<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter ended June 30, 1998
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 000-24553
CNBT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0575813
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
5320 Bellaire Boulevard
Bellaire, Texas 77401
(Address of principal executive offices, including zip code)
713-661-4444
(Registrant's telephone number, including area code)
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 and Exchange Act
of 1934 ("Act") 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 [_]
At June 30, 1998, 5,065,601 shares of Citizens National Bank of Texas, common
stock, $2.03 par value, were outstanding.
1
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CNBT BANCSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1998 and 1997
and at December 31, 1997....................................... 3
Consolidated Statements of Income for the Three Months
Ended June 30, 1998 and June 30, 1997 and the Six Months
Ended June 30, 1998 and June 30, 1997.......................... 4
Consolidated Statements of Comprehensive Income for the
Three Months Ended June 30, 1998 and 1997 and the Six
Months Ended June 30, 1998 and 1997............................ 5
Consolidated Statements of Stockholders' Equity for the
Year Ended December 31, 1997 and for the Six Months
Ended June 30, 1998............................................ 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997................................... 7
Notes to Interim Consolidated Financial Statements............. 8
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview....................................................... 10
Results of Operations.......................................... 11
Financial Condition............................................ 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk..... 23
PART II. OTHER INFORMATION
Item 1 Legal Proceedings.............................................. 23
Item 4 Submission of Matters to a Vote of Security Holders............ 23
Item 5 Other Information.............................................. 24
Item 6 Exhibits and Reports on Form 8-K............................... 25
SIGNATURES................................................................... 25
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------------- ------------
1998 1997 1997
-------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks...................................... $ 12,355 $ 11,452 $ 12,099
Due from banks - interest bearing overnight funds............ 56 27 3,177
Investment securities available-for-sale..................... 109,131 88,434 93,036
Investment securities held-to-maturity (approximate
market value of $108,082 and $69,353 at June 30,
1998 and 1997, respectively (unaudited), and
$77,569 at December 31, 1997)............................... 107,247 69,218 76,795
Loans, net................................................... 108,139 95,751 101,866
Bank premises and equipment, net............................. 5,862 5,421 5,384
Other assets................................................. 3,823 2,962 3,249
-------- -------- --------
TOTAL ASSETS.................................................. $346,613 $273,265 $295,606
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand...................................................... $ 66,214 $ 50,998 $ 54,598
NOW Accounts................................................ 20,551 18,810 20,209
Savings..................................................... 7,720 6,708 6,932
Money market................................................ 75,379 67,527 68,786
Time, $100,000 and over..................................... 41,174 29,741 31,173
Other time.................................................. 87,597 75,763 79,209
-------- -------- --------
TOTAL DEPOSITS............................................. 298,635 249,547 260,907
Other borrowed funds......................................... 13,000 2,700 0
Accrued interest and other liabilities....................... 1,682 1,047 2,483
Federal income taxes payable................................. 222 0 35
Deferred income taxes payable................................ 425 357 534
-------- -------- --------
TOTAL LIABILITIES.......................................... 313,964 253,651 263,959
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.03 par value, 30,000,000
shares authorized, 5,065,601 (unaudited),
3,893,091 (unaudited), and 5,044,181 shares
issued and outstanding at June 30, 1998 and
1997 and December 31, 1997, respectively.................... 10,285 7,905 10,242
Surplus...................................................... 16,679 7,905 16,656
Retained earnings............................................ 4,791 3,123 3,637
Net unrealized gains on available-for-sale securities, net
of deferred income taxes of $461, $351 and $573
at June 30, 1998 and 1997 (unaudited),
and December 31, 1997, respectively......................... 894 681 1,112
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................. 32,649 19,614 31,647
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY....................................................... $346,613 $273,265 $295,606
======== ======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
3
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- -----------------
1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................. $2,670 $2,303 $ 5,276 $4,549
Interest on investment securities:
Taxable.................................... 2,457 2,044 4,605 4,079
Nontaxable................................. 708 490 1,385 869
------ ------ ------- ------
Total interest on investment securities... 3,165 2,534 5,990 4,948
------ ------ ------- ------
TOTAL INTEREST INCOME...................... 5,835 4,837 11,266 9,497
INTEREST EXPENSE
Interest on deposits and FHLB borrowings.... 2,723 2,250 5,127 4,362
------ ------ ------- ------
Net interest income........................ 3,112 2,587 6,139 5,135
PROVISION FOR LOAN LOSSES.................... 167 167 332 327
------ ------ ------- ------
Net interest income after provision
for loan losses.......................... 2,945 2,420 5,807 4,808
OTHER INCOME
Service fees................................ 491 482 980 979
Net realized gains (losses) on sale of
available-for-sale securities.............. (1) 0 50 (13)
Other operating income...................... 316 81 396 137
------ ------ ------- ------
TOTAL OTHER INCOME......................... 806 563 1,426 1,103
OTHER EXPENSES
Salaries and employee benefits.............. 1,200 953 2,300 1,879
General and administrative.................. 356 269 686 531
Data processing............................. 225 202 451 387
FDIC assessments............................ 7 8 15 14
Occupancy expenses, net..................... 141 124 275 250
Equipment maintenance....................... 154 128 282 238
Postage and printing fees................... 125 110 225 194
Professional fees........................... 142 74 263 143
------ ------ ------- ------
TOTAL OTHER EXPENSES....................... 2,350 1,868 4,497 3,636
------ ------ ------- ------
INCOME BEFORE FEDERAL INCOME
TAXES...................................... 1,401 1,115 2,736 2,275
Applicable federal income taxes............. 346 308 671 604
------ ------ ------- ------
NET INCOME................................... $1,055 $ 807 $ 2,065 $1,671
====== ====== ======= ======
Earnings per common share:
Basic Earnings Per Share................... $.21 $.21 $.41 $.43
====== ====== ======= ======
Fully Diluted Earnings Per Share........... $.20 $.20 $.40 $.42
====== ====== ======= ======
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
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CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- -----------------
1998 1997 1998 1997
------ ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income...................................... $1,055 $ 807 $2,065 $1,671
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period................................ 93 1,298 (251) 432
Less: reclassification adjustment for gains
(losses) included in net income.............. 0 0 33 9
------ ------ ------ ------
93 1,298 (218) 441
------ ------ ------ ------
Comprehensive income............................ $1,148 $2,105 $1,847 $2,112
====== ====== ====== ======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------- COMPRE-
PAR RETAINED HENSIVE
SHARES VALUES SURPLUS EARNINGS INCOME TOTAL
--------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.............. 3,886,491 $ 6,303 $ 6,303 $ 5,025 $ 240 $17,871
Par value change....................... 0 1,590 1,594 (3,184) 0 0
Proceeds from exercise of
stock options......................... 7,690 14 9 0 0 23
Cash dividends ($.10 per share)........ 0 0 0 (389) 0 (389)
Cash dividends ($.30 per share)........ 0 0 0 (1,513) 0 (1,513)
Net proceeds from issuance of stock
through initial public offering....... 1,150,000 2,335 8,750 0 0 11,085
Comprehensive income:
Unrealized gains on investment
securities available-for-sale, net
of deferred income taxes of $334...... 0 0 0 0 872 872
Net income............................. 0 0 0 3,698 0 3,698
--------- ------- ------- ------- ------- -------
Total comprehensive income............. 4,570
-------
BALANCE, DECEMBER 31, 1997.............. 5,044,181 10,242 16,656 3,637 $ 1,112 31,647
Proceeds from exercise of stock
options (unaudited)................... 21,420 43 23 0 0 66
Cash dividends ($.09) per share
(unaudited)............................ 0 0 0 (911) 0 (911)
Comprehensive income:
Unrealized loss on investment
securities available for-sale, net
of deferred income tax benefit of
$161 (unaudited)..................... 0 0 0 0 (218) (218)
Net income (unaudited)................ 0 0 0 2,065 0 2,065
--------- ------- ------- ------- ------- -------
Total comprehensive income (unaudited). 1,847
-------
BALANCE, JUNE 30, 1998
(UNAUDITED)............................ 5,065,601 $10,285 $16,679 $ 4,791 $ 894 $32,649
========= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
CITIZENS NATIONAL BANK OF TEXAS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 2,065 $ 1,671
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.............................................. 204 183
Premium amortization net of discount accretion........... (56) 21
Provision for loan losses................................. 332 327
Net realized gains (losses) on available-for-sale
securities................................................ (50) 13
Loss on disposal of bank premises and equipment
and other assets......................................... 69 27
Provision (benefit) for deferred taxes.................... 3 6
Changes in assets and liabilities:
Accrued interest receivable............................... (310) (407)
Other assets.............................................. (275) (70)
Accrued expenses.......................................... 208 185
Accrued interest payable.................................. 48 84
Federal income taxes payable.............................. 187 (258)
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................................ 2,425 1,782
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities.................. (31,809) (13,574)
Proceeds from sales of available-for-sale securities........ 11,800 3,729
Proceeds from maturities of available-for-sale securities... 3,617 1,161
Purchases of held-to-maturity securities.................... (48,564) (9,011)
Proceeds from maturities of held-to-maturity securities..... 18,185 8,181
Loans originated, net of principal collected................ (6,750) (5,576)
Proceeds from sales of other real estate and repossessed
assets..................................................... 87 57
Cash paid for bank premises and equipment................... (682) (419)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES...................... (54,116) (15,452)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW,
savings, and money market accounts......................... 19,339 6,184
Proceeds from sales of time deposits, net of payments
for maturing time deposits................................. 18,389 5,305
Net increase in other borrowed funds........................ 13,000 2,700
Proceeds from exercise of stock options..................... 66 20
Dividends paid.............................................. (1,968) (1,449)
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES................................................ 48,826 12,760
-------- --------
NET DECREASE IN CASH AND CASH
EQUIVALENTS................................................ (2,865) (910)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD.................................................. 15,276 12,389
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD..................................................... $ 12,411 $ 11,479
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
7
<PAGE>
CITIZENS NATIONAL BANK AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included. Operating results for the six-month period ended June 30, 1998,
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Annual Report on Form 10-K for the year-ended
December 31, 1997, of Citizens National Bank of Texas (the "Bank") as filed with
the Comptroller of the Currency, and included as Exhibit 99.1 to the Form S-4
Registration Statement (File No. 333-50039) of CNBT Bancshares, Inc. filed with
the Securities and Exchange Commission on April 14, 1998.
(2) Earnings Per Common Share
Earnings per common share was computed based on the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
Net income................................... $ 1,055 $ 807 $ 2,065 $ 1,671
Divided by weighted average common
shares and common share equivalents:
Weighted average common shares........... 5,061,778 3,888,957 5,054,023 3,887,731
Weighted average common share
equivalents............................ 92,728 55,560 97,065 56,184
---------- ---------- ---------- ----------
Total average common shares and
common share equivalents.................. 5,154,506 3,944,517 5,151,088 3,943,915
========== ========== ========== ==========
Earnings per common share - Basic........... $ 0.21 $ 0.21 $ 0.41 $ 0.43
========== ========== ========== ==========
Earnings per common share - Fully Diluted... $ 0.20 $ 0.20 $ 0.40 $ 0.42
========== ========== ========== ==========
</TABLE>
Note: Common shares, common share equivalents, and earnings per share for
1997 have been adjusted to reflect a 10% stock dividend declared in May 1997.
See note (3) below for additional information regarding the stock split.
(3) Common Stock
During July 1997, the Board of Directors and stockholders authorized and
approved an increase in the authorized shares available for issuance from
5,000,000 shares to 30,000,000 shares.
On March 25, 1997, the Board of Directors authorized an increase in the par
value of common stock from $1.784 to $2.03 per share which effectively increased
common stock by $1,590,000 and surplus by $1,594,000 with a
8
<PAGE>
corresponding charge to retained earnings of $3,184,000. Additionally, a 10%
stock dividend representing 353,797 shares of common stock was declared to
stockholders of record on April 30, 1997. During the six months ended June 30,
1997, a dividend of $.10 per share was declared and paid to stockholders of
record in May 1997 totaling $389,000.
The Bank's Board of Directors declared cash dividends to be payable to
stockholder's of record for the quarters ending June 30,1998 and March 31, 1998.
The cash dividends were each $0.09 per share and were payable July 15, 1998 and
April 15, 1998, respectively.
On October 6, 1997, the Bank completed the sale of 1,150,000 shares of its
Common Stock, $2.03 par value per share, in an initial public offering. The
Bank realized proceeds, net of the underwriting discount, of $11,085,000. The
Bank is using the net proceeds of the sale for general corporate purposes,
including the development or acquisition of additional branches or the
acquisition of other financial institutions. Pending the application of the net
proceeds, the Bank has invested such proceeds in accordance with its normal
investment policies.
As of June 30, 1998, an additional 21,314 shares of common stock were
issuable (without regard to vesting restrictions) upon exercise of outstanding
employee stock options under the Bank's 1992, 1994, 1995, and 1997 Stock Option
Plans.
(4) Comprehensive Income
In June 1997, SFAS No. 130, Reporting Comprehensive Income was issued.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid in capital)
and distributions to owners (dividends). This statement is effective for fiscal
years beginning after December 15, 1997. For the three and six months periods
ended June 30, 1998 and 1997, unrealized holding gain (losses) on debt and
equity securities available-for-sale is the Bank's only other comprehensive
income component. Prior periods have been reclassified to reflect the
application of the provisions of SFAS No. 130. The following table sets forth
the amounts of other comprehensive income included in equity along with the
related tax effect for the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------------- ---------------------------
Tax Net Tax Net
Expense of Tax Expense of Tax
Pretax (Benefit) Amount Pretax (Benefit) Amount
------ --------- ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Net unrealized gain (loss) on
securities available-for-sale...... $ 141 $ (48) $ 93 $1,967 $(669) $1,298
Less: reclassification adjustment
for net gain (loss) realized in
net income......................... 0 0 0 0 0 0
----- ------ ---- ------ ----- ------
Other comprehensive income........... $ 141 $ (48) $ 93 $1,967 $(669) $1,298
===== ====== ==== ====== ===== ======
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------------------------
June 30, 1998 June 30, 1997
----------------------------------- ---------------------------
Tax Net Tax Net
Expense of Tax Expense of Tax
Pretax (Benefit) Amount Pretax (Benefit) Amount
------ --------- ------- ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Net unrealized gain (loss) on
securities available-for-sale...... $(380) $ 129 $(251) $ 655 $(223) $ 432
Less: reclassification adjustment
for net gain (loss) realized in
net income......................... 50 (17) 33 (13) 4 (9)
----- ------ ----- ------ ----- ------
Other comprehensive income........... $(330) $ 112 $(218) $ 668 $(227) $ 441
===== ====== ===== ====== ===== ======
</TABLE>
(5) Recent Accounting Standards
In June 1997, SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information was issued. This statement requires public companies to
report certain information about their operating segments in their annual
financial statements and quarterly reports issued to stockholders. It also
requires public companies to report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Implementation of SFAS No. 131 should have no
material effect on the Bank's Consolidated Financial Statements.
(6) General
CNBT Bancshares, Inc., a Texas corporation (the "Company"), was
incorporated under the laws of the State of Texas on April 8, 1998, primarily to
serve as a holding company for the Bank. All requisite regulatory approvals and
the satisfaction of all other conditions to the organization of the Bank into a
holding company structure have been completed. The reorganization was effective
on July 2, 1998. The accompanying unaudited consolidated financial statements
reflect the financial position, results of operations, and cash flows of the
Bank, as the formation of the holding company was consummated after the end of
the quarter ended June 30, 1998. For further discussion of the holding company
formation, the reader is directed to the Company's Form S-4 Registration
Statement (File No. 333-50039) filed with the Securities and Exchange Commission
on April 14, 1998, as amended.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
On June 23, 1998, the stockholders of Citizens National Bank of Texas (the
"Bank") approved an Agreement and Plan of Merger dated April 20, 1998, relating
to the formation of a bank holding company structure with CNBT Bancshares, Inc.
(hereinafter referred to as the "Company") serving as the holding company of the
Bank. This transaction was consummated on July 2, 1998, accordingly, financial
information for the period ended June 30, 1998, contained herein, only reflects
the operations of the Bank. For further discussion on the holding company
formation, the reader is directed to the Company's Form S-4 Registration
Statement (File No. 333-50039) filed April 14, 1998, as amended, and Item 5
herein below.
The Bank has received approval from the Office of the Comptroller of the
Currency ("OCC") to establish a new branch in Northwest Houston near the
intersection of N. Eldridge and FM 529. The new branch opened May 15, 1998, in
a interim location that will be replaced by a permanent stand alone branch to be
built by the Bank. Consistent with its policy of obtaining the services of an
experienced banking professional when opening a new branch, the Bank has
10
<PAGE>
hired Robert J. Kramer as President of the new branch. Most recently, Mr. Kramer
was President and Chief Executive Officer of Independence Bank, N.A., Houston,
Texas, which operated in the area of the new branch. Mr. Kramer has been active
in banking in the Houston area since 1961.
For the six months ended June 30, 1998, the Bank had net income of $2.1
million, an increase of $400,000 or 23.5% from the same time period in 1997.
This earnings growth was due primarily to an increase in net interest income,
which resulted from strong loan growth. Net income per share, basic and fully
diluted, decreased to $0.41 and $.40, respectively, for the six months ended
June 30, 1998, from $0.43 and $0.42 for the same time period in 1997. The Bank's
annualized return on average assets was 1.31% and the annualized return on
average common equity was 12.90% for the six months ended June 30, 1998,
compared to 1.26% and 18.29% for the same time period in 1997. Earning per share
and return on equity declined as a result of the issuance by the Bank of
1,150,000 shares in October 1997.
Total assets increased to $346.6 million at June 30, 1998, from $273.3
million at June 30, 1997, an increase of $73.3 million or 26.8%, and from $295.6
million at December 31, 1997, an increase of $51.0 million or 17.3%. The
increase was due primarily to an increase in the Bank's deposits. Deposits
increased to $298.6 million at June 30, 1998, from $249.5 million at June 30,
1997, an increase of $49.1 million or 19.7%, and from $260.9 million at December
31, 1997, an increase of $37.7 million or 14.4%. Total stockholders' equity was
$32.6 million at June 30, 1998, representing an increase of $13.0 million or
66.3% over total stockholders' equity of $19.6 million at June 30, 1997, and an
increase of $1.0 million or 3.2% over stockholders' equity of $31.6 million at
December 31, 1997. The significant increase in stockholders' equity is
attributable to the initial public offering in October 1997.
Results of Operations
Net Interest Income
Net interest income for the six months ended June 30, 1998, was $6.1
million, an increase of $1.0 million or 19.6% from $5.1 million for the six
months ended June 30, 1997. The Bank's net interest margin was 4.14% and 4.13%
and the net interest spread was 3.02% and 3.21% for the six months ended June
30, 1998 and 1997, respectively. The increase in net interest margin resulted
from an increase in net interest income relative to the increase in total
average interest-earning assets. There was a decrease in the yield on total
interest-earning assets of 0.03% and an increase of 0.16% in the rate paid on
interest-bearing liabilities which resulted in a decrease in net interest
spread.
The increase in net interest income resulted from increases in the Bank's
loan and securities portfolios. Interest income from loans increased to $5.3
million from $4.5 million for the six months ended June 30, 1998 and 1997,
respectively, an increase of $727,000 or 16.0%. The growth in the loan
portfolio helped increase the yield to 9.92% for the six months ended June 30,
1998, from 9.74% for the six months ended June 30, 1997. Interest income from
the securities portfolio increased to $6.0 million for the six months ended June
30, 1998, from $4.9 million for the six months ended June 30, 1997, a $1.1
million or 22.4% increase. This was due primarily to a 21.4% increase in
average securities held by the Bank and a yield that decreased to 6.30% for the
six months ended June 30, 1998, compared to the same period in 1997. Partially
offsetting the interest income growth was an increase in interest expense, which
grew to $5.1 million for the six months ended June 30, 1998, compared to $4.4
million for the six months ended June 30, 1997. This increase was the result of
strong growth in average deposits, in particular, money market and savings
deposits and certificates of deposit.
11
<PAGE>
The following table presents, for the periods indicated, the total dollar
amount of average balances, interest income from average interest-earning assets
and the resulting yields, as well as the interest expense on average interest-
bearing liabilities, expressed both in dollars and rates. No tax equivalent
adjustments were made and all average balances are average daily balances.
Nonaccruing loans have been included in the tables as loans carrying a zero
yield.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- --------- ------------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Loans................................. $106,338 $ 5,276 9.92% $ 93,376 $ 4,549 9.74%
Securities............................ 187,950 5,924 6.30 154,806 4,938 6.38
Federal funds sold and other
earning assets....................... 2,011 66 6.56 742 10 2.70
-------- ------- -------- -------
Total interest-earning assets........ 296,299 11,266 7.60 248,924 9,497 7.63
Less: allowance for loan losses......... 1,022 715
-------- --------
Total earning assets, net of allowance... 295,277 248,209
Nonearning assets........................ 21,062 16,946
-------- --------
Total Assets......................... $316,339 $265,155
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits...... $ 20,322 $ 178 1.75% $ 19,275 $ 168 1.74%
Saving and money market
accounts............................. 78,457 1,478 3.77 69,531 1,246 3.58
Certificates of deposit............... 116,874 3,254 5.57 103,211 2,804 5.43
Borrowed funds........................ 8,051 217 5.39 5,289 144 5.45
------- -------- -------
Total interest-bearing liabilities... 223,704 5,127 4.58 197,306 4,362 4.42
------- -------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand
deposit.............................. 58,406 48,320
Other liabilities..................... 2,217 1,256
-------- --------
Total liabilities.................... 284,327 246,882
Stockholders' equity..................... 32,012 18,273
-------- --------
Total liabilities and
stockholders' equity............... $316,339 $265,155
======== ========
Net interest income...................... $ 6,139 $ 5,135
======= =======
Net interest spread (1).................. 3.02% 3.21%
Net interest margin (2).................. 4.14% 4.13%
</TABLE>
(1) The interest rate spread is the difference between the average yield in
interest-earning assets and the average rate paid on interest-bearing
liabilities.
(2) The net interest margin is equal to the net interest income divided by the
average interest-earning assets.
12
<PAGE>
The following table presents for the periods indicated the dollar amount of
changes in interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1998 VS. 1997
-------------------------
INCREASE (DECREASE)
DUE TO
---------------
VOLUME RATE TOTAL
------ ----- ------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C>
Loans............................................ $ 536 $ 191 $ 727
Securities....................................... 1,128 (142) 986
Other earning assets............................. (22) 78 56
------ ----- ------
Total increase (decrease) in interest income.... 1,642 127 1,769
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits................. 8 2 10
Savings and money market accounts................ 88 144 232
Certificates of deposit.......................... 292 158 450
Borrowed funds................................... 77 (4) 73
------ ----- ------
Total increase (decrease) in interest expense... 465 300 765
------ ----- ------
Increase (decrease) in net interest income........ $1,177 $(173) $1,004
====== ===== ======
</TABLE>
Provisions for Loan Losses
The provision for loan losses was $332,000 for the six months ended
June 30, 1998, and $327,000 for the same period in 1997, an increase of $5,000
or 1.5%.
Noninterest Income
Noninterest income for the six months ended June 30, 1998, was $1.4
million, an increase of $300,000 or 27.3% from $1.1 million in the same period
in 1997. The following table presents, for the periods indicated, the major
categories of noninterest income:
SIX MONTHS ENDED
JUNE 30,
---------------
1998 1997
------ ------
(DOLLARS IN THOUSANDS)
Service fees............................. $ 980 $ 979
Net realized gains (losses) on sale of
available-for-sale securities........... 50 (13)
Other operating income................... 396 137
------ ------
Total noninterest income................. $1,426 $1,103
====== ======
For the six months ended June 30, 1998, service fees on deposit accounts
were comparable to the amount for the same periods in 1997. Even though deposit
accounts grew from 22,206 at June 30, 1997 to 24,491 at June 30, 1998, service
fee income remained comparable due to competition involving free checking
accounts. Other operating income increased to $396,000 for the six months ending
June 30, 1998, an increase of $259,000 or 189.1% over the same period in 1997.
The increase is primarily attributed to a recovery received in the amount of
$229,000 from the Bank's bonding company due to a former employee's defalcation.
13
<PAGE>
Noninterest Expenses
In the six-month period ended June 30, 1998, noninterest expenses increased
$861,000 or 24.0% to $4.5 million from the 1997 comparable period. For the six
months ended June 30, 1998, the efficiency ratio, calculated by dividing total
noninterest expenses (excluding securities gains and losses) by net interest
income plus noninterest income, increased to 59.84% for the six months ended
June 30, 1998, from 58.17% for the six months ended June 30, 1997. This increase
was primarily due to an increase in salaries and employee benefits along with
other general and administrative expenses.
Salaries and benefit expense and general administrative expenses, for the
six months ended June 30, 1998, was $3.0 million, an increase of $600,000 or
25.0% from $2.4 million in the same period of 1997. The increase was due to
additional personnel required to accommodate the Bank's growth and the opening
of a new branch office in Northwest Houston. Total full-time equivalent
employees at June 30, 1998, increased to 107 from 96 at June 30, 1997.
Occupancy expense and equipment maintenance increased to $557,000 for the
six-month period ended June 30, 1998, from $488,000 for the six-month period
ended June 30, 1997. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance expense.
Depreciation expense increased to $204,000 for the six-month period June 30,
1998, an increase of $21,000 or 11.5% from $183,000 for the same period in 1997.
This increase was primarily due to equipment purchases. Maintenance expense for
the six-month period ended June 30, 1998, was $134,000, an increase of $22,000
or 19.6% over the same period in 1997.
Data processing expense for the six-month period ended June 30, 1998, was
$451,000, as compared to $387,000 for the same period in 1997, an increase of
$64,000 or 16.5%. The increase is due to the Bank's re-negotiation of its
contract for data processing services which are handled by a third party vendor,
and the increase in the number of the Bank's deposit accounts and loans, along
with the increase in the number of items processed.
Income Taxes
Income tax expense includes the regular federal income tax at the statutory
rate. The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of nondeductible
interest expense, and the amount of other nondeductible expenses. In the first
six months of 1998, income tax expense was $671,000, an increase of $67,000 or
11.1% from $604,000 of income tax expense for the same period in 1997. The
higher income tax expense in the first six months of 1998 compared to the first
six months of 1997 is principally due to the increase in taxable income. The
effective tax rates were 24.5% for the six months ended June 30, 1998, and 26.5%
for the six months ended June 30, 1997.
14
<PAGE>
FINANCIAL CONDITION
Loan Portfolio
Loans, net of unearned interest, were $109.3 million at June 30, 1998, an
increase of $6.4 million or 6.2% from $102.9 million at December 31, 1997. At
June 30, 1998, loans as a percentage of assets and deposits were 31.5% and
36.6%, respectively.
The following table summarizes the loan portfolio of the Bank by type of
loan as of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial and industrial.............. $ 22,933 21.0% $ 25,230 24.5%
Real estate:
Construction and land development... 12,394 11.3 10,673 10.4
1-4 family residential.............. 11,685 10.7 10,808 10.5
Commercial owner occupied........... 22,484 20.6 17,846 17.3
Other............................... 698 0.6 378 0.4
Consumer............................... 39,082 35.8 37,940 36.9
-------- ----- -------- -----
Total loans......................... $109,276 100.0% $102,875 100.0%
======== ===== ======== =====
</TABLE>
Nonperforming Assets
The Bank's conservative lending policies have resulted in strong asset
quality. Nonperforming assets were $523,000 at June 30, 1998, compared to $1.3
million at December 31, 1997. This resulted in a ratio of nonperforming assets
to loans plus other real estate of 0.48% and 1.31% at June 30, 1998, and
December 31, 1997, respectively, and a ratio of nonperforming assets to total
assets of 0.15% and 0.46% at June 30, 1998 and December 31, 1997, respectively.
The Bank has well developed procedures in place to maintain a high quality
loan portfolio. These procedures include credit quality policies that begin
with approval of lending policies and underwriting guidelines by the Board of
Directors, an independent loan review conducted by outside auditors, low
individual lending limits for officers, Loan Committee approval for large credit
relationships, and quality loan documentation procedures. The Bank's lending
officers and loan personnel identify and analyze weaknesses in the portfolio and
report credit risk changes on a monthly basis to the Bank's Board of Directors.
The Bank performs monthly and quarterly concentration analyses based on
collateral types, business lines, large credit sizes, and officer portfolio
loads. The Bank also monitors its delinquency levels for any negative or
adverse trends. There can be no assurance, however, that the Bank's loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to general economic conditions.
The Bank generally places a loan on nonaccrual status and ceases accruing
interest when loan payment performance is deemed unsatisfactory. All loans past
due 90 days, however, are placed on nonaccrual status, unless the loan is both
well collateralized and in the process of collection. Cash payments received
while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Bank is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.
15
<PAGE>
The following table presents information regarding nonperforming assets at
June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----- ------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
Nonaccrual loans............................................ $ 207 $ 279
Accruing loans 90 or more days past due..................... 268 1,016
Restructured loans.......................................... 48 54
Other real estate and foreclosed property................... 0 0
----- ------
Total nonperforming assets................................. $ 523 $1,349
===== ======
Nonperforming assets to total loans and other real estate... .48% 1.31%
Nonperforming assets to total assets........................ .15% .46%
</TABLE>
Allowance for Loan Losses
The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Based on an evaluation of
the loan portfolio, management presents a monthly review of the allowance for
loan losses to the Board of Directors, indicating any changes in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification
by industry of the Bank's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its loan portfolio by the loan review function, and the annual
examination of the Bank's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.
In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions, and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Bank's historical charge-off experience. The Bank then charges to operations a
provision for loan losses determined on an annualized basis to maintain the
allowance for loan losses at an adequate level determined according to the
foregoing methodology.
Management believes that the allowance for loan losses at June 30, 1998, is
adequate to cover losses inherent in the portfolio as of such date. There can
be no assurance, however, that the Bank will not sustain losses in future
periods, which could be greater than the size of the allowance at June 30, 1998.
16
<PAGE>
The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1998 1997
------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Allowance for loan losses at beginning of period... $ 1,009 $ 687
Provision for loan losses.......................... 332 877
Charge-offs........................................ (277) (636)
Recoveries......................................... 73 81
------- ------
Allowance for loan losses at end of period......... $ 1,137 $1,009
======= ======
JUNE 30, DECEMBER 31,
1998 1997
------- ------
Allowance to period-end loans...................... 1.04% .98%
Net charge-offs (recoveries) to average loans...... .19 .57
Allowance to period-end nonperforming loans........ 217.40 74.80
</TABLE>
Securities
The Bank's securities portfolio as of June 30, 1998, totaled $216.3
million, as compared to $169.8 million at December 31, 1997, and $157.7 million
at June 30, 1997. The year-to-date increase of $46.5 million or 27.4% is a
result of the Bank's reinvestment of excess liquidity in U.S. Government and
agency and mortgage-backed securities and municipal bonds. The Bank is required
to classify its debt and equity securities into one of three categories:
held-to-maturity, trading or available-for-sale. Investments in debt securities
are classified as held-to-maturity and measured at amortized cost in the
financial statements only if management has the intent and ability to hold these
securities to maturity. Securities that are bought and held principally for the
purposes of selling them in the near term are classified as trading and measured
at fair value in the financial statements with unrealized gains and losses
included in earnings. Securities not classified as either held-to-maturity or
trading are classified as available-for-sale and measured at fair value in the
financial statements with unrealized gains and losses reported, net of tax in a
separate components of stockholders' equity until realized. Gains and losses on
sales of securities are determined using the specific-identified method.
As of June 30, 1998, the held-to maturity portfolio totaled $107.2 million
and the available-for-sale portfolio totaled $109.1 million. The net unrealized
gain in the available-for-sale portfolio was $1.4 million as of June 30, 1998.
The Bank tracks but does not record market changes on its held-to-maturity
portfolio. At June 30, 1998, the market value of the held-to-maturity portfolio
was $108.1 million.
17
<PAGE>
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values at June 30, 1998, and
December 31, 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency securities... $ 17,100 $ 57 $ (12) $ 17,145
Mortgage-backed securities.............. 33,890 258 (45) 34,103
Obligations of state and political
subdivisions........................... 54,067 1,308 (119) 55,256
Other securities........................ 2,627 0 0 2,627
-------- -------- ------ --------
Total securities........................ $107,684 $ 1,623 $ (176) $109,131
======== ======== ====== ========
DECEMBER 31, 1997
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
U.S. Government and agency securities... $ 17,085 $ 262 $ (1) $ 17,346
Mortgage-backed securities.............. 22,757 259 0 23,016
Obligations of state and political
subdivisions........................... 48,884 1,363 (81) 50,166
Other securities........................ 2,508 0 0 2,508
-------- -------- ------ --------
Total securities....................... $ 91,234 $ 1,884 $ (82) $ 93,036
======== ======== ======= ========
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values at June 30, 1998, and
December 31, 1997:
JUNE 30, 1998
-----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
U.S. Government and agency securities... $ 50,712 $ 682 $ (34) $ 51,360
Mortgage-backed securities.............. 56,535 285 (98) 56,722
-------- -------- ------ --------
Total securities....................... $107,247 $ 967 $ (132) $108,082
======== ======== ======= ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ----------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government and agency securities... $49,055 $ 982 $ (24) $50,013
Mortgage-backed securities.............. 27,740 195 (379) 27,556
------- ------ ----- -------
Total securities....................... $76,795 $1,177 $(403) $77,569
======= ====== ===== =======
</TABLE>
U.S. Government and agency securities are primarily securities issued by
the Federal National Mortgage Association (Fannie Mae) ("FNMA"), Federal Home
Loan Bank ("FHLB"), and Federal Home Loan Mortgage Corporation (Freddie Mac)
("FHLMC"). Mortgage-backed securities are securities that have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the FNMA, FHLMC and the Governmental National Mortgage
Association (Ginnie Mae) ("GNMA"). These securities have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed
by the agencies. The Bank has no mortgage-backed securities that have been
issued by non-agency entities.
Deposits
Total deposits as of June 30, 1998, were $298.6 million, as compared to
$249.5 million at June 30, 1997, an increase of $49.1 million or 19.7%,
resulting from growth in same location deposits, combined with the additional
deposits of the branch offices. When compared to total deposits of $260.9
million on December 31, 1997, the amount at June 30, 1998, represents a year-to-
date increase of $37.7 million, as the strong deposit growth experienced in 1997
continued through the first six months of 1998.
Non-interest bearing demand deposits at June 30, 1998, were $66.2 million,
as compared to $51.0 million at June 30, 1997, an increase of $15.2 million or
29.8%. When compared to non-interest bearing demand deposits of $54.6 million on
December 31, 1997, the June 30, 1998, amount represents a year-to-date increase
of $11.6 million. The percentage of non-interest bearing deposits to total
deposits as of June 30, 1998, continued strong at 22.2%.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of demand, savings, NOW
accounts, money market, and time accounts. The Bank relies primarily on
advertising, competitive pricing policies, and customer service to attract and
retain these deposits. As of June 30, 1998, the Bank had no deposits classified
as brokered funds. Deposits provide generally all the funding for the Bank's
lending and investment activities and the interest paid for deposits must be
managed carefully to control the level of interest expense.
19
<PAGE>
The Bank's ratios of average demand deposits to average total deposits at
June 30, 1998, and December 31, 1997, were 21.3%, and 20.4%, respectively. The
daily average balances and weighted average rates paid on deposits for the six-
month period ended June 30, 1998 and the year ended December 31, 1997, are
presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
--------------- ---------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW accounts....................... $ 20,322 1.75% $ 19,348 1.76%
Regular savings.................... 7,218 2.22 6,731 2.24
Money Market....................... 71,239 3.92 65,010 3.84
CDs less than $100,000............. 66,807 5.54 61,097 5.53
CDs $100,000 and over.............. 30,796 5.55 27,544 5.52
IRAs & QRPs........................ 19,271 5.68 16,706 5.62
-------- ---- -------- ----
Total interest-bearing deposits... 215,653 4.55 196,436 4.49
-------- ---- -------- ----
Noninterest-bearing deposits....... 58,406 0 50,494 0
-------- ---- -------- ----
Total deposits..................... $274,059 3.58% $246,930 3.57%
======== ==== ======== ====
</TABLE>
The following table sets forth the maturity and repricing of the Bank's
certificates of deposit that are $100,000 or greater at June 30, 1998, and
December 31, 1997:
JUNE 30, DECEMBER 31,
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
3 months or less.............. $16,786 $ 9,000
Between 3 months and 1 year... 17,223 15,110
Over 1 year................... 7,165 7,063
------- -------
Total CDs $100,000 and over... $41,174 $31,173
======= =======
Borrowings
Other short-term borrowings generally represent borrowings from the FHLB
with maturities ranging from one to thirty days. Information relating to these
borrowings as of June 30, 1998, is summarized as follows:
JUNE 30, DECEMBER 31,
1998 1997
------- -------
(DOLLARS IN THOUSANDS)
Other short-term borrowings:
Average....................... $ 2,391 $ 4,582
Period-end.................... 3,000 0
Maximum month-end balance during
period (all FHLB borrowings)... 21,669 15,100
Interest rate:
Average....................... 5.39% 5.46%
Period-end (weighted average). 6.30% 0.00%
At period ending June 30, 1998, the Bank had three separate borrowing
programs in effect. The Bank borrowed $3 million in overnight funds at a rate
of 6.3%. Also, the Bank borrowed $10,000,000 that had a five-year stated
20
<PAGE>
maturity with a two-year lockout. Those borrowings consist of $5,000,000 at
5.335% and $5,000,000 at 5.385%. At December 31, 1997, there were no borrowings
outstanding.
Interest Rate Sensitivity
The Bank analyzes its interest rate risk position by use of a simulation
model and shock analysis. As of June 30, 1998 the simulation model indicates
that, in the event of a 200 basis point increase in underlying market interest
rates, the Bank's net interest income would decrease 8.9%. Correspondingly, in
the event of a 200 basis point decrease in market interest rates, the Bank's net
interest income would increase by 9.3%. The results of this "rate shock test",
which assumes a parallel shift in the yield curve, indicate that the present mix
of interest earning assets and interest-bearing liabilities should provide
reasonable protection from changes in interest rates. However, because the Bank
maintains a significant percentage of its assets in investment securities and a
significant portion of its investment securities consist of fixed rate
securities rather than adjustable rate securities, a rapid increase or decrease
in interest rates could have a greater adverse effect on the Bank's net interest
margin and results of operation. The simulation model also provides a detailed
interest rate sensitivity gap ("GAP") analysis, which the Bank uses as a
secondary source in analyzing its asset/liability mix. At June 30, 1998 the GAP
measurement of interest rate sensitive assets minus interest rate sensitive
liabilities divided by total assets indicates a cumulative negative GAP of 23.7%
through one year and a cumulative negative GAP of 3.5% for all periods. The
Bank seeks to maintain the cumulative GAP to total assets within 35% for one
year.
The Bank's Investment-Asset/Liability Committee has recently adopted
specific investment policies directed at reducing the length of maturity of
securities that it purchases and shifting a portion of the securities portfolio
to adjustable rate securities.
Capital Resources and Liquidity
Stockholders' equity increased to $32.6 million at June 30, 1998, from
$31.6 million at December 31, 1997, an increase of $1.0 million or 3.2%. This
increase was primarily attributable to $2.1 million in earnings offset by a net
unrealized loss on securities of $218,000. Additionally, the Bank declared
dividends of $911,000.
Liquidity involves the Bank's ability to raise funds through asset growth
and reduce assets to meet deposit withdrawals and other payment obligations, to
maintain reserve requirements, and to operate the Bank on an ongoing basis.
During the six months ended June 30, 1998, the Bank's liquidity needs have
primarily been met by growth in deposits, as previously discussed. The cash
position was further supplemented by the amortization of the securities and loan
portfolios. Additionally, access to borrowed funds from the FHLB was available
and has been utilized to take advantage of investment opportunities.
FHLB advances may be utilized from time to time as either a short-term
funding source or a long-term funding source. FHLB advances can be particularly
attractive as a long-term funding source to balance interest rate sensitivity
and reduce interest rate risk. The Bank is eligible for two borrowing programs
through the FHLB. The first, called "Short-Term Fixed" (STF), requires delivery
of eligible securities for collateral. At June 30, 1998, the Bank had
approximately $137.9 million available as a short-term funding source in this
program. Maturities under this program range from 1-35 days.
The second borrowing program, the "Blanket Borrowing Program" (BBP), is
under an overnight borrowing agreement which does not require the delivery of
specific collateral. Borrowings are limited to a maximum of 65% of the Bank's
1-4 family mortgage loans. At June 30, 1998, the Bank had approximately $22.6
million in potential borrowings available under this program. Under this
program, the Bank must hold approximately $1 in FHLB stock for each $10 in
borrowings. In addition, under the Blanket Borrowing Program, the Bank may
deliver specific collateral which will dramatically increase total potential
borrowings. Upon delivery, the FHLB will review the collateral and assign a
loan-to-value ratio of approximately 90%. In addition to real estate loans, the
FHLB will accept delivery of credit card and installment loans. The advances
are limited to 50% of assets or total eligible collateral, whichever is less.
21
<PAGE>
The advances are subject to the stock purchase requirements as mentioned above.
At June 30, 1998, the Bank had total potential borrowings under the various
programs discussed above of $160.5 million.
The Bank's risk-based capital ratios remain above the levels designated as
"well capitalized". At June 30, 1998, the Bank's tier 1 capital to assets, tier
1 risk-based capital, and tier 1 leverage ratios were 9.16%, 21.29% and 10.04%,
respectively.
Year 2000 Issue
The Year 2000 issue is the result of many existing computer programs using
two digits rather than four to identify a year in a date field. These programs
were designed and developed without considering the impact of the upcoming
change in the century. Computer hardware, date-driven automated equipment, and
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000. If not corrected, many computer systems could fail or create
erroneous results causing disruptions of operations, including a temporary
inability to process transactions or engage in normal business activities. The
Year 2000 issue affects virtually all companies and organizations.
In May 1997, the OCC issued an advisory letter to all national banks
concerning the Year 2000 issue. The OCC has directed that all national banks
must largely complete all software code enhancements and revisions, hardware
upgrades, and other associated changes by December 31, 1998. Between January 1,
1999 and the end of the year, banks must test and implement their Year 2000
conversion projects. In addition, the OCC is conducting an examination of each
bank's Year 2000 preparedness.
The Bank has completed an internal review of all computer hardware, date-
sensitive automated equipment, and software. Some of the Bank's software will
require modification or replacement so that applications and computer systems
will properly use dates beyond December 31, 1999. The Bank is using both
internal and external resources to correct or replace and test in-house code to
ensure uninterrupted customer service. The Bank believes that through
modifications to existing software and conversion to new software, the Year 2000
issue will be adequately addressed. The Bank is also working with its third
party data processing vendor to coordinate their Year 2000 activities with the
Bank's to ensure Year 2000 readiness.
The Bank plans to complete its Year 2000 readiness project within one year
and should begin significant testing of programs during the third quarter of
1998. The Bank currently expects to incur approximately $100,000 in programming
and equipment costs in connection with the Year 2000 project which is being
funded through operating cash flows, will be expensed or capitalized as incurred
over the next two years, and is not expected to have any material adverse effect
on the Bank's results of operations.
The Bank is also reviewing its loan portfolio and deposit base to assess
Year 2000 compliance by its significant borrowers and depositors.
The Bank's Year 2000 readiness project costs include the estimated costs
and time associated with the impact of the Bank's primary third party data
processing vendor's Year 2000 issues and are based on presently available
information. The costs associated with the Year 2000 readiness project and the
date on which the Bank plans to complete the project are based on management's
best estimates, which were derived using assumptions of future events including
the availability of certain resources, third party vendors Year 2000 plans, and
other factors. There is no assurance that the Bank's estimates will be realized
and actual results could differ materially. Specific factors that might cause
such a material difference include the availability and cost of trained
programming personnel and the ability to locate and correct all relevant
computer code. In addition, there can be no assurance that the systems and
applications of other companies on which the Bank's systems and applications
rely will be timely converted, that a fail to convert by another company, or
that a conversion that is incompatible with the Bank's systems and applications
would not have a material adverse impact on the Bank.
22
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On June 15, 1998, Marsha Emmons, a former employee of the Bank, filed a
lawsuit against the Bank in the United States District Court for the Southern
District of Texas, Houston Division under the caption Marsha Emmons v. Citizens
National Bank, Civil Action No. H-98-1846. The plaintiff alleges that she
suffered employment discrimination on the basis of sex and seeks injunctive
relief restoring her to employment, lost pay, medical benefits, compensatory
damages, punitive damages, and her costs of the lawsuit, together with
prejudgment and postjudgrnent interest. The case has not yet entered the
discovery stage. The Bank intends to vigorously defend against this action and
believes the ultimate resolution of this suit will not have a material adverse
effect on the Bank's financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of the Bank was held on June 23, 1998. Three matters
were considered at the meeting.
(a) The following directors were elected to the Board of Directors for a
period of one year.
Votes
--------------------
Directors For Withheld
--------- --------- --------
John B. Barnes 4,572,763 42,190
William H. Bruecher, Jr. 4,571,763 43,190
James K. Chancelor 4,573,763 41,190
C. Joe Chapman 4,571,563 43,390
Frank G. Cook 4,560,399 54,554
Robert C. Dawson 4,571,363 43,590
James B. Earthman, III 4,572,763 42,190
Lura M. Griffin 4,572,363 42,590
Alton L. Hollis 4,572,763 42,190
Joseph E. Ives 4,573,763 41,190
Larry L. January 4,572,851 42,102
Albert V. Kochran 4,572,363 42,590
I. W. Marks 4,564,855 50,098
David E. Preng 4,572,763 42,190
Mary A. Walker 4,573,763 41,190
B. Ralph Williams 4,573,763 41,190
(b) Ratification of the appointment of Mann Frankfort Stein & Lipp as the
Bank's independent auditors for the fiscal year ending December 31, 1998 was
also considered and approved with 4,521,902 votes for, 73,696 votes against, and
19,337 abstentions.
(c) Stockholders also considered and acted upon a proposal to approve and
adopt a Agreement and Plan of Merger dated as of April 20, 1998, providing,
among other things, for the merger of the Bank and Citizens Bank, N.A., an
interim national bank association and an indirect subsidiary of CNBT Bancshares,
Inc., a Texas corporation (the "Holding Company"), formed to serve as a holding
company for the Bank. The proposal was approved with 4,066,067 votes for,
156,167 votes against, and 9,844 abstentions.
23
<PAGE>
Item 5. Other Information; Acquisition or Disposition of Assets.
Pursuant to an Agreement and Plan of Merger (the "Agreement") dated as of
April 20, 1998, and an Agreement to Merge dated as of July 2, 1998, the Holding
Company acquired, effective July 2, 1998, all of the issued and outstanding
capital stock of the Bank. The purpose of the Agreement was to create a bank
holding company structure for the Bank. The reorganization of the Bank (the
"Reorganization") was accomplished through the merger of the Bank with and into
Citizens Bank, N.A., an interim national banking association and wholly-owned
subsidiary of the Holding Company.
The Holding Company did not engage in any business activity prior to the
July 2, 1998, the effective date of the Reorganization, and its only significant
asset at the present time is its investment in the Bank resulting from the
Reorganization (the "Continuing Bank"). On the effective date, the Continuing
Bank changed its name to Citizens National Bank of Texas.
The operations of the Continuing Bank will continue in substantially the
same manner as conducted by the Bank immediately prior to the Reorganization.
All 16 directors of the Bank automatically became directors of the Holding
Company and the Continuing Bank, and the officers and employees of the Bank
assumed corresponding positions with the Continuing Bank.
On the effective date of the Reorganization, each share of common stock of
the Bank, par value $2.03 per share, was converted into one (1) share of common
stock of the Holding Company, par value $1.00 per share. In order to effect the
Reorganization, the Holding Company issued approximately 5,054,181 shares of its
common stock.
The shares of common stock issued by the Holding Company to shareholders of
the Bank in the Reorganization were registered pursuant to a registration
statement on Form S-4EF (No. 333-50039) filed by the Holding Company with the
Securities and Exchange Commission (the "Commission") on April 14, 1998 (the
"Registration Statement"), and the Registration Statement became automatically
effective under General Instruction G of Form S-4EF on the twentieth day after
the date of filing. The prospectus and proxy statement ("Proxy Statement")
contained in the Registration Statement and used in connection with the Annual
Meeting contains a more complete description of the business of the Bank and the
Holding Company, as well as the terms of the Reorganization. Such Proxy
Statement in the form mailed to shareholders of the Bank is hereby incorporated
by reference.
Financial Statements. The Reorganization met all of the conditions set
forth in Staff Accounting Bulletin No. 50 Financial Statement Requirements in
Filings Involving the Formation of a One Bank Holding Company. Therefore, the
Holding Company omitted from inclusion in the Proxy Statement the financial
statements of the Bank and the information required by Guide 3 of the Industry
Guides promulgated under the Securities Act of 1933. However, the audited
financial statements of the Bank for the two years ended December 31, 1997,
prepared in conformity with generally accepted accounting principles, as
contained in the 1997 Annual Report to Stockholders of the Bank, which was
furnished to stockholders along with the Proxy Statement, and in the Bank's
Annual Report on Form 10-K for the year ended December 31, 1997, included as
Exhibit 99.1 to the Registration Statement, are incorporated herein by
reference.
In addition, the pro forma financial information is incorporated by
reference to page 36 of the Proxy Statement as included in the Registration
Statement.
24
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Item
----------- ----
2 Plan and Agreement of Merger dated as of April 20, 1998,
among Citizens National Bank of Texas, Citizens Bank,
National Association, and CNBT Bancshares, Inc. (incorporated
by reference to Exhibit 2.1 to the Registration Statement on
Form S-4, File No. 333-50039).
11 Computation of Earnings Per Share (included as Note (2) to
Interim Consolidated Financial Statements on page 8 of this
Form 10-Q).
27 Financial Data Schedule.
99.1 Financial Statements contained in the 1997 Annual Report on
Form 10-K of the Bank (incorporated by reference to Exhibit
99.1 of the Registration Statement on Form S-4, File No.
333-50039).
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on July 10, 1998, reporting
on "Item 5 - Other Events" with respect to the consummation of the holding
company transaction on July 2, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
CNBT BANCSHARES, INC.
(Registrant)
By /s/ B. Ralph Williams August 12, 1998
--------------------------------- ---------------------------
B. Ralph Williams, President and Chief Date
Executive Officer
By /s/ Randall W. Dobbs August 12, 1998
--------------------------------- ---------------------------
Randall W. Dobbs, Executive Vice Date
President and Chief Operations
Officer (Chief Accounting Officer)
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CITIZENS NATIONAL BANK OF TEXAS AT JUNE 30, 1998, AND
FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,355
<INT-BEARING-DEPOSITS> 56
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,131
<INVESTMENTS-CARRYING> 107,247
<INVESTMENTS-MARKET> 108,082
<LOANS> 109,276
<ALLOWANCE> 1,137
<TOTAL-ASSETS> 346,613
<DEPOSITS> 298,635
<SHORT-TERM> 3,000
<LIABILITIES-OTHER> 2,329
<LONG-TERM> 10,000
0
0
<COMMON> 10,285
<OTHER-SE> 22,364
<TOTAL-LIABILITIES-AND-EQUITY> 346,613
<INTEREST-LOAN> 2,670
<INTEREST-INVEST> 3,165
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,835
<INTEREST-DEPOSIT> 2,723
<INTEREST-EXPENSE> 2,723
<INTEREST-INCOME-NET> 3,112
<LOAN-LOSSES> 167
<SECURITIES-GAINS> (1)
<EXPENSE-OTHER> 2,350
<INCOME-PRETAX> 1,401
<INCOME-PRE-EXTRAORDINARY> 1,401
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,055
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 7.60
<LOANS-NON> 207
<LOANS-PAST> 268
<LOANS-TROUBLED> 48
<LOANS-PROBLEM> 523
<ALLOWANCE-OPEN> 1,015
<CHARGE-OFFS> 92
<RECOVERIES> 47
<ALLOWANCE-CLOSE> 1,137
<ALLOWANCE-DOMESTIC> 1,137
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HE
FINANCIAL STATEMENTS OF CITIZENS NATIONAL BANK OF TEXAS AT DECEMBER 31, 1997,
AND THE YEAR THEN ENDED AND AT MARCH 31, 1998, AND FOR THE THREE MONTHS ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 12,099 11,273
<INT-BEARING-DEPOSITS> 206,309 215,895
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 93,036 96,369
<INVESTMENTS-CARRYING> 76,795 101,811
<INVESTMENTS-MARKET> 77,569 102,018
<LOANS> 102,875 105,980
<ALLOWANCE> 1,009 1,015
<TOTAL-ASSETS> 295,606 322,775
<DEPOSITS> 260,907 273,238
<SHORT-TERM> 0 5,300
<LIABILITIES-OTHER> 3,051 2,319
<LONG-TERM> 0 10,000
0 0
0 0
<COMMON> 10,242 10,242
<OTHER-SE> 21,405 21,656
<TOTAL-LIABILITIES-AND-EQUITY> 295,606 322,775
<INTEREST-LOAN> 9,572 2,606
<INTEREST-INVEST> 10,369 2,825
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 19,941 5,431
<INTEREST-DEPOSIT> 8,821 2,404
<INTEREST-EXPENSE> 9,075 2,404
<INTEREST-INCOME-NET> 10,866 3,027
<LOAN-LOSSES> 877 165
<SECURITIES-GAINS> 263 51
<EXPENSE-OTHER> 7,644 2,147
<INCOME-PRETAX> 4,852 1,335
<INCOME-PRE-EXTRAORDINARY> 4,852 1,335
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,698 1,010
<EPS-PRIMARY> 0.89 0.20
<EPS-DILUTED> 0.88 0.20
<YIELD-ACTUAL> 7.74 7.70
<LOANS-NON> 279 220
<LOANS-PAST> 1,016 526
<LOANS-TROUBLED> 54 52
<LOANS-PROBLEM> 1,349 798
<ALLOWANCE-OPEN> 687 1,009
<CHARGE-OFFS> 636 185
<RECOVERIES> 81 26
<ALLOWANCE-CLOSE> 1,009 1,015
<ALLOWANCE-DOMESTIC> 1,009 1,015
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
