Executives:
o The Chairman of the Board's recommendations for base salary increases.
o The Company's solid performance during 1994 with respect to virtually all of the above-mentioned criteria. The Committee recognized the effect of 1993's nonrecurring items (i.e. the change in the method of accounting for income taxes and the one-time restructuring charge) and the Company's positioning for the future.
o A study completed during 1993 by a task force of senior officers, which established job grades and compensation ranges for all positions Company-wide. A national consulting firm, Hewitt Associates (not associated with Mr. R. J. Hewitt), was engaged to assist the task force with sources of external information and lend objectivity to the process.
o Market salary survey data from the Financial Institution Compensation Survey by Watt Company for 1994.
BONUSES -- Bonuses are based in large part on the same considerations as are applicable to base salary -- i.e., the desire to remain competitive with compensation paid by similarly situated companies, and the desire to recognize and reward, and thereby encourage, good performance by the Company and its executive officers. At its November 30, 1995 meeting, the Committee reviewed the Chairman of the Board's recommendation for 1995 bonuses and the performance of the Company during 1995. Noting the continued solid performance of the Company related to many of the above-mentioned criteria, specifically regulatory compliance, net margins, and improved net interest margins and stock price, the Committee granted bonuses to the executive officers to reflect their contribution to the success of the Company during 1995.
STOCK OPTION PROGRAM -- The Committee believes that the best way to more closely align the interests of the Company's executive officers with those of its shareholders is to encourage the ownership of stock in the Company by its executive officers. This objective is accomplished in part through the Company's 1991 Stock Option Plan which was approved by the Company's shareholders at the 1992 annual meeting. Pursuant to the 1991 Stock Option Plan, executive officers are eligible to receive stock options from time to time, giving them the right to purchase shares of Common Stock of the Company at a specified price in the future. The Committee determined that in light of the number of stock options granted to the Named Executives in 1993, it recommended the grant of stock options only to newly Named Executive John H. Freeman in 1995.
OTHER ITEMS -- The Committee also is charged with determining the annual profit threshold that the Company is required to meet before the Company will contribute profit-sharing amounts to the Company's 401(k) Profit Sharing Plan. This Plan is open to participation by all employees of the Company who have been employed by the Company for at least one year, and not just to executive officers. In addition, the Committee has certain responsibilities with respect to the Company's Supplemental Executive Retirement Plan, which is designed to provide to the Company's executive officers benefits that, but for the operation of certain restrictions imposed by ERISA, they would have been entitled to receive pursuant to the Company's qualified defined benefit pension plan (as described herein). At the November 30, 1995 meeting, the Committee determined to limit covered
compensation under this Plan to the executive officers' 1996 base salary, effective January 1, 1996.
DISCUSSION OF 1995 COMPENSATION FOR THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
In determining the appropriate base salary for Mr. Hrdlicka, the Chairman, President and Chief Executive Officer of the Company, the Committee generally undertook the same process and considered the same factors as are described above with respect to executive officers generally.
At the February 1995 meeting a raise of $25,000 was recommended for 1995 by the Committee. Mr. Hrdlicka has led the Company effectively during a difficult period in the Texas banking industry and through the Company's restructuring. Consequently, the Committee determined it was important to compensate Mr. Hrdlicka in a manner commensurate with his performance in order to encourage his continued service to the Company.
The Committee awarded Mr. Hrdlicka a bonus of $35,000 at the November 1995 meeting. This bonus recognized the Company's performance during 1995 as described earlier, specifically regulatory compliance and the additional responsibilities Mr. Hrdlicka has performed since he was named President on June 24, 1994.
Mr. Hrdlicka's Total Cash Compensation (Base Salary and Bonus) in 1995 was between the 50th and 75th percentile of Total Compensation of chief executive officers of financial institutions of similar size to the Company. The Committee believes Mr. Hrdlicka's compensation package is reasonable and competitive by industry standards.
MEMBERS OF THE COMPENSATION COMMITTEE R. J. Hewitt, Chairman R. W. Briggs, Jr. Jack R. Morrison
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hewitt, Briggs and Morrison are the only persons who have served on the Compensation Committee of the Board of Directors at any time during the 1995 fiscal year. No member of the Compensation Committee was, during the 1995 fiscal year, an officer or employee of the Company or any of its subsidiaries, or was formerly an officer of the Company or any of its subsidiaries or had any relationships with the Company requiring disclosure by the Company under Item 404 of Regulation S-K, except that Mr. Morrison was formerly employed by the Bank as the head of the Trust Division. He retired from the Bank on June 1, 1984, and is currently receiving pension benefits from the Company.
During the Company's 1995 fiscal year, no executive officer of the Company served as (i) a member of the Compensation Committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served on the Company's Compensation Committee, (ii) a director of another entity, one of whose executive officers served on the Company's Compensation Committee, or (iii) a member of the Compensation Committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity, one of whose executive officers served as a director of the Company.
COMPENSATION OF EXECUTIVE OFFICERS
A summary of the compensation of the Named Executives is provided as follows:
SUMMARY COMPENSATION TABLE
(1) These amounts represent the cost of group life insurance coverage in excess of $50,000 and club dues. In addition, these amounts include the non-business portion of car allowance paid in 1995 which was $5,197, $7,077, $5,527, $8,181, $7,485 and $6,981 for Messrs. Hrdlicka, Jones, Freeman, Duke, Sprawka and Smith, respectively. Also, these amounts include $16,228 and $360 paid to Mr. Hrdlicka and Mr. Jones, respectively, pursuant to the decision by the Company to pay highly compensated executive officers in cash their portion of the Company's 40l(k) Profit Sharing contributions which could not be deferred because of restrictions imposed by the Employee Retirement Income Security Act ("ERISA"). Also $11,400 was paid to Mr. Freeman for relocation expenses.
(2) Includes the Company's contribution to the 401(k) profit-sharing defined contribution plan (described below) for profits and 25% match to participants' contribution.
The following table shows options granted to Named Executives for fiscal year 1995 and the potential value at their expiration date (10 years), assuming annual increases of 5% and 10%, respectively.
OPTIONS GRANTED IN LAST FISCAL YEAR
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
(1) Options were issued June 18, 1991 and vested on June 18, 1994. The exercise price of each of the options is $10.75. (2) Options were issued November 24, 1993 and vest on November 24, 1996. The exercise price of each of the options is $26.75. (3) See "Options Granted in Last Fiscal Year."
401(k) PROFIT SHARING DEFINED CONTRIBUTION PLAN
For many years the Company maintained a profit sharing plan in which substantially all of the employees of the Company and its subsidiaries were eligible to participate upon completion of one year of employment. The Company adopted a Section 401(k) defined contribution plan effective January 1, 1987, for the benefit of employees of the Company and its subsidiaries who elect to participate. Effective January 1, 1990, the profit sharing and 401(k) plans were merged into a single plan and will be referred to as the "401(k) profit sharing plan" or the "plan".
The plan provides for the making of contributions by the Company from its current and accumulated earnings in such amount as is determined by the Company. Such Company contributions are allocated to participating employees on the basis of covered compensation. Generally, covered compensation is all compensation paid to an employee for services rendered, including overtime and 401(k) salary reductions but excluding bonuses and commissions. During 1994, the plan was amended to include all compensation, including bonuses and commissions, for non-highly-compensated employees as defined by the Internal Revenue Service up to the current dollar threshold established by the Internal Revenue Service. The 1995 limit was $66,000.
Employees may elect to (i) reduce their covered compensation by an amount equal to from one percent to fifteen percent thereof, and (ii) have the Company contribute such amount to the plan as salary deferral contributions on behalf of the employee. The Company provides supplemental contributions to the plan on behalf of the participant equal to a maximum of 25% of the first 5% of the salary deferral contributions made on his behalf, such percentage to be determined annually by the Board.
A participant's right to salary deferral contributions made on his behalf is fully vested at all times. Employee contributions which were made to the profit sharing plan in prior years became vested immediately upon contribution. Employer contributions vest in annual increments of 20%, beginning upon the completion of three years of active service, or if earlier, upon death, retirement, attainment of age 65 or disability. Generally, amounts may not be withdrawn from the plan by a participant until death, total disability, termination of employment or retirement. The plan was amended in 1995 to provide for vesting of all participants upon change of control.
PENSION PLAN
For many years, the Company and its participating subsidiaries have maintained a qualified defined benefit pension plan in which all regular employees participate. The full expense of the pension plan is borne by the Company and its subsidiaries. The aggregate contribution which the Company and its subsidiaries elected to
contribute to the pension plan for 1994 was 5.0% of the covered compensation of plan participants. Covered compensation is the compensation of plan participants for the prior fiscal year, including base salary, overtime, and salary reductions contributed to the 401(k) plan, but excluding bonuses and commissions. During 1994, the plan was amended to include all compensation, including bonuses and commissions for non-highly-compensated employees as defined by the Internal Revenue Service up to the current dollar threshold established by the Internal Revenue Service. The 1995 limit was $66,000.
Benefits payable under the qualified pension plan become vested upon the completion of five years of accredited service or upon reaching age 62, whichever first occurs. The amount of benefit payable is based upon a participant's age, years of accredited service and compensation. Effective January 1, 1989, the plan's benefit formula was amended to comply with the Tax Reform Act of 1986 (the "1986 Act"). Upon termination or retirement, a participant will be entitled to the greater of the benefit computed based upon (i) a formula based on accredited service and final average compensation and (ii) a formula based on accredited service, final average compensation as of December 31, 1988, and career average compensation on and after January 1, 1989.
The Company established a nonqualified deferred compensation plan for highly compensated executives. Pursuant to such plan, pension benefit shortfalls under the qualified pension plan resulting from the Internal Revenue Code Section 415 limitation on maximum annual benefits, the Section 401(a)(17) limitation on annual compensation and the Section 401(1) provisions on permitted integration are generally restored to pre-1986 Act levels. Benefit eligibility conditions and payment forms are identical to those contained in the qualified pension plan. The plan was amended effective January 1, 1994 to provide for a pension benefit equal to 2% of the latest annual salary up to a maximum of 20 years of service. This is reduced by the benefits received from the qualified pension plan. Additionally, upon change in control the plan terminates all participants will be vested in their accrued plan benefits, and the plan will be liquidated. The amount set aside for the plan for the year 1995 was $200,000 for all participants in the plan (22 persons including the executive officers of the Company). Also, voluntary deferral of salary and bonuses by the participants in the plan will be allowed. The plan was amended during 1995 to terminate the deferral of salary and bonus portions of the plan.
The following table sets forth, on a straight life annuity basis, estimated annual retirement benefits payable in aggregate under the qualified and nonqualified pension plans to persons in specified compensation and years-of-service categories. Computation of the estimated annual pension benefit is based on the Social Security law in effect at January 1, 1994, and assumes the employee retires at age 65 (the normal retirement age under the
plan) in 2005. As Social Security benefits increase, the amounts shown in the table will decrease.
As of December 31, 1995, the following executive officers had the following years of accredited service under the pension plans: Mr. Hrdlicka--9; Mr. Duke--8; Mr. Jones--5; Mr. Freeman--0; Mr. Smith--8; and Mr. Sprawka--8.
EXECUTIVE RETENTION/SEVERANCE AGREEMENTS
On September 5, 1995, the Company entered into executive retention/severance agreements with its six executive officers including Messrs. Charles R. Hrdlicka, Chairman and Chief Executive Officer; David Jones, Executive Vice President - Trust and Investments; John H. Freeman III, Executive Vice President - General Banking; Malcolm Duke, executive Vice President - Operations and Administration; Dugan Smith, Executive Vice President - Credit Administration; and Gregory Sprawka, Executive Vice President and Chief Financial Officer - Finance and Treasury. The executive retention/severance agreements are intended to reward the officers for continued service to the Company, including continued cooperation and effort to accommodate and facilitate a change in corporate control of the Company. In consideration for this continued cooperation and effort to accommodate a change of control, the agreements provide for the payment of a cash bonus in an amount equal to one-half the officer's base compensation and severance benefits in the event of an involuntary termination of employment other than by reason of death, disability, or for cause as such terms are defined in the executive retention/severance agreements, or termination of employment by the officer for good cause as such term is defined in the executive retention/severance agreements. Upon any such termination of employment, in addition to compensation benefits already earned, the officer will be entitled to receive two times the officer's annual base pay as of the Effective Time. No such payments, however, can exceed the amount deductible for income tax purposes under the Code.
Upon a change of control, the bonuses due Messrs. Hrdlicka, Jones, Duke, Freeman, Smith, and Sprawka will be $187,500, $81,375, $77,500, $78,500, $68,600, and $68,500, respectively. If pursuant to the provisions described above, severance payments are required to be made to Messrs. Hrdlicka, Jones, Duke, Freeman, Smith, and Sprawka, the amounts of such payments will be $750,000, $325,000, $310,000, $314,000, $274,000, and $274,000, respectively.
OTHER EMPLOYEE BENEFITS
The Company provides a group health insurance plan, a flexible benefit plan (Section 125 Plan) along with the normal vacation and sick pay benefits.
TOTAL INVESTMENT RETURNS TO SHAREHOLDERS
The chart shown below depicts the total return to shareholders during the period beginning December 31, 1989, and ending December 31, 1995, and compares these returns against two indices. The definition of total return includes appreciation in market value of the stock as well as the actual cash dividends paid to shareholders. The comparative indices utilized are the Standard & Poor's Composite -- 500 Stock Index, which is a broad nationally recognized index of stock performance, and the NASDAQ Bank Stock Index, which includes all companies listed on NASDAQ having the industry classification of banks. The chart assumes that the value of the investment in the Company's Common Stock and in each of the two indices was $100 on December 31, 1990, and that all dividends were reinvested.
ITEM 12

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 22, 1996, the number of shares and percentage of Company stock beneficially owned by each of the directors of the Company are set forth on page 76. As of March 22, 1996, the number of shares and percentage of Company stock beneficially owned by each of the Named Executives and the directors and executive officers of the Company as a group are listed below.
_______________ * Less than 1%.
PRINCIPAL HOLDERS OF SECURITIES
As of March 15, 1996, the following persons were known by the Company to own beneficially more than five percent of the Company's outstanding Common Stock, the only class of voting securities outstanding:
_______________ (1) See "Directors" for further information.
ITEM 13

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Some of the Company's officers and directors and members of their families are, as they have been in the past, customers of the Bank, and some of the Company's officers and directors, and
members of their families, are directors, officers, or principals in entities which are, as they have been in the past, customers of the Bank. As such customers, they have had transactions in the ordinary course of business with the Bank, including borrowings, all of which were on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Bank.
The Bank leases office space from Plaza Associates, a Texas general partnership, the owner of the twelve-story One O'Connor Plaza office building and the land on which it is located in Victoria, Texas. The principal general partners of Plaza Associates are two children of D. H. Braman, Jr., five grandchildren of Tom O'Connor, Jr. and three trusts for the benefit of two grandchildren of Tom O'Connor, Jr. and one child of D. H. Braman, Jr. D. H. Braman, Jr. and Ralph R. Gilster, III serve as trustees for certain of these trusts. See "Directors and Executive Officers of Registrant" and "Principal Holders of Securities" for information regarding the relationships of Messrs. Braman and Gilster to the Company. The Bank's lease on One O'Connor Plaza covers the entire office building. The lease commenced in 1985, is a long-term triple net lease with a primary term of 25 years and six renewal terms of five years each, exercisable at the option of the Bank, with annual rentals of $2,540,208 during the first 15 years and $2,989,580 during the next ten years and rentals for renewal terms at fair market value. The Bank has an option at the end of the primary term and each renewal term to purchase the property at its fair market value.
Approximately 21% of the space in One O'Connor Plaza is subleased by the Bank to a partnership, of which Dennis O'Connor, Tom O'Connor, Jr. and D. H. Braman, Jr. are partners, under a sublease with a three-year term commencing in August 1, 1985 with an option for 17 additional months, and annual rentals of $770,742, subject to adjustment based upon the actual costs of operating the building.
Approximately 3% of the space in 120 Main Place, Victoria, Texas, owned by the Bank, is leased to The Fordyce Company, of which R. W. Briggs, Jr. is Chairman, at an annual rental of $58,762, which expires in 1997.
The firm of Anderson, Smith, Null, Stofer & Murphree ("ASNS&M"), of which Munson Smith is a partner, received $236,372 for legal services rendered to the Company and its subsidiaries during the year ended December 31, 1995. ASNS&M also subleases approximately 6% of One O'Connor Plaza from the Bank. The sublease, effective February 1, 1995 and expiring January 31, 1997 with three one-year options to renew, calls for annual lease payments of $151,739, subject to adjustments based on actual cost.
ITEM 14

ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a)1. Financial Statements are provided on pages 49 through 74 herein.
2. Financial Statement Schedules
All financial statement schedules have been omitted because the information is either not applicable or presented in the related financial statements.
3. Exhibits
2.1 - Agreement and Plan of Merger between the Company, Norwest Corporation and Norwest Sub Corporation dated November 12, 1995 (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 [File No. 0-8037]).
3.1 - Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037]).
**3.2 - Amended and Restated Bylaws of the Company adopted April 18, 1995.
10.1 - Dividend Reinvestment and Stock Purchase Plan of the Company (incorporated by reference to the Prospectus included in the Registration Statement of the Company on Form S-3 filed with the Commission on September 5, 1985 [File No. 33-00091]).
**10.2 - Lease Agreement, dated July 18, 1995, between Victoria Bank & Trust Company and the Estate of Thos. O'Connor.
10.3 - Purchase and Sale Agreement, dated as of December 21, 1984, between Victoria Bank & Trust Company and Plaza Associates (incorporated by reference to Exhibit 10(d) to the Registration Statement of the Company on Form S-15 filed with the Commission on January 25, 1985 [File No. 2-95482]).
10.4 - Lease Agreement, effective November 1, 1992, between Victoria Bank & Trust Company and The Fordyce Company (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 [File No. 0-8037]).
**10.5 - Lease Agreement, dated February 1, 1995, between Victoria Bank & Trust Company and Anderson, Smith, Null, Stofer & Murphee, LLP.
**10.6 - Amended and Restated Nonqualified Deferred Compensation Plan of the Company, effective December 19, 1995.*
10.7 - Trust agreement by and between Victoria Bankshares, Inc., and Victoria Bank & Trust Company effective January 1, 1994 (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037]).
10.8 - Stock Option Plan of the Company (incorporated by reference to Exhibit 20 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 [File No. 0-8037]).*
**10.9 - Form of Executive Retention/Severance Agreement entered into on September 5, 1995, with Messrs. Hrdlicka, Jones, Freeman, Duke, Sprawka, and Smith.*
**21 - List of Subsidiaries of the Company as of March 22, 1996.
**23.1 - Consent of Independent Public Accountants - Arthur Andersen LLP.
**27 - Financial Data Schedule
____________________ *Management contract or compensatory plan or arrangement. **Filed herewith.
(b) Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VICTORIA BANKSHARES, INC.
By: /s/ Gregory Sprawka ------------------------------- Gregory Sprawka Executive Vice President and Chief Financial Officer and Secretary-Treasurer
DATE: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
INDEX TO EXHIBITS
2.1 - Agreement and Plan of Merger between the Company, Norwest Corporation and Norwest Sub Corporation dated November 12, 1995 (incorporated by reference to Exhibit 2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 [File No. 0-8037]).
3.1 - Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037]).
**3.2 - Amended and Restated Bylaws of the Company adopted April 18, 1995.
10.1 - Dividend Reinvestment and Stock Purchase Plan of the Company (incorporated by reference to the Prospectus included in the Registration Statement of the Company on Form S-3 filed with the Commission on September 5, 1985 [File No. 33-00091]).
**10.2 - Lease Agreement, dated July 18, 1995, between Victoria Bank & Trust Company and the Estate of Thos. O'Connor.
10.3 - Purchase and Sale Agreement, dated as of December 21, 1984, between Victoria Bank & Trust Company and Plaza Associates (incorporated by reference to Exhibit 10(d) to the Registration Statement of the Company on Form S-15 filed with the Commission on January 25, 1985 [File No. 2-95482]).
10.4 - Lease Agreement, effective November 1, 1992, between Victoria Bank & Trust Company and The Fordyce Company (incorporated by reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 [File No. 0-8037]).
**10.5 - Lease Agreement, dated February 1, 1995, between Victoria Bank & Trust Company and Anderson, Smith, Null, Stofer, and Murphee, LLP.
**10.6 - Amended and Restated Nonqualified Deferred Compensation plan of the Company effective December 19, 1995.*
10.7 - Trust agreement by and between Victoria Bankshares, Inc., and Victoria Bank & Trust Company, effective January 1, 1994 (incorporated by reference to Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037]).
10.8 - Stock Option Plan of the Company (incorporated by reference to Exhibit 20 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 [File No. 0-8037]).*
**10.9 - Form of Executive Retention/Severance Agreement entered into on September 5, 1995, with Messrs. Hrdlicka, Jones, Freeman, Duke, Sprawka, and Smith.*
**21 - List of Subsidiaries of the Company as of March 22, 1996.
**23.1 - Consent of Independent Public Accountants - Arthur Andersen LLP.
**27 - Financial Data Schedule
____________________ *Management contract or compensatory plan or arrangement. **Filed herewith.