<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
COMMISSION FILE NUMBER: 1-13472
* * * * * *
NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of registrant as specified in its charter)
TEXAS 74-1692337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
104 EAST MANN ROAD, LAREDO, TEXAS 78042
(Address of principal executive offices) (Zip Code)
(210) 724-2424
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,661,234 shares of Common
Stock, $.001 par value, outstanding as of July 20, 1998.
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<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 20,304 $ 27,278
Interest-bearing accounts 3,315 216
Federal funds sold 16,810 29,940
Trading securities 1,454 3,433
Investment securities available for sale 140,947 139,771
Investment securities held to maturity 101,329 106,631
Loans, net of discounts 167,692 136,313
Allowance for possible loan losses (2,551) (2,458)
Bank premises and equipment, net 15,216 12,538
Goodwill 8,992 9,180
Other assets 7,389 7,318
------------ ------------
Total Assets $ 480,897 $ 470,160
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand deposits, non-interest bearing $ 66,092 $ 66,346
Interest-bearing transaction accounts (NOW) 58,322 62,633
Savings and money market accounts 92,987 88,972
Certificates and time deposits under $100,000 132,126 131,787
Certificates and time deposits $100,000 and over 71,870 64,677
------------ ------------
Total Deposits 421,397 414,415
------------ ------------
Accrued interest, taxes and other liabilities 2,440 2,001
Obligations under short sale transactions 1,995 --
Long term notes payable 891 2,646
------------ ------------
Total Liabilities 426,723 419,062
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized,
issued and outstanding: 4,661,234 at June 30, 1998 and
4,658,734 at December 31, 1997 5 5
Surplus - Common Stock 16,355 16,341
Retained earnings 37,142 32,796
Accumulated other comprehensive income 2,003 1,956
------------ ------------
Treasury Stock, at cost (63,500 shares) (1,331) --
------------ ------------
Total Stockholders' Equity 54,174 51,098
------------ ------------
Total Liabilities and Stockholders' Equity $ 480,897 $ 470,160
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,024 $ 3,052 $ 7,746 $ 6,000
Interest on Investment Securities 3,803 2,645 7,633 5,142
Interest on Federal Funds Sold 305 299 664 621
Interest on Deposits in Banks 28 42 32 50
-------- -------- -------- --------
TOTAL INTEREST INCOME 8,160 6,038 16,075 11,813
INTEREST EXPENSE:
Interest on Deposits 3,613 2,395 7,160 4,697
Interest on Debt 72 58 139 129
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 3,685 2,453 7,299 4,826
NET INTEREST INCOME 4,474 3,585 8,776 6,987
Less: Provision for Possible Loan Losses 48 -- 68 25
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,426 3,585 8,708 6,962
NON-INTEREST INCOME:
Service Charges and Fees 794 620 1,588 1,250
Net Trading Account Profit (Loss) (524) -- 789 --
Net realized Gains (Losses) on Sales of Securities 107 1 634 1,093
Net Gains on Sales of Other Real Estate and Assets -- 40 -- 47
Miscellaneous Income 110 38 183 163
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 487 699 3,194 2,553
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 1,932 1,394 3,764 2,763
Occupancy and Equipment Expenses 689 407 1,259 824
Goodwill Amortization 94 21 188 28
Other Expenses 1,078 879 2,249 1,639
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 3,793 2,701 7,460 5,254
INCOME BEFORE FEDERAL INCOME TAXES 1,120 1,583 4,442 4,261
Federal Income Tax Expense 36 33 96 94
-------- -------- -------- --------
NET INCOME $ 1,084 $ 1,550 $ 4,346 $ 4,167
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.23 $ 0.33 $ 0.93 $ 0.89
======== ======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.33 $ 0.91 $ 0.88
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK (A) OTHER
------------------------------- COMPREHENSIVE
NUMBER OF RETAINED TREASURY INCOME,
SHARES PAR VALUE SURPLUS EARNINGS STOCK NET OF TAX TOTAL
--------- --------- -------- -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 4,659 $ 5 $ 16,341 $ 25,321 $ -- $ 1,242 $ 42,909
Net Income -- -- -- 7,475 -- -- 7,475
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 714 714
--------
Total Comprehensive Income 8,189
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 4,659 5 16,341 32,796 -- 1,956 51,098
Net Income -- -- -- 4,346 -- -- 4,346
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 47 47
--------
Total Comprehensive Income 4,393
--------
Exercise of stock options 2 -- 14 -- -- -- 14
Treasury stock purchased (64) -- -- -- (1,331) -- (1,331)
-------- -------- -------- -------- -------- -------- --------
BALANCE AT JUNE 30, 1998 4,597 $ 5 $ 16,355 $ 37,142 $ (1,331) $ 2,003 $ 54,174
======== ======== ======== ======== ======== ======== ========
(A) Common Stock with a par value of $0.001 per share, 100,000,000 shares
authorized
Disclosure of reclassification amount:
Unrealized loss on securities AFS arising during
period $ (371)
Reclassification adjustment for gains included
in income, net of tax of $216 418
--------
Net unrealized gain on securities AFS, net of tax $ 47
========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDING
JUNE 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,346 $ 4,167
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,030 433
Credit for deferred federal income taxes 40 45
Provision to allowance for possible loan losses 68 25
Net realized gains on securities available for sale (634) (1,093)
Net decrease in trading account 5,449 --
Gain on sale of other real estate owned and other assets -- (47)
Increase in accrued interest receivable and other assets (40) (810)
Increase in accrued interest payable and other liabilities 437 178
-------- --------
Net cash provided by operating activities 10,696 2,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold 13,130 2,925
Net increase in interest-bearing accounts (3,098) (1,379)
Net increase in loans (31,450) (5,270)
Purchases of securities available for sale (17,282) (22,098)
Proceeds from sales of securities available for sale 10,004 8,868
Proceeds from maturities of securities available for sale 5,304 7,012
Purchases of securities held to maturity (7,035) (8,120)
Proceeds from maturities of securities held to maturity 12,315 6,464
Capital expenditures (3,469) (529)
Proceeds from sale of other real estate owned -- 537
-------- --------
Net cash used in investing activities (21,581) (11,590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, NOW accounts,
savings and money-market accounts (549) (945)
Net increase in certificates of deposit and time deposits 7,532 13,619
Proceeds from advances on other borrowings -- 3,000
Principal payments on other borrowings (1,755) (5,144)
Purchase of treasury stock (1,331) --
Proceeds from exercise of common stock options 14 --
-------- --------
Net cash provided by financing activities 3,911 10,530
Net (decrease) increase in cash and due from banks (6,974) 1,838
Cash and due from banks at beginning of period 27,278 17,305
-------- --------
Cash and due from banks at end of period $ 20,304 $ 19,143
======== ========
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 7,222 $ 4,754
Federal income taxes paid $ 56 $ 59
Loans originated to facilitate the sale of foreclosed assets $ -- $ 478
Loan foreclosures $ 97 $ 94
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of National
Bancshares Corporation of Texas and its wholly-owned subsidiaries have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation S-K.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The consolidated financial statements include the accounts of the parent company
and all subsidiaries, and all significant intercompany balances and transactions
have been eliminated. Certain items in prior year's financial statements have
been reclassified in conformity with the current year's presentation. The
consolidated financial statements are unaudited, but include all adjustments
(consisting primarily of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the results of the periods
presented. The results of operations for the six month period ended June 30,
1998 are not necessarily indicative of the results that may be reported for the
entire year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1997.
NOTE 2 - SUBSIDIARIES
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, NBT of Delaware, Inc. and the accounts of NBT of
Delaware, Inc.'s wholly-owned subsidiaries (i) NBC Bank, N.A., Eagle Pass,
Texas; (ii) NBC Bank - Laredo, N.A., Laredo, Texas; (iii) NBC Bank, Rockdale,
Texas; (iv) NBC Bank - Central, N.A., Luling, Texas; and (v) NBC Holdings -
Texas, Inc., Laredo, Texas.
NOTE 3 - INVESTMENT SECURITIES AND OBLIGATIONS FROM SHORT-SALE TRANSACTIONS
The following tables present the amortized cost and approximate fair value of
the investment securities portfolio as of June 30, 1998 and December 31, 1997
(Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 132,603 $ 3,039 $ (26) $ 135,616
U.S. Government agency and mortgage-backed securities 2,346 16 (2) 2,360
Other securities including Federal Reserve Bank stock 2,961 10 -- 2,971
---------- ---------- ---------- ----------
Total $ 137,910 $ 3,065 $ (28) $ 140,947
========== ========== ========== ==========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 98,952 $ 1,906 $ (5) $ 100,853
U.S. Government agency and mortgage-backed securities 2,313 22 -- 2,335
Foreign debt securities 64 1 (4) 61
---------- ---------- ---------- ----------
Total $ 101,329 $ 1,929 $ (9) $ 103,249
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $133,545 $ 2,543 $ -- $136,088
U.S. Government agency and mortgage-backed securities 1,584 17 -- 1,601
Other securities including Federal Reserve Bank stock 1,677 405 -- 2,082
-------- -------- -------- --------
Total $136,806 $ 2,965 $ -- $139,771
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $103,932 $ 1,646 $ (4) $105,574
U.S. Government agency and mortgage-backed securities 2,635 34 -- 2,669
Foreign debt securities 64 -- (8) 56
-------- -------- -------- --------
Total $106,631 $ 1,680 $ (12) $108,299
======== ======== ======== ========
</TABLE>
Unrealized gains and losses on investment securities held at June 30, 1998 and
December 31, 1997 have been judged to be temporary market fluctuations with no
material financial impact on the Company.
The following table shows the maturity schedule of the Company's investment
portfolio as of June 30, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
----------------------------- -----------------------------
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 19,221 $ 19,355 $ 15,960 $ 16,045
Due in one year to five years 59,402 63,569 59,139 60,123
Due from five to ten years 56,221 54,940 23,917 24,745
Due after ten years 347 354 2,313 2,336
---------- ---------- ---------- ----------
Total $ 135,191 $ 138,218 $ 101,329 $ 103,249
Equity Securities 2,379 2,389 -- --
Federal Reserve Bank Stock 340 340 -- --
---------- ---------- ---------- ----------
Total $ 137,910 $ 140,947 $ 101,329 $ 103,249
========== ========== ========== ==========
</TABLE>
The carrying value of investment securities pledged to secure public funds
amounted to approximately $45,541,000 at June 30, 1998 and $36,167,000 at
December 31, 1997.
At June 30, 1998, the Company had one short investment position totaling
$1,995,000 which was included in obligations under short-sale transactions. At
June 30, 1998, the Company recorded a net unrealized loss of $615,000 on this
position which is reflected in the trading losses on the income statement. Short
sales can result in off-balance sheet risk, as losses can be incurred in excess
of the reported obligation if market prices of the securities subsequently
increase.
7
<PAGE> 8
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses for the six months ended
June 30, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 2,458 $ 2,408
Provisions to allowance for possible loan losses 68 25
Losses charged to the allowance (131) (78)
Recoveries credited to the allowance 156 104
---------- ----------
Net (charge-offs) recoveries 25 26
---------- ----------
Balance at end of period $ 2,551 $ 2,459
========== ==========
</TABLE>
Impaired Loans
A loan within the scope of SFAS No. 114 is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled principal and interest payments. At June 30, 1998
and 1997, the Banks have impaired loans of $1,964,000 and $1,314,000,
respectively. The allowance for loan losses related to those loans was $ 312,000
and $98,000, respectively. The average recorded investment in impaired loans
during the six months ended June 30, 1998 was $1,366,000 and $1,108,000,
respectively. Interest income of approximately $25,000 and $35,000 on impaired
loans was recognized for cash payments received during the six months ended June
30, 1998 and 1997, respectively.
NOTE 5 - NOTES PAYABLE
On September 30, 1997, the Company executed a $4 million note with Texas
Independent Bank in Dallas. The note bears a variable interest rate at New York
prime (8.5% at June 30, 1998). Principal payments of $200,000 plus interest are
due quarterly, with the balance due at maturity. The note matures on September
30, 2000. The note is collateralized by the common stock of NBT of Delaware,
Inc. and the stock of the subsidiary banks.
In May 1994 and July 1995, a subsidiary Bank borrowed $200,000 and $175,000,
respectively, from the Federal Home Loan Bank of Dallas. The notes bear interest
rates of 7.49% and 6.393%, respectively. The maturity dates of the notes are
June 1999 and August 2015, respectively. Principal and interest payments are due
monthly in the approximate amount of $2,900 per month in the aggregate with the
remaining balances due at maturity. Both of these loans are secured by a certain
block of fixed rate mortgage loans carried by the subsidiary Bank.
NOTE 6 - INCOME TAX EXPENSE
The provision for Federal income tax expense is less than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Tax based on statutory rate $ 1,510 $ 1,449
Decrease in deferred tax asset valuation allowance (1,615) (1,512)
Alternative minimum tax 89 85
Other, net 112 72
----------- -----------
Federal income tax expense $ 96 $ 94
=========== ===========
</TABLE>
8
<PAGE> 9
The Company had approximately $103 million in net operating loss carryforwards
at June 30, 1998 which will be available to reduce income tax liabilities in
future years. If unused, approximately $99 million of such carryforwards will
expire in 2005, with the remaining approximately $4 million expiring in 2006.
The net operating loss carryforwards, along with certain other items, create
deferred tax assets. A valuation allowance has been created to reduce deferred
tax assets to an amount more likely than not to be realized. During the six
months ended June 30, 1998 and 1997, the valuation allowance has been reduced to
adjust the recorded deferred tax asset to the realizable amount. Pursuant to
Statement of Financial Accounting Standards No, 109, "Accounting for Income
Taxes", reductions to the valuation allowance are recorded as decreases in
current period income tax expense.
NOTE 7 - ACQUISITIONS
On July 18, 1997, the Company acquired three branches of Wells Fargo Bank in
Giddings, Marble Falls and Taylor, Texas. The Company acquired approximately
$103.4 million in deposits and $2.6 million in the owned branch facilities,
branch furniture, fixtures and certain equipment. The Company paid a purchase
price of approximately $9.9 million for the Wells Fargo acquisitions.
NOTE 8 - ACCOUNTING CHANGES
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income." This statement establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements; however, the adoption of this statement had no
impact on the Company's net income or stockholders' equity. SFAS No. 130
requires unrealized gains and losses on the Company's available for sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Amounts in the financial
statements for earlier periods have been reclassified for comparative purposes,
as required by SFAS No. 130.
NOTE 9 - STOCK REPURCHASE PLAN
On May 15, 1997, the Board of Directors approved a stock repurchase plan. The
plan authorized management to purchase up to 500,000 shares of the Company's
common stock through the open market based on market conditions.
In the first six months of 1998, 63,500 shares were purchased by the Company
through the open market.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the Consolidated Financial Statements, accompanying
notes, and selected financial data appearing elsewhere in this Report.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1998 was $1.1 million or
$.23 per common share compared with $1.5 million or $.33 per common share for
the three months ended June 30, 1997. The second quarter of 1998 included a
non-recurring net trading loss in the amount of $524,000 and a non-recurring
gain on investment securities of $107,000. With the exclusion of the
non-recurring items, net income for the second quarter of 1998 was $1.5 million,
or $.32 per share. Net interest income for the three months ended June 30, 1998
increased $889,000 over the same period of 1997 which is due to internal growth
in the loan portfolio and the Wells Fargo acquisitions. Net interest income was
$144,000 higher than the previous quarter ended March 31, 1998. Non-interest
expenses were up $1.1 million, or 40%, for the three months ended June 30, 1998
compared to the three months ended June 30, 1997, this was primarily due to the
expenses of operating the Wells Fargo ranches and the opening of two new
branches in the first quarter of 1998. Non-interest income improved $246,000 or
37% for the three months ended June 30, 1998, excluding the non-recurring items,
due to service charges and fees primarily from deposits obtained from the Wells
Fargo acquisitions. For the three months ended June 30, 1998, the Company's
return on average assets was .90%, or 1.25% adding back the non-recurring items.
The return on average assets for the three months ended June 30, 1997 was 1.84%.
Net income for the six months ended June 30, 1998 was $4.3 million or $.93
per common share compared with $4.1 million or $.89 per common share for the six
months ended June 30, 1997. For the six months ended June 30, 1998, the
Company's return on average assets was 1.83%, compared to 2.51% for the six
months ended June 30, 1997 or 1.23% and 1.84%, deducting the non-recurring gains
on securities, respectively. Average assets have increased $140.1 million or 42%
over the six months ended June 30, 1997. The Company's return on average equity
for the six months ended June 30, 1998 was 16.76%, or 11.27% deducting the
non-recurring gains on securities. For the six months ended June 30, 1997 the
Company's return on average equity was 19.03% and 14.04%, deducting the
non-recurring gain on securities. The ratio of average stockholders' equity to
total average assets was 10.9% and 13.1% for the six months ended June 30, 1998
and 1997, respectively.
NET INTEREST INCOME
Net interest income constitutes the principal source of income for the
Banks and represents the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The increase of
$1.8 million or 26% in net interest income for the six months ended June 30,
1998 compared to the same period in 1997 was due to internal loan growth which
accounts for $1.7 million of the increase and the remainder is due to the Wells
Fargo acquisitions. Average loans increased $37 million or 33% over the second
quarter of 1997. The net interest margin for the six months ended June 30, 1998
was 4.20% compared to 4.59% as of June 30, 1997. The net interest margin is the
net return on earning assets which is computed by dividing taxable equivalent
net interest income by average total earning assets.
The net interest spread decreased 16 basis points to 3.59% at June 30, 1998
from 3.75% at June 30, 1997. The decrease in the net interest spread is
primarily due to the increase in rates being paid on deposits and the decrease
in the rates being paid on loans.
10
<PAGE> 11
INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------------------ -------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
-------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts 1,709 28 6.57% 2,647 42 6.36%
Federal funds sold 22,415 304 5.44% 20,997 299 5.71%
Investment securities (F):
US Treasuries 236,754 3,718 6.30% 161,774 2,543 6.31%
US Government agencies 4,890 76 6.23% 5,383 91 6.78%
Other 644 10 6.23% 631 11 6.99%
-------- -------- -------- -------- -------- --------
Total investment securities 242,288 3,804 6.30% 167,788 2,645 6.32%
Loans, net of discounts (A) 158,993 4,028 10.16% 114,983 3,058 10.67%
-------- -------- -------- -------- -------- --------
Total interest-earning assets 425,405 8,164 7.70% 306,415 6,044 7.91%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 17,676 14,242
Allowance for possible loan losses (2,518) (2,450)
Other assets 39,695 19,056
-------- --------
Total assets 480,258 337,263
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 61,193 401 2.63% 38,789 278 2.87%
Savings, money market and certificates of deposit 294,363 3,212 4.38% 202,600 2,117 4.19%
Other debt 4,518 72 6.39% 2,858 58 8.14%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 360,074 3,686 4.11% 244,247 2,453 4.03%
Non-interest bearing liabilities:
Demand deposits 64,402 46,452
Other liabilities 3,296 2,046
-------- --------
Total liabilities 427,772 292,745
STOCKHOLDERS' EQUITY (F) 52,486 44,518
-------- --------
Total liabilities and stockholders' equity 480,258 337,263
======== ========
Taxable equivalent net interest income 4,478 3,591
Less: taxable equivalent adjustment 4 4
-------- --------
Net interest income 4,474 3,587
======== ========
Net interest spread (B) 3.59% 3.88%
======== ========
Net interest margin (C) 4.22% 4.70%
======== ========
SELECTED OPERATING RATIOS:
Return on assets (D) 0.90% 1.84%
======== ========
Return on equity (E) 8.27% 13.93%
======== ========
</TABLE>
- ----------------------
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing net income by average
total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
11
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
------------------------------------- ---------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
-------- -------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts 969 32 6.62% 2,412 50 4.16%
Federal funds sold 24,211 664 5.50% 22,932 621 5.43%
Investment securities (F):
US Treasuries 238,666 7,468 6.28% 157,886 4,916 6.24%
US Government agencies 4,498 146 6.51% 5,542 186 6.73%
Other 629 19 6.06% 671 21 6.28%
-------- -------- -------- -------- -------- --------
Total investment securities 243,793 7,633 6.28% 164,099 5,123 6.11%
Loans, net of discounts (A) 150,847 7,754 10.31% 113,848 6,009 10.59%
-------- -------- -------- -------- -------- --------
Total interest-earning assets 419,820 16,083 7.68% 303,291 11,803 7.75%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,729 14,394
Allowance for possible loan losses (2,511) (2,431)
Other assets 38,747 19,383
-------- --------
Total assets 474,785 334,637
======== ========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 62,135 817 2.64% 40,194 571 2.85%
Savings, money market and certificates of deposit 292,025 6,343 4.36% 199,642 4,126 4.14%
Other debt 3,897 139 7.15% 3,065 129 8.44%
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 358,057 7,299 4.09% 242,901 4,826 4.01%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 61,732 46,243
Other liabilities 3,126 1,708
-------- --------
Total liabilities 422,915 290,852
STOCKHOLDERS' EQUITY (F) 51,870 43,785
-------- --------
Total liabilities and stockholders' equity 474,785 334,637
======== ========
Taxable equivalent net interest income 8,784 6,977
Less: taxable equivalent adjustment 8 9
-------- --------
Net interest income 8,776 6,968
======== ========
Net interest spread (B) 3.59% 3.75%
======== ========
Net interest margin (C) 4.20% 4.59%
======== ========
SELECTED OPERATING RATIOS:
Return on assets (D) 1.83% 2.51%
======== ========
Return on equity (E) 16.76% 19.03%
======== ========
</TABLE>
- ----------------------
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing net income by average
total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
12
<PAGE> 13
The following tables analyze the increase in taxable-equivalent net
interest income stemming from changes in interest rates and from asset and
liability volume, including mix, for the three and six months ended June 30,
1998 and 1997. Non-accruing loans have been included in assets for calculating
this table, thereby reducing the yield on loans. The changes in interest due to
both rate and volume in the table below have been allocated to volume or rate
change on a pro-rata basis.
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
VS. JUNE 30, 1997
----------------------------------
Due to Changes in
Increase ---------------------
(Decrease) Rates Volume
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ (13) $ 1 $ (14)
Federal funds sold 6 (15) 21
Investment securities 1,159 36 1,123
Loans, net of discounts 970 (201) 1,171
---------- ---------- ----------
Total taxable-equivalent interest income $ 2,122 $ (179) $ 2,301
INTEREST EXPENSE:
Interest-bearing deposits 1,221 99 1,122
Other debt 14 (20) 34
---------- ---------- ----------
Total interest expense 1,235 79 1,156
---------- ---------- ----------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 887 $ (258) $ 1,145
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
VS. JUNE 30, 1997
------------------------------------------
Due to Changes in
Increase --------------------------
(Decrease) Rates Volume
---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ (18) $ 12 $ (30)
Federal funds sold 43 9 34
Investment securities 2,510 23 2,487
Loans, net of discounts 1,745 (209) 1,954
---------- ---------- ----------
Total taxable-equivalent interest income $ 4,280 $ (165) $ 4,445
INTEREST EXPENSE:
Interest-bearing deposits 2,465 245 2,220
Other debt 10 (25) 35
---------- ---------- ----------
Total interest expense 2,475 220 2,255
---------- ---------- ----------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 1,805 $ (385) $ 2,190
========== ========== ==========
</TABLE>
Taxable-equivalent net interest income for the six months ended June 30,
1998 increased $1.8 million or 26% over the same period in 1997. The increase is
reflected in the increase in the volume of earning assets and in the increase in
the market rates and volume of interest bearing liabilities.
13
<PAGE> 14
INTEREST RATE SENSITIVITY
Management seeks to maintain consistent growth of net interest income
through periods of changing interest rates by avoiding fluctuating net interest
margins. Interest rate sensitivity is the relationship between changes in market
interest rates and changes in net interest income due to repricing
characteristics of interest earning assets and liabilities.
The following table indicates the Company's interest rate sensitivity
position at June 30, 1998:
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
NON-RATE
RATE SENSITIVE SENSITIVE
-------------------------------------------------------------- ----------
IMMEDIATELY WITHIN WITHIN OVER
0-30 DAYS 90 DAYS ONE YEAR TOTAL ONE YEAR TOTAL
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of discounts $ 65,111 $ 10,867 $ 22,107 $ 98,085 $ 68,962 $ 167,047
Investment securities 2,999 5,486 26,830 35,315 206,961 242,276
Federal funds sold 16,810 -- -- 16,810 -- 16,810
Interest-bearing accounts 3,215 100 -- 3,315 -- 3,315
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets $ 88,135 $ 16,453 $ 48,937 $ 153,525 $ 275,923 $ 429,448
========== ========== ========== ========== ========== ==========
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $ 151,309 -- -- $ 151,309 -- $ 151,309
Certificates and time deposits 29,684 62,264 98,353 190,301 14,223 204,524
Debt 551 2 6 559 332 891
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing
liabilities $ 181,544 $ 62,266 $ 98,359 $ 342,169 $ 14,555 $ 356,724
========== ========== ========== ========== ========== ==========
Interest sensitivity gap $ (93,409) $ (45,813) $ (49,422) $ (188,644)
========== ========== ========== ==========
Cumulative gap $ (93,409) $ (139,222) $ (188,644) $ (188,644)
========== ========== ========== ==========
Ratio of earning assets to
interest-bearing liabilities 48.6% 26.4% 49.8% 44.9%
</TABLE>
The interest rate sensitivity table reflects a cumulative liability
sensitive position during the one year period shown. Generally, this indicates
that the liabilities reprice more quickly than the assets in a given period, and
that a decline in market rates will benefit net interest income. An increase in
market rates would have the opposite effect.
14
<PAGE> 15
NON-INTEREST INCOME
The major components of non-interest income are service charges and fees
earned on deposit accounts. The following table summarizes changes in
non-interest income for the six months ended June 30, 1998 and 1997:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED 1998/1997
---------------------------- --------------------------
JUNE 30, 1998 JUNE 30, 1997 $ CHANGE % CHANGE
------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Service charges and fees $ 1,588 $ 1,250 $ 338 27.0%
Net realized gains on sales of securities 634 1,093 (459) -42.0%
Net trading profits 789 -- 789 100.0%
Net gains on sales of other real estate owned -- 47 (47) -100.0%
Miscellaneous income 183 163 20 12.3%
---------- ---------- ---------- ----------
Total non-interest income $ 3,194 $ 2,553 $ 641 25.1%
========== ========== ========== ==========
</TABLE>
The $641,000 or 25.1% increase in non-interest income for the six months
ended June 30, 1998 is due primarily to the $338,000 increase in service charges
and fees and the $330,000 increase in net securities gains and trading account
profits over the six months ended June 30, 1997. Excluding the nonrecurring
gains on sales of securities and other real estate owned, non-interest income
increased $358,000 or 25.3% over 1997. The Wells Fargo branch acquisitions
represent the majority of the increase over the prior year in service charges
and fees.
NON-INTEREST EXPENSE
Non-interest expense includes all expenses of the Company other than
interest expense, loan loss provision and income tax expense. The following
table summarizes the changes in non-interest expense for the six months ended
June 30, 1998 and 1997:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED 1998/1997
------------------------------- ----------------------------
JUNE 30, 1998 JUNE 30, 1997 $ CHANGE % CHANGE
------------- -------------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 3,764 $ 2,763 $ 1,001 36.2%
Occupancy and equipment expenses 1,259 824 435 52.8%
Data processing fees 133 143 (10) -7.0%
FDIC insurance 24 16 8 50.0%
Insurance 51 52 (1) -1.9%
Office supplies 319 199 120 60.3%
Postage and courier 260 230 30 13.0%
Professional fees 424 365 59 16.2%
Goodwill amortization 188 28 160 571.4%
Miscellaneous other expenses 1,038 634 404 63.7%
---------- ---------- ---------- ----------
Total non-interest expense $ 7,460 $ 5,254 $ 2,206 42.0%
========== ========== ========== ==========
</TABLE>
Total non-interest expense for the six months ended June 30, 1998 increased
$2.2 million or 42.0% over 1997. Salaries and benefits rose $1 million or 36.2%
in 1998. Approximately 43% of the increase is related to the acquisition of the
Wells Fargo Bank branches in July 1997. Another factor increasing salaries and
benefits was the hiring of additional personnel for the San Marcos and South
Laredo branches which were opened during the first quarter of 1998. The $435,000
or 52.8% increase in occupancy and equipment expenses is due mainly to the (i)
acquisitions of the three Wells Fargo bank buildings, (ii) construction of two
new branches and (iii) installation of
15
<PAGE> 16
computer networks at the new locations. The $160,000 increase in goodwill is a
result of the Wells Fargo branch acquisitions.
INCOME TAXES
The Company recognized income tax expense of $96,000 for the six months
ended June 30, 1998 compared to $94,000 for the six months ended June 30, 1997.
At June 30, 1998, the Company had approximately $103 million in net operating
loss carryforwards that will be available to reduce income tax liabilities in
future years. If unused, approximately $99 million of such carryforwards will
expire in 2005, with the remaining approximately $4 million expiring in 2006.
CASH EARNINGS
The Company has historically paid cash and used the purchase method in
accounting for its acquisitions which has resulted in the creation of intangible
assets. These intangible assets are deducted from capital in the determination
of regulatory capital. Thus, "cash" or "tangible" earnings represents the
regulatory capital generated during the year and can be viewed as net income
excluding intangible amortization, net of tax. While the definition of "cash" or
"tangible" earnings may vary by company, we believe this definition is
appropriate as it measures the per share growth of regulatory capital, which
impacts the amount available for stock repurchases and acquisitions. The
following table reconciles reported earnings to net income excluding intangible
amortization ("cash" earnings):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------------------------------------------------------------------------
June 1998 June 1997
------------------------------------------ -----------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
earnings amortization earnings earnings amortization earnings
---------- ------------ ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 4,442 $ 188 $ 4,630 $ 4,261 $ 28 $ 4,289
Income taxes 96 3 99 94 1 95
---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 4,346 $ 185 $ 4,531 $ 4,167 $ 27 $ 4,194
========== ========== ========== ========== ========== ==========
Net income per diluted
common share $ 0.91 $ 0.95 $ 0.88 $ 0.89
Return on assets 1.83% 1.91% 2.51% 2.51%
Return on equity 16.76% 17.47% 19.03% 19.16%
</TABLE>
16
<PAGE> 17
LOANS
The following table presents the composition of the Company's loan
portfolio by type of loan:
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
JUNE 30, % OF DECEMBER 31, JUNE 30,
1998 TOTAL 1997 1997
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial 25,749 15.4% 22,911 19,837
Real estate construction 14,830 8.8% 10,338 7,666
Real estate mortgage 101,241 60.4% 81,752 73,196
Consumer installment loans,
net of unearned discount 25,872 15.4% 21,312 17,761
---------- ---------- ---------- ----------
Gross Loans 167,692 100.0% 136,313 118,460
---------- ========== ========== ==========
</TABLE>
Real estate mortgage loans have shown a 27% increase since June 30, 1997.
Real estate loan demand has increased due to the banks offering home equity
loans. The increase in total loans has been from internal growth. No loans were
acquired from the Wells Fargo branch acquisitions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to operations
in the form of a provision for loan losses. Loans, or portions thereof, which
are considered to be uncollectible are charged against the allowance and
subsequent recoveries, if any, are credited to the allowance. The allowance
represents the amount, which in the judgment of each subsidiary Bank's
management will be adequate to absorb possible losses. The adequacy of the
allowance is determined by management's continuous evaluation of the loan
portfolio and by the employment of third party loan review consultants. Industry
concentrations, specific credit risks, past loan loss experience, delinquency
ratios, current loan portfolio quality and projected economic conditions in the
Bank's market areas are pertinent factors in determining the adequacy of the
allowance for loan losses. Loans identified as losses by management, external
loan review or bank examiners are charged-off.
The Company recorded net recoveries of $25,000 for the six months ended
June 30, 1998 compared to net recoveries of $26,000 for the six months ended
June 30, 1997.
17
<PAGE> 18
The following table summarizes, for the periods presented, the activity
in the allowance for loan losses arising from provisions credited to operations,
loans charged off and recoveries of loans previously charged off.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Average loans outstanding $ 150,847 $ 113,848
Balance of allowance for loan losses at beginning of year $ 2,458 $ 2,408
Provision for loan losses 68 25
Charge-Offs:
Commercial 12 22
Real estate construction -- --
Real estate mortgage 28 --
Consumer installment 91 56
--------- ---------
Total charge-offs 131 78
--------- ---------
Recoveries:
Commercial 10 19
Real estate construction -- --
Real estate mortgage 30 19
Consumer installment 116 66
--------- ---------
Total recoveries 156 104
--------- ---------
Net charge-offs (recoveries) (25) (26)
--------- ---------
Balance of allowance for loan losses at end of period $ 2,551 $ 2,459
========= =========
Net charge-offs (recoveries) as a percentage
of average loans outstanding -0.02% -0.02%
========= =========
Allowance for loan losses as a percentage of:
Total loans, net of unearned discount 1.52% 2.08%
========= =========
Non-performing loans 109.39% 158.74%
========= =========
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans and foreclosed real
estate. Loans to a customer whose financial condition has deteriorated are
considered for non-accrual status whether or not the loan is ninety days or more
past due. All installment loans past due ninety days or more are placed on
non-accrual unless the loan is well secured or in the process of collection. On
non-accrual loans, interest income is not recognized until actually collected.
At the time the loan is placed on no accrual status, interest previously accrued
but not collected is reversed and charged against current income.
Foreclosed real estate consists of property which has been acquired through
foreclosure. At the time of foreclosure, the property is recorded at the lower
of the estimated fair value less selling expenses or the loan balance with any
write down charged to the allowance for loan losses. Any future write downs on
the property are charged to operations.
18
<PAGE> 19
The following table discloses non-performing assets and loans ninety days
past due and still accruing interest as of June 30, 1998 and December 31, 1997:
(Dollars in thousands)
NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Non-accrual loans $1,964 $1,314
Foreclosed real estate 368 311
------ ------
Total non-performing assets $2,332 $1,625
====== ======
Non-performing assets as a percentage of:
Total assets 0.49% 0.34%
Total loans plus foreclosed real estate 1.39% 1.16%
Accruing loans past due 90 days or more $ 616 $ 40
</TABLE>
Independent third party loan reviews of the subsidiary Banks are performed
on an annual basis. The loans are also reviewed by banking regulators on an
eighteen month basis. On a monthly basis, the Board of Directors' Loan Committee
of each Bank reviews new loans, renewals and delinquencies. Management of each
Bank monitors on a continuing basis those loans which it feels should be
followed closely. The Banks are required by regulation to have foreclosed real
estate appraised periodically.
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet the
commitments of the Company. Asset liquidity is provided by cash and assets which
are readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash and short-term investments in time deposits in banks,
federal funds sold and securities available for sale. Liquidity is also provided
by access to core funding sources, primarily core depositors in the Company's
trade area. The Banks have not and do not solicit brokered deposits as a funding
source. The liquidity of the Company is enhanced by the fact that 78% of total
deposits at June 30, 1998 were "core" deposits. Core deposits, for this purpose,
are defined as total deposits less public funds and certificates of deposit
greater than $100,000.
At June 30, 1998, the Company's liquid assets totaled $183 million or 38%
of total gross assets, compared to 43% at June 30, 1997. Secondary sources of
liquidity include the Banks' ability to sell loan participations and purchase
federal funds. NBC-Eagle Pass has an approved federal funds line at a
correspondent bank. NBC - Laredo has an approved line of credit with the Federal
Home Loan Bank.
The Company's principal source of funds consists of dividends received
from the Banks, which derive their funds from deposits, interest and principal
payments on loans and investment securities, sales of investment securities and
borrowings.
CAPITAL RESOURCES
Total stockholders' equity increased $3.1 million to $54.2 million at June
30, 1998 from $51.1 million at June 30, 1997. The ratio of total stockholders'
equity to total assets was 11.3% at June 30, 1998 compared with 10.9% at June
30, 1997. The Company began a stock repurchase plan in 1997 and has repurchased
63,500 common shares at a cost of $1.3 million as of June 30, 1998.
19
<PAGE> 20
The Company and subsidiary Banks are subject to minimum capital ratios
mandated by their respective banking industry regulators. The table below
illustrates the Company and subsidiary Bank's compliance with the risk-based
capital guidelines of the Federal Reserve Bank (FRB) and the Office of the
Comptroller of the Currency (OCC). These guidelines are designed to measure Tier
1 and total capital while taking into consideration the risk inherent in both on
and off balance sheet items. Off balance sheet items include unfunded loan
commitments and letters of credit. Currently under the regulatory guidelines,
the net unrealized gain or loss on securities available for sale is not included
in the calculation of risk-based capital and the leverage ratio. The leverage
ratio is Tier 1 capital divided by average total assets. A leverage ratio of 3.0
percent is the minimum requirement for only the most highly rated banking
organizations and all other institutions are required to maintain a leverage
ratio of 3 to 5 percent.
Tier 1 capital includes common stockholders' equity less goodwill. Total
capital includes Tier 1 capital and a portion of the allowance for loan losses.
The ratios are calculated by dividing the qualifying capital by the
risk-weighted assets.
The table below illustrates the Company and its subsidiary Banks'
compliance with the risk-based capital guidelines as of June 30, 1998:
<TABLE>
<CAPTION>
NBC NBC NBC NBC
CONSOLIDATED EAGLE PASS LAREDO ROCKDALE LULING
------------- ------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total average assets (net of goodwill) $ 471,208 $ 245,942 $ 78,414 $ 109,757 $ 27,158
Risk weighted assets (net of goodwill) $ 176,184 $ 90,871 $ 49,833 $ 28,121 $ 17,350
Tier 1 capital $ 43,178 $ 16,346 $ 7,824 $ 6,313 $ 3,507
Total capital $ 45,385 $ 17,442 $ 8,414 $ 6,665 $ 3,727
Leverage ratio 9.16% 6.65% 9.98% 5.75% 12.91%
Risk based capital ratios:
Tier 1 24.51% 17.99% 15.70% 22.45% 20.21%
Total capital 25.76% 19.19% 16.88% 23.70% 21.48%
</TABLE>
YEAR 2000
The Company has formed a Year 2000 project team comprising of
technological, data processing, and operations personnel from each of the Banks'
management. The project team has developed and is currently executing a planned
review and risk assessment of all technology items used in the Company's
operations, including core data processing systems, as well as material
relationships with suppliers, correspondents, and customer groups. The
identification of critical items and relations, and the renovation or
replacement of items, which are non-compliant with current guidelines, is
expected to be largely complete in 1998 in accordance with regulatory agency
guidelines. Year 2000 compliance will be effected through data processing
hardware and software upgrades and purchases of new equipment with an estimated
aggregate cost of approximately $150,000. These costs are being expensed as
incurred over a three-year period beginning in 1997.
FORWARD-LOOKING INFORMATION
The Company may from time to time make "forward-looking" statements as such
term is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, the interest rate environment, governmental regulation and
supervision, technological change, one-time events and other factors described
herein and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from such forward-looking
statements.
20
<PAGE> 21
PART II - OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11.1 Statement Regarding computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
21
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
Date: August 12, 1998 By: /s/ Anne Renfroe
-------------------------------------
Anne Renfroe, Chief Accounting Officer
and Principal Financial Officer
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
11.1 Statement Regarding computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $ 0.23 $ 0.33 $ 0.93 $ 0.89
========== ========== ========== ==========
DILUTED EPS:
Net income $ 0.23 $ 0.33 $ 0.91 $ 0.88
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Income available to common stockholders $ 1,084 $ 1,550 $ 4,346 $ 4,167
============= ============= ============= =============
Weighted average number of common
shares used in Basic EPS 4,661,234 4,658,734 4,660,383 4,658,734
Effect of dilutive stock options 131,818 72,589 127,314 70,856
------------- ------------- ------------- -------------
Weighted number of common shares
and dilutive potential common stock
used in Diluted EPS 4,793,052 4,731,323 4,787,697 4,729,590
============= ============= ============= =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,304
<INT-BEARING-DEPOSITS> 3,315
<FED-FUNDS-SOLD> 16,810
<TRADING-ASSETS> 1,454
<INVESTMENTS-HELD-FOR-SALE> 101,329
<INVESTMENTS-CARRYING> 140,947
<INVESTMENTS-MARKET> 103,249
<LOANS> 167,692
<ALLOWANCE> 2,551
<TOTAL-ASSETS> 480,897
<DEPOSITS> 421,397
<SHORT-TERM> 1,995
<LIABILITIES-OTHER> 2,440
<LONG-TERM> 891
0
0
<COMMON> 5
<OTHER-SE> 54,174
<TOTAL-LIABILITIES-AND-EQUITY> 480,897
<INTEREST-LOAN> 7,746
<INTEREST-INVEST> 7,633
<INTEREST-OTHER> 696
<INTEREST-TOTAL> 16,075
<INTEREST-DEPOSIT> 7,160
<INTEREST-EXPENSE> 139
<INTEREST-INCOME-NET> 8,776
<LOAN-LOSSES> 68
<SECURITIES-GAINS> 1,423
<EXPENSE-OTHER> 7,460
<INCOME-PRETAX> 4,442
<INCOME-PRE-EXTRAORDINARY> 4,442
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,346
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.91
<YIELD-ACTUAL> 7.68
<LOANS-NON> 1,964
<LOANS-PAST> 616
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,493
<ALLOWANCE-OPEN> 2,458
<CHARGE-OFFS> 131
<RECOVERIES> 156
<ALLOWANCE-CLOSE> 2,551
<ALLOWANCE-DOMESTIC> 2,551
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,441
</TABLE>
