<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ____________________
For Quarter Ended March 31, 1995 Commission File Number 0-8037
VICTORIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
TEXAS 74-1756447
(State or other jurisdiction of (I.R.S.Employer Identification Number)
incorporation or organization)
One O'Connor Plaza, Victoria, Texas 77902
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (512)573-9432
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of April 1, 1995
7,962,512 shares of common stock, $1.00 par value, issued and outstanding
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VICTORIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
----------- ----------
ASSETS (Unaudited)
<S> <C> <C>
Cash and Due From Banks $ 107,859 $ 115,786
Interest-Bearing Deposits with Banks 102 180
Investment Securities Held to Maturity 712,824 750,595
Investment Securities Available for Sale 97,655 107,227
----------- ----------
Total Investment Securities (Market Value of
$800,266 in March, 1995 and $839,377 in
December, 1994) 810,479 857,822
Trading Accounts 88 166
Federal Funds Sold and Other Short-Term Investments 120,290 114,212
Loans:
Total Loans, Net of Unearned Discount 579,063 574,190
Allowance for Loan Losses (9,869) (9,882)
----------- ----------
Net Loans 569,194 564,308
Premises and Equipment, Net 42,529 41,620
Other Real Estate and Other Loan Related Assets, Net 957 1,007
Other Assets 51,371 51,047
----------- ----------
TOTAL ASSETS $1,702,869 $1,746,148
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 333,943 $ 362,553
Interest-Bearing Transactional Accounts 582,432 611,870
Time 536,081 489,064
----------- ----------
Total Deposits 1,452,456 1,463,487
Federal Funds Purchased and Short-Term Borrowings 55,872 96,198
Long-term Debt 1,678 1,720
Other Liabilities 14,815 9,678
----------- ----------
Total Liabilities 1,524,821 1,571,083
----------- ----------
Stockholders' Equity:
Preferred Stock - $1 Par Value; 1,000,000 Shares Authorized; None
Outstanding 0 0
Common Stock - $1 Par Value; Authorized 35,000,000 Shares; Issued and
Outstanding 7,962,512 at March 31, 1995 and December 31, 1994 7,963 7,963
Surplus 107,987 107,987
Unrealized Holding Losses, Net of Tax (424) (1,531)
Retained Earnings 62,522 60,646
----------- ----------
Total Stockholders' Equity 178,048 175,065
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,702,869 $1,746,148
=========== ===========
</TABLE>
2
<PAGE> 3
VICTORIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except For Per Share Amounts) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $13,416 $11,531
Interest on Securities Held to Maturity 10,030 10,347
Interest on Securities Available for Sale 1,372 868
Interest on Trading Accounts 4 21
Interest on Federal Funds Sold and Other Short-Term Investments 1,682 1,341
-------- --------
TOTAL INTEREST INCOME 26,504 24,108
-------- --------
INTEREST EXPENSE
Interest-Bearing Transactional Accounts 3,941 3,473
Time Deposits 5,771 4,095
Federal Funds Purchased and Short-Term Borrowings 1,131 905
Long-Term Debt 27 0
-------- --------
TOTAL INTEREST EXPENSE 10,870 8,473
-------- --------
NET INTEREST INCOME 15,634 15,635
Provision for Loan Losses 0 0
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 15,634 15,635
-------- --------
NONINTEREST INCOME
Service Charges and Other Fees 3,683 3,555
Trust Services Income 1,686 1,201
Data Processing Income 714 801
Securities Gains (Losses) 131 (37)
Other Operating Income 781 1,072
-------- --------
TOTAL NONINTEREST INCOME 6,995 6,592
-------- --------
NONINTEREST EXPENSE
Salaries, Wages and Employee Benefits 8,805 8,053
Net Occupancy Expense 1,766 1,373
Equipment Rental, Depreciation and Maintenance 1,088 1,130
FDIC Insurance 802 804
Other Operating Expense 4,425 4,377
-------- --------
TOTAL NONINTEREST EXPENSE 16,886 15,737
-------- --------
INCOME BEFORE INCOME TAXES 5,743 6,490
Federal Income Tax Provision 1,877 2,298
-------- --------
NET INCOME $ 3,866 $ 4,192
======== ========
PRIMARY EARNINGS PER SHARE $ 0.49 $ 0.53
======== ========
</TABLE>
3
<PAGE> 4
VICTORIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1995 1994
--------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 3,866 $ 4,192
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 2,295 2,500
Realized Security (Gains) Losses (131) 37
Decrease (Increase) in Trading Account Securities 78 (1,665)
Origination of Available for Sale Loans (1,308) (317)
Proceeds from Sale of Available for Sale Loans 3,172 8,601
Increase (Decrease) in Accrued Receivables (954) 493
Decrease in Accrued Payables 4,540 1,320
--------- ----------
Net Cash Provided by Operating Activities 11,558 15,161
INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities
Held to Maturity 64,210 85,738
Proceeds from Maturities of Investment Securities
Available for Sale 845 0
Proceeds from Sales of Investment Securities
Available for Sale 14,686 19,946
Purchase of Investment Securities Held to Maturity (30,507) (31,887)
Purchase of Investment Securities Available for Sale (1,122) (25,823)
Net Increase in Federal Funds Sold (6,078) (60,738)
Net Decrease in Other Short-Term Investments 85 377
Net Increase in Loans Held for Investment (6,492) (22,734)
Proceeds from Sales of Premises and Equipment 434 630
Purchases of Premises and Equipment (2,234) (1,185)
---------- ----------
Net Cash Provided (Used) by Investing Activities 33,827 (35,676)
FINANCING ACTIVITIES
Net Decrease in Transactional Accounts (58,048) (10,104)
Net Increase (Decrease) in Time Deposits 47,017 (6,756)
Net Increase (Decrease) in Federal Funds Purchased (30,075) 275
Net Decrease in Other Short-Term Borrowings (10,252) (1,941)
Payment of Long-term Debt (41) 0
Cash Dividends (1,991) (1,029)
---------- ---------
Net Cash Used by Financing Activities (53,390) (19,555)
Decrease in Cash and Cash Equivalents (8,005) (40,070)
Cash and Cash Equivalents at Beginning of Period:
Cash and Due From Banks 115,786 145,367
Interest-Bearing Deposits with Banks 180 147
---------- ----------
Total 115,966 145,514
Cash and Cash Equivalents at End of Period:
Cash and Due From Banks 107,859 105,036
Interest-Bearing Deposits with Banks 102 408
---------- ----------
Total $ 107,961 $ 105,444
========== ==========
Supplementary Information to Statements of Cash
Flows:
Interest Expense Payments $ 10,332 $ 8,630
Federal Income Tax Payments $ 0 $ 0
</TABLE>
4
<PAGE> 5
VICTORIA BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations,
although the Company believes that the disclosures are adequate to
make a fair presentation of the results of the interim periods. It is
suggested that these financial statements be read in conjunction with
the financial statements and the notes thereto in the Company's latest
Annual Report on Form 10-K. 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.
(2) Principles of Consolidation
The consolidated financial statements for the Company include the
accounts of Victoria Bankshares, Inc., its subsidiary bank, and its
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 the
opinion of Management, the financial statements present fairly the
results of the periods presented. These statements have not been
examined by independent public accountants and are subject to year-
end audit and adjustment. Certain reclassifications have been made to
prior period amounts to conform with current period presentations.
5
<PAGE> 6
(3) Allowance for Loan Losses
An analysis of the allowance for loan losses for the three months
ended March 31, 1995 and 1994, follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Balance at beginning of period $ 9,882 $ 9,738
Provision charged to operating expense 0 0
Loans charged off (234) (161)
Recoveries 221 173
-------- --------
Balance at end of period $ 9,869 $ 9,750
======== ========
</TABLE>
On January 1, 1995, the Company adopted SFAS 114 as amended by SFAS
118. The Company has measured the impairment related to substantially
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. The Company had previously measured the allowance
for credit 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 March 31, 1995, the recorded investment in loans that are
considered impaired was $8.3 million. Included in this amount were
$3.0 million of impaired loans for which the related allowance for
loan losses was $1.3 million. Impaired loans of $5.3 million were
carried at fair value and as a result do not have a related allowance
for loan losses. The average recorded investment in impaired loans
during the three months ended March 31, 1995, was approximately $8.4
million.
The balance and the effect on interest income of impaired and
restructured loans by category for the three months ended March 31,
1995, are as follows. Due to the performing status of the troubled
debt restructurings as of the adoption of SFAS 114 they are not
considered impaired and, therefore, are presented separately in the
following table (in thousands):
<TABLE>
<CAPTION>
March 31, 1995
------------------------------------
Impaired Restructured
-------- ------------
<S> <C> <C>
Principal amount at March 31, 1995 $ 8,260 $ 607
======== ========
Gross amount of interest that would
have been recorded at original rate 197 15
Amount of payments reflected in income 161 10
-------- --------
Net impact on interest income $ 36 $ 5
======== ========
</TABLE>
6
<PAGE> 7
At March 31, 1995 and 1994, the Company had $607 thousand and $617
thousand, respectively, of loans that resulted from troubled debt
restructurings.
(4) Allowance for Foreclosed Assets
An analysis of the allowance for foreclosed assets for the three
months ended March 31, 1995 and 1994 follows (in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------------
1995 1994
--------- ---------
<S> <C> <C>
Balance at Beginning of Period $ 119 $ 159
Provision Charged to Operating Expense 0 0
Losses Charged to the Allowance (1) (3)
--------- ---------
Balance at the End of Period $ 118 $ 156
========= =========
</TABLE>
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.
(5) Investment Securities
Investment 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 cost adjusted for
market value fluctuations and the amortization of premium and
accretion of discount on a level yield basis. 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 accounts are
recognized currently in other operating income.
During the first three months of 1995, the Company had proceeds from
sales of investment securities available for sale of $14.7 million,
which includes net realized gains of $131 thousand. There were no
transfers between the held to maturity and the available for sale
category during the first three months of 1995 or 1994. The following
table shows as of March 31 1995, the distribution of the Company's
investment securities (in thousands):
7
<PAGE> 8
<TABLE>
<CAPTION>
Due Due
Due After One After Five Due
Within But Within But Within After
One Year Five Years Ten Years Ten Years Total
-------- ---------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Amortized Cost:
Securities Held to Maturity $194,432 $361,184 $44,770 $112,438 $712,824
Securities Available for Sale 61,114 33,998 1,610 1,583 98,305
-------- -------- ------- -------- --------
Total 255,546 395,182 46,380 114,021 811,129
Market Value 253,699 387,968 45,740 112,859 800,266
</TABLE>
(6) Common Stock and Retained Earnings
Primary earnings per share were computed using the weighted average
number of shares of common stock outstanding. The weighted average
number of shares was 7,962,512 for the three months ended March 31,
1995 and 7,915,621 for the three months ended March 31, 1994.
The Company maintains a Stock Option Plan, which was originated in
1991, pursuant to which a total of 300,000 shares of the Company's
common stock has been reserved for issuance. To date, options to
acquire 279,839 shares of common stock have been granted and 232,948
remain outstanding. The stock options did not have a material
dilutive effect on the calculation of earnings per share and were,
therefore, not included in such calculations.
(7) Federal Income Taxes
At March 31, 1995, the Company's provision for federal income taxes
was $1.9 million compared to $2.3 million at March 31, 1994. The
Company's net deferred tax asset balance at March 31, 1995, was $1.3
million. This net deferred tax asset is composed of the expected tax
benefit from the reversal of temporary differences between tax and
book net income. The existing net temporary differences will reverse
during future periods. The Company has not recorded a valuation
allowance against the deferred tax asset because it expects to fully
utilize these future benefits.
The provision for federal income tax was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1995 1994
------- ------
<S> <C> <C>
Current Expense $ 1,663 $2,075
Deferred Expense 214 223
------- ------
Total Tax Provision $ 1,877 $2,298
======= ======
</TABLE>
Taxes provided on consolidated income for the three months ended March
31, 1995 and 1994, were different than the amount computed by applying
the U. S. federal income tax statutory rate for the reasons noted
below (dollars in thousands):
8
<PAGE> 9
<TABLE>
<CAPTION>
March 31,
---------------------------------------------------------
1995 1994
------------------------- -----------------------
Percent of Percent of
Pretax Pretax
Amount Income Amount Income
------- ---------- ------- ---------
<S> <C> <C> <C> <C>
Tax Provision Computed
at the Statutory Rate $ 2,010 35% $ 2,272 35%
Increase (Decrease) in
Provision Resulting From:
Tax Exempt Interest (173) (3%) (38) (1%)
Other 40 1% 64 1%
-------- -------- -------- --------
Total Tax Provision $ 1,877 33% $ 2,298 35%
======== ======== ======== ========
</TABLE>
The components of and changes in the net deferred tax asset were as
follows (in thousands):
<TABLE>
<CAPTION>
Deferred
January 1, (Expense) March 31,
1995 Benefit 1995
----------- --------- -----------
<S> <C> <C> <C>
Net Tax Depreciation In Excess
of Book $(1,881) $ (26) $(1,907)
Discount Accretion (10) 0 (10)
Other Real Estate Provisions
In Excess of Realized Losses 508 0 508
Net Charge-Offs in Excess of
Provision for Loan Losses 3,072 (4) 3,068
Other Temporary Differences, Net (191) (184) (375)
-------- ------- --------
Total Deferred Tax Asset 1,498 (214) 1,284
Valuation Allowance 0 0 0
-------- ------- --------
Deferred Tax Asset, Net $ 1,498 $ (214) $ 1,284
======== ======= ========
</TABLE>
(8) Statements of Cash Flows
For purposes of the statements of cash flows, the Company defines cash
and due from banks as cash and cash equivalents. Investment
securities 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 the debt security or to
scheduled payments on a debt security payable in installments over its
term.
(9) 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 March 31, 1995, the Company had outstanding standby
letters of credit of approximately $3,375,000 and commitments to
extend credit of approximately $154,788,000, which included
$83,600,000 of commitments to correspondent banks for federal fund
lines. The credit risks involved in these instruments are essentially
the same as those involved in extending loan facilities to
9
<PAGE> 10
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 $7.2 million in student loans that
the Company sold with recourse in 1993. The Company has provided for
possible credit risk in each of the above transactions in its
allowance for loan losses and does not anticipate losses in excess of
such reserve as a result of these transactions.
The Company is involved in various legal proceedings that are in
various stages of litigation by the Company and its legal counsel.
Some of these actions allege "lender liability" claims on a variety of
theories and claim substantial actual and punitive damages. The
Company has determined, based on discussions with its counsel, that
any material loss in such action, individually or in the aggregate, is
remote or the damages sought, even if fully recovered, would not be
considered material. However, many of these matters are in various
stages of proceedings and further developments could cause Management
to revise its assessment of these matters.
(10) Acquisitions
On January 12, 1995, the Company entered into a definitive merger
agreement with United Bancshares, Inc., parent company of Rosenberg
Bank & Trust in Rosenberg, Texas. Rosenberg Bank & Trust had $68.3
million in total assets at December 31, 1994, and three branches in
Fort Bend County, Texas. The merger is expected to be a
stock-for-stock exchange transaction, subject to the customary
conditions to closing, with the closing date to be scheduled upon
approval by the shareholders of United Bancshares, Inc., and state and
federal banking regulators. The Company expects to account for this
merger as a pooling of interests.
On April 27, 1995, the Company entered into an agreement with
Cattlemen's Financial Services, Inc., that is expected to result in
the combination of their principal subsidiaries, Victoria Bank & Trust
and Cattlemen's State Bank. The transaction is conditional upon final
approvals by the shareholders of Cattlemen's Financial Services, Inc.,
and state and federal banking regulators. Cattlemen's State Bank has
approximately $110 million in total assets and two branches. This
acquisition is expected to be a cash transaction accounted for as a
purchase.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The following discussion highlights the major changes affecting the operations
and financial condition of Victoria Bankshares, Inc., and its subsidiaries (the
"Company") for the three months ended March 31, 1995.
OVERVIEW OF OPERATIONS
The Company reported net income of $3.9 million or $0.49 per share for the
first quarter of 1995 compared to net income of $4.2 million or $0.53 per share
reported for the same period in 1994. The decline in net income is primarily
attributable to steadily rising interest rates. The continuous tightening of
monetary policy by the Federal Reserve is impacting net interest income by
negatively affecting funding costs, deposit mix, and volumes of alternative
funding. The market-driven interest rate spread between yields on new loans
and rates on new deposits has narrowed substantially causing additional
pressure on net interest income. Expenses related to acquisitions and health
insurance costs have partially offset the Company's progress towards improved
efficiency.
On January 12, 1995, the Company entered into a definitive merger agreement
with United Bancshares, Inc., parent company of Rosenberg Bank & Trust in
Rosenberg, Texas. At the end of 1994 Rosenberg Bank & Trust had $68.3 million
in total assets and three branches in Fort Bend County, Texas. The merger is
expected to be a stock-for-stock exchange transaction, subject to the customary
conditions to closing with the closing date to be scheduled upon approval by
the shareholders of United Bancshares, Inc., and state and federal banking
regulators, which is expected to occur in the second quarter of 1995.
On April 27, 1995, the Company entered into an agreement with Cattlemen's
Financial Services, Inc., that is expected to result in the combination of
their principal subsidiaries, Victoria Bank & Trust and Cattlemen's State Bank.
The transaction is conditional upon final approvals by the shareholders of
Cattlemen's Financial Services, Inc., and state and federal banking regulators.
Cattlemen's State Bank has approximately $110 million in total assets and two
branches. This acquisition is expected to be a cash transaction accounted for
as a purchase.
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. Net
interest income was flat between years being $15.6 million for both the first
three months of 1995 and 1994. The positive effect of improved asset quality
and loan growth was offset by decreased volume of funding sources.
The interest income on certain loans and investment securities is not subject
to Federal income tax. So that interest and rates on these types of assets can
be meaningfully compared to those that are taxable, an adjustment for taxable
equivalency, net of the estimated effect of interest expense disallowed, is
added to interest income. The taxable-equivalent adjustment was calculated
using the statutory Federal income tax rate of 35 percent. Taxable-equivalent
interest income for the three months ended March 31, 1995, March 31, 1994, and
December 31, 1994, is as follows (in thousands):
11
<PAGE> 12
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, March 31, December 31,
1995 1994 1994
------------- ------------ ------------
<S> <C> <C> <C>
Interest Income-Book Basis $ 26,504 $24,108 $ 26,395
Add Taxable-Equivalent
Interest Income 201 47 202
-------- ------- --------
Interest Income-Taxable
Equivalent Basis 26,705 24,155 26,597
Interest Expense 10,870 8,473 10,382
-------- ------- --------
Net Interest Income-Taxable
Equivalent Basis $ 15,835 $15,682 $ 16,215
======== ======= ========
</TABLE>
Net interest income on a tax equivalent basis for the three months ended March
31, 1995, was $15.8 million, an increase of $153 thousand or 0.9% from the net
interest income of $15.7 million for the three months of 1994. 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 for all funding sources is lower than the rate paid on
interest-bearing liabilities alone. For the three months ended March 31, 1995,
the net interest spread was 3.41% and the net interest margin was 4.24%
compared to 3.41% and 4.05%, respectively. The average interest rate received
on earning assets and the average rate paid on interest-bearing liabilities
both increased 90 basis points when compared to the first three months of 1994.
When comparing the three months ended March 31, 1995, to the three months ended
December 31, 1994, net interest income decreased $380 thousand even though both
the net interest spread and net interest margin increased. The 2.0% decrease
in the volume of earning assets was the primary cause of the decrease in
interest income.
The following tables show the calculation of the interest rate margin and
interest rate spread (dollars in thousands):
12
<PAGE> 13
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
--------------------------------------- ------------------------------------
Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate
- ------ ---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans, Net of Unearned Discount(1) $ 574,727 $ 13,429 9.48% $ 535,903 $ 11,543 8.74%
Investment Securities
Held to Maturity:
Government, Agency & Other (2) 693,043 9,626 5.59% 779,776 10,274 5.17%
State, County & Municipal (1) 33,125 560 6.85% 3,597 108 12.14%
Investment Securities
Available for Sale (1)(3) 105,366 1,404 5.40% 88,990 868 3.96%
Trading Accounts 268 4 6.05% 1,652 21 5.21%
Federal Funds Sold and
Short-Term Investments 109,622 1,682 6.22% 159,142 1,341 3.42%
----------- --------- ----------- ---------
Total Interest-Earning Assets 1,516,151 26,705 7.14% 1,569,060 24,155 6.24%
Noninterest-Earning Assets:
Cash and Due From Banks 117,541 127,843
Other Assets 95,637 84,595
Allowance for Loan Losses (9,921) (9,764)
----------- -----------
Total Assets $1,719,408 $1,771,734
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-Bearing Liabilities:
Interest-Bearing Transactional
Accounts $ 599,604 $ 3,941 2.67% $ 619,236 $ 3,473 2.27%
Time Deposits 498,444 5,771 4.70% 475,254 4,095 3.49%
Federal Funds Purchased and
Short-Term Borrowings 81,407 1,131 5.63% 120,861 905 3.04%
Long-Term Debt 1,814 27 6.41% 0 0 0.00%
----------- -------- ----------- ---------
Total Interest-Bearing
Liabilities 1,181,269 10,870 3.73% 1,215,351 8,473 2.83%
Noninterest-Bearing Liabilities:
Demand Deposits 350,832 383,507
Other Liabilities (3) 9,115 8,117
----------- -----------
Total Liabilities 1,541,216 1,606,975
Stockholders' Equity (3) 178,192 164,759
----------- -----------
Total Liabilities and
Stockholders' Equity $1,719,408 $1,771,734
=========== ===========
Net Interest Income $ 15,835 $ 15,682
======== =========
Net Interest Spread 3.41% 3.41%
====== ======
Interest Rate Margin 4.24% 4.05%
====== ======
</TABLE>
(1) 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%.
(2) Includes interest-bearing deposits with other banks.
(3) The average balance has been adjusted to exclude the effect of Statement
of Financial Accounting Standards No. 115.
13
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1995 December 31, 1994
-------------------------------------- ------------------------------------
Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate
- ------ ---------- -------- ------- ---------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans, Net of Unearned Discount(1) $ 574,727 $ 13,429 9.48% $ 570,951 $ 13,290 9.23%
Investment Securities
Held to Maturity
Government, Agency & Other (2) 693,043 9,626 5.59% 719,759 9,736 5.39%
State, County & Municipal (1) 33,125 560 6.85% 32,192 577 7.11%
Investment Securities Available
for Sale (1)(3) 105,366 1,404 5.40% 103,718 1,339 5.12%
Trading Accounts 268 4 6.05% 362 5 5.48%
Federal Funds Sold and
Short-Term Investments 109,622 1,682 6.22% 120,368 1,650 5.44%
----------- --------- ------ ----------- ---------
Total Interest-Earning Assets 1,516,151 26,705 7.14% 1,547,350 26,597 6.82%
Noninterest-Earning Assets:
Cash and Due From Banks 117,541 115,719
Other Assets 95,637 92,029
Allowance for Loan Losses (9,921) (9,880)
----------- -----------
Total Assets $1,719,408 $1,745,218
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-Bearing Liabilities:
Interest-Bearing Transactional
Accounts $ 599,604 $ 3,941 2.67% $ 611,067 $ 3,975 2.58%
Time Deposits 498,444 5,771 4.70% 485,534 5,191 4.24%
Federal Funds Purchased and
Short-Term Borrowings 81,407 1,131 5.63% 95,765 1,188 4.92%
Long-Term Debt 1,814 27 6.41% 1,734 28 6.41%
----------- -------- ----------- --------
Total Interest-Bearing
Liabilities 1,181,269 10,870 3.73% 1,194,100 10,382 3.45%
Noninterest-Bearing Liabilities:
Demand Deposits 350,832 365,220
Other Liabilities (3) 9,115 10,877
----------- -----------
Total Liabilities 1,541,216 1,570,197
Stockholders' Equity (3) 178,192 175,021
----------- -----------
Total Liabilities and
Stockholders' Equity $1,719,408 $1,745,218
=========== ===========
Net Interest Income $ 15,835 $ 16,215
======== ========
Net Interest Spread 3.41% 3.37%
====== ======
Interest Rate Margin 4.24% 4.16%
====== ======
</TABLE>
(1) 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%.
(2) Includes interest-bearing deposits with other banks.
(3) The average balance has been adjusted to exclude the effect of Statement
of Financial Accounting Standards No. 115.
14
<PAGE> 15
The amount of net interest income is the result of the relationship between the
volume of interest-earning assets and the rates earned, and the volume 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 from each other to analyze the impact of these
components on the period changes in net interest income. Rate/volume variances
have been allocated to each category of interest-earning assets and
interest-bearing liabilities based on the percentage impact of rate and volume
on the total change of both components. Because of changes in the total mix of
the categories of interest-earning assets and interest-bearing liabilities, the
computations for each of the components does not equal the calculation for
interest-earning assets as a total and interest-bearing liabilities as a total.
The following tables analyze the changes attributable to the rate and volume
components of net interest income (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995/MARCH 31, 1994 Total
(IN THOUSANDS) Net
Increase (Decrease) Due To Change In Increase
Average Volume Average Rate (Decrease)
---------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 869 $ 1,017 $ 1,886
Investment Securities
Held to Maturity (689) 493 (196)
Investment Securities
Available for Sale 156 380 536
Trading Accounts (22) 5 (17)
Federal Funds Sold and
Short-Term Investments (511) 852 341
Interest-Earning Assets
as a Total (845) 3,395 2,550
Interest Expense:
Interest-Bearing
Transactional Accounts (113) 581 468
Time Deposits 208 1,468 1,676
Federal Funds Purchased and
Short-term Borrowings (365) 591 226
Long-term Debt 0 27 27
Interest-Bearing Liabilities
as a Total (238) 2,635 2,397
Net Interest Income (607) 760 153
</TABLE>
The paragraphs below describe the change in net interest income attributable to
rate and volume when comparing the three months ended March 31, 1995 to the
three months ended March 31, 1994.
The decrease in net interest income due to change in average volume is
attributable to a 3.4% decrease in the average volume of earning assets. The
decrease in average volume due to investment securities held to maturity and
fed funds sold in short-term investments more than offset the effect of the
increase in average loan volume. The volume of interest-bearing liabilities
decreased
15
<PAGE> 16
2.8% as the effect of the decrease in volume of federal funds purchased and
short-term borrowings and interest-bearing transactional accounts was only
partially offset by the effect of the increase in higher costing in time
deposits.
The increase in net interest income attributable to average rate resulted as
the effect of the increase in average rate on interest-earning assets exceeded
the effect of the increase in rates on interest-bearing liabilities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995/DECEMBER 31, 1994 Total
(IN THOUSANDS) Net
Increase (Decrease) Due To Change In Increase
Average Volume Average Rate (Decrease)
---------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 87 $ 52 $ 139
Investment Securities
Held to Maturity (346) 219 (127)
Investment Securities
Available for Sale (1) 66 65
Trading Accounts (1) 0 (1)
Federal Funds Sold and
Short-Term Investments (153) 185 32
Interest-Earning Assets
as a Total (565) 673 108
Interest Expense:
Interest-Bearing
Transactional Accounts (74) 40 (34)
Time Deposits 138 442 580
Federal Funds Purchased and
Short-term Borrowings (188) 131 (57)
Long-term Debt 2 (3) (1)
Interest-bearing Liabilities
as a Total (111) 599 488
Net Interest Income (454) 74 (380)
</TABLE>
The paragraphs below describe the change in net interest income attributable to
rate and volume when comparing the three months ended March 31, 1995, to the
three months ended December 31, 1994.
The decrease in net interest income due to average volume was attributable to a
2.0% decrease in average-earning assets. The effect of the increase due to the
increase in loan volume was more than offset by the effect of the decrease in
the average volume of investment securities held to maturity and federal funds
sold in short-term investments. Interest-bearing liabilities decreased 1.1%.
The effect of the decrease of interest-bearing transactional accounts and
federal funds purchased and short-term borrowings was only partially offset by
the increase in time deposits.
The increase in net interest income attributable to change in average rate
resulted as the average rate on earning assets was more responsive to the
increase in market rates than the average rate on interest-bearing liabilities.
16
<PAGE> 17
The Company anticipates continued increase in loan volume due to the strength
of regional economy and the rate on investment securities held to maturity to
continue to increase as upcoming maturities will be reinvested at higher rates.
A potential offset of these positive trends would be an increase in the cost of
deposits as customers move from lower costing demand deposits and
interest-bearing transactional accounts to higher costing time deposits.
PROVISION FOR LOAN LOSSES
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. There was no provision for
loan losses made for the three month period ended March 31, 1995 or the three
month period ended March 31, 1994. The allowance for loan losses was 1.7% of
loans, net of unearned discount, at March 31, 1995 and March 31, 1994. The
loan loss allowance as a percentage of impaired and other nonnperforming loans
was 111.3% at March 31, 1995, as compared to 111.9% a year earlier, reflecting
loan growth which has not compromised asset quality as nonperforming assets
continue to decline. Nonperforming assets totaled $9.8 million at March 31,
1995, as compared with $10.8 million at December 31, 1994, an 8.8% reduction.
NONINTEREST INCOME
Total noninterest income increased $403 thousand or 6.1% for the three months
ended March 31, 1995, as compared to the same period in 1994. The analysis
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1995 1994
-------- -------
<S> <C> <C>
Service Charges and Other Fees $ 3,683 $ 3,555
Trust Services Income 1,686 1,201
Data Processing Income 714 801
Securities Gains (Losses) 131 (37)
Other Operating Income:
Investment Product Income 230 359
Safe Deposit Income 136 146
Mortgage Banking Income 38 174
All Other Operating Income 377 393
-------- -------
Total Noninterest Income $ 6,995 $ 6,592
======== ========
</TABLE>
The increase in noninterest income for the three months ended March 31, 1995,
as compared to the same period in 1994 is due primarily to trust services
income generated by the acquired trust business of the former Ameritrust Texas
National Association office located in Corpus Christi ("Corpus Christi Trust")
from Texas Commerce Bank National Association early in the third quarter of
1994. Trust services income is dependent upon the market value of trust
assets. Fluctuations in stock and bond values may impact future trust services
income levels. Service charges and other fees increased as a result of income
from a new ATM surcharge that began in the fourth quarter in 1994. Also
contributing to the increase were securities gains during the first three
months of 1995 in comparison to securities losses incurred during the first
quarter of 1994. Security gains
17
<PAGE> 18
incurred during the first quarter of 1995 resulted from sales of an equity
investment by the Company's Small Business Administration ("SBA") licensed
subsidiary and in-substance maturities of securities held to maturity.
These increases were partially offset by decreased mortgage banking income 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. Investment
product income also decreased as a result of a lower level of sales of
annuities, fixed income securities, and mutual funds.
NONINTEREST EXPENSE
Total noninterest expense increased $1.1 million or 7.3% for the three months
ended March 31, 1995, compared to the same period in 1994. The analysis
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Salaries and Wages $ 6,694 $ 6,163
Retirement and Other Employee Benefits 2,111 1,890
Net Occupancy Expense 1,766 1,673
Equipment, Rental, Depreciation
and Maintenance 1,088 1,187
FDIC Insurance 802 804
Other Operating Expenses:
Legal Expense 174 172
Marketing Expense 246 245
Operating Supplies 566 529
Communications Expense 253 241
Postage Expense 333 309
Outside Service Expense 660 573
Amortization of Intangible Assets 498 354
All Other 1,695 1,597
-------- --------
Total Noninterest Expense $16,886 $15,737
======== ========
</TABLE>
The largest increase in noninterest expense for the three months ended March
31, 1995, as compared to the same period in 1994, occurred in salaries and
wages as a result of the acquisition of the Corpus Christi Trust in the third
quarter of 1994 and normal merit increases. Retirement and other employee
benefits increased due to increased health care expense as a result of rising
health care costs and increased claims. Amortization of intangible assets, net
occupancy expense, and outside service expense all increased as a result of the
acquisition of the Corpus Christi Trust.
The Company's primary subsidiary ("the Bank") has been notified by the FDIC
that its assessment rate for 1995 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.
The FDIC has indicated that due to stability in the Bank Insurance Fund,
insurance premiums may be reduced in the latter part of 1995.
18
<PAGE> 19
PROVISIONS FOR FEDERAL INCOME TAXES
For the three months ended March 31, 1995 and 1994, the provision for federal
income taxes was $1.9 million and $2.3 million, respectively.
The Company had a net deferred tax asset of $1.3 million as of March 31, 1995.
This net deferred tax asset is composed of the expected tax benefits from the
reversal of the temporary differences between tax and book net income. The
existing net temporary differences will reverse during future periods. During
1993, the Company fully utilized all operating loss and tax credit
carryforwards, thus returning to a statutory tax rate. The Company did not
record a valuation allowance against the net deferred tax asset because it
expects to fully recognize these future benefits.
CAPITAL MANAGEMENT
The Federal Reserve Board maintains 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 are added to the risk-weighted asset
base by converting them to a balance sheet equivalent and assigning them the
appropriate risk weight.
The guidelines require that banking organizations achieve and maintain 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 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
excluding unrealized holding gains (losses), 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. The
following table summarizes the Company's "Tier 1" and total capital (dollars in
thousands):
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
------------------------- ----------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Tier 1 Capital $152,851 18.95% $150,478 17.54%
Tier 1 Capital Minimum Requirement 32,261 4.00 34,311 4.00
-------- ------ -------- -----
Excess Tier 1 Capital 120,590 14.95 $116,167 13.54
======== ====== ======== =====
Total Capital 162,720 20.17 160,360 18.69
Total Capital Minimum Requirement 64,522 8.00 68,622 8.00
-------- ------ -------- -----
Excess Total Capital $ 98,198 12.17% 91,738 10.69
======== ====== ======== =====
Risk Adjusted Assets, Net
of Intangible Assets $806,529 $857,779
======== ========
</TABLE>
19
<PAGE> 20
The Company's "Tier 1" and total capital ratios both increased from December
31, 1994 to March 31, 1995 as a result of decreased risk adjusted assets due
primarily to a decrease in other short-term investments and increased capital
due to income earned during the period. 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 capital adequacy. The "leverage ratio" is defined
to be a company's "Tier 1" capital divided by its total average assets. The
"leverage ratio" adopted by these federal banking regulators must equal or
exceed 3.0% "Tier 1" capital-to-total average assets 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" increased to
9.02% at March 31, 1995 from 8.75% at December 31, 1994, due to both an
increase in "Tier 1" capital and a decrease in total average assets. The
Company's "leverage ratio" substantially exceeds the regulatory minimum.
The FDIC maintains rules on capital adequacy ranging in five categories from
critically undercapitalized to well-capitalized. A well-capitalized company is
one that maintains a Total Risk-based Capital Ratio of at least 10%, a Tier 1
Risk-based Ratio 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 respond to 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.
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.
An integral part of the Company's liquidity management is the funding of the
banking subsidiary, which derives its source of fundings predominately from
deposits within its marketing area. The customer base of deposits is
diversified between individuals, partnerships and corporations, public
entities, and correspondent banks. This diversification helps the Company
avoid the risk of dependence on large concentrations of funds. The Company
does not, as a matter of policy, place certificates of deposit through brokers.
The Parent Company, as of March 31, 1995, has $11.0 million in available for
sale securities, which can be used to provide liquid resources as well as
currently unanticipated capital needs of its subsidiaries. Additional sources
of liquidity for the parent company are dividends from subsidiaries which are
dependent on their earnings. The amount of retained earnings available to the
Parent Company from subsidiaries for payment of dividends without prior
regulatory approval was approximately $73,427,000 at March 31, 1995.
Cash dividends have been paid by the Parent Company for twelve consecutive
quarters. In February 1995, the Company paid a $.16 per share quarterly
20
<PAGE> 21
dividend, an increase of 23%, and a special $.09 per share dividend. The board
has declared a $.16 per share dividend payable May 15, 1995.
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 a measure of the 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 than
liabilities being subject to repricing; therefore, market interest rate changes
will be reflected more quickly in asset rates. If interest rates decline, an
asset sensitive 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 characteristics represents a matched
interest rate sensitivity position. Any excess of assets or liabilities
results in an interest rate sensitivity gap. The purpose of this analysis is
to be aware of the potential risk to future earnings resulting from the impact
of possible future changes in interest rates on currently existing net asset or
net liability positions. The following table presents the interest sensitivity
position of the Company at March 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
Over One
Rate Sensitive Within Year and
--------------------------------------------------- Nonrate
30-Days 90-Days 180-Days One Year Total Sensitive Total
------- ------- -------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned Discount $252,678 $ 26,851 $ 27,792 $ 72,158 $379,479 $ 199,584 $ 579,063
Investment Securities 126,649 44,599 47,624 169,398 388,270 422,209 810,479
Federal Funds Sold and Other
Short-Term Investments 120,290 0 0 0 120,290 0 120,290
Other Earning Assets 190 0 0 0 190 0 190
--------- --------- --------- --------- --------- ---------- -----------
Total Earning Assets 499,807 71,450 75,416 241,556 888,229 621,793 1,510,022
Interest-Bearing Liabilities:
Interest-Bearing Transactional
Accounts 269,792 0 0 0 269,792 312,640 582,432
Time Deposits 71,367 73,199 116,067 164,212 424,845 111,236 536,081
Fed Funds Purchased and Other
Short-Term Borrowings 55,723 26 40 83 55,872 0 55,872
Long-Term Debt 0 0 0 0 0 1,678 1,678
--------- --------- --------- --------- --------- --------- -----------
Total Interest-Bearing
Liabilities 396,882 73,225 116,107 164,295 750,509 $425,554 $1,176,063
--------- --------- --------- --------- -------- --------- -----------
Interest Sensitivity Gap $102,925 $ (1,775) $(40,691) $ 77,261 $137,720
========= ========= ========= ========= =========
Cumulative Interest
Sensitivity Gap $102,925 $101,150 $ 60,459 $137,720
========= ========= ========= =========
Ratio of Earning Assets to
Interest-Bearing Liabilities 125.93% 97.58% 64.95% 147.03% 118.35%
========= ========= ========= ========= =========
</TABLE>
21
<PAGE> 22
The Company had an asset sensitivity gap position in the 30-day period of
$102.9 million. The cumulative rate sensitive gap position at one year was an
asset sensitive position of $137.7 million, which indicates 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 asset and liabilities equally or at the same time.
The Company's Asset and Liability Committee reviewed monthly the consolidated
position 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 following summary shows the composition of the loan portfolio at March 31,
1995, and December 31, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
----------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Loans secured primarily by
real estate:
Construction & land development $ 18,696 3.21% $ 17,672 3.06%
Other real estate loans 238,073 40.89 232,380 40.18
Agricultural loans 39,913 6.85 36,861 6.37
Commercial & industrial loans 113,892 19.56 117,353 20.29
Consumer loans 168,993 29.02 171,459 29.64
Loans to financial institutions &
all other loans 2,714 0.47 2,671 0.46
--------- ------- -------- -------
Total Loans $582,281 100.00% $578,396 100.00%
======= =======
Less:
Unearned discount (3,218) (4,206)
Allowance for loan losses (9,869) (9,882)
--------- ---------
Net Loans $569,194 $564,308
========= =========
</TABLE>
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
22
<PAGE> 23
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 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.
Management determined that the appropriate level of the allowance was $9.9
million at March 31, 1995 and December 31, 1994, and $9.8 million as of March
31, 1994. The allowance for loan losses is based on estimates, and ultimate
losses will 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 occur. A detailed analysis of the Company's
allowance for loan losses is shown in the following table (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
March 31, March 31,
1995 1994
-------- --------
<S> <C> <C>
Balance of allowance for loan
losses at beginning of period $ 9,882 $ 9,738
Addition to allowance for purchased loans 0 0
Provision for loan losses 0 0
Charge-offs:
Real estate loans 59 14
Agricultural loans 0 3
Commercial & industrial loans 24 60
Consumer loans 151 84
Loans to financial institutions
and all other loans 0 0
-------- --------
Total charge-offs 234 161
-------- --------
Recoveries:
Real estate loans 74 60
Agricultural loans 0 1
Commercial & industrial loans 70 33
Consumer loans 77 79
Loans to financial institutions
and all other loans 0 0
-------- --------
Total recoveries 221 173
-------- --------
Net charge-offs (recoveries) 13 (12)
-------- --------
Balance at end of period $ 9,869 $ 9,750
======== ========
Allowance for loan losses/Loans,
Net of unearned discount 1.70% 1.80%
======== ========
Allowance for loan losses/
Nonperforming loans 111.30% 111.94%
======== ========
</TABLE>
23
<PAGE> 24
NONPERFORMING ASSETS
The Company's nonperforming assets consist of impaired loans, troubled debt
restructurings, loans 90 days past due and still accruing and other real estate
and other assets which have been repossessed or acquired through workout
situations.
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 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 Company has
measured the impairment related to substantially 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.
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 March 31,
1995, all restructured loans were performing.
Loans 90 days past due and still accruing are well secured and in the process
of collection.
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 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.
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. 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.
At March 31, 1995, the recorded investment in loans that are considered
impaired under SFAS 114 was $8.3 million. Included in this amount is $3.0
million of impaired loans for which the related allowance for credit losses is
$1.3 million.
24
<PAGE> 25
Impaired loans of $5.3 million were carried at fair value and as a result do
not have an allowance for loan losses. The average recorded investment in
impaired loans during the three months ended March 31, 1995, was approximately
$8.4 million. For the three months ended March 31, 1995, the Company
recognized interest income on those impaired loans of $161 thousand.
The total amount of nonperforming assets, which includes loans past due 90 days
or more and still accruing at March 31, 1995, was $10.3 million as compared
with $11.2 million at December 31, 1994, reflecting a decrease of 8.1%.
Nonperforming assets as a percentage of total assets was 0.6% as of March 31,
1995 and December 31, 1994.
The following table discloses information regarding nonperforming assets at
March 31, 1995 and December 31, 1994. The Company's method for identifying
nonperforming assets in prior years is materially consistent with the
guidelines and requirements of SFAS 114 (in thousands).
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
------------- ------------
<S> <C> <C>
IMPAIRED LOANS
Nonaccrual Loans:
Real Estate $ 6,692 $ 0
Energy 41 0
Agricultural 72 0
Commercial 769 0
Consumer 686 0
Troubled Debt Restructurings 0 0
OTHER NONPERFORMING
Nonaccrual Loans 0 9,145
Troubled Debt Restructurings 607 617
Other Real Estate 957 1,007
Loans Past Due 90 Days
or More and Still Accruing 466 427
-------- --------
Total Nonperforming Assets $10,290 $ 11,196
======== ========
</TABLE>
LOAN CONCENTRATIONS
The economy of the market area served by the Company is characterized by
petroleum and natural gas production and related supplies and services,
petro-chemical operations, light and medium manufacturing operations,
agribusinesses, educational centers, and tourism. The agricultural businesses
are highly diversified, including beef and dairy cattle, poultry, cotton, and a
variety of grain crops. In general, real estate values, as well as real estate
development and sales activities, tend to reflect a region's economic
environment. Management believes that the loans in the real estate portfolio
are generally adequately supported by market prices or other credit factors.
Real estate loans totaled $256.8 million at March 31, 1995 (approximately 44.1%
of the loan portfolio), 3.2% of which were nonperforming. At December 31,
1994, real estate loans were $250.1 million (approximately 43.2% of the loan
portfolio), of which 3.6% were nonperforming. The majority of the Company's
real estate loans are secured by property located outside the major
metropolitan areas in which the Company operates. The Company's portfolio is
comprised of interim construction, residential, commercial building, farm
acreage, vacant lots, and
25
<PAGE> 26
land development loans. Residential loans made up approximately 40.5% of the
total real estate loans at March 31, 1995.
Consumer loans totaled $169.0 million at March 31, 1995 (approximately 29.0% of
the loan portfolio), 0.4% of which were nonperforming. These consumer loans
include $86.2 million in loans originated through automobile dealers. At
December 31, 1994, consumer loans totaled $171.5 million (approximately 29.7%
of the loan portfolio), 0.5% of which were nonperforming. Loans originated
through automobile dealers were approximately $84.5 million of this category at
December 31, 1994.
Agricultural loans, exclusive of loans secured by farm acreage which are
categorized by the Company as real estate loans, were $39.9 million at March
31, 1995 (approximately 6.9% of the loan portfolio), 0.2% of which were
nonperforming. At December 31, 1994, agricultural loans totaled $36.9 million
(approximately 6.4% of the loan portfolio), of which 0.1% were nonperforming.
At March 31, 1995, the Company's commercial and industrial loans were $116.6
million (approximately 20.0% of the loan portfolio), 0.7% of which were
nonperforming. At December 31, 1994, commercial and industrial loans were
$120.0 million (approximately 20.8% of the loan portfolio), of which 0.6% were
nonperforming. The majority of the Company's commercial and industrial loans
are with businesses characterized by light and medium manufacturing operations
and other service companies. Included in the above figures, the Company's
energy loans were $901 thousand (approximately 0.2% of the loan portfolio), of
which 4.6% were nonperforming at March 31, 1995. At December 31, 1994, energy
loans totaled $1.7 million (approximately 0.3% of the loan portfolio), of which
2.3% were nonperforming.
26
<PAGE> 27
INVESTMENT SECURITIES
The amortized cost and market values of investment securities held to maturity
and available for sale, by type, together with unrealized gains and losses as
of the dates indicated are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1995
--------------------------------------------------------
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
U. S. Government and
Government Agency $594,532 $585,271 $ 2,216 $ 11,477
State and Political
Subdivisions 32,836 32,680 121 277
Investment Grade
Corporate Bonds 80,819 80,172 163 810
Mortgage-Backed
Securities 4,637 4,487 1 151
-------- -------- ---------- ---------
Total $712,824 $702,610 $ 2,501 $ 12,715
======== ======== ========== =========
Securities Available for Sale:
U.S. Government
and Government Agency 88,554 87,800 76 830
State and Political Subdivisions 3,493 3,606 113 0
Other 6,258 6,249 141 150
-------- -------- ---------- ---------
Total $ 98,305 $ 97,655 $ 330 $ 980
======== ======== ========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------
Amortized Market Unrealized Unrealized
Cost Value Gains Losses
--------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Securities Held to Maturity:
U.S. Government and
Government Agency $621,068 $605,059 $ 806 $ 16,815
State and Political
Subdivisions 33,564 32,711 57 910
Investment Grade
Corporate Bonds 91,004 89,649 91 1,446
Mortgage-Backed
Securities 4,959 4,731 1 229
-------- -------- ---------- ---------
Total $750,595 $732,150 $ 955 $ 19,400
======== ======== ========== =========
Securities Available for Sale:
U.S. Government
and Government Agency 98,386 96,190 0 2,196
State and Political Subdivisions 4,760 4,737 7 30
Other 6,436 6,300 26 162
-------- -------- ---------- ---------
Total $109,582 $107,227 $ 33 $ 2,388
======== ======== ========== =========
</TABLE>
27
<PAGE> 28
KEY RATIOS
The table below presents for the Company and its subsidiaries certain operating
ratios as of and for the three months ended:
<TABLE>
<CAPTION>
March 31,
--------------------------------
Operating Ratios 1995 1994
------ ------
<S> <C> <C>
Return on average assets 0.91% 0.96%
Return on average equity 8.85 10.31
Dividend payout ratio 51.50 24.55
Leverage ratio 9.02 8.44
</TABLE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
*3.1 - Amendments to the Amended and Restated Bylaws of the Company
effective April 18, 1995.
*27 - Financial Data Schedule.
__________________________
*Filed herewith.
28
<PAGE> 29
SIGNATURE
Pursuant to the requirements 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,
Chief Financial Officer, and
Secretary-Treasurer (on behalf of
the registrant and as principal
financial and accounting officer)
Date: 5/12/95
----------------------
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
3.1 Amendments to the Amended and Restated Bylaws of the Company
effective April 18, 1995.
27 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 3.1
AMENDMENTS TO THE AMENDED AND RESTATED BYLAWS
I. Article II, Section 1 of the Amended and Restated Bylaws of the
Corporation shall be amended in its entirety to read as follows:
Section 1. Qualification and Number. The property, business and
affairs of the Corporation shall be managed and controlled by the
Board of Directors and, subject to any restrictions imposed by law, by
the articles of incorporation or by these bylaws, the Board of
Directors may exercise all the powers of the Corporation. Directors
need not be residents of Texas or shareholders of the Corporation
absent provisions to the contrary in the articles of incorporation or
laws of the State of Texas.
The number of directors of the Corporation shall be determined
from time to time by resolution by the Board (provided that any
decrease does not shorten the term of any incumbent directors).
The directors shall, except as hereinafter otherwise provided,
be elected at the annual meeting of shareholders. Nominations of
persons for election to the Board of Directors may be made by the
Board of Directors or a committee appointed by the Board of Directors
for the purpose of nominating candidates or by any shareholder
entitled to vote for the election of directors generally. However,
any shareholder entitled to vote in the election of directors
generally may nominate one or more persons for election as directors
only if written notice of such shareholder's intent to make such
nomination or nominations has been given by notice in writing, either
by personal delivery or by first class United States mail, postage
pre-paid, to the Secretary of the Corporation at the principal office
of the Corporation no later than forty-five (45) days nor more than
sixty (60) days prior to any meeting of the shareholders called for
the election of directors; provided, however, that in the event that
less than fifty-five (55) days' notice of the date of the meeting is
given to shareholders, such written notice shall be delivered or
mailed, as prescribed, not later than the close of business on the
tenth (10th) day following the day on which notice of the meeting was
mailed to shareholders. Each such notice shall set forth: (i) the
name and address of the shareholder proposing to make such nomination
or nominations; (ii) a description of all arrangements or
understandings between the shareholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder; (iii)
the name, age, business experience, principal occupation or employment
and other qualifications of the person or persons to be nominated; and
(iv) the consent of each nominee to serve as a director of the
Corporation if so elected. No shareholder nomination shall be
effective unless made in accordance with the procedures set forth
herein. The person presiding at the meeting shall, if the facts
warrant, determine and declare to the meeting that a shareholder
nomination was not made in accordance with the Bylaws, and if such
person should so determine, shall so declare to the meeting and the
defective nomination shall be disregarded.
<PAGE> 2
II. The following Section shall be inserted as the new Section 2 of
Article II of the Amended and Restated Bylaws of the Corporation:
Section 2. Term, Removal and Vacancies. The Board of Directors
shall be divided into three classes, as nearly equal in number as
possible, with the term of office of one class expiring each year. At
the annual meeting of stockholders in 1995, four directors of the
first class shall be elected to hold office for a term expiring at the
next succeeding annual meeting, four directors of the second class
shall be elected to hold office for a term expiring at the second
succeeding annual meeting, and three directors of the third class
shall be elected to hold office for a term expiring at the third
succeeding annual meeting. At each annual meeting of shareholders,
the respective successors to the class of directors whose term shall
then expire shall be elected to hold office for a term expiring at the
third succeeding annual meeting. Any increase or decrease in the
number of directors elected by holders of common stock shall be
apportioned among the classes of directors so as to make each class as
nearly equal in number as is practicable.
Notwithstanding any other provision of the articles of
incorporation or these bylaws (and notwithstanding the fact that some
lesser percentage may be specified by law, the articles of
incorporation or these bylaws), any director or the entire board of
directors may be removed only for cause and only by the affirmative
vote of the holders of sixty-six and two-thirds percent (66-2/3%) of
all the shares of stock of the Corporation entitled to vote at a
meeting of stockholders, voting together as a single class.
Any vacancies in the board of directors, for any reason, and
any newly created directorships resulting from any increase in the
number of directors (to the extent permitted by law) shall be filled
by the board of directors, acting by not less than a majority of the
directors then in office, even if less than a quorum (which majority
may consist of a sole remaining director). Any directors so chosen to
fill any such vacancies or newly created directorships shall, unless
otherwise required by law, hold office until the next election of the
class for which such directors shall have been chosen and until their
respective successors shall be duly elected and qualified.
III. Section 11 of Article II of the Amended and Restated Bylaws of the
Corporation shall be deleted in its entirety.
IV. The remaining Sections of Article II shall be renumbered.
V. Article VIII of the Amended and Restated Bylaws of the Corporation
shall be amended in its entirety to read as follows:
Section 1. Amendment to Bylaws. These bylaws may be altered,
amended, or repealed by the affirmative vote of the holders of a
majority of the outstanding stock at any annual meeting, or at any
special meeting if notice of the proposed amendment be contained in
the notice of said special meeting, or by the affirmative vote of a
majority
<PAGE> 3
of the full Board of Directors at any regular or special meeting,
provided notice of said proposed amendment be contained in the notice
of the special meeting.
Notwithstanding any other provisions of these bylaws, no
amendment to these bylaws shall amend, alter, change or repeal any of
the provisions of this Article VIII or Article II, Section II of these
bylaws, unless such amendment, alteration, change or repeal shall
receive either (i) the affirmative vote of the holders of not less
than eighty percent (80%) of all shares of stock of the Corporation
entitled to vote at a meeting of shareholders, voting together as a
single class, or (ii) the affirmative vote of a majority of directors
in office.
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<CASH> 107,859
<INT-BEARING-DEPOSITS> 102
<FED-FUNDS-SOLD> 120,290
<TRADING-ASSETS> 88
<INVESTMENTS-HELD-FOR-SALE> 97,655
<INVESTMENTS-CARRYING> 712,824
<INVESTMENTS-MARKET> 702,610
<LOANS> 579,063
<ALLOWANCE> 9,869
<TOTAL-ASSETS> 1,702,869
<DEPOSITS> 1,452,456
<SHORT-TERM> 55,872
<LIABILITIES-OTHER> 14,815
<LONG-TERM> 1,678
<COMMON> 7,963
0
0
<OTHER-SE> 170,085
<TOTAL-LIABILITIES-AND-EQUITY> 1,702,869
<INTEREST-LOAN> 13,416
<INTEREST-INVEST> 11,406
<INTEREST-OTHER> 1,682
<INTEREST-TOTAL> 26,504
<INTEREST-DEPOSIT> 9,712
<INTEREST-EXPENSE> 10,870
<INTEREST-INCOME-NET> 15,634
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 131
<EXPENSE-OTHER> 16,886
<INCOME-PRETAX> 5,743
<INCOME-PRE-EXTRAORDINARY> 5,743
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,866
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 4.24
<LOANS-NON> 8,260
<LOANS-PAST> 466
<LOANS-TROUBLED> 607
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,882
<CHARGE-OFFS> 234
<RECOVERIES> 221
<ALLOWANCE-CLOSE> 9,869
<ALLOWANCE-DOMESTIC> 7,994
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,875
</TABLE>
