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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
_______________
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
incorporation or organization) Identification No.)
One O'Connor Plaza 77902
Victoria, Texas (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (512) 573-9432
_______________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 Par Value
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by nonaffiliates
of the registrant as of February 28, 1995 was $207,025,312.
The number of shares of Common Stock of the registrant outstanding as
of February 28, 1995 was 7,962,512.
Documents Incorporated by Reference
Annual Report to Shareholders for the year ended December 31, 1994
Pages 1, and 25 through 45 (Parts I, II, and IV)
Portions of Proxy Statement for Annual Meeting of Shareholders
held on April 18, 1995 (Part III)
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PART I
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 six other nonbank subsidiaries (collectively referred to as the
"Nonbank Subsidiaries"). At December 31, 1994, the Company and its
subsidiaries had consolidated total assets of $1.75 billion, net loans
outstanding of $563 million, total deposits of $1.46 billion, and stockholders'
equity of $175.1 million.
During 1994, the Bank made one acquisition which increased the Bank's
assets by approximately $8 million and increased trust assets under management
by approximately $365 million. This acquisition was accounted for as a
purchase. 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 1995, the Bank has 37 branch offices in
30 communities and 21 counties of South Central Texas (see "BUSINESS
ACTIVITIES"). A total of 88 automated teller machines in 50 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
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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 $5.5 million in dividends during 1994 from a nonbank subsidiary. At
December 31, 1994, the Company held $2.4 million in the AIM Short-term
Investment Company (U. S. Treasury) Fund and $10.2 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, 1994,
the Company's leverage ratio of 8.8% substantially exceeded the 4.0% regulatory
requirement. Additionally, the Company's risk-based capital ratio of 18.7%
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):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Loans, net of unearned discount $ 557,821 $ 465,901 $ 368,330
Investment securities and time
deposits with banks 846,128 867,751 817,431
Total interest-earning assets 1,547,729 1,542,589 1,377,973
Total assets 1,745,472 1,736,413 1,528,855
Deposits 1,461,755 1,447,213 1,277,782
Stockholders' equity 169,483 147,137 121,462
</TABLE>
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 page 17 of this document and the financial statements of the Company
included on pages 25 through 44 of the Company's 1994 Annual Report to
Shareholders, Exhibit 13 hereto, which pages are incorporated herein by
reference.
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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.
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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 six wholly owned Nonbank Subsidiaries: Transact
Financial Corporation (mortgage loans); Central Computers, Inc. (data
processing for commercial banks); Victoria Capital Corporation (investments in
small businesses); V.B.I., Inc., (inactive); 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.
ACQUISITIONS
For information on the 1994 acquisitions by the Company, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company" included on pages 7 through 24 of the Company's 1994
Annual Report to Shareholders, Exhibit 13 hereto, which pages are incorporated
herein by reference.
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. The merger is expected to be a stock-for-stock
exchange transaction, subject to customary conditions to closing, with the
closing date to be scheduled upon approval by state and federal banking
regulators.
The Company anticipates acquiring other existing financial
institutions in Texas should suitable opportunities develop. In any future
acquisition, the Company expects that it would be competing with other
prospective purchasers, including other bank holding companies doing business
in Texas. Any proposal for the acquisition or establishment of additional
banks is subject to approval by the appropriate regulatory authorities. See
"SUPERVISION AND REGULATION."
As opportunities develop, the Company may undertake additional
nonbanking activities permitted by the BHCA or may acquire companies engaged in
those activities. At present, the Company has no plans to commence any new
nonbanking activities or to acquire any company engaged primarily in such
activities.
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EMPLOYEES
As of December 31, 1994, the Company and its subsidiaries had
approximately 857 full-time employees and approximately 177 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. As a
result of the current rising interest rate environment, the Bank is more
competitive for funds with mutual funds and other investments. 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
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dairy cattle, poultry, cotton, and a variety of grain crops. Also, through the
acquisition of a bank in Bryan in 1993, the Company expanded into an area
positively affected by a major educational center.
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, 1994, 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 3.1% 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 40.0% of the total loan portfolio. The remaining
loan portfolio categories and the percentage of each to the total loan
portfolio at December 31, 1994, consisted of the following: loans to oil and
gas producers and related service businesses, 0.3%; agricultural loans (other
than loans secured by agricultural real property), 6.4%; other commercial and
industrial loans, 20.0%; consumer loans, 29.7%; 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. 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. Continued
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
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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 Code permits out-of-state bank holding companies to
acquire certain existing banks and bank holding companies in Texas. One of
several 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 25.0% of the total deposits held by all
national and state banks domiciled in Texas. Based on this statute, the
Federal Reserve Board has approved entry by out-of-state bank holding companies
into Texas. This has increased and likely will continue to increase the
competition that the Company faces in acquiring depository institutions in
Texas.
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The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 enacted on September 29, 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)
beginning on September 29, 1995, 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. A bill has been
introduced in the Texas House to opt-out. It cannot be predicted whether the
opt-out bill will be enacted.
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, 1994, the Company's ratio of total
capital-to- risk-weighted assets was approximately 18.7%, 17.5% of which was
"Tier 1" capital. Both ratios significantly exceed regulatory minimums.
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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, 1994, was 8.8%, exceeding the
regulatory minimum.
The Federal Reserve Board is required by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") 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. Regulations
to implement this mandate have been proposed.
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, 1994, the Bank's ratio of "Tier 1" capital-to-total risk-weighted assets
was 14.40% and its ratio of total capital-to-total risk-weighted assets was
15.52%. These ratios have decreased from 15.08% and 16.27%, respectively, as
of December 31, 1993.
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
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for which the requirement is 3.0% of total adjusted assets. As of December 31,
1994, the Bank's ratio of "Tier 1" capital-to-total adjusted assets was 7.51%.
This ratio has increased from 7.27% 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.
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Bank Dividends
Dividends paid by the Bank provide substantially all of the Company's
cash flow. Under Texas law, prior to the declaration of any dividend by any
state-chartered bank, it must transfer to "certified surplus" an amount not
less than 10.0% of its net profits earned since the last dividend was declared,
so long as certified surplus is less than the capital of such bank. At
December 31, 1994, there was an aggregate of approximately $69.0 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 $.23 for
every $100 of deposits and the weakest institutions paying $.31 for every $100
of deposits.
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. Effective April
1, 1995, assessments will be paid quarterly rather than semiannually. The Bank
has been notified by the FDIC that its assessment rate for 1995 will remain at
the lowest risk-based premium available. The FDIC has proposed dropping the
lowest assessment rate from $.23 for every $100 of deposits to $.04, which
would have a positive effect on the Bank's cost of funds. Under the proposed
rule, the reduction in deposit premiums would not be effective until the ratio
of the Bank Insurance Fund ("BIF") to estimated deposits of BIF-insured members
is 1.25%.
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STATISTICAL INFORMATION
The following statistical and other information is provided as part of
the Management Discussion and Analysis on the pages indicated.
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
I. Distribution of Average Assets, Liabilities
and Stockholders' Equity; Interest Rates and
Interest Differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17-22
II. Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-38
III. Loan Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-31
IV. Summary of Loan Loss Experience . . . . . . . . . . . . . . . . . . . . . . . 31-33
V. Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-22,28-30
VI. Short-Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37*
</TABLE>
* of the Company's 1994 Annual Report to Shareholders which is incorporated
herein by reference.
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EXECUTIVE OFFICERS OF THE COMPANY
The names, ages, and positions of the executive officers of the Company
and its subsidiaries are set forth below.
<TABLE>
<CAPTION>
Executive Officer & Position Position with
With Company Age Subsidiaries
- ---------------------------- --- -------------
<S> <C> <C>
Charles R. Hrdlicka 56 Chairman of the Board, President,
Chairman of the Board, Chief Executive Officer, and
President, Chief Executive Director of the Bank; Director of
Officer and Director Victoria Securities Corporation;
Director of Central Computers, Inc.;
Director of Victoria Capital
Corporation; and Director and
President of Victoria Financial
Services, Inc.
Malcolm L. Duke 50 Executive Vice President of the
Executive Vice President - Bank; Chairman of the Board, Operations
Administration Chief Executive Officer and Director
of Central Computers, Inc.
John H. Freeman, III 41 Executive Vice President of the Bank;
Executive Vice President - Director of Victoria Securities
General Banking Group Corporation; Director of Central
Computers, Inc.
David H. Jones 57 Executive Vice President and Executive
Vice President - Executive Trust Officer of the Bank;
Trust and Investment Services Senior Vice President and Director
of Victoria Capital Corporation;
President, Chief Executive Officer
and Director of Victoria Securities
Corporation
J. Dugan Smith 35 Executive Vice President of the
Executive Vice President - Bank; Senior Vice President and
Credit Administration Director of Victoria Capital
Corporation; Vice President and
Director of Victoria Financial
Services, Inc.; Director of Transact
Financial Corporation
</TABLE>
14
<PAGE> 15
<TABLE>
<CAPTION>
Executive Officer & Position Position with
With Company Age Subsidiaries
- ---------------------------- --- -------------
<S> <C> <C>
Gregory Sprawka 44 Executive Vice President and
Executive Vice President, Chief Chief Financial Officer of the
Financial Officer, and Bank; Chairman of the Board, Secretary-
Treasurer President and Director of Transact
Financial Corporation;
President and Director of
V.B.I. Inc.; Treasurer and
Director of Victoria Capital
Corporation; Secretary-Treasurer
and Director of Victoria
Securities Corporation; Chief
Financial Officer, Secretary-
Treasurer, and Director of
Central Computers; and
Secretary-Treasurer and
Director of Victoria Financial
Services, Inc.
Frank J Warrington 51 Senior Vice President - Audit
Senior Vice President - Administration of the Bank
Audit Administration
</TABLE>
Each executive officer has served for more than five years as an
executive officer of the Company or the Bank except for Mr. Jones and Mr.
Freeman. Mr. Jones served as Chief Administrative Officer and Executive Trust
Officer with Capital Bank in Dallas prior to his election as Executive Vice
President and Executive Trust Officer of the Bank in 1990. 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.
Each executive officer will hold office until the next annual meeting of the
Board of Directors of the Company or until his successor has been duly elected
and qualified.
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.
15
<PAGE> 16
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. See pages 12 and 13 of the Proxy Statement attached as Exhibit
99 hereto, which pages are incorporated by reference. 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 (24%)
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
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 1994.
16
<PAGE> 17
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
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Certain information concerning the Common Stock of the Company is
included on page 48 of the Company's 1994 Annual Report to Shareholders,
Exhibit 13 hereto, under the heading "Quotations and Cash Dividends on Capital
Stock," which pages are incorporated herein by reference.
ITEM 6
SELECTED FINANCIAL DATA
Selected financial data is presented on page 45 of the Company's 1994
Annual Report to Shareholders, attached as Exhibit 13 hereto, and is
incorporated herein by reference. 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 incorporated by reference
under Item 7 of this Report and with the related consolidated financial
statements and notes thereto incorporated by reference under Items 8 and 14(a)1
of this Report.
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 incorporated by reference to pages 25
through 45 of the Company's 1994 Annual Report to Shareholders.
OVERVIEW OF OPERATIONS
The Company reported net income of $16.6 million for the year ended
1994 compared to net income of $18.5 million reported for the year ended 1993.
Excluding the recognition of two nonrecurring items in 1993, core earnings for
the year ended 1994 increased
17
<PAGE> 18
$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.
Earnings per share were $2.09 for 1994 compared to $2.50 for 1993. Factors
contributing to the increase in core earnings in 1994, compared to 1993,
include 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. The 1993 restructuring
of the branch and lending functions helped to contain the growth of noninterest
expense during 1994.
The Company returned to paying federal income taxes at the full
corporate rate of 35% during 1994. As a result, income before taxes may be
more indicative of the Company's operating trends. Income before taxes was
$25.2 million for the year ended 1994, an increase of $4.6 million or 22.0%
when compared to 1993. If the nonrecurring $2.8 million restructuring charge
is excluded from 1993, the increase between years in income before taxes is
$1.8 million or 7.4%.
On July 1, 1994, the Company acquired the trust business of the former
Ameritrust Texas National Association office located in Corpus Christi from
Texas Commerce Bank National Association paying a premium of $8.8 million. The
acquisition increased the Company's trust assets under management by $365
million to over $1 billion.
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 has $68.3 million in total
assets and three branches in Fort Bend County. 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 state and
federal banking regulators.
The Company views these acquisitions as a means of expanding within its
service area and anticipates that they will contribute favorably to future
results of the Company. The Company anticipates that, in the future, it will
have the opportunity to acquire other successful financial institutions.
The Company continues to be well capitalized. At December 31, 1994,
the Company's ratio of total capital-to-risk-weighted-assets was 18.69% and
its leverage ratio was 8.75%, 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. Net interest income increased to
18
<PAGE> 19
$63.5 million, an increase of 2.5% from the $61.9 million reported in 1993.
The improvement results primarily from improved asset quality and loan growth.
The interest income on certain loans and investment securities is not
subject to Federal income tax. For analytical purposes, at December 31, 1994
and December 31, 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):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1994 1993
--------- --------
<S> <C> <C>
Interest Income-Book Basis . . . . . . . . . . . . . . . . . $100,538 $ 97,477
Taxable-Equivalent Adjustment . . . . . . . . . . . . . . . . 485 224
--------- --------
Interest Income-Taxable
Equivalent Basis . . . . . . . . . . . . . . . . . . . . . 101,023 97,701
Interest Expense . . . . . . . . . . . . . . . . . . . . . . (37,078) (35,585)
--------- ---------
Net Interest Income-Taxable
Equivalent Basis . . . . . . . . . . . . . . . . . . . . . $ 63,945 $ 62,116
========= =========
</TABLE>
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 increased 3 basis points to 3.42%
in 1994 from 3.39% in 1993 and the interest rate margin increased 10 basis
points to 4.13% in 1994 from 4.03% in 1993 (dollars in thousands).
19
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------ ------------------------------- ---------------------------
Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Loans, Net of Unearned
Discount(1) . . . . $ 557,821 $50,203 9.00% $ 465,901 $ 40,247 8.64% $ 368,330 $ 34,928 9.48%
Investment Securities
Held to Maturity:
Taxable (2) . . . . 733,953 38,749 5.28 863,546 50,197 5.81 811,067 57,936 7.14
Tax-Exempt (1) . . . 17,717 1,346 7.60 4,205 521 12.40 6,364 534 8.40
Investment Securities
Available for
Sale (1)(3) . . . . 95,259 4,446 4.67 0 0 0.00 0 0 0.00
Trading Accounts . . . 1,042 57 5.50 1,337 67 4.99 536 32 5.97
Federal Funds Sold
and Short-Term
Investments . . . . 142,738 6,222 4.36 207,600 6,669 3.21 191,676 7,158 3.73
----------- -------- ------ ----------- -------- ------ ----------- -------- -----
Total Interest-
Earning Assets . . 1,548,530 101,023 6.52 1,542,589 97,701 6.33 1,377,973 100,588 7.30
----------- -------- ------ ----------- -------- ------ ----------- -------- -----
Noninterest-Earning Assets:
Cash and Due
From Banks . . . . . 116,707 118,528 94,698
Other Assets . . . . . 90,874 85,868 67,068
Allowance for
Loan Losses . . . . (9,838) (10,572) (10,884)
----------- ----------- -----------
Total Assets . . . $1,746,273 $1,736,413 $1,528,855
=========== =========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities:
Interest-Bearing
Transactional
Accounts . . . . . $ 613,184 $ 14,801 2.41% $ 577,743 $ 13,290 2.30% $ 471,286 $ 14,158 3.00%
Time Deposits . . . . 476,486 18,073 3.79 501,217 18,488 3.69 495,443 23,119 4.67
Federal Funds Purchased
and Short-Term
Borrowings . . . . . 104,336 4,138 3.97 128,552 3,714 2.89 113,129 3,888 3.44
Long-Term Debt . . . . 1,037 66 6.41 1,644 93 5.65 5,560 349 6.28
----------- -------- ------ ---------- -------- ------ ---------- -------- -----
Total Interest-
Bearing
Liabilities . . . 1,195,043 37,078 3.10 1,209,156 35,585 2.94 1,085,418 41,514 3.82
----------- -------- ------ ---------- -------- ------ ---------- -------- -----
Noninterest-Bearing Liabilities:
Demand Deposits . . . 372,085 368,253 311,053
Other Liabilities (3) 9,141 11,867 10,922
---------- ---------- ----------
Total
Liabilities . . . . 1,576,269 1,589,276 1,407,393
---------- ---------- ----------
Stockholders'
Equity (3) . . . . . . 170,004 147,137 121,462
---------- ---------- ----------
Total
Liabilities and
Stockholders'
Equity . . . . . . $1,746,273 $1,736,413 $1,528,855
========== ========== ==========
Net Interest Income . . . $ 63,945 $ 62,116 $59,074
======== ======== =======
Net Interest Spread . . . 3.42% 3.39% 3.48%
====== ====== ======
Interest Rate Margin . . 4.13% 4.03% 4.29%
====== ====== ======
</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% for the years ended December 31, 1994 and December 31,
1993.
(2) Includes interest-bearing deposits with other banks.
(3) The 1994 average balance has been adjusted to exclude the effect of
Statement of Financial Accounting Standards No. 115.
20
<PAGE> 21
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):
<TABLE>
<CAPTION>
1994/1993 1993/1992
------------------------------ -----------------------------
Increase Increase
(Decrease) Due to (Decrease) Due to
Change in Total Change in Total
------------------ Net ----------------- Net
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . $ 8,215 $ 1,741 $ 9,956 $ 8,636 $ (3,317) $ 5,319
Investment Securities Held to Maturity . . (6,106) (4,517) (10,623) 3,341 (11,093) (7,752)
Investment Securities Available for Sale . 4,446 -0- 4,446 -0- -0- -0-
Trading Accounts . . . . . . . . . . . . . (15) 5 (10) 41 (6) 35
Federal Funds Sold and
Other Short-Term Investments . . . . . . (2,431) 1,984 (447) 564 (1,053) (489)
Interest-Earning Assets as a Total . . . 378 2,944 3,322 12,017 (14,904) (2,887)
Interest Expense:
Interest-Bearing Transactional
Accounts . . . . . . . . . . . . . . . . 838 673 1,511 2,830 (3,698) (868)
Time Deposits . . . . . . . . . . . . . . . (929) 514 (415) 266 (4,897) (4,631)
Federal Funds Purchased and
Short-Term Borrowings . . . . . . . . . . (787) 1,211 424 491 (665) (174)
Long-Term Debt . . . . . . . . . . . . . . (37) 10 (27) (224) (32) (256)
Interest-Bearing Liabilities as a Total . (415) 1,908 1,493 4,733 (10,662) (5,929)
Net Interest Income . . . . . . . . . . . . . $ 793 $ 1,036 $ 1,829 $ 7,284 $ (4,242) $ 3,042
</TABLE>
21
<PAGE> 22
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 30.2% of
average interest-earning assets at December 31, 1993, to 36.0% 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
interest-bearing liability category, increased from 47.8% of average
interest-bearing liabilities at December 31, 1993, to 51.3% at December 31,
1994. Overall, average interest-earning assets grew 0.4% from December 31,
1993, to December 31, 1994, while average interest-bearing liabilities
decreased 1.2% for the same periods. Average noninterest-bearing liabilities
and stockholders' equity, by comparison, grew 4.5% from December 31, 1993, to
December 31, 1994.
Changes Due to Rates
The increase 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. Due to
recent increases in market rates and the short average life of the portfolio,
this trend is expected to reverse during 1995.
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 Company made no provision for loan losses in 1994 and
1993 due to continued adequacy of the allowance for loan losses as a result of
increased loan balances being offset by decreased nonperforming loans and net
recoveries in 1994. Current trends in net charge-offs and reductions in
nonperforming loans should allow for continued low levels of provisions for
loan losses in the future if the regional economy remains stable.
During 1994, the Company recorded net recoveries to the allowance for
loan losses of $144 thousand, down from a net charge-off of $417 thousand in
1993. Reflecting continued improvement in the quality of the loan portfolio,
the allowance for loan losses at December 31, 1994, was 1.7% of loans, net of
unearned discount, compared to 1.9% at December 31, 1993. The allowance as a
percent of nonperforming loans was 118.9% at December 31, 1994, as compared to
102.5% a year earlier.
22
<PAGE> 23
NONINTEREST INCOME
Noninterest income totaled $27.1 million in 1994, up $919 thousand or
3.5% from December 31, 1993. The following table presents a comparative
analysis of the major components of noninterest income (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
Increase
1994 1993 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Service Charges and Other Fees . . . . . . . . . . . . . . . $14,643 $13,949 $ 694
Trust Services Income . . . . . . . . . . . . . . . . . . . . 5,556 4,230 1,326
Data Processing Income . . . . . . . . . . . . . . . . . . . 3,201 3,196 5
Securities Gains (Losses) . . . . . . . . . . . . . . . . . . (796) 48 (844)
Other Operating Income:
Investment Product Income . . . . . . . . . . . . . . . . 1,241 1,615 (374)
Safe Deposit Income . . . . . . . . . . . . . . . . . . . 561 499 62
Mortgage Banking Income . . . . . . . . . . . . . . . . . 615 703 (88)
All Other Operating Income . . . . . . . . . . . . . . . 2,111 1,973 138
------- ------- ------
Total Noninterest Income . . . . . . . . . . . . . . . . $27,132 $26,213 $ 919
======= ======= ======
</TABLE>
Service charges and other fees increased 5.0% in 1994 resulting mainly
from a full year's effect on income from the acquisitions of a branch in
Richmond from another bank holding company ("Richmond Branch") on October 8,
1993, and the New First City Texas Bryan/College Station bank ("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 Ameritrust Texas National
Association office located in Corpus Christi from Texas Commerce Bank National
Association ("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 Bryan Bank as mentioned above.
Securities losses totaled $796 thousand during 1994 as compared to
gains of $48 thousand in 1993 due mainly to losses of $446 thousand on
dispositions of two equity investments held by the Company's Small Business
Administration ("SBA") licensed subsidiary. Also contributing to the losses
were sales of securities held as available for sale in order to improve total
return. These losses will be recovered in interest gains.
Other operating income, which includes investment product income,
mortgage banking income, and safe deposit income, decreased 5.4% in the
aggregate during 1994. The decrease in investment product income is
attributable to decreases in total commissions
23
<PAGE> 24
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 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 $2.0 million or 3.0% to $65.4
million in 1994 from $67.5 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):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
Increase
1994 1993 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Salaries and Wages . . . . . . . . . . . . . . . . . . . . . $25,526 $24,668 $ 858
Retirement and Other
Employee Benefits . . . . . . . . . . . . . . . . . . . . 7,124 10,483 (3,359)
Net Occupancy Expense . . . . . . . . . . . . . . . . . . . . 5,903 5,503 400
Equipment Rental, Depreciation, and
Maintenance . . . . . . . . . . . . . . . . . . . . . . . . 4,572 4,217 355
FDIC Insurance . . . . . . . . . . . . . . . . . . . . . . . 3,199 3,010 189
Other Operating Expenses
Taxes Other Than Income . . . . . . . . . . . . . . . . . 1,738 1,962 (224)
Marketing Expense . . . . . . . . . . . . . . . . . . . . 1,493 1,370 123
Operating Supplies . . . . . . . . . . . . . . . . . . . 2,189 2,116 73
Communication Expense . . . . . . . . . . . . . . . . . . 1,139 1,088 51
Postage Expense . . . . . . . . . . . . . . . . . . . . . 1,127 1,058 69
Outside Service Expense . . . . . . . . . . . . . . . . . 5,189 5,860 (671)
Amortization of Intangible Assets . . . . . . . . . . . . 1,702 1,225 477
All Other . . . . . . . . . . . . . . . . . . . . . . . . 4,529 4,914 (385)
------- ------- --------
Total Noninterest Expense . . . . . . . . . . . . . . . $65,430 $67,474 $(2,044)
======= ======= ========
</TABLE>
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 32.0% during 1994
primarily as a result of the nonrecurring restructuring charge in 1993 for
expenses relating to an early retirement program and
24
<PAGE> 25
decreased employee health care expense as a result of an overfunding of the
health care plan at year-end 1993. Future employee health care expenses are
anticipated to increase due to rising health care costs and increased claims.
Net occupancy expense increased 7.3% during 1994 primarily as a result
of the timing of the 1993 acquisitions and the 1994 acquisition.
Equipment rental, depreciation, and maintenance expense increased 8.4%
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.
Federal Deposit Insurance Corporation ("FDIC") insurance expense
increased $189 thousand or 6.3% during 1994 due to increased deposits obtained
in the 1993 acquisitions. The Company's primary subsidiary, Victoria Bank &
Trust Company ("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 second half of 1995.
Taxes other than income decreased 11.4% 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
increased during 1994 as a result of the timing of acquisitions.
Outside service expense decreased 11.5% 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 7.8% 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 $8.6 million compared to $6.9 million
25
<PAGE> 26
for the year ended December 31, 1993. As previously mentioned, 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
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, 1994, the Company's ratios of "Tier 1" and total
capital to risk-weighted assets were 17.54% and 18.69%, respectively. Both
ratios significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital
(dollars in thousands):
26
<PAGE> 27
<TABLE>
<CAPTION>
December 31, 1994
------------------------------
Amount Ratio
-------- ------
<S> <C> <C>
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . $150,478 17.54%
Tier 1 Capital Minimum Requirement . . . . . . . . . . . . . 34,326 4.00
--------- ------
Excess Tier 1 Capital . . . . . . . . . . . . . . . . . . . . $116,152 13.54%
======== ======
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . $160,360 18.69%
Total Capital Minimum Requirement . . . . . . . . . . . . . . 68,652 8.00
-------- ------
Excess Total Capital . . . . . . . . . . . . . . . . . . . . $ 91,708 10.69
======== ======
Risk Adjusted Assets,
Net of Goodwill . . . . . . . . . . . . . . . . . . . . . . $857,779
========
</TABLE>
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, 1994, was 8.75%, 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.
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.
27
<PAGE> 28
The Company paid cash dividends of $4.1 million and $2.9 million to
holders of common stock during 1994 and 1993, respectively. The Company has
paid cash dividends for eleven 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, both of
which will be paid on February 14, 1995.
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 19.8% in
1994 from 18.8% in 1993. This increase was the result of customers moving
funds into time deposits as interest rates increased during 1994.
The table below sets forth the maturity distribution based on
remaining maturities of certificates of deposit of $100,000 or more issued by
the Bank (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1993
-------- --------
<S> <C> <C>
Maturing in 3 Months or Less . . . . . . . . . . . . . . . . $ 40,158 $ 40,952
Maturing in Over 3 Through 6 Months . . . . . . . . . . . . . 19,131 20,040
Maturing in Over 6 Through 12 Months . . . . . . . . . . . . 23,541 18,390
Maturing in Over 12 Months . . . . . . . . . . . . . . . . . 14,239 10,488
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,069 $ 89,870
======== ========
</TABLE>
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.
28
<PAGE> 29
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,
1994 (dollars in thousands).
<TABLE>
<CAPTION>
Over One
Rate Sensitive Within Year and
---------------------------------------------------------- Nonrate
30-Day 90-Day 180-Day One Year Total Sensitive Total
------- ------- ------- -------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned Discount.. $244,112 $28,186 $41,055 $ 59,846 $373,199 $199,537 $ 572,736
Investment Securities . ......... 114,400 64,541 55,529 121,885 356,355 501,467 857,822
Federal Funds Sold and Other
Short-Term Investments........... 114,212 -0- -0- -0- 114,212 -0- 114,212
Other Earning Assets............. 346 -0- -0- -0- 346 -0- 346
-------- ------- ------- -------- -------- -------- ----------
Total Earning Assets ......... 473,070 92,727 96,584 181,731 844,112 701,004 1,545,116
Interest-Bearing Liabilities:
Interest-Bearing
Transactional Accounts......... 297,620 -0- -0- -0- 297,620 314,250 611,870
Time Deposits.................... 74,509 88,786 107,652 111,414 382,361 106,703 489,064
Fed Funds Purchased and Other
Short-Term Borrowings.......... 96,052 26 39 81 96,198 -0- 96,198
Long-Term Debt................... -0- -0- -0- -0- -0- 1,720 1,720
-------- ------- ------- -------- -------- -------- ----------
Total Interest-Bearing
Liabilities................ 468,181 88,812 107,691 111,495 776,179 422,673 1,198,852
-------- ------- ------- -------- -------- -------- ----------
Interest Sensitivity Gap........... $ 4,889 $ 3,915 $(11,107) $ 70,236 $ 67,933
======== ======= ======== ======== ========
Ratio of Earning Assets to
Interest-Bearing Liabilities..... 101.04% 104.41% 89.69% 162.99% 108.75%
======== ======= ======== ======== ========
</TABLE>
The Company had an asset sensitivity gap position in the 30-day period
of $4.9 million. The cumulative rate sensitive gap position at one year was an
asset sensitive position of $67.9 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.
29
<PAGE> 30
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, 1994 (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
------------------ ----------------- ----------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Secured Primarily by
Real Estate:
Construction and
Land Development . . . . $ 17,607 3.05% $ 22,506 4.20% $ 10,846 2.95% $ 10,017 2.62% $ 7,967 2.18%
Other Real Estate
Loans . . . . . . . . . 230,991 40.04 202,263 37.77 129,869 35.29 145,508 38.11 150,531 41.12
Agricultural . . . . . . . . 36,861 6.39 34,005 6.35 25,452 6.91 23,922 6.27 17,923 4.90
Commercial and Industrial
Loans . . . . . . . . . . 117,353 20.34 109,863 20.52 77,214 20.98 89,231 23.37 91,566 25.01
Consumer Loans . . . . . . . 171,459 29.72 162,472 30.34 117,282 31.86 104,589 27.40 86,261 23.57
Loans to Financial
Institutions and
all Other Loans . . . . . 2,671 0.46 4,410 0.82 7,381 2.01 8,502 2.23 11,791 3.22
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total Loans . . . . . . . . . 576,942 100.00% 535,519 100.00% 368,044 100.00% 381,769 100.00% 366,039 100.00%
====== ====== ====== ====== ======
Less:
Unearned Discount . . . . (4,206) (8,814) (8,024) (7,605) (6,467)
Allowance for Loan Losses (9,882) (9,738) (9,855) (11,290) (13,043)
-------- -------- -------- -------- --------
Net Loans . . . . . . . . . . $562,854 $516,967 $350,165 $362,874 $346,529
======== ======== ======== ======== ========
</TABLE>
30
<PAGE> 31
Maturities in the Company's loan portfolio at December 31, 1994, are
summarized below (in thousands):
<TABLE>
<CAPTION>
Due Due
Due in After One After
One Year Through Five
or Less Five Years Years Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
Loans Secured Primarily by Real Estate:
Construction and Land Development . . . . . . . . . . . $ 16,798 $ 210 $ 599 $ 17,607
Other Real Estate Loans . . . . . . . . . . . . . . . . 37,419 89,207 104,365 230,991
Agricultural . . . . . . . . . . . . . . . . . . . . . . . 30,500 6,284 77 36,861
Commercial and Industrial Loans . . . . . . . . . . . . . . 65,977 44,146 7,230 117,353
Consumer Loans . . . . . . . . . . . . . . . . . . . . . . 75,905 94,292 1,262 171,459
Loans to Financial Institutions and all Other Loans . . . . 1,136 1,025 510 2,671
-------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $227,735 $235,164 $114,043 $576,942
======== ======== ======== ========
</TABLE>
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):
<TABLE>
<CAPTION>
December 31, 1994
-----------------
<S> <C>
Loans Having Predetermined Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . $194,966
Loans Having Floating or Adjustable Interest Rates . . . . . . . . . . . . . . . . . . . 154,241
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $349,207
========
</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 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 $9.9 million at December 31, 1994. The
31
<PAGE> 32
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):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1994 1993 1992 1991 1990
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Period . . . . . $ 9,738 $ 9,855 $11,290 $13,043 $15,250
Provision for Loan Losses . . . . . . . . -0- -0- 174 107 2,543
Reserves on Purchased Loans . . . . . . . -0- 300 -0- 160 534
Charge-offs:
Real Estate Loans . . . . . . . . . . 64 304 1,038 978 2,513
Agricultural . . . . . . . . . . . . 4 20 66 69 287
Commercial and Industrial Loans . . . 121 369 909 840 2,642
Consumer Loans . . . . . . . . . . . 564 892 908 1,061 1,156
Loans to Financial Institutions
and all Other Loans . . . . . . . . . -0- -0- -0- 935 865
------- ------- ------- ------- -------
Total Charge-Offs . . . . . . . . . 753 1,585 2,921 3,883 7,463
------- ------- ------- ------- -------
Recoveries:
Real Estate Loans . . . . . . . . . . 304 289 132 430 480
Agricultural . . . . . . . . . . . . 53 6 19 71 191
Commercial and Industrial Loans . . . 131 466 397 1,033 1,084
Consumer Loans . . . . . . . . . . . 409 407 539 265 400
Loans to Financial Institutions
and all Other Loans . . . . . . . . . -0- -0- 225 64 24
------- ------- ------- ------- -------
Total Recoveries . . . . . . . . . 897 1,168 1,312 1,863 2,179
------- ------- ------- ------- -------
Net Charge-Offs (Recoveries) . . . . . . (144) 417 1,609 2,020 5,284
------- ------- ------- ------- -------
Balance at End of Period . . . . . . . . $ 9,882 $ 9,738 $ 9,855 $11,290 $13,043
======= ======= ======= ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balances:
Average Loans, Net of Unearned Discount . $557,821 $465,901 $368,330 $366,888 $367,849
Loans, Net of Unearned Discount . . . . . 572,736 526,705 360,020 374,164 359,572
Net Charge-Offs (Recoveries) . . . . . . (144) 417 1,609 2,020 5,284
Allowance for Loan Losses . . . . . . . . 9,882 9,738 9,855 11,290 13,043
Nonperforming Assets . . . . . . . . . . 10,769 14,699 19,872 28,692 40,040
Nonperforming Loans . . . . . . . . . . . 8,308 9,501 11,349 16,600 24,332
Ratios:
Net Charge-Offs (Recoveries) to:
Average Loans, Net of Unearned Discount (.03%) .09% .44% .55% 1.44%
Loans, Net of Unearned Discount . . . (.03%) .08% .45% .54% 1.47%
Allowance for Loan Losses . . . . . . (1.46%) 4.28% 16.33% 17.89% 40.51%
Allowance for Loan Losses to:
Loans, Net of Unearned Discount . . . 1.73% 1.85% 2.74% 3.02% 3.63%
Nonperforming Assets . . . . . . . . . 91.76% 66.25% 49.59% 39.35% 32.57%
Nonperforming Loans . . . . . . . . . 118.95% 102.49% 86.84% 68.01% 53.60%
</TABLE>
The table below shows an allocation of the allowance for loan losses
by major categories of loans for the five years ended December 31, 1994.
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
32
<PAGE> 33
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):
<TABLE>
<CAPTION>
Commercial Financial
Real and Institutions
Estate Agricultural Industrial Consumer and Other Unallocated Total
------ ------------ ---------- -------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994:
Allowance . . . . $2,812 $ 283 $1,401 $3,584 $ 23 $1,779 $ 9,882
Percentage of Loans 1.13% .77% 1.19% 2.09% .86% 1.73%
December 31, 1993:
Allowance . . . . 3,066 395 1,708 2,787 29 1,753 9,738
Percentage of Loans 1.36% 1.16% 1.55% 1.72% .66% 1.85%
December 31, 1992:
Allowance . . . . 2,675 344 1,703 3,242 117 1,774 9,855
Percentage of Loans 1.90% 1.35% 2.21% 2.76% 1.59% 2.74%
December 31, 1991:
Allowance . . . . 3,472 475 2,800 2,517 140 1,886 11,290
Percentage of Loans 2.23% 1.99% 3.14% 2.41% 1.65% 3.02%
December 31, 1990:
Allowance . . . . 3,485 422 3,494 2,329 1,249 2,064 13,043
Percentage of Loans 2.20% 2.35% 3.82% 2.70% 10.59% 3.63%
</TABLE>
All percentages are calculated using loans net of unearned discount.
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.
The following table discloses information regarding nonperforming
assets for each of the last five years (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans (1) . . . . . . . . . . . . . . $ 7,691 $ 8,902 $10,626 $15,833 $23,179
Troubled Debt Restructurings (1) . . . . . . . . 617 599 723 767 1,153
Other Loan Related Assets . . . . . . . . . . . . 2,461 5,198 8,523 12,092 15,708
------- ------- ------- ------- -------
Total Nonperforming Assets . . . . . . . . . . . $10,769 $14,699 $19,872 $28,692 $40,040
======= ======= ======= ======= =======
Loans 90 Days or More Past Due and
Still Accruing . . . . . . . . . . . . . . . . $ 427 $ 471 $ 4,150 $ 1,157 $ 2,862
======= ======= ======= ======= =======
</TABLE>
_______________
(1) See also Note 5 of Notes to Financial Statements for interest foregone.
Total nonperforming assets, which include nonperforming loans and other
nonperforming assets, totaled $10.8 million or 1.9% of total loans and other
nonperforming assets at December 31, 1994, as compared with $14.7 million or
2.8% of total loans and other nonperforming assets at December 31, 1993. Total
nonperforming assets represented 0.6% and 0.8% of the total assets at December
31, 1994 and December 31, 1993, respectively. The Company anticipates a
continued low level of nonperforming assets if the regional economy remains
stable. The total amount of loans past
33
<PAGE> 34
due 90 days or more and still accruing, totaled $427 thousand at December 31,
1994, compared to $471 thousand at December 31, 1993.
NONPERFORMING LOANS
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 placed on a nonaccrual basis. Loans are placed on
a nonaccrual basis when there are serious doubts regarding the complete
collectibility of principal and interest. Amounts received on nonaccrual loans
generally are applied 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 accrued at the restructured rates
when it is anticipated that no loss of original principal will occur. Loans
which are 90 days delinquent but are well secured and in the process of
collection are not included in nonperforming loans.
Any loans classified for regulatory purposes that have not been
included in nonperforming loans will not in Management's view, materially
impact future operating results, liquidity, or capital resources.
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan" as amended by Statement of Financial Accounting Standards
No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition
and Disclosures." 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 new standards also require certain disclosures regarding
impaired loans. The Company adopted these standards effective January 1, 1995.
Loans classified as "in-substance foreclosures" were reclassified to nonaccrual
loans at that time. The adoption of these accounting standards did not have a
material effect on the Company's consolidated financial position or results of
operations since the Company's recognition and measurement policies regarding
nonperforming loans are materially consistent with the accounting requirements
for impaired loans.
Other Nonperforming Assets
Other nonperforming assets consist of real estate acquired through
loan foreclosures or other workout situations and other assets acquired through
repossessions. In addition, other nonperforming assets include in-substance
foreclosed loans for
34
<PAGE> 35
which the Company bears the risks of property ownership and there is little
likelihood of the borrower being able to repay the loan through means other than
foreclosure and sale of the property. Such loans are carried as other loan
related assets as if they had been formally foreclosed or repossessed.
According to Company policy all other loan related assets with a value of $100
thousand or over are appraised on an annual basis by an independent appraisal
service.
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, the Company expanded
into an area positively affected by a major educational center. 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,
including recent events in Mexico.
Real estate loans totaling $248.6 million comprised approximately
43.1% of the loan portfolio at December 31, 1994, of which 2.7% was
nonperforming. At December 31, 1993, real estate loans totaled $224.8 million
comprising 42.0% of the loan portfolio, of which 3.3% 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 $171.5 million at December 31, 1994
(approximately 29.7% 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
$162.5 million (approximately 30.3% 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 $36.9 million at
December 31, 1994, or approximately 6.4% of the Company's loan portfolio, of
which .09% were nonperforming. At December 31, 1993, agricultural loans
totaled $34.0 million comprising approximately 6.4% of the Company's loan
portfolio, of
35
<PAGE> 36
which 1.7% 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 .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
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):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Book Value:
Held to Maturity:
U. S. Government and
Government Agency . . . . . . . . . . . . . . $621,068 $679,513 $701,230
State and Political Subdivisions . . . . . . . . 33,564 3,428 5,057
Investment Grade Corporate Bonds . . . . . . . 91,004 114,196 69,502
Mortgage-Backed Securities . . . . . . . . . . 4,959 9,343 11,643
Other (1) . . . . . . . . . . . . . . . . . . . -0- -0- 1,397
Available for Sale:
U.S. Government . . . . . . . . . . . . . . . . 96,190 82,522 -0-
State and Political Subdivisions . . . . . . . 4,737 -0- -0-
Other (1) . . . . . . . . . . . . . . . . . . . 6,300 6,836 -0-
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . . $857,822 $895,838 $788,829
======== ======== ========
Market Value: . . . . . . . . . . . . . . . . . . . . $839,377 $906,466 $808,024
======== ======== ========
</TABLE>
_____________________
(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 (56%), 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
36
<PAGE> 37
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,
1994, constituted 12.2% of the portfolio, securities with unrealized losses
constituted 86.9% of the portfolio with the remaining portfolio consisting of
securities with no unrealized gains or losses. At December 31, 1993,
securities with unrealized gains constituted 62.5% of the portfolio, securities
with unrealized losses constituted 21.1% of the portfolio, and the remaining
portfolio consisted of securities with no unrealized gains or losses. At
December 31, 1994, available for sale securities had an aggregate unrealized
holding loss of $2.4 million. The unrealized holding losses, net of tax, of
$1.5 million are recorded in stockholders' equity. At December 31, 1993,
available for sale securities had an aggregate unrealized holding gain of $345
thousand. The unrealized holding gains, net of tax, of $224 thousand are
recorded in stockholders' equity. See Note 4 to the Financial Statements.
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, 1994, 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).
37
<PAGE> 38
<TABLE>
<CAPTION>
US Govt. State & Investment Mortgage-
& Govt. Political Grade Corp. Backed
Agency Subdivision Bonds Securities Other Total
------- ----------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Due Within One Year
Market Value . . . . . . . . . . $186,004 $ 6,028 $30,602 $ -0- $ 6,300 $228,934
Book Value:
Held to Maturity . . . . . . . 158,345 6,034 30,791 -0- -0- 195,170
Available for Sale . . . . . . 29,036 -0- -0- -0- 6,300 35,336
Yield . . . . . . . . . . . . . . 4.87% 7.92% 4.80% 0.00% 4.18% 4.92%
Due After One But Within Five Years .
Market Value . . . . . . . . . . 403,910 9,193 50,211 -0- -0- 463,314
Book Value:
Held to Maturity . . . . . . . 347,326 9,051 51,175 -0- -0- 407,552
Available for Sale . . . . . . 67,154 302 -0- -0- -0- 67,456
Yield . . . . . . . . . . . . . . 5.48% 7.66% 5.49% 0.00% 0.00% 5.52%
Due After Five But Within Ten Years
Market Value . . . . . . . . . . 22,724 20,171 8,836 -0- -0- 51,731
Book Value:
Held to Maturity . . . . . . . 23,535 18,285 9,038 -0- -0- 50,858
Available for Sale . . . . . . -0- 2,554 -0- -0- -0- 2,554
Yield . . . . . . . . . . . . . . 6.00% 7.36% 5.56% 0.00% 0.00% 6.46%
Due After Ten Years
Market Value . . . . . . . . . . 88,611 2,056 -0- 4,731 -0- 95,398
Book Value:
Held to Maturity . . . . . . . 91,862 194 -0- 4,959 -0- 97,015
Available for Sale . . . . . . -0- 1,881 -0- -0- -0- 1,881
Yield . . . . . . . . . . . . . . 6.59% 6.25% 0.00% 7.05% 0.00% 6.61%
</TABLE>
1993 COMPARED TO 1992
The following discussion highlights the major changes affecting the
operations and financial condition of the Company for the two years ended
December 31, 1993. 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, 1993, the Company reported earnings of
$18.5 million compared to $19.1 million for the year ended December 31, 1992, a
decrease of 3.0%. Primary earnings per share were $2.50 for 1993 compared to
$2.69 for 1992. The year of 1993 was highlighted by four events which had a
material effect on 1993: (i) a change in the method used to account for income
tax, (ii) a restructuring of the branch and lending functions, (iii) two
acquisitions, and (iv) a common stock offering of 835,000 shares. Each of
these events will be described in the paragraphs below.
On January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes." The cumulative
effect of this change in accounting method resulted in the recognition of $4.8
million of income. Even though this recognition had a material impact on
1993's financial results, its effect on the comparison of results of operation
between 1993 and 1992 is offset by the utilization of net operating loss
carryforwards during 1992. This is best indicated by comparing federal income
tax expense less the effect of this accounting change ($2.1 million) in 1993
against federal income tax expense less utilization of net operating loss ($1.8
million) in 1992. The
38
<PAGE> 39
two amounts represent 10.2% and 8.8% of income before taxes in 1993 and 1992,
respectively. The Company will record income taxes at the statutory rate
(currently 35%) less permanent differences in future years. This will have a
negative effect on future years' net income.
On June 28, 1993, the Company announced a $2.8 million dollar charge
against earnings which represented the cost of restructuring its branch and
lending functions. This one-time charge is expected to reduce future expense
growth by $2.4 million annually. The financial benefit of this restructuring
began to be realized in the fourth quarter of 1993. Disregarding this one-time
charge, income before tax increased 11.9% over 1992. In addition to the
related cost savings, the Company anticipates the restructuring to positively
affect loan growth and the sale of financial products as the branch and lending
functions increase their focus on the customer.
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%. In addition to growth in
revenue producing accounts, Bryan/College Station became the largest market
serviced by the Company. 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. Management believes these acquisitions will
continue to have a positive impact on the Company's financial results in the
future.
On August 4, 1993, the Company completed a registered offering of
835,000 shares of common stock. Investor interest in the public portion of the
offering exceeded expectations and was oversubscribed. Net proceeds from the
offering were $18.1 million, after deducting expenses related to the offering.
$3.0 million of the proceeds were used to retire all remaining long-term debt.
The remaining proceeds provide capital for future acquisition opportunities.
Other factors contributing to the net income of 1993, compared to
1992, include an increase in net interest income, improved asset quality, the
growth of noninterest income, and containment of noninterest expense. However,
the interest rate margin decreased in 1993 as the positive effects of the
declining market rates
39
<PAGE> 40
slowed and maturing investment securities were reinvested at lower yields.
The Company continues to be well-capitalized. At December 31, 1993,
the Company's ratio of total capital-to-risk-weighted-assets was 18.62% and
its leverage ratio was 8.4%, 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
1993 is adjusted to a "fully taxable equivalent" basis to recognize the income
tax savings on tax-exempt items. Net interest income for 1992 is not recorded
on a "fully taxable equivalent" basis because the Company did not realize the
benefit of tax-exempt income during this period. Net interest income increased
to $62.1 million in 1993, an increase of 5.1% from the $59.1 million reported
in 1992.
The decrease of $5.2 million of nonperforming assets had a positive
impact on the net interest margin. Interest income foregone on nonperforming
loans declined to $.7 million in 1993 as compared to $.9 million in 1992.
Additionally, the interest carrying cost (based on the Company's average cost
of federal funds purchased) of other loan-related assets decreased to $190
thousand in 1993 from $317 thousand in 1992.
As the table presented on page 20 illustrates, the interest rate
margin decreased 26 basis points to 4.03% in 1993 from 4.29% in 1992.
The table presented on page 21 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 increase in average volume of
interest-earning assets, principally loans from the acquisition of the Bryan
Bank and Richmond Branch.
Changes Due to Rates
The decrease in net interest income due to the change in average rates
results from the difference of the reinvestment rate on interest-earning assets
being greater than the difference of the reissuance rate on interest-bearing
liabilities as a result of a flattening of the yield curve and the maturity of
fixed rate long-term assets.
40
<PAGE> 41
PROVISION FOR LOAN LOSSES
The Company made no provision for loan losses in 1993 as compared to
$174 thousand in 1992. This decrease is due to decreases in nonperforming
loans and net charge-offs.
During 1993, the Company recorded net charge-offs against the
allowance for loan losses of $417 thousand, down from $1.6 million in 1992.
The ratio of net charge-offs to average loans, net of unearned discount, for
1993 was .1%, down from .4% in 1992. Reflecting improved loan portfolio
quality, the allowance for loan losses at December 31, 1993, was 1.9% of loans,
net of unearned discount, compared to 2.7% at December 31, 1992. The allowance
as a percent of nonperforming loans was 102.5% at December 31, 1993, as
compared to 86.8% a year earlier.
NONINTEREST INCOME
Noninterest income totaled $26.2 million in 1993, up $3.4 million or
14.7% from December 31, 1992. The following table presents a comparative
analysis of the major components of noninterest income (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------------------------
Increase
1993 1992 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Service Charges and Other Fees . . . . . . . . . . $13,949 $12,375 $1,574
Trust Services Income . . . . . . . . . . . . . . . 4,230 2,952 1,278
Data Processing Income . . . . . . . . . . . . . . 3,196 2,995 201
Securities Gains . . . . . . . . . . . . . . . . . 48 318 (270)
Other Operating Income
Investment Product Income . . . . . . . . . . . 1,615 1,310 305
Safe Deposit Income . . . . . . . . . . . . . . 499 482 17
Mortgage Banking Income . . . . . . . . . . . . 703 464 239
All Other Operating Income . . . . . . . . . . 1,973 1,951 22
------- ------- ------
Total Noninterest Income . . . . . . . . . . . $26,213 $22,847 $3,366
======= ======= ======
</TABLE>
Service charges and other fees increased 12.7% in 1993 resulting
mainly from increased volume of customer accounts due to acquisitions in 1993,
and increased fees paid by correspondent banks and commercial customers as a
result of the usage of lower earning credit rates in deposit account analysis.
The earning credit rate is the rate used by the Company to analyze if deposit
account customers have sufficient balances to compensate the Company for
services performed. The earning credit rate is tied to open market rates, such
as 90-day Treasury Bills or Fed Funds rates, both of which have decreased
within the last year thereby reducing the value of deposits and increasing the
account balance to compensate the Company for services performed. As market
rates move upward, this trend will reverse and the related fees will be
impacted.
41
<PAGE> 42
Trust services income increased 43.3% during 1993 as the assets under
management increased $200.0 million to $710.2 million. This increase can be
attributed to the acquisition of the Bryan Bank which added approximately
$139.0 million in trust assets during the first quarter of 1993 and $981
thousand in trust fees during 1993.
Data processing income increased 6.7% during 1993 primarily
attributable to an increase in fees and services provided to customers.
Securities gains decreased $270 thousand during 1993 due primarily to
gains recognized by the First National Bank of Rockport ("FNB, Rockport") prior
to its acquisition and sales of in-substance maturities in 1992.
Other operating income, which includes investment product income, safe
deposit income, mortgage banking income, and all other, increased 13.9% in
aggregate during 1993 resulting from increases in total commissions from a
higher level of sales of fixed income securities to customers through the
dealer bank, fees collected on the origination of mortgage loans sold in the
secondary market due to an increase in mortgage refinancings, gains on the sale
of foreclosed properties, and credit card fee income. Income of $120 thousand
was recorded as a result of fees generated from the sale of annuities through a
new program started in 1993. Also contributing to the increase in other
operating income was an accrued discount booked in 1992 on the sale of a
portion of the student loan portfolio which was completed in the first quarter
of 1993.
NONINTEREST EXPENSE
Total noninterest expense increased $6.7 million or 11.0% to $67.5
million in 1993 from $60.8 million in 1992. This increase resulted primarily
from the additional expenses, including conversions, of the acquired branches
of the Bryan Bank and Richmond Branch ($6.7 million) and the previously
mentioned $2.8 million restructuring charge. Excluding expenses related to
acquisitions and restructuring, total noninterest expense decreased 3.5%.
Noninterest expense in future periods will be affected positively as a result
of the branch and lending function restructuring during 1993. The following
table presents a comparative analysis of the major components of noninterest
expense (in thousands):
42
<PAGE> 43
<TABLE>
<CAPTION>
December 31,
---------------------------------------
Increase
1993 1992 (Decrease)
------- ------- ----------
<S> <C> <C> <C>
Salaries and Wages . . . . . . . . . . . . . . . $24,668 $23,116 $ 1,552
Retirement and Other
Employee Benefits . . . . . . . . . . . . . . 10,483 7,105 3,378
Net Occupancy Expense . . . . . . . . . . . . . . 5,503 5,395 108
Equipment Rental, Depreciation, and
Maintenance . . . . . . . . . . . . . . . . . . 4,217 3,624 593
FDIC Insurance . . . . . . . . . . . . . . . . . 3,010 2,875 135
Other Operating Expenses
Taxes Other Than Income . . . . . . . . . . . 1,962 1,191 771
Marketing Expense . . . . . . . . . . . . . 1,370 1,368 2
Operating Supplies . . . . . . . . . . . . . 2,116 2,300 (184)
Communication Expense . . . . . . . . . . . . 1,088 999 89
Postage Expense . . . . . . . . . . . . . . . 1,058 960 98
Outside Service Expense . . . . . . . . . . . 5,860 6,211 (351)
Amortization of Intangible Assets . . . . . . 1,225 505 720
All Other . . . . . . . . . . . . . . . . . . 4,914 5,164 (250)
------- ------- -------
Total Noninterest Expense . . . . . . . . . $67,474 $60,813 $ 6,661
======= ======= =======
</TABLE>
Salaries and wages increased 6.7% during 1993 due to staffing
increases related to acquisitions in 1993, $200 thousand related to
restructuring, and normal merit increases. These increases were partially
offset, however, by a reduction in the number of employees, and, therefore, the
related expense, as a result of the restructuring plan announced by the Company
discussed above in the "Overview of Operations" section.
Retirement and other employee benefits increased 47.5% during 1993
primarily as a result of a charge of $2.6 million during the second quarter of
1993 for expenses relating to the restructuring plan announced by the Company
discussed above in the "Overview of Operations" section.
Equipment rental, depreciation, and maintenance increased 16.4% during
1993 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. Also contributing to the increase
was increased repairs and maintenance expenses as a result of acquisitions in
1993.
FDIC insurance expense increased 4.7% during 1993 due to an increased
assessment paid in June on deposits obtained in the acquisition of the Bryan
Bank. This increase in volume of deposits resulted in an increased expense of
approximately $135 thousand. The Company will have increased FDIC insurance
expense in 1994 due to a full year of the insurance expense on the deposits
acquired from the Bryan Bank and Richmond Branch. The Company's primary
subsidiary, Victoria Bank & Trust Company ("the Bank"), has been notified by
the FDIC that its assessment rate for 1994 will remain
43
<PAGE> 44
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.
Taxes other than income, primarily Texas franchise tax, increased
64.7% during 1993 as a result of a refund received by the Parent Company in
1992 for franchise taxes paid in preceding years which aggregated approximately
$130 thousand. This refund was received because, under rules promulgated by
the Controller of Public Accounts, expanded categories of income from U. S.
Treasury sources were deemed excluded from income for the purposes of computing
the earned surplus tax. Also contributing to the increase in noninterest
expense were increases in ad valorem taxes on premises and personal property as
a result of tax rate increases and additional properties acquired through the
acquisitions of the Bryan Bank and Richmond Branch in 1993.
Operating supplies decreased 8.0% during 1993 due to a change in the
relationship with the checkbook vendor in which the vendor sells directly to
the Bank customers. This was offset partially by increased supplies expense as
a result of acquisitions in 1993.
Communications and postage expense both increased due to expenses
related to the acquisitions in 1993.
Amortization of intangible assets increased 142.6% primarily as a
result of the acquisition of the Bryan Bank.
All other noninterest expense decreased due to a reduction in expenses
related to foreclosed assets as a result of decreased foreclosures offset
partially by increased expenses relating to acquisitions, primarily travel.
INCOME TAXES
For the year ended December 31, 1993, the Company's provision for
federal income taxes was $6.9 million compared to $8.2 million for the year
ended December 31, 1992. For 1992, the provision, excluding the alternative
minimum tax, was then reduced by the utilization of net operating loss
carryforwards of $6.4 million. As previously discussed, 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 in the first month of 1993 of which $2.4 million remains
as of December 31, 1993. This deferred tax asset is composed of the expected
tax benefit from the reversal of temporary differences between tax and book net
income. During 1993, the Company fully utilized the operating loss
carryforwards, and all tax credit carryforwards. After recognition of all
these benefits, the Company returned to a statutory tax rate position. The
existing net temporary differences will reverse during future periods. The
Company did not record a valuation allowance against
44
<PAGE> 45
the deferred tax asset because it expects to fully recognize these future
benefits.
EXTRAORDINARY ITEMS
The decrease in extraordinary items at December 31, 1993, from
December 31, 1992, is the result of the Company purchasing in 1992 the
remaining balance of $737 thousand of its 9.625% Senior Notes and redeeming all
of the outstanding $10.8 million in principal amount of its 10.5% Convertible
Subordinated Debentures, which were due in 1997.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
As of December 31, 1993, the Company had $4.8 million reported as the
cumulative effect of change in accounting method as the result of the adoption
of Statement of Financial Accounting Standards No. 109 discussed earlier.
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 (i.e., the exclusion of intangible
assets), 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 reserve for possible loan losses.
At December 31, 1993, the Company's ratios of "Tier 1" and total
capital to risk-weighted assets were approximately 17.44% and 18.62%,
respectively. Both ratios significantly exceed regulatory minimums.
The following table summarizes the Company's Tier 1 and Total Capital
(dollars in thousands):
45
<PAGE> 46
<TABLE>
<CAPTION>
December 31, 1993
------------------------------
Amount Ratio
-------- ------
<S> <C> <C>
Tier 1 Capital . . . . . . . . . . . . . . . . . . . . . . . $144,400 17.44%
Tier 1 Capital Minimum Requirement . . . . . . . . . . . . . 33,116 4.00
-------- ------
Excess Tier 1 Capital . . . . . . . . . . . . . . . . . . . . $111,284 13.44%
======== ======
Total Capital . . . . . . . . . . . . . . . . . . . . . . . . $154,138 18.62%
Total Capital Minimum Requirement . . . . . . . . . . . . . . 66,232 8.00
-------- ------
Excess Total Capital . . . . . . . . . . . . . . . . . . . . $ 87,906 10.62%
======== ======
Risk Adjusted Assets,
Net of Goodwill . . . . . . . . . . . . . . . . . . . . . . $827,899
========
</TABLE>
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, 1993, was 8.4%, which
also significantly 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 levels required under the
well-capitalized category.
The Federal Reserve Board is required 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 multifamily mortgages. These
regulations are expected to be finalized and effective in 1994. Based upon
current proposed regulations, the Company does not expect a material effect on
its risk-based capital.
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.
46
<PAGE> 47
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 18.8% in 1993 from 21.8% in 1992. 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):
<TABLE>
<CAPTION>
December 31,
------------------------------
Remaining Maturity 1993 1992
-------- --------
<S> <C> <C>
Maturing in 3 Months or Less . . . . . . . . . . . . . . $ 40,952 $ 51,658
Maturing in Over 3 Through 6 Months . . . . . . . . . . . 20,040 23,876
Maturing in Over 6 Through 12 Months . . . . . . . . . . 18,390 16,691
Maturing in Over 12 Months . . . . . . . . . . . . . . . 10,488 4,373
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 89,870 $ 96,598
======== ========
</TABLE>
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.
On January 3, 1992, $10,847,000 (all of the outstanding debentures) of
the 10.5% Convertible Subordinated Debentures due September 1, 1997, were
redeemed at a 1% premium plus accrued interest. Funding for the redemption was
provided from the sale of
47
<PAGE> 48
available unpledged securities and a loan of $8 million from a nonaffiliated
bank. The balance of the loan was paid off on August 4, 1993, using the
proceeds from the issuance of the common stock.
The Parent Company, as of December 31, 1993, has $17.2 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
$56,987,000 at December 31, 1993. The Parent Company received $4.1 million in
dividends in 1993 from subsidiaries. Cash dividends of $2.9 million and $2.2
million were paid by the Parent Company to holders of common stock during 1993
and 1992, respectively. The Company has paid a $.10 per share dividend for
seven 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, 1993 (dollars in thousands).
48
<PAGE> 49
<TABLE>
<CAPTION>
Over One
Rate Sensitive Within Year and
---------------------------------------------------------------- Nonrate
30-Day 90-Day 180-Day One Year Total Sensitive Total
------- ------- ------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Earning Assets:
Loans, Net of Unearned Discount $224,503 $24,832 $35,121 $ 58,292 $342,748 $183,957 $ 526,705
Investment Securities . . . . . 156,901 63,494 59,988 113,404 393,787 529,758 923,545
Federal Funds Sold and Other
Short-Term Investments . . . 98,943 -0- -0- -0- 98,943 -0- 98,943
Other Earning Assets . . . . . 1,373 -0- -0- -0- 1,373 -0- 1,373
-------- ------- ------- -------- -------- -------- ----------
Total Earning Assets . . . 481,720 88,326 95,109 171,696 836,851 713,715 1,550,566
Interest-Bearing Liabilities:
Interest-Bearing Transactional
Accounts . . . . . . . . . . 299,520 -0- -0- -0- 299,520 315,423 614,943
Time Deposits . . . . . . . . . 81,352 94,667 115,512 106,115 397,646 81,093 478,739
Fed Funds Purchased and Other
Short-Term Borrowings . . . . 119,210 -0- -0- -0- 119,210 -0- 119,210
-------- ------- ------- -------- -------- -------- ----------
Total Interest-Bearing
Liabilities . . . . . . 500,082 94,667 115,512 106,115 816,376 396,516 1,212,892
-------- ------- ------- -------- -------- -------- ----------
Interest Sensitivity Gap . . . . $(18,362) $ (6,341) $(20,403) $ 65,581 $ 20,475
======== ======== ======== ======== ========
Ratio of Earning Assets to
Interest-Bearing Liabilities. . 96.33% 93.30% 82.34% 161.80% 102.51%
======== ======== ======== ======== ========
</TABLE>
The Company had a negative interest rate sensitivity gap position in
the 30-day period of $18.4 million. The cumulative rate sensitive gap position
at one year was a positive $20.5 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 30 presents information on the
composition of the loan portfolio.
Maturities in the Company's loan portfolio at December 31, 1993, are
summarized below (in thousands):
49
<PAGE> 50
<TABLE>
<CAPTION>
Due Due
Due in After One After
One Year Through Five
or Less Five Years Years Total
-------- ---------- ------- --------
<S> <C> <C> <C> <C>
Loans Secured Primarily by Real Estate:
Construction and Land Development . . . . . . . . . . . $ 14,997 $ 3,281 $ 4,228 $ 22,506
Other Real Estate Loans . . . . . . . . . . . . . . . . 47,529 92,395 62,339 202,263
Agricultrual . . . . . . . . . . . . . . . . . . . . . . . 28,175 5,015 815 34,005
Commercial and Industrial Loans . . . . . . . . . . . . . . 67,945 38,584 3,334 109,863
Consumer Loans . . . . . . . . . . . . . . . . . . . . . . 72,294 88,813 1,365 162,472
Loans to Financial Institutions and all Other Loans . . . . 2,334 1,079 997 4,410
-------- -------- ------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . $233,274 $229,167 $73,078 $535,519
======== ======== ======= ========
</TABLE>
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):
<TABLE>
<CAPTION>
December 31, 1993
-----------------
<S> <C>
Loans Having Predetermined Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . $183,546
Loans Having Floating or Adjustable Interest Rates . . . . . . . . . . . . . . . . . . . 118,699
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $302,245
========
</TABLE>
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 $14.7 million or 2.8% of total loans and
other nonperforming assets at December 31, 1993, as compared with $19.9 million
or 5.4% of total loans and other nonperforming assets at December 31, 1992.
Total nonperforming assets represented .8% and 1.3% of the total assets at
December 31, 1993 and December 31, 1992, respectively. The Company anticipates
continued declines in nonperforming assets if the regional economy continues to
improve. The total amount of loans past due 90 days or more and still
accruing, totaled $471 thousand at December 31, 1993, compared to $4.2 million
at December 31, 1992. Of the balance at December 31, 1992, $2.9 million is
attributed to student loans issued under the government guaranteed program
which were sold in 1993.
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
50
<PAGE> 51
dairy cattle, poultry, cotton, and a variety of grain crops. Also, through the
acquisition of the Bryan Bank, the Company expanded into an area positively
affected by a major educational center. 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 is beginning
to show signs of improvement. Management believes that the loans in the real
estate portfolio are generally adequately supported by market prices or other
credit factors.
Real estate loans totaling $224.8 million comprised approximately
42.0% of the loan portfolio at December 31, 1993, of which 3.3% was
nonperforming. At December 31, 1992, real estate loans totaled $140.7 million
comprising 38.2% of the loan portfolio, of which 6.1% 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 41% of the total real estate
loans.
Consumer loans totaled $162.5 million at December 31, 1993
(approximately 30.3% of the loan portfolio), .5% of which were nonperforming.
These consumer loans include $2.7 million in student loans which were
originated with commitments to purchase when they enter payout status and
approximately $72.1 million in loans originated through automobile dealers. At
December 31, 1992, consumer loans totaled $117.3 million (approximately 31.9%
of the loan portfolio), 1.0% of which were nonperforming. Student loans were
$13.3 million and loans originated through automobile dealers were
approximately $34.8 million of this category in 1992. The reduction in the
student loans from 1992 to 1993 is the result of the sale of these loans with
recourse to Student Loan Marketing Association.
Agricultural loans, exclusive of loans secured by farm acreage which
are categorized by the Company as real estate loans, totaled $34.0 million at
December 31, 1993, or approximately 6.4% of the Company's loan portfolio, of
which 1.7% were nonperforming. At December 31, 1992, agricultural loans
totaled $25.5 million comprising approximately 6.9% of the Company's loan
portfolio, of which 1.4% 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 $1.6 million at December 31, 1993, or .3% of
the loan portfolio, and all were performing. At December 31, 1992, energy
loans totaled $2.3 million comprising approximately .6% of the loan portfolio,
of which 2% were nonperforming. The majority of the Company's energy
51
<PAGE> 52
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, 1993, constituted
62.5% of the portfolio, unrealized losses constituted 21.1% of the portfolio
with the remaining portfolio consisting of securities with no unrealized gains
or losses. This remaining portfolio includes the available for sale securities
which constitute 10.0% of the portfolio. At December 31, 1993, these
securities had an aggregate unrealized holding gain of $345 thousand. The
unrealized holding gains, net of tax, of $224 thousand are recorded in
stockholders' equity. At December 31, 1992, unrealized gains constituted 80.9%
of the portfolio, unrealized losses constituted 15.1% of the portfolio, and the
remaining portfolio consisted of securities with no unrealized gains or losses.
The average maturity of the portfolio was 1.78 years at December 31,
1993, compared to 1.75 years at December 31, 1992. 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, 1993, the distribution of
maturities and the weighted average interest yields to maturity of the
Company's investment securities (dollars in thousands):
<TABLE>
<CAPTION>
US Govt. State & Investment Mortgage-
& Govt. Political Grade Corp. Backed
Agency Subdivision Bonds Securities Other Total
------- ----------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Due Within One Year
Market Value . . . . . . . . . . $174,973 $1,296 $21,892 $ -0- $ 6,836 $204,997
Book Value:
Held to Maturity . . . . . . . 173,007 1,261 21,573 -0- -0- 195,841
Available for Sale . . . . . . -0- -0- -0- -0- 6,836 6,836
Yield . . . . . . . . . . . . . . 6.04% 8.26% 5.78% 0.00% 4.35% 5.31%
Due After One But Within Five Years
Market Value . . . . . . . . . . $461,704 $1,749 $81,839 $ -0- $ -0- $545,292
Book Value:
Held to Maturity . . . . . . . 373,230 1,612 81,211 -0- -0- 456,053
Available for Sale . . . . . . 82,522 -0- -0- -0- 82,522
Yield . . . . . . . . . . . . . . 4.79% 8.65% 5.04% 0.00% 0.00% 4.84%
Due After Five But Within Ten Years
Market Value . . . . . . . . . . $ 28,087 $ 381 $11,408 $ -0- $ -0- $ 39,876
Book Value Held to Maturity . . . 27,823 361 11,412 -0- -0- 39,596
Yield . . . . . . . . . . . . . . 6.01% 8.62% 4.29% 0.00% 0.00% 5.54%
Due After Ten Years
Market Value . . . . . . . . . . $106,932 $ 192 $ -0- $9,177 $ -0- $116,301
Book Value Held to Maturity . . . 105,453 194 -0- 9,343 -0- 114,990
Yield . . . . . . . . . . . . . . 6.66% 5.27% 0.00% 6.79% 0.00% 6.67%
</TABLE>
52
<PAGE> 53
These values represent contractual maturities, but actual repayments
and yields are dependent upon monthly cash flows and prepayments.
The weighted average yields have been calculated on the basis of daily
averages weighted for cost and duration of investment in each security and are
not presented on a fully taxable equivalent basis.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and report of independent public accountants
are included on pages 25 through 44 of the Company's 1994 Annual Report to
Shareholders, Exhibit 13 hereto, which statements and report are incorporated
herein by reference.
Supplementary financial information consisting of selected quarterly
financial data, which is set forth in Note 17 of the "Notes to Financial
Statements" on page 44 of the Company's 1994 Annual Report to shareholders,
Exhibit 13 hereto, is incorporated herein by reference.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 114 "Accounting by
Creditors for Impairment of a Loan" as amended by SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
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 new
standards also require certain disclosures regarding impaired loans. SFAS No.
114 as amended by SFAS No. 118 is effective for financial statements issued for
fiscal years beginning after December 15, 1994, although earlier adoption is
permitted. The Company adopted these standards effective January 1, 1995.
Loans classified as "in-substance foreclosures" were reclassified to
nonaccrual loans at that time. The adoption of these accounting standards did
not have a material effect on the Company's consolidated financial position or
results of operations since the Company's recognition and measurement policies
regarding nonperforming loans are consistent with the accounting requirements
for impaired loans.
53
<PAGE> 54
ITEM 9
CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
Information pertaining to directors of the Company is incorporated
herein by reference to "Election of Directors" on pages 2 through 5 of the
Company's Proxy Statement relating to the Annual Meeting of Shareholders to be
held on April 18, 1995 ("Proxy Statement"), attached as Exhibit 99 hereto.
Information with respect to the executive officers of the Company is included
under the caption "Executive Officers of the Company" in Part I of this Report
and is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
Information concerning executive compensation is included under the
headings "Compensation Committee Interlocks and Insider Participation" on page
8, and "Compensation of Executive Officers," on pages 9 through 12 of the Proxy
Statement attached as Exhibit 99 hereto, which pages are incorporated herein by
reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information on security ownership of certain beneficial owners and
management is included under the headings "Security Ownership of Management"
and "Principal Holders of Securities" on page 14 of the Proxy Statement,
attached as Exhibit 99 hereto, which pages are incorporated herein by
reference.
ITEM 13
CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Information on certain relationships and related transactions is
included under the heading "Election of Directors" on pages 4 through 5 and
"Interest of Management in Certain Transactions" on pages 12 through 13 of the
Proxy Statement, attached as Exhibit 99 hereto, which pages are incorporated
herein by reference.
54
<PAGE> 55
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements and report of independent public
accountants, included in the Company's 1994 Annual Report to Shareholders,
filed as Exhibit 13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1994, are incorporated herein by reference:
<TABLE>
<CAPTION>
Pages of
1994 Annual
Report to
Shareholders
------------
<S> <C>
Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . . . . . 25
Victoria Bankshares, Inc. and Subsidiaries:
Consolidated Balance Sheets as of
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Operations for
each of the three years ended
December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Statements of Changes in Stockholders' Equity
for each of the three years
ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Consolidated Statements of Cash Flow
for each of the three
years ended December 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . 29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-44
</TABLE>
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
<TABLE>
<S> <C>
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 (incorporated by reference to Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037].
</TABLE>
55
<PAGE> 56
<TABLE>
<S> <C>
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 December 14, 1984, between Victoria Bank & Trust Company and the Estate of
Thos. O'Connor (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form
10-K for the year ended December 31, 1984 [File No. 0-8037]).
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 - Amended and restated Nonqualified Deferred Compensation Plan of the Company effective January 1,
1994 (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994 [File No. 0-8037].
10.6 - 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].
10.7 - 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]).
*13 - 1994 Annual Report to Shareholders of the Company
21 - List of Subsidiaries of the Company (incorporated by reference to Exhibit 22 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992 [File No. 0-8037]).
</TABLE>
56
<PAGE> 57
<TABLE>
<S> <C>
**23.1 - Consent of Independent Public Accountants - Arthur Andersen LLP.
**27 - Financial Data Schedule
*99 - Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of Shareholders
of the Company to be held on April 18, 1995.
</TABLE>
____________________
* Deemed filed only with respect to those portions thereof expressly
incorporated herein y reference.
** Filed herewith.
57
<PAGE> 58
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: May 31, 1995
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ CHARLES R. HRDLICKA Chairman of the Board and *
- ----------------------------- Chief Executive Officer *
(Charles R. Hrdlicka) and Director (Principal *
Executive Officer) *
*
*
*
/s/ GREGORY SPRAWKA Executive Vice President and * May 31, 1995
- ----------------------------- Chief Financial Officer, *
(Gregory Sprawka) Secretary-Treasurer *
(Principal Financial and *
Accounting Officer) *
*
</TABLE>
58
<PAGE> 59
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ D. H. BRAMAN, JR. Director *
- ---------------------------- *
(D. H. Braman, Jr.) *
*
*
/s/ R. W. BRIGGS, JR. Director *
- ----------------------------- *
(R. W. Briggs, Jr.) *
*
*
/s/ EDWIN W. DENTLER Director *
- ----------------------------- *
(Edwin W. Dentler) *
*
*
/s/ R. J. HEWITT Director *
- ----------------------------- *
(R. J. Hewitt) *
*
*
Director *
- ------------------------------ *
(Ralph R. Gilster, III) *
*
*
/s/ JACK R. MORRISON Director * May 31, 1995
- ----------------------------- *
(Jack R. Morrison) *
*
*
/s/ DENNIS O'CONNOR Director *
- ----------------------------- *
(Dennis O'Connor) *
*
*
Director *
- ----------------------------- *
(Tom O'Connor, Jr.) *
*
*
/s/ MUNSON SMITH Director *
- ----------------------------- *
(Munson Smith) *
*
</TABLE>
59
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<S> <C>
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 (incorporated by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994 [File No. 0-8037].
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 December 14, 1984, between Victoria Bank & Trust Company and the Estate of Thos.
O'Connor (incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1984 [File No. 0-8037]).
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 - Amended and restated Nonqualified Deferred Compensation Plan of the Company effective January 1, 1994
(incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1994 [File No. 0-8037].
10.6 - 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].
10.7 - 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]).
</TABLE>
<PAGE> 61
<TABLE>
<S> <C>
*13 - 1994 Annual Report to Shareholders of the Company
21 - List of Subsidiaries of the Company (incorporated by reference to Exhibit 22 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 [File No. 0-8037]).
**23.1 - Consent of Independent Public Accountants - Arthur Andersen LLP.
**27 - Financial Data Schedule
*99 - Notice of Annual Meeting of Shareholders and Proxy Statement for the Annual Meeting of Shareholders of
the Company to be held on April 18, 1995.3.1-Articles of Incorporation of the Company, as amended, prior
to April 28, 1988 (incorporated by reference to Exhibit 4(c) to the Registration Statement of the Company
on Form S-2 filed with the Commission on August 4, 1982 [File No. 2-78695]).
</TABLE>
____________________
* Deemed filed only with respect to those portions thereof expressly
incorporated herein by reference.
** Filed herewith.
<PAGE> 1
Exhibit 23.1
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our reports incorporated by reference in this Form 10-K/A, into the Company's
previously filed Registration Statement File No. 33-48171.
Arthur Andersen LLP
Houston, Texas
January 17, 1995
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 115,786
<INT-BEARING-DEPOSITS> 180
<FED-FUNDS-SOLD> 114,212
<TRADING-ASSETS> 166
<INVESTMENTS-HELD-FOR-SALE> 107,227
<INVESTMENTS-CARRYING> 750,595
<INVESTMENTS-MARKET> 732,150
<LOANS> 572,736
<ALLOWANCE> (9,882)
<TOTAL-ASSETS> 1,746,148
<DEPOSITS> 1,463,487
<SHORT-TERM> 96,198
<LIABILITIES-OTHER> 9,678
<LONG-TERM> 1,720
<COMMON> 7,963
0
0
<OTHER-SE> 167,102
<TOTAL-LIABILITIES-AND-EQUITY> 1,746,148
<INTEREST-LOAN> 50,150
<INTEREST-INVEST> 44,166
<INTEREST-OTHER> 6,222
<INTEREST-TOTAL> 100,538
<INTEREST-DEPOSIT> 32,874
<INTEREST-EXPENSE> 37,078
<INTEREST-INCOME-NET> 63,460
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (796)
<EXPENSE-OTHER> 65,430
<INCOME-PRETAX> 25,162
<INCOME-PRE-EXTRAORDINARY> 25,162
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,593
<EPS-PRIMARY> 2.09
<EPS-DILUTED> 2.09
<YIELD-ACTUAL> 4.13
<LOANS-NON> 7,691
<LOANS-PAST> 427
<LOANS-TROUBLED> 617
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 9,738
<CHARGE-OFFS> 753
<RECOVERIES> 897
<ALLOWANCE-CLOSE> 9,882
<ALLOWANCE-DOMESTIC> 8,103
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,779
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