<PAGE>
UNITED STATES
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, 1999
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period ___ to ___
Commission File Number 000-24553
CNBT BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0575815
(State or other jurisdiction of (I.R.S. employer
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 July 30, 1999, 4,911,117 shares of CNBT Bancshares, Inc., common stock, $1.00
par value, were outstanding.
<PAGE>
CNBT BANCSHARES, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1999
and 1998 and at December 31, 1998............... 3
Consolidated Statements of Income for the Three
Months Ended June 30, 1999 and 1998 and
the Six Months Ended June 30, 1999 and 1998..... 4
Consolidated Statements of Comprehensive Income
for the Three Months Ended June 30, 1999 and
1998 and the Six Months Ended June 30, 1999
and 1998........................................ 5
Consolidated Statements of Stockholders' Equity
for the Year Ended December 31, 1998 and
for the Six Months Ended June 30, 1999.......... 6
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998............. 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............................ 10
Financial Condition.............................. 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................ 21
Item 4. Submission of Matters to a Vote of Security
Holders......................................... 21
Item 6. Exhibits and Reports on Form 8-K................. 21
SIGNATURES.................................................. 22
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CNBT BANCSHARES, INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------ --------------
1999 1998 1998
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and due from banks.................................... $ 11,108 $ 12,355 $ 13,070
Due from banks - interest bearing overnight funds.......... 684 56 224
Investment securities available-for-sale................... 130,206 109,131 164,796
Investment securities held-to-maturity (approximate
market value of $115,710 and $108,082 at June 30,
1999 and 1998, respectively (unaudited), and
$79,715 at December 31, 1998)............................ 118,980 107,247 79,728
Loans, net................................................. 119,145 108,139 110,177
Bank premises and equipment, net........................... 6,543 5,862 5,913
Deferred income taxes receivable........................... 681 - -
Other assets............................................... 3,861 3,823 4,022
-------- -------- --------
TOTAL ASSETS.................................................. $391,208 $346,613 $377,930
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand................................................... $ 73,927 $ 66,214 $ 72,738
NOW Accounts............................................. 22,736 20,551 24,020
Savings.................................................. 8,533 7,720 7,620
Money market............................................. 93,057 75,379 85,018
Time, $100,000 and over.................................. 42,872 41,174 42,108
Other time............................................... 99,023 87,597 99,413
-------- -------- --------
TOTAL DEPOSITS......................................... 340,148 298,635 330,917
Other borrowed funds....................................... 18,000 13,000 11,100
Accrued interest and other liabilities..................... 1,922 1,682 1,689
Federal income taxes payable............................... 41 222 -
Deferred income taxes payable.............................. - 425 838
-------- -------- --------
TOTAL LIABILITIES...................................... 360,111 313,964 344,544
COMMITMENTS AND CONTINGENT LIABILITIES........................
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value at June 30, 1999 and December
31, 1998, $2.03 par value at June 30, 1998,
respectively; 30,000,000 shares authorized, 5,069,217
shares issued and 4,911,117 shares outstanding at June
30, 1999 (unaudited), 5,065,601 shares issued and
outstanding at June 30, 1998 (unaudited), 5,065,601
shares issued and 4,910,201 shares outstanding at
December 31, 1998........................................ 5,069 10,285 5,065
Surplus.................................................... 21,905 16,679 21,899
Retained earnings.......................................... 6,740 4,791 6,264
Accumulated other comprehensive income; net unrealized
gains (losses) on available-for-sale securities, net of
deferred income taxes (benefit) of $(530), $461 and
$838 at June 30, 1999 and 1998 (unaudited), and
December 31, 1998, respectively.......................... (1,029) 894 1,719
-------- -------- --------
32,685 32,649 34,947
Less: treasury stock at cost; 158,100 shares at June 30,
1999 (unaudited), 155,400 shares at December 31, 1998.... (1,588) - (1,561)
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 31,097 32,649 33,386
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $391,208 $346,613 $377,930
======== ======== ========
</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,
----------------- ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................. $2,799 $2,670 $ 5,523 $ 5,276
Interest on investment securities:
Taxable................................... 2,967 2,457 5,835 4,605
Nontaxable................................ 766 708 1,492 1,385
------ ------ ------- -------
Total interest on investment securities..... 3,733 3,165 7,327 5,990
------ ------ ------- -------
TOTAL INTEREST INCOME..................... 6,532 5,835 12,850 11,266
INTEREST EXPENSE
Interest on deposits and FHLB borrowings... 3,083 2,723 6,094 5,127
------ ------ ------- -------
Net interest income....................... 3,449 3,112 6,756 6,139
PROVISION FOR LOAN LOSSES................... 150 167 300 332
------ ------ ------- -------
Net interest income after provision
for loan losses........................ 3,299 2,945 6,456 5,807
OTHER INCOME
Service fees............................... 588 491 1,153 980
Net realized gains (losses) on sale of
available-for-sale securities............. 7 (1) 26 50
Other operating income..................... 94 316 175 396
------ ------ ------- -------
TOTAL OTHER INCOME........................ 689 806 1,354 1,426
OTHER EXPENSES
Salaries and employee benefits............. 1,334 1,200 2,655 2,300
General and administrative................. 317 356 658 686
Data processing............................ 238 225 458 451
FDIC assessments........................... 9 7 18 15
Occupancy expenses, net.................... 158 141 306 275
Equipment maintenance...................... 140 154 292 282
Postage and printing fees.................. 128 125 220 225
Professional fees.......................... 142 142 270 263
------ ------ ------- -------
TOTAL OTHER EXPENSES...................... 2,466 2,350 4,877 4,497
------ ------ ------- -------
INCOME BEFORE FEDERAL INCOME
TAXES..................................... 1,522 1,401 2,933 2,736
Applicable federal income taxes............ 300 346 493 671
------ ------ ------- -------
NET INCOME.................................. $1,222 $1,055 $ 2,440 $ 2,065
====== ====== ======= =======
Earnings per common share:
Basic Earnings Per Share.................. $ .25 $ .21 $ .50 $ .41
====== ====== ======= =======
Fully Diluted Earnings Per Share.......... $ .24 $ .20 $ .49 $ .40
====== ====== ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
4
<PAGE>
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,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Net income........................................ $ 1,222 $ 1,055 $ 2,440 $2,065
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period................................... (2,119) 93 (2,731) (185)
Less: reclassification adjustment for (gains)
losses included in net income................... (5) 0 (17) (33)
------- ------- ------- ------
(2,124) 93 (2,748) (218)
------- ------- ------- ------
Comprehensive income (loss)....................... $ (902) $ 1,148 $ (308) $1,847
======= ======= ======= ======
</TABLE>
See accompanying notes to interim consolidated financial statements.
5
<PAGE>
CNBT BANCSHARES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
------------------ Compre-
Par Treasury Retained hensive
Shares Values Stock Surplus Earnings Surplus Total
------ ------ --------- ------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997.............. 5,044,181 $10,242 $ 0 $16,656 $ 3,637 $ 1,112 $31,647
Proceeds from exercise of stock
options............................... 21,420 43 0 23 0 0 66
Cash dividends per share............... 0 0 0 0 (1,858) 0 (1,858)
Re-purchase stock...................... (155,400) 0 (1,561) 0 0 0 (1,561)
Par value change....................... 0 (5,220) 0 5,220 0 0 0
Comprehensive income:
Unrealized gain on investment
securities available-for-sale, net
of deferred income taxes of $312...... 0 0 0 0 0 607 607
Net income............................ 0 0 0 0 4,485 0 4,485
--------- ------- ------- ------- ------- ------- -------
Total comprehensive income ............ 5,902
---------
BALANCE, DECEMBER 31, 1998.............. 4,910,201 $ 5,065 $(1,561) $21,899 $ 6,264 $ 1,719 $33,386
Proceeds from exercise of stock
options (unaudited)................... 3,616 4 0 6 0 0 10
Cash dividends (unaudited)............. 0 0 0 0 (1,964) 0 (1,964)
Re-purchase stock (unaudited).......... (2,700) 0 (27) 0 0 0 (27)
Comprehensive income:
Unrealized loss on investment
securities available-for-sale, net
of deferred income tax benefit of
$1,416 (unaudited).................... 0 0 0 0 0 (2,748) (2,748)
Net income (unaudited)................ 0 0 0 0 2,440 0 2,440
--------- ------- ------- ------- ------- ------- -------
Total comprehensive loss (unaudited)... (308)
-------
BALANCE, JUNE 30, 1999
(UNAUDITED)............................ 4,911,117 $ 5,069 $(1,588) $21,905 $ 6,740 $(1,029) $31,097
========= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to interim consolidated financial statements.
6
<PAGE>
CNBT BANCSHARES, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 2,440 $ 2,065
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.............................................. 224 204
Premium amortization net of discount accretion............ 229 (56)
Provision for loan losses................................. 300 332
Net realized gain on available-for-sale
securities............................................... (16) (50)
Loss on disposal of bank premises and equipment
and other assets........................................ 16 69
Provision (benefit) for deferred taxes.................... (103) 3
Changes in assets and liabilities:
Accrued interest receivable............................... 246 (310)
Other assets.............................................. (121) (275)
Accrued expenses.......................................... 289 208
Accrued interest payable.................................. (56) 48
Federal income taxes payable/receivable................... 55 187
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES................................................ 3,503 2,425
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities.................. (13,939) (31,809)
Proceeds from sales of available-for-sale securities........ 37,673 11,800
Proceeds from maturities of available-for-sale securities... 6,586 3,617
Purchases of held-to-maturity securities.................... (50,463) (48,564)
Proceeds from maturities of held-to-maturity securities..... 11,104 18,185
Loans originated, net of principal collected................ (9,615) (6,750)
Proceeds from sales of other real estate and repossessed
assets..................................................... 353 87
Cash paid for bank premises and equipment................... (854) (682)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES...................... (19,155) (54,116)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW,
savings, and money market accounts......................... 8,857 19,339
Proceeds from sales of time deposits, net of payments
for maturing time deposits................................. 374 18,389
Net increase in other borrowed funds........................ 6,900 13,000
Proceeds from exercise of stock options..................... 10 66
Purchase of common stock.................................... (27) 0
Dividends paid.............................................. (1,964) (1,968)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 14,150 48,826
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS..................... (1,502) (2,865)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.............. 13,294 15,276
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 11,792 $ 12,411
======== ========
</TABLE>
See accompanying notes to interim consolidated financial statements.
7
<PAGE>
CNBT BANCSHARES, INC AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(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 periods ending June 30, 1999 and 1998
are not necessarily indicative of the annual results.
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, 1998, of CNBT Bancshares, Inc. (the "Company") as filed with the
Securities and Exchange Commission.
(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,
----------------------- ------------------------
1999 1998 1999 1998
---------- ---------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net income................................... $ 1,222 $ 1,055 $ 2,440 $ 2,065
Divided by weighted average common
shares and common share equivalents:
Weighted average common shares....... 4,911,117 5,061,778 4,910,570 5,054,023
Weighted average common share
equivalents........................ 69,989 92,728 62,978 97,065
---------- ---------- ---------- ----------
Total average common shares and
common share equivalents................ 4,981,106 5,154,506 4,973,548 5,151,088
========== ========== ========== ==========
Earnings per common share - Basic........... $ 0.25 $ 0.21 $ 0.50 $ 0.41
========== ========== ========== ==========
Earnings per common share - Fully Diluted... $ 0.24 $ 0.20 $ 0.49 $ 0.40
========== ========== ========== ==========
</TABLE>
(3) Common Stock
The Board of Directors declared cash dividends to be payable to stockholders
of record for the quarters ending March 30, 1998, June 30, 1998 and September
30, 1998 of $0.09 per share. A cash dividend of $0.10 was declared payable to
stockholders of record at December 31, 1998, March 30, 1999 and June 30, 1999.
Also, a special dividend for $0.20 per share was declared at March 30, 1999 in
addition to the regular quarterly dividend.
On July 2, 1998, the Board of Directors authorized the formation of a holding
company. The transaction was consummated with an exchange of the Bank's common
stock ($2.03 par value) for common stock in the newly created bank holding
company ($1.00 par value) which resulted in a decrease in Common Stock of
$5,220,000 and a corresponding increase in Surplus of $5,220,000. This
transaction has been accounted for at historical cost in a manner similar to a
pooling of interest.
As of June 30, 1999, an additional 51,314 shares of common stock were
issuable (without regard to vesting restrictions) upon exercise of outstanding
employee stock options under the 1992, 1994, 1995, 1997, and 1998 Stock Option
Plans.
8
<PAGE>
(4) Comprehensive Income
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). For the three and six
month periods ending June 30, 1999 and 1998, unrealized holding gain (losses) on
debt and equity securities available-for-sale is the only other comprehensive
income component. 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 ending June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
June 30, 1999 June 30, 1998
------------------------------------ ------------------------------
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....... $ (3,211) $ 1,092 $ (2,119) $ 141 $ (48) $ 93
Less: reclassification adjustment
for net (gain) loss realized in
net income.......................... (7) 2 (5) 0 0 0
-------- ------------ -------- ------- -------- ------
Other comprehensive income (loss).... $ (3,218) $ 1,094 $ (2,124) $ 141 $ (48) $ 93
======== ============ ======== ======= ======== ======
Six Months Ended
-----------------------------------------------------------------------
June 30, 1999 June 30, 1998
------------------------------------- --------------------------------
Tax Net Tax Net
Expense of Tax Expense of Tax
Pretax (Benefit) Amount Pretax (Benefit) Amount
-------- ----------- --------- -------- --------- -------
Net unrealized gain (loss) on
securities available-for-sale....... $ (4,138) $ 1,407 $ (2,731) $ (280) $ 95 $ (185)
Less: reclassification adjustment
for net (gain) loss realized in
net income.......................... (26) 9 (17) (50) 17 (33)
-------- ------------ -------- ------- -------- ------
Other comprehensive income (loss).... $ (4,164) $ 1,416 $ (2,748) $ (330) $ 112 $ (218)
======== ============ ======== ======= ======== ======
</TABLE>
(5) General
CNBT Bancshares, Inc., a Texas corporation, 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. 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.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
CNBT Bancshares, Inc. (the "Company") is a bank holding company headquartered
in Bellaire, Texas, which derives substantially all of its income from the
operation of its wholly-owned bank subsidiary, Citizens National Bank of Texas
(the "Bank"). The Company was formed in July 1998 as a bank holding company for
the Bank, which was chartered in 1983.
For the six months ended June 30, 1999, the Company had net income of $2.4
million, an increase of $300,000 or 14.29% from the same period in 1998. This
earnings growth was due primarily to an increase in net interest income, which
resulted from strong loan growth and a substantial increase in the securities
portfolio. Net income per share, basic and fully diluted, increased to $0.50
and $0.49, respectively, for the six months ended June 30, 1999, from $0.41 and
$0.40 for the same time period in 1998. The Company's annualized return on
average assets was 1.26% and the annualized return on average common equity was
14.82% for the six months ended June 30, 1999, compared to 1.31% and 12.90% for
the same time period in 1998.
Total assets increased to $391.2 million at June 30, 1999, from $346.6
million at June 30, 1998, an increase of $44.6 million or 12.87%, and from
$377.9 million at December 31, 1998, an increase of $13.3 million or 3.52%. The
increase was due primarily to an increase in the deposits. Deposits increased
to $340.1 million at June 30, 1999, from $298.6 million at June 30, 1998, an
increase of $41.5 million or 13.9%, and from $330.9 million at December 31,
1998, an increase of $9.2 million or 2.78%. Total stockholders' equity was $31.1
million at June 30, 1999, representing a decrease of $1.5 million or 4.6% over
total stockholders' equity of $32.6 million at June 30, 1998, and a decrease of
$2.3 million or 6.89% over stockholders' equity of $33.4 million at December 31,
1998. The decrease in stockholders' equity is attributable to a special cash
dividend of $0.20 per share (an aggregate dividend of $2.0 million) in addition
to the regular quarterly dividends and a decrease in unrealized gain/losses on
investment securities.
RESULTS OF OPERATIONS
Management believes that the explanations for the six months ended June 30,
1999 adequately explain the results for the three months then ended.
Net Interest Income
Net interest income for the six months ended June 30, 1999, was $6.8 million,
an increase of $700,000 or 11.48% from $6.1 million for the six months ended
June 30, 1998. The Company's net interest margin was 3.70% and 4.14% and the net
interest spread was 2.73% and 3.02% for the six months ended June 30, 1999 and
1998, respectively. The decrease in net interest margin resulted from a smaller
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 0.57% compared to a decrease of 0.28% 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 loan and
securities portfolios. Interest income from loans increased to $5.5 million
from $5.3 million for the six months ended June 30, 1999 and 1998, respectively,
an increase of $200,000 or 3.77%. The yield in the loan portfolio decreased to
9.55% for the six months ended June 30, 1999, from 9.92% for the six months
ended June 30, 1998. Interest income from the securities portfolio increased to
$7.3 million for the six months ended June 30, 1999, from $6.0 million for the
six months ended June 30, 1998, a $1.3 million or 21.67% increase. This was due
primarily to a 32.21% increase in average securities held that was offset by a
decrease in yield from 6.30% to 5.87% for the six months ended June 30, 1999,
compared to the same period in 1998. Partially offsetting the interest income
growth was an increase in interest expense, which grew to $6.1 million for the
six months ended June 30, 1999, compared to $5.1 million for the six months
ended June 30, 1998. This increase was the result of strong growth in average
deposits, in particular, money market and savings deposits and certificates of
deposit.
10
<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, 1999 June 30, 1998
---------------------------------- -----------------------------------
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..................................... $115,628 $ 5,523 9.55% $106,338 $ 5,276 9.92%
Securities................................ 248,490 7,288 5.87 187,950 5,924 6.30
Federal funds sold and other
earning assets........................ 1,210 39 6.45 2,011 66 6.56
-------- ------- -------- -------
Total interest-earning assets........ 365,328 12,850 7.03 296,299 11,266 7.60
Less: allowance for loan losses............. 1,203 1,022
-------- --------
Total earning assets, net of allowance....... 364,125 295,277
Nonearning assets............................ 24,150 21,062
-------- --------
Total Assets......................... $388,275 $316,339
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing demand deposits.......... $ 23,553 $ 182 1.55% $ 20,322 $ 178 1.75%
Savings and money market accounts......... 98,263 1,710 3.48 78,457 1,478 3.77
Certificates of deposit................... 142,398 3,695 5.19 116,874 3,254 5.57
Borrowed funds............................ 19,337 507 5.24 8,051 217 5.39
-------- ------- -------- -------
Total interest-bearing liabilities... 283,551 6,094 4.30 223,704 5,127 4.58
------- -------
Noninterest-bearing liabilities:
Noninterest-bearing demand deposit........ 69,409 58,406
Other liabilities......................... 2,387 2,217
-------- --------
Total liabilities.................... 355,347 284,327
Stockholders' equity......................... 32,928 32,012
-------- --------
Total liabilities and
stockholders' equity............... $388,275 $316,339
======== ========
Net interest income.......................... $ 6,756 $ 6,139
======= =======
Net interest spread (1)...................... 2.73% 3.02%
Net interest margin (2)...................... 3.70% 4.14%
</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.
11
<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, 1999 vs. 1998
----------------------------------------
Increase (Decrease)
Due to
------------------------
Volume Rate Total
------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans............................................ $ 675 $ (428) $ 247
Securities....................................... 2,452 (1,088) 1,364
Other earning assets............................. (26) (1) (27)
------ ------- ------
Total increase (decrease) in interest income.... 3,101 (1,517) 1,584
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits................. 53 (49) 4
Savings and money market accounts................ 514 (282) 232
Certificates of deposit.......................... 982 (541) 441
Borrowed funds................................... 318 (28) 290
------ ------- ------
Total increase (decrease) in interest expense... 1,867 (900) 967
------ ------- ------
Increase (decrease) in net interest income........ $1,234 $ (617) $ 617
====== ======= ======
</TABLE>
Provisions for Loan Losses
The provision for loan losses was $300,000 for the six months ended June 30,
1999, and $332,000 for the same period in 1998, a decrease of $32,000 or 9.64%.
Noninterest Income
Noninterest income for the six months ended June 30, 1999, remained constant
at $1.4 million. The following table presents, for the periods indicated, the
major categories of noninterest income:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
---------------- ------
(Dollars in thousands)
<S> <C> <C>
Service fees..................... $1,153 $ 980
Net realized gains on sale of
available-for-sale securities... 26 50
Other operating income........... 175 396
------ ------
Total noninterest income......... $1,354 $1,426
====== ======
</TABLE>
For the six months ended June 30, 1999, service fees on deposit accounts were
$1.2 million as compared to $1.0 million for the same period in 1998, an
increase of $200,000 or 20.0%. Other operating income decreased to $175,000 for
the six months ending June 30, 1999 as compared to $396,000 at June 30, 1998. A
recovery of $229,000 from the banks bonding company was received during the six
month period ending June 30, 1998, resulting from an employee defalcation.
Deposit accounts grew from 24,491 at June 30, 1998 to 26,636 at June 30, 1999.
Noninterest Expenses
In the six month period ended June 30, 1999, noninterest expenses increased
$400,000 or 8.89% to $4.9 million from the 1998 comparable period. For the six
months ended June 30, 1999, the efficiency ratio, calculated by dividing total
noninterest expenses (excluding securities gains and losses) by net interest
income plus noninterest income increased to 60.3% for the six months ended June
30, 1999, from 59.8% for the six months ended June 30, 1998. This increase was
primarily due to an increase in salaries and employee benefits along with other
general and administrative expenses.
12
<PAGE>
Salaries and employee benefit expense and general administrative expenses,
for the six months ended June 30, 1999, was $3.3 million, an increase of
$300,000 or 10.0% from $3.0 million in the same period of 1998. The increase
was due to additional personnel required to accommodate the growth and the
opening of a new branch office in northwest Houston. Total full-time equivalent
employees at June 30, 1999, increased to 115 from 99 at June 30, 1998.
Occupancy expense and equipment maintenance increased to $598,000 for the
six-month period ended June 30, 1999, from $557,000 for the six-month period
ended June 30, 1998. Major categories included within occupancy expense are
building lease expense, depreciation expense, and maintenance expense.
Depreciation expense increased to $225,000 for the six-month period June 30,
1999, an increase of $21,000 or 10.29% from $204,000 for the same period in
1998. This increase was primarily due to additional depreciation on new
equipment purchases. Maintenance expense for the six-month period ended June
30, 1999, was $146,000, an increase of $12,000 or 8.96% over the same period in
1998.
Data processing expense for the six-month period ended June 30, 1999, was
$458,000, as compared to $451,000 for the same period in 1998, an increase of
$7,000 or 1.55%.
Income Taxes
The income tax provision includes both federal current and deferred income
tax amounts using the statutory rates currently in effect. 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 1999,
income tax expense was $493,000, a decrease of $178,000 or 26.53% from $671,000
of income tax expense for the same period in 1998. The lower income tax expense
in the first six months of 1999 compared to the first six months of 1998 is
principally due to the increase in nontaxable income and other changes in
temporary differences. The effective tax rates were 16.81% for the six months
ended June 30, 1999, and 24.52% for the six months ended June 30, 1998.
FINANCIAL CONDITION
Loan Portfolio
Loans, net of unearned interest, were $120.4 million at June 30, 1999, an
increase of $9.0 million or 8.08% from $111.4 million at December 31, 1998. At
June 30, 1999, loans as a percentage of assets and deposits were 30.78% and
35.40%, respectively.
The following table summarizes the loan portfolio of the Bank by type of loan
as of June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------ -------------------
Amount Percent Amount Percent
------------- -------- -------- --------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Commercial and industrial............ $ 23,771 19.7% $ 23,836 21.4%
Real estate:
Construction and land development... 14,139 11.7 11,144 10.0
1-4 family residential.............. 12,936 10.7 11,161 10.0
Commercial owner occupied........... 28,232 23.5 25,760 23.1
Other............................... 1,616 1.4 643 0.6
Consumer............................. 39,714 33.0 38,816 34.9
-------- ----- -------- -----
Total loans......................... $120,408 100.0% $111,360 100.0%
======== ===== ======== =====
</TABLE>
Nonperforming Assets
The Bank's conservative lending policies have resulted in strong asset
quality. Nonperforming assets were $497,000 at June 30, 1999, compared to
$507,000 at December 31, 1998. This resulted in a ratio of nonperforming assets
to loans plus other real estate of 0.41% and 0.46% at June 30, 1999, and
December 31, 1998, respectively, and a ratio of nonperforming assets to total
assets of 0.13% at June 30, 1999 and December 31, 1998.
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
13
<PAGE>
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.
The following table presents information regarding nonperforming assets at
June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
(Dollars in thousands)
<S> <C> <C>
Nonaccrual loans............................................ $ 182 $ 239
Accruing loans 90 or more days past due..................... 260 174
Restructured loans.......................................... 55 40
Other real estate and foreclosed property................... 0 54
----- -----
Total nonperforming assets................................. $ 497 $ 507
===== =====
Nonperforming assets to total loans and other real estate... 0.41% 0.46%
Nonperforming assets to total assets........................ 0.13% 0.13%
</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, 1999, 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, 1999.
14
<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,
1999 1998
------------- -------------
(Dollars in thousands)
<S> <C> <C>
Allowance for loan losses at beginning of period... $ 1,183 $ 1,009
Provision for loan losses.......................... 300 612
Charge-offs........................................ (337) (569)
Recoveries......................................... 117 131
------- -------
Allowance for loan losses at end of period......... $ 1,263 $ 1,183
======= =======
June 30, December 31,
1999 1998
-------- -----------
Allowance to period-end loans...................... 1.05% 1.06%
Net charge-offs (recoveries) to average loans...... 0.19% 0.41%
Allowance to period-end nonperforming loans........ 254.12% 261.15%
</TABLE>
Securities
The Company's securities portfolio as of June 30, 1999, totaled $249.2
million as compared to $244.5 million at December 31, 1998, and $216.4 million
at June 30, 1998. The year-to-date increase of $4.7 million or 1.92% is a
result of the reinvestment of excess liquidity in U.S. Government and agency and
mortgage-backed securities and municipal bonds. The Company 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, 1999, the held-to-maturity portfolio totaled $119.0 million
and the available-for-sale portfolio totaled $130.2 million. The net unrealized
loss in the available-for-sale portfolio was $1.5 million as of June 30, 1999.
The Company tracks but does not record market changes on its held-to-maturity
portfolio. At June 30, 1999, the market value of the held-to-maturity portfolio
was $115.7 million.
15
<PAGE>
The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values at June 30, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities... $ 31,918 $ 21 $ (557) $ 31,382
Mortgage-backed securities.............. 35,359 71 (385) 35,045
Obligations of state and political
subdivisions........................... 60,463 465 (1,129) 59,799
Other securities........................ 3,980 0 0 3,980
-------- ------ ------- --------
Total securities........................ $131,720 $ 557 $(2,071) $130,206
======== ====== ======= ========
December 31, 1998
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------------- ---------- ----------- ---------
(Dollars in thousands)
U.S. Government and agency securities... $ 62,078 $ 927 $ 0 $ 63,005
Mortgage-backed securities.............. 42,057 172 (132) 42,097
Obligations of state and political
subdivisions........................... 55,315 1,757 (60) 57,012
Other securities........................ 2,682 0 0 2,682
-------- ------ ------- --------
Total securities....................... $162,132 $2,856 $ (192) $164,796
======== ====== ======= ========
</TABLE>
The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values at June 30, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Loss Value
----------------- ---------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agency securities... $ 17,595 $ 0 $ (527) $ 17,068
Mortgage-backed securities.............. 101,385 102 (2,845) 98,642
-------- ---- ------- --------
Total securities....................... $118,980 $102 $(3,372) $115,710
======== ==== ======= ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
December 31, 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... $ 9,734 $ 44 $ (30) $ 9,748
Mortgage-backed securities.............. 69,994 188 (215) 69,967
-------- ---- ------- --------
Total securities....................... $ 79,728 $232 $ (245) $ 79,715
======== ==== ======= ========
</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 Company has no mortgage-backed securities that have been
issued by non-agency entities.
Deposits
Total deposits as of June 30, 1999, were $340.1 million, as compared to
$298.2 million at June 30, 1998, an increase of $41.5 million or 13.99%,
resulting from growth in same location deposits, combined with the additional
deposits of the branch offices. When compared to total deposits of $330.9
million on December 31, 1998, the amount at June 30, 1999, represents a year-to-
date increase of $9.2 million, as the strong deposit growth experienced in 1998
continued through the first six months of 1999.
Non-interest bearing demand deposits at June 30, 1999, were $73.9 million, as
compared to $66.2 million at June 30, 1998, an increase of $7.7 million or
11.63%. When compared to non-interest bearing demand deposits of $72.7 million
on December 31, 1998, the June 30, 1999, amount represents a year-to-date
increase of $1.2 million. The percentage of non-interest bearing deposits to
total deposits as of June 30, 1999, continued strong at 21.73%.
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, 1999, 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.
17
<PAGE>
The Bank's ratios of average non-interest bearing deposits to average total
deposits at June 30, 1999, and December 31, 1998, were 20.80%, and 21.37%,
respectively. The daily average balances and weighted average rates paid on
deposits for the six month period ended June 30, 1999 and the year ended
December 31, 1998, are presented below:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1999 December 31, 1998
------------------- -------------------
Amount Rate Amount Rate
------------- ----- --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts....................... $ 23,553 1.55% $ 21,005 1.71%
Regular savings.................... 7,967 1.96 7,429 2.18
Money Market....................... 90,296 3.61 75,497 3.93
CDs less than $100,000............. 80,644 5.15 70,862 5.50
CDs $100,000 and over.............. 40,279 5.18 35,103 5.59
IRAs & QRPs........................ 21,475 5.36 19,918 5.67
-------- ---- -------- ----
Total interest-bearing deposits... 264,214 4.23 229,814 4.49
Noninterest-bearing deposits....... 69,409 0 62,446 0
-------- ---- -------- ----
Total deposits..................... $333,623 3.35% $292,260 3.58%
======== ==== ======== ====
</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, 1999, and
December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(Dollars in thousands)
<S> <C> <C>
3 months or less.............. $18,481 $10,462
Between 3 months and 1 year... 17,436 25,520
Over 1 year................... 6,955 6,126
------- -------
Total CDs $100,000 and over... $42,872 $42,108
======= =======
</TABLE>
Borrowings
Other borrowings generally represent borrowings from the FHLB with
maturities ranging from one to thirty days. Information relating to these
borrowings as of June 30, 1999, is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
<S> <C> <C>
(Dollars in thousands)
Other borrowings:
Average................................. $19,337 $11,086
Period-end.............................. 18,000 11,100
Maximum month-end balance during period...
(all FHLB borrowings).................... 29,750 21,669
Interest rate:
Average................................. 5.24% 5.40%
Period-end (weighted average)........... 5.29% 5.38%
</TABLE>
At period ending June 30, 1999, the Bank had two separate borrowing programs
in effect. The Bank borrowed $8.0 million with a 10 year stated maturity and a
5 year lockout. Those borrowings consist of $6.1 million at 5.19% and $1.9
million at 5.24%. Also, the Bank borrowed $10 million that had a five-year
stated maturity with a two-year lockout. Those borrowings consist of $5 million
at 5.335% and $5 million at 5.385%.
Interest Rate Sensitivity
The Company analyzes its interest rate risk position by use of a simulation
model and shock analysis. As of June 30, 1999, the simulation model indicates
that, in the event of a 200 basis point increase in underlying market interest
rates,
18
<PAGE>
the Company's net interest income would decrease 11.69%. Correspondingly, in the
event of a 200 basis point decrease in market interest rates, the Company's net
interest income would increase by 10.91%. 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
Company 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
Company's net interest margin and results of operation. The simulation model
also provides a detailed interest rate sensitivity gap ("GAP") analysis, which
the Company uses as a secondary source in analyzing its asset/liability mix. At
June 30, 1999, the GAP measurement of interest rate sensitive assets minus
interest rate sensitive liabilities divided by total assets indicates a
cumulative negative GAP of 30.26% through one year and a cumulative positive GAP
of 6.15% for all periods. The Company seeks to maintain the cumulative GAP to
total assets within 35% for one year.
The Company's Investment-Asset/Liability Committee has 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 decreased to $31.1 million at June 30, 1999, from $33.4
million at December 31, 1998, a decrease of $2.3 million or 6.89%. This
decrease was attributable to $2.4 million in earnings offset by a net unrealized
loss on securities of $2.7 million and payment of dividends of $2.0 million,
which included the regular quarterly dividends of $0.10 per share along with a
special dividend for $0.20 per share paid on April 15, 1999.
Liquidity involves the Company'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 Company on an ongoing basis.
During the six months ended June 30, 1999, the Company's liquidity needs have
primarily been met by growth in deposits and FHLB borrowings, 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 were 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. These borrowing programs are available as either
a short-term financing arrangement (usually with maturities ranging from 1-35
days) or as a long-term financing arrangement. Under either of these two
arrangements, the Company is required to hold a certain amount of FHLB stock.
Generally, FHLB borrowings are limited to a maximum of 75% of the Company's 1-4
family mortgage loans before specific collateral is required. A secondary source
of collateral is the delivery of eligible securities. At June 30, 1999, the
Company had approximately $148.3 million in eligible securities maintained in
safekeeping at the FHLB. In addition, the Company may deliver other collateral
which includes credit card and installment loans and are usually assigned a
loan-to-value ratio of approximately 90%. With regards to the above, total
advances are limited to 50% of assets or total eligible collateral, whichever is
less. At June 30, 1999, the Company had total potential borrowings (without
purchasing addition stock) of $44.4 million.
The Bank's risk-based capital ratios remain above the levels designated as
"well capitalized". At June 30, 1999, the Bank's tier I capital to assets, tier
I risk-based capital, and tier I leverage ratios were 8.21%, 19.81% and 8.27%,
respectively.
19
<PAGE>
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 Company has completed an internal review of all computer hardware, date-
sensitive automated equipment, and software. Some of the Company's software
will require modification or replacement so that applications and computer
systems will properly use dates beyond December 31, 1999. The Company is using
both internal and external resources to correct or replace and test in-house
code to ensure uninterrupted customer service. The Company believes that
through modifications to existing software and conversion to new software, the
Year 2000 issue will be adequately addressed. The Company is also working with
its third party data processing vendor to coordinate their Year 2000 activities
with the Company's to ensure Year 2000 readiness.
The Company began significant testing of programs in October 1998. The
Company 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 during
1999, and is not expected to have any material adverse effect on the Company's
results of operations.
The Company is also reviewing its loan portfolio and deposit base to assess
Year 2000 compliance by its significant borrowers and depositors.
The Company's Year 2000 readiness project costs include the estimated costs
and time associated with the impact of the Company'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 Company 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 Company'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 Company's systems and
applications rely will be timely converted, that a failure to convert by another
company, or that a conversion that is incompatible with the Company's systems
and applications would not have a material adverse impact on the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is interest rate risk. For
information regarding the interest rate risk exposure of the Company's financial
instruments, see "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Interest Rate Sensitivity" on page 19. The Company's
financial instruments generally are not subject to market risks associated with
foreign currency exchange rate risk, commodity price risk, or other market risks
or price risks (such as equity price risk). The Company did not use derivative
financial instruments (such as futures, forwards, swaps, options, and other
financial instruments with similar characteristics) to manage its interest rate
risk during the quarter ended June 30, 1999.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Bank is a party to miscellaneous legal proceedings, which arose in the
ordinary course of business. While the outcome of these claims cannot be
predicated with certainty, management believes that the ultimate resolution of
these matters will not have a material adverse impact on the Company's financial
condition or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of the Bank was held on May 18, 1999. Two matters were
considered at the meeting.
(a) The following directors were elected to the Board of Directors for a
period of one year.
<TABLE>
<CAPTION>
Votes
--------------------
Directors For Withheld
- --------- --------- --------
<S> <C> <C>
John B. Barnes 3,450,918 10,685
William H. Bruecher, Jr. 4,448,307 13,296
James K. Chancelor 3,450,918 10,685
C. Joe Chapman 3,439,457 22,146
Frank G. Cook 3,447,699 14,515
Robert C. Dawson 3,449,918 13,904
James B. Earthman, III 3,449,107 11,685
Lura M. Griffin 3,448,307 12,496
Alton L. Hollis 3,450,918 13,296
Joseph E. Ives 3,439,169 10,685
Larry L. January 3,449,107 22,434
Albert V. Kochran 3,380,292 12,496
I. W. Marks 3,450,918 10,685
David E. Preng 3,053,293 403,910
Mary A. Walker 3,450,918 10,685
B. Ralph Williams 3,447,288 14,315
</TABLE>
(b) Ratification of the appointment of Mann Frankfort Stein & Lipp as the
Bank's independent auditors for the fiscal year ending December 31, 1999 was
also considered and approved with 3,451,393 votes for, 3,110 votes against, and
7,110 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit No. Item
----------- ----
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
21
<PAGE>
(b) Reports on Form 8-K.
None
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 July 30, 1999
---------------------------------------- -------------
B. Ralph Williams, President and Chief Date
Executive Officer
By /s/ Randall W. Dobbs July 30, 1999
---------------------------------------- -------------
Randall W. Dobbs, Executive Vice Date
President/Cashier and Chief Operations
Officer
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CNBT BANCSHARES, INC. AT JUNE 30, 1999, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 11,108
<INT-BEARING-DEPOSITS> 684
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 130,206
<INVESTMENTS-CARRYING> 118,980
<INVESTMENTS-MARKET> 115,710
<LOANS> 120,408
<ALLOWANCE> 1,263
<TOTAL-ASSETS> 391,208
<DEPOSITS> 340,148
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,963
<LONG-TERM> 18,000
0
0
<COMMON> 5,069
<OTHER-SE> 26,028
<TOTAL-LIABILITIES-AND-EQUITY> 391,208
<INTEREST-LOAN> 5,523
<INTEREST-INVEST> 7,327
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,850
<INTEREST-DEPOSIT> 5,586
<INTEREST-EXPENSE> 6,094
<INTEREST-INCOME-NET> 6,756
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 26
<EXPENSE-OTHER> 4,877
<INCOME-PRETAX> 2,933
<INCOME-PRE-EXTRAORDINARY> 2,933
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,440
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.49
<YIELD-ACTUAL> 7.03
<LOANS-NON> 182
<LOANS-PAST> 260
<LOANS-TROUBLED> 55
<LOANS-PROBLEM> 497
<ALLOWANCE-OPEN> 1,183
<CHARGE-OFFS> 337
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 1,263
<ALLOWANCE-DOMESTIC> 1,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
