<PAGE> 1
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13472
* * * * * *
NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of small business issuer as specified in its charter)
TEXAS 74-1692337
(State of Incorporation) (I.R.S. Employer Identification Number)
104 EAST MANN ROAD, LAREDO, TEXAS 78042
(Address of principal executive offices)
Telephone number: (956) 724-2424
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].
Issuer's revenues for its most recent fiscal year: $ 27,333,979 (Total
Interest Income).
State the aggregate market value of voting stock held by non-affiliates
based upon the closing AMEX sale price on March 13, 1998 : $101,327,464.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of March 13, 1998 : 4,658,734 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held May
29, 1998 (Part III).
================================================================================
<PAGE> 2
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Description of Business............................................ 3
Item 2. Description of Property............................................ 8
Item 3. Legal Proceedings.................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders................ 9
PART II
Item 5. Market for Common Equity and Related Shareholder Matters........... 10
Item 6. Selected Consolidated Financial Data............................... 11
Item 7. Management's Discussion and Analysis............................... 13
Item 8. Financial Statements............................................... 27
Item 9. Changes and/or Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 53
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons....... 53
Item 11. Executive Compensation............................................. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 54
Item 13. Certain Relationships and Related Transactions..................... 54
PART IV
Item 14. Exhibits and Reports on Form 8-K................................... 54
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
National Bancshares Corporation of Texas (the "Company") is a bank
holding company incorporated in Texas on June 14, 1971, and registered under the
Bank Holding Company Act of 1956, as amended (the "Act"). The Company
successfully emerged from reorganization (the "Reorganization") under Chapter 11
of the United States Bankruptcy Code in May 1992. As a result of the
Reorganization, the Company came under new management and control and its assets
and liabilities were substantially restructured. The Company now conducts its
banking operations through NBC Bank-Laredo, N.A., Laredo, Texas, ("NBC-Laredo"),
NBC Bank, N.A., Eagle Pass, Texas ("NBC-Eagle Pass"), NBC Bank, Rockdale, Texas
("NBC-Rockdale") and NBC Bank Central, N.A., Luling, Texas ("NBC-Luling"),
(collectively, the "Banks"). NBC-Laredo, NBC-Eagle Pass, NBC-Rockdale and
NBC-Luling are wholly owned subsidiaries of NBT of Delaware, Inc., a Delaware
corporation that is a wholly owned subsidiary of the Company. The Company
operates its data and item processing for the Banks through NBC Holdings-Texas,
Inc., a wholly owned subsidiary of NBT of Delaware, Inc. At December 31, 1997,
the Company (on a consolidated basis) had total assets of $470.1 million, total
investments securities of $246.4 million, total loans of $136.3 million, total
deposits of $414.4 million, total stockholders' equity of $51.1 million and net
operating loss carry-forwards for federal income tax purposes of $103 million.
For the year ended December 31, 1997, the Company recorded net income of $7.5
million.
During 1997, the Company acquired three branches of Wells Fargo Bank
in the Texas cities of Giddings, Taylor and Marble Falls. The Company acquired
approximately $103.4 million in deposits and $2.6 million in the owned branch
facilities, branch furniture, fixtures and certain equipment. In 1996, the
Company acquired Luling Bancshares, Inc., including its subsidiary, The First
National Bank in Luling, Texas. The Company acquired approximately $26 million
in total assets and assumed liabilities of approximately $24 million.
The Company's executive offices are located at 104 East Mann Road,
Laredo, Texas 78042, and its telephone number is (956) 724-2424.
THE BANKS
Each of the Banks is a separate entity which operates under the
day-to-day management of its own board of directors and officers. The Banks
grant agribusiness, commercial, residential and installment loans to customers
primarily in Central and South Texas. The Banks also offer a range of commercial
banking services, including acceptance of deposits and providing letters of
credit. Deposit services include certificates of deposit, individual retirement
accounts, checking accounts, interest-bearing checking accounts, savings
accounts and money market accounts. In addition, the Banks provide traveler's
checks, safe deposit boxes and other customary nondeposit banking services. The
Banks provide limited escrow services, and NBC-Rockdale provides trust services.
NBC-Eagle Pass, NBC-Laredo and NBC-Luling do not currently intend to provide
trust services in the future. NBC-Luling is the only subsidiary that provides
discount brokerage services at this time. NBC-Eagle Pass operates two branches,
one located in Marble Falls, Texas and the other in Eagle Pass, Texas. They also
operate a loan production office in San Antonio with a full service branch
expected to be completed in 1998. NBC-Rockdale operates two branches, located in
Giddings and Taylor, Texas. NBC-Laredo also operates one branch location in
South Laredo. NBC-Luling operates a branch in San Marcos, Texas which opened
during the first quarter of 1998. Loans consist of real estate loans,
residential mortgages, construction loans, commercial loans directed at small to
middle market businesses and loans to individuals. In addition, each of the
Banks is subject to legal lending limits. Such limits generally restrict loans
to any one customer in an amount not to exceed 15% of any one Bank's total
capital plus the allowance for possible loan losses.
The following table sets forth certain financial information with respect to the
Banks as of December 31, 1997 (Dollars in thousands):
<TABLE>
<CAPTION>
ASSETS LOANS DEPOSITS
--------- ---------- ----------
<S> <C> <C> <C>
NBC-Eagle Pass $ 238,882 $ 61,653 $ 217,778
NBC-Rockdale $ 115,210 $ 21,548 $ 103,393
NBC-Laredo $ 78,821 $ 39,176 $ 70,002
NBC-Luling $ 29,619 $ 13,937 $ 23,972
</TABLE>
3
<PAGE> 4
LOAN PORTFOLIO
REAL ESTATE LOANS. The Banks have historically engaged in real estate
lending through construction and term mortgage loans, all of which are secured
by deeds of trust on underlying real estate. Each loan is evaluated based on,
among other things, the character and leverage capacity of the borrower; capital
and investment in a particular property, if applicable; cash flow; collateral;
market conditions for the borrower's business or project; and prevailing
economic trends and conditions. The Banks lending policies also require an
independent appraisal or an evaluation on each parcel of real estate which will
be taken as collateral for a loan. The Banks disburse funds under each
construction loan in accordance with a disbursement schedule that is part of the
construction loan agreement and details the budgeted project cost. Borrowers are
required to submit payment requests with cost breakdowns and invoices that are
accompanied by, as appropriate, labor releases, original material releases and
payee signatures acknowledging pending payment. Payment requests must also be
supported by project inspection reports that include, among other things; line
item actual cost comparisons to budgeted costs, photographs of the project and a
discussion of the project's status. Funds are disbursed only after an officer of
the Bank has reviewed the request and a determination has been made that the
project is proceeding on budget. The majority of all of the Banks real estate
loans are small and medium sized real estate loans.
COMMERCIAL LOANS. Commercial loans include loans made primarily to
small and medium sized businesses and professionals for working capital.
Although the Banks typically look to the borrower's cash flow as the principal
source of repayment of such loans, many of these are secured by real estate as a
secondary source of repayment. Buildings for which the Banks have provided the
construction financing secure certain of the Banks' commercial loans.
INSTALLMENT LOANS. Installment loans consist primarily of automobile
loans; loans made to finance small equipment acquisitions, small loans for
personal and household needs and home improvement loans. These loans are made
primarily as an accommodation to existing customers and are not a substantial
part of the Banks lending strategy.
DEPOSITS
The Banks have generated a substantial portion of its deposits from
individuals and small businesses in its immediate market area. The Banks offer
competitive interest rates on money market accounts, savings accounts and
certificates of deposit. NBC-Eagle Pass and NBC-Laredo enjoy long-term deposit
relationships with many Mexican Nationals.
COMPETITION
The Banks face substantial competition for deposits and loans
throughout their market areas. The primary factors in competing for deposits are
interest rates, personalized services, the quality and range of financial
services offered, convenience of banking facilities and hours of operation.
Competition comes primarily from other commercial banks, savings and loans,
credit unions, mutual funds and other financial intermediaries. The Company
believes the primary factors in competing for loans are interest rates, loan
origination fees, the quality and range of lending services and personalized
services. The Banks face competition for deposits and loans throughout their
market areas not only from local institutions but also from out-of-state
financial intermediaries which have opened loan production offices which solicit
deposits in its market areas. Many of the financial intermediaries operating in
the Banks' market areas offer certain services, such as trust, investment and
international banking services, which the Company does not offer directly.
Additionally, banks with larger capitalization and financial intermediaries not
subject to bank regulatory restrictions have larger lending limits and are
thereby able to serve the needs of larger customers. Management believes,
however, that the Banks long-term presence, local expertise and ongoing
commitment to the community, as well as their commitment to quality and
personalized banking services, are the key factors that contribute to their
competitiveness.
Based on June 30, 1997 data, NBC-Laredo holds 2% of the total deposits
of its community. There are six local banks in the Laredo area as well as a
branch of Norwest Bank and a branch of Pacific Southwest Bank. The Laredo market
is dominated by International Bank of Commerce with approximately 33% of the
community's total deposits and Laredo National Bank with 41% of deposits.
NBC-Eagle Pass is one of four banks located in Eagle Pass, Texas and holds in
excess of 64% of the community's banking deposits. NBC-Rockdale is the largest
bank in Rockdale holding over 64% of the total deposits and is the third largest
of the four banks located in Milam County, Texas holding approximately 19% of
the county's deposits. NBC-Luling is one of two banks, as well as a branch of
American National Bank of Gonzales, located in
4
<PAGE> 5
Luling, Texas, holding over 34% of the deposits of the city.
GROWTH OBJECTIVES
The Company intends to grow its business in the State of Texas by
adding additional branches and through possible bank or branch acquisitions.
Because the Company has $103 million of net operating loss carryforwards as of
December 31, 1997, which will not begin to expire until 2005, the Company
believes it is well positioned to grow its business by acquiring additional
banks. The Company's ability and willingness to acquire additional banks is
dependent upon (i) the availability of suitable candidates, (ii) the price and
(iii) strategic fit for such additional banks and/or branches. Acquiring
additional banks or adding additional branches is also subject to certain
federal and state regulatory approvals. See "Supervision and Regulation -- The
Company" and " Supervision and Regulation -- Interstate Banking and Branching."
There can be no assurance, however, that the Company will obtain the required
regulatory approvals or that the Company will be able to successfully add
additional branches or acquire additional banks.
EMPLOYEES
At December 31, 1997, the Company employed approximately 210 full-time
equivalent employees. Management believes that its relations with its employees
are satisfactory. Employees of the Company enjoy a variety of employee benefit
programs, including a 401(k) plan, paid vacations and comprehensive medical,
life and accident insurance plans.
SUPERVISION AND REGULATION
THE COMPANY. The Company, as a registered bank holding company, is
subject to regulation under the Act. The Company is required to file with the
Federal Reserve Board ("FRB") quarterly and annually and also reports such
additional information as the FRB may require pursuant to the Act. The Company
is subject to examination by the FRB. The FRB may require the Company to
terminate an activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The FRB also
has the authority to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, the Company must file written notice and
obtain approval from the FRB prior to purchasing or redeeming its equity
securities. Under the Act and regulations adopted by the FRB, a bank holding
company and its nonbanking subsidiaries are prohibited from requiring certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. Further, the Company is required by the FRB
to maintain certain levels of capital. See "Supervision and Regulation--Capital
Adequacy Guidelines."
The Company is required to obtain prior approval of the FRB for the
acquisition of more than 5% of the outstanding shares of any class of voting
securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the FRB is also required for the merger or
consolidation of the Company and another bank holding company. The Company is
prohibited by the Act, except in certain statutorily prescribed instances, from
acquiring direct or indirect ownership or control of more than 5% of the
outstanding voting shares of any company that is not a bank or bank holding
company and from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks or furnishing services to its
subsidiaries. However, the Company may, subject to the prior approval of the
FRB, engage in any, or acquire shares of companies engaged in, activities that
are deemed by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The FRB is also empowered
to differentiate between activities commenced de novo and activities commenced
by acquisition, in whole or in part, of a going concern and is generally
prohibited from approving an application by a bank holding company to acquire
voting shares of any commercial bank in another state unless such acquisition is
specifically authorized by the laws of such other state.
Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. In addition, it is the
FRB's policy that in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB's regulations or both.
5
<PAGE> 6
THE BANKS. Banks are extensively regulated under federal and state law.
NBC-Laredo, NBC-Eagle Pass and NBC-Luling, as national banks, are subject to
primary supervision, periodic examination and regulation by the Office of the
Comptroller of the Currency (the "OCC"). NBC-Rockdale, a Texas state chartered
bank, is subject to examination and regulation by the Texas State Banking
Department.
The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation ("FDIC"), which currently insures deposits of each member bank to a
maximum of $100,000 per depositor. For this protection, the Banks, as is the
case with all insured banks, pay a semi-annual statutory assessment and are
subject to the rules and regulations of the FDIC. See "Supervision and
Regulation - FDIC Insurance."
The regulations promulgated by these federal agencies govern most
aspects of the Banks business, including, without limitation, capital to assets
ratios, reserves against deposits, maximum lending limitations, investments,
mergers and acquisitions, borrowings, dividends and locations of branch offices.
The Banks are also subject to applicable provisions of Texas law, insofar as
they do not conflict with or are not preempted by federal law. Supervision,
legal action and examination of the Banks by the regulatory agencies are
generally intended to protect depositors, and are not intended for the
protection of shareholders. The OCC also has the authority to prohibit national
banks from engaging in what, in the OCC's opinion, constitutes an unsafe or
unsound practice in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the OCC
could assert that the payment of dividends or other payments might, under some
circumstances, are such an unsafe or unsound practice.
CONTROL ISSUES. Investors in the Common Stock of the Company are
potentially subject to certain change of bank control laws; those contained in
the Act, the Federal Deposit Insurance Act (the "FDIA") and applicable Texas
laws. In general, persons who wish to acquire a number of shares of Common Stock
that, when aggregated with that person's other holdings of Common Stock, if any,
would equal or exceed 10% of the Company's Common Stock, or who otherwise might
be subject to the change of bank control rules, should consult with their legal
counsel regarding the applicability of the provisions of any of these laws.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Branching
Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions of banks and
bank holding companies without geographic limitation beginning one year after
enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge
with a bank in another state as long as neither of the states has opted out of
interstate branching between the date of enactment of IBBEA and May 31, 1997.
IBBEA further provides that states may enact laws permitting interstate bank
merger transactions prior to June 1, 1997. A bank may establish a de novo branch
in a state in which the bank does not maintain a branch if the state expressly
permits de novo branching. Once a bank has established branches in a state
through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank involved in the
merger transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through de
novo branching may establish and acquire additional branches in such state in
the same manner and to the same extent as a bank having a branch in such state
as a result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out state, whether through an acquisition or de novo. On
August 28, 1995, Texas enacted legislation opting out of interstate branching.
FDIC INSURANCE. The deposits of the Banks are insured by the FDIC. For
this protection, the Banks are subject to the rules and regulations of the FDIC.
The Banks also pay FDIC insurance premiums based on each Bank's annual
assessment rate assigned to it by the FDIC. The assessment rate is based on the
institution's capitalization risk category and "supervisory subgroup." An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup is based on
the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
FDICIA REGULATION. On December 19, 1991, Congress enacted the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which
substantially revised the bank regulatory and funding provisions of the FDIA
6
<PAGE> 7
and made revisions to several other federal banking statutes. Among other
things, FDICIA requires the federal banking regulators to take "prompt and
corrective action" in respect of depository institutions insured by the FDIC
that do not meet minimum capital requirements. FDICIA establishes five capital
tiers: `"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." As of
December 31, 1997, all of the Banks were classified as "well capitalized".
FDICIA directs that each federal banking agency prescribe standards, by
regulation or guidelines, for depository institutions relating to internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, asset
quality, earnings, stock valuation, and such other operational and managerial
standards as the agency deems appropriate. The FDIC, in consultation with the
other federal banking agencies, has adopted a final rule and guidelines with
respect to internal and external audit procedures and internal controls in order
to implement those provisions of FDICIA intended to facilitate the early
identification of problems in financial management of depository institutions.
On July 10, 1995, the federal banking agencies published the final rules
implementing three of the safety and soundness standards required by FDICIA,
including operational and managerial standards, asset quality and earnings
standards, and compensation standards.
FDICIA also contains a variety of other provisions that may effect the
operations of the Company, including new reporting requirements, revised
regulatory standards for real estate lending, "truth in savings" provisions, and
the requirement that a depository institution give ninety days notice to
customers and regulatory authorities before closing any branch.
CAPITAL ADEQUACY GUIDELINES. The federal banking agencies have issued
guidelines for risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, and takes off-balance sheet items into account in assessing
capital adequacy and minimizes disincentives to holding liquid, low-risk assets.
Under these guidelines, assets and credit equivalent amounts of off-balance
sheet items, such as letters of credit and outstanding loan commitments, are
assigned to one of several risk categories, which range from 0% for risk-free
assets, such as cash and certain U.S. government securities, to 100% for
relatively high-risk assets, such as loans, investments in fixed assets,
premises and other real estate owned. The aggregated dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital.
A banking organization's qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1
capital consists primarily of common stock, related surplus, retained earnings,
and qualifying preferred stock. Intangibles, such as goodwill, as well as the
unrealized gain or loss on available for sale securities, are generally deducted
from Tier 1 capital. At least 50% of the banking organization's total regulatory
capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the
allowance for possible loan and lease losses in an amount up to 1.25% of
risk-weighted assets; (ii) preferred stock not qualifying as Tier 1 capital plus
related surplus; and, (iii) mandatory convertible debt. The inclusions of the
foregoing elements of Tier 2 capital are subject to certain requirements and
limitations of the federal banking agencies. The federal banking agencies have
also adopted a minimum leverage ratio of Tier 1 capital to total assets of 3%
for banks that have a uniform composite ("CAMEL") rating of 1. All other
institutions and institutions experiencing or anticipating significant growth
are expected to maintain capital at least 100 to 200 basis points above the
minimum level. Furthermore, higher leverage ratios are required to be considered
well capitalized or adequately capitalized under the prompt corrective action
provisions of the FDICIA. See "Management's Discussion and Analysis- Capital
Resources."
CRA AND FAIR LENDING DEVELOPMENTS. The Banks are subject to certain
fair lending requirements and reporting obligations involving home mortgage
lending operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance with
such laws and CRA into account when regulating and supervising other activities.
7
<PAGE> 8
ENVIRONMENTAL LAWS. Under various federal, state and local laws,
ordinances and regulations, a current or previous owner, developer or operator
of real estate may be liable for the cost of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The cost of such
removal or remediation of such substances can be substantial. These laws often
impose liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such substances. As a result, the
presence of such substances on any of the real property collateral securing any
of the Banks' loans may render such collateral less valuable or worthless or may
result in the Banks being unwilling to foreclose upon such collateral. In
addition, the Banks may incur substantial environmental liabilities and costs
from owning any collateral previously foreclosed upon that is later determined
to contain such substances. The Banks attempt to reduce this risk by making
inquiry with respect to environmental matters in connection with the extension
of credit; however, there can be no assurance that environmental liabilities do
not or will not exist with respect to the Banks' collateral.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Banks on their deposits and
other borrowings and the interest rate received by the Banks on loans extended
to their customers and securities held in the Banks portfolio comprise the major
portion of the Banks earnings. These rates are highly sensitive to many factors
that are beyond the control of the Banks. Accordingly, the earnings and growth
of the Banks are subject to the influence of local, domestic and foreign
economic conditions, including recession, unemployment and inflation.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies, particularly
the FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in
United States Government securities, by adjusting the required level of reserves
for financial intermediaries subject to its reserve requirements and by varying
the discount rate applicable to borrowings by depository institutions. The
actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect the interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the Texas legislature and
before various bank regulatory and other professional agencies. The likelihood
of any major changes and the impact such changes might have on the Company
and/or the Banks are impossible to predict. Certain of the potentially
significant changes which have been enacted and proposals which have been made
recently are discussed above.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are currently located in the NBC-Laredo Bank
building located at 104 East Mann Road, Laredo, Texas, occupying premises of
approximately 600 square feet. The Company has lease with an indefinite term
with the Bank with monthly lease payments of $1,500 per month.
The Company has entered into a forty-two month sublease for 1,429
square feet in Suite 1700 at 100 Wilshire Boulevard, Santa Monica, California,
with lease payments of $3,500 per month. The lease expires on December 31, 1999.
This property is for office use.
The Company has entered into a three year lease for 1,703 square feet
in Suite 875 at 111 Soledad, San Antonio, Texas, with lease payments of $1,397
per month. This property is used for data processing and item processing for the
Banks. The lease expires on September 30, 1998.
8
<PAGE> 9
The Company has entered into a twelve month lease for 1,785 square feet
in Suite 660 at 613 N.W. Loop 410, San Antonio, Texas, with lease payments of
$2,244 per month. The lease expires on July 31, 1998. This property is used as a
loan production office.
NBC-Laredo's main banking facility is located at 104 East Mann Road,
Laredo, Texas. The Bank owns and occupies a 12,000 square foot, two story
building situated on approximately two acres at this address. NBC-Laredo leases
a 1,200 square foot motor bank approximately one-half mile south of its main
location at Mall Del Norte, Laredo, Texas. This property is leased until
December 31, 1999, with monthly lease payments of $1,700 per month. NBC-Laredo
also owns and occupies a 2,761 square foot branch located at 2302 Blaine Street,
Laredo, Texas which was opened in March 1998.
NBC-Eagle Pass' main banking facility is located at 439 Main Street,
Eagle Pass, Texas, which is within five blocks of the international bridge into
Piedras Negras, Coahuila, Mexico. The Bank owns and occupies a two-story, 22,434
square foot building situated on one city block at this address. NBC-Eagle Pass
also owns and occupies a 4,000 square foot branch bank, NBC-East, located
approximately one mile east of the main bank at 2538 E. Main Street. NBC-Eagle
Pass also owns and occupies a two-story 19,761 square foot branch located at 700
Hwy 281, Marble Falls, Texas. NBC-Eagle Pass owns a 3 acre tract in San Antonio,
Texas located at Arion Parkway and Hwy 281 North. A 30,000 square foot branch
expected to be completed in the fourth quarter of 1998 is currently under
construction at this site.
NBC-Rockdale's main banking facility is located at 401 E. Cameron
Street, Rockdale, Texas. The Bank owns and occupies a 22,000 square foot two
story building at this location. NBC-Rockdale also owns and occupies a 1,700
square foot motor bank located at 1401 W. Cameron Street, Rockdale, Texas.
NBC-Rockdale also owns and occupies a 14,524 square foot branch located at 104
W. Austin, Giddings, Texas and a 15,136 square foot branch located at 316 N.
Main Street, Taylor Texas.
NBC-Luling's main banking facility is located at 200 S. Pecan Ave.,
Luling, Texas. The bank owns and occupies a 5,500 square foot one story building
at this location. In March, 1998, NBC-Luling opened a 2,925 square foot branch
which it owns and occupies at 1081 Wonder World Drive, San Marcos, Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Banks from time to time are involved in legal
actions arising from normal business activities. Management believes that those
actions are without merit or that the ultimate liability, if any, resulting from
them will not materially affect the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
9
<PAGE> 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Common Stock of the Company has been listed on the American Stock
Exchange since April 28, 1995 under the symbol "NBT." Prior to that date, the
Common Stock of the Company was not listed on any stock exchange nor quoted on
the National Association of Securities Dealers Automated Quotation Systems
("NASDAQ"). As of December 31, 1997, the Company had approximately 980
shareholders of record.
The following table sets forth the high and low sales/bid
prices/quotations for the Company's Common Stock during 1997 and 1996. These bid
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
SALES/BID PRICES
----------------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1997:
4TH QUARTER $ 22.00 $ 17.75
3RD QUARTER 20.75 13.56
2ND QUARTER 13.75 13.06
1ST QUARTER 14.00 11.25
1996:
4th Quarter $ 12.00 $ 10.88
3rd Quarter 11.38 10.38
2nd Quarter 11.63 10.75
1st Quarter 11.38 9.63
</TABLE>
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Company's Board of Directors out of funds legally available
therefore. The Company has not previously paid any dividends on the Common
Stock. The Company currently intends to retain all future earnings for use in
the expansion and operation of its business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, the general financial condition of the Company, as well as
other relevant factors. The Company's principal source of funds to pay dividends
on the Common Stock is the cash dividends the Company receives from the Banks.
The payment of dividends by the Banks to the Company is subject to certain
restrictions imposed by federal banking laws, regulations and authorities.
10
<PAGE> 11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
- -------------------------------------------------------------------------------
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
STATEMENT OF INCOME DATA: (dollars in thousands) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
---------- ---------- ---------- ---------- ----------
Interest income ................................... $ 27,334 $ 20,820 $ 18,955 $ 15,985 $ 14,904
Interest expense .................................. 11,722 8,112 7,359 5,589 5,184
---------- ---------- ---------- ---------- ----------
Net interest income ......................... 15,612 12,708 11,596 10,396 9,720
Provision(Credit) for loan losses ................. 80 (5) (855) (990) (1,290)
Non-interest income ............................... 4,387 2,789 2,762 2,521 2,478
Non-interest expense .............................. 12,244 9,586 9,149 8,491 8,587
Income taxes ...................................... 200 206 159 440 707
Extraordinary credit, net of tax .................. -- -- 219 -- --
---------- ---------- ---------- ---------- ----------
Net income ...................................... $ 7,475 $ 5,710 $ 6,124 $ 4,976 $ 4,194
========== ========== ========== ========== ==========
COMMON SHARE DATA:**
Net income before extraordinary credit ............ $ 1.60 $ 1.23 $ 1.33 $ 1.39 $ 1.27
Extraordinary credit, net of tax .................. -- -- 0.05 -- 1.05
Book value ........................................ $ 10.97 9.21 7.94 6.16 5.30
Weighted Average shares outstanding ............... 4,658,734 4,639,955 4,443,436 3,589,524 3,313,969
BALANCE SHEET DATA (AT PERIOD END):
(dollars in thousands)
Total assets ...................................... $ 470,160 $ 327,918 $ 270,092 $ 264,487 $ 231,773
Investments and federal funds sold ................ 279,991 184,021 152,677 155,364 120,287
Total loans ....................................... 136,313 113,258 91,588 90,448 90,814
Allowance for loan losses ......................... 2,458 2,408 1,906 2,495 3,005
Total deposits .................................... 414,415 279,755 231,937 229,054 202,327
Other debt ........................................ 2,646 3,995 366 4,361 8,336
Total stockholders' equity ........................ 51,098 42,909 35,977 29,386 20,176
PERFORMANCE DATA:
Return on average total assets .................... 1.92% 1.97% 2.31% 2.06% 1.85%
Return on average stockholders' equity ............ 16.28% 14.73% 18.25% 21.54% 24.32%
Net interest margin (tax equivalent) .............. 4.42% 4.80% 4.77% 4.70% 4.67%
ASSET QUALITY RATIOS:
Non-performing loans to total loans ............... 1.16% 1.69% 1.70% 2.00% 2.93%
Net loan charge-offs (recoveries) to
average loans................................... 0.02% (0.04%) (0.29%) (0.54%) .13%
Allowance for loan losses to total loans .......... 1.80% 2.13% 2.08% 2.76% 3.31%
CAPITAL RATIOS:
Average stockholders' equity to average total
assets.......................................... 11.78% 13.35% 12.65% 9.57% 7.59%
Tier 1 risk-based capital*......................... 27.77% 33.58% 35.77% 28.14% 20.82%
Total risk-based capital* ......................... 29.02% 34.84% 37.18% 29.39% 22.09%
Leverage ratio* ................................... 9.13% 13.67% 13.28% 10.57% 8.79%
</TABLE>
* Calculated in accordance with Federal Reserve guidelines currently in
effect.
** Restated to reflect eight-for-one reverse stock split effective on
September 12, 1994.
11
<PAGE> 12
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
Selected quarterly consolidated financial data is presented in the
following tables for the years ended December 31, 1997 and 1996. (Dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 QUARTER ENDED (UNAUDITED)
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income ........................ $ 5,774 $ 6,038 $ 7,589 $ 7,932
Interest expense ....................... 2,372 2,453 3,279 3,618
-------- -------- -------- --------
Net interest income .................... 3,402 3,585 4,310 4,314
Provision for loan losses .............. 25 -- 10 45
Gain (Loss) on sales of securities ..... 1,091 1 96 (55)
Non-interest income .................... 763 698 852 941
Non-interest expense ................... 2,553 2,701 3,467 3,522
-------- -------- -------- --------
Income before federal income taxes ..... 2,678 1,583 1,781 1,633
Federal income taxes ................... 61 33 37 69
-------- -------- -------- --------
Net income ............................. $ 2,617 $ 1,550 $ 1,744 $ 1,564
-------- -------- -------- --------
Basic earnings per share ............... $ .56 $ .33 $ .37 $ .34
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
1997 QUARTER ENDED (UNAUDITED)
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income ........................ $ 4,826 $ 5,002 $ 5,143 $ 5,848
Interest expense ....................... 1,896 1,927 1,995 2,293
-------- -------- -------- --------
Net interest income .................... 2,930 3,075 3,148 3,555
Provision (credit) for loan losses ..... 20 10 10 (45)
Loss on sales of securities ............ -- (1) -- (6)
Non-interest income .................... 739 602 727 728
Non-interest expense ................... 2,235 2,381 2,310 2,661
-------- -------- -------- --------
Income before federal income taxes ..... 1,414 1,285 1,555 1,661
Federal income taxes ................... 53 33 37 83
-------- -------- -------- --------
Net income ............................. $ 1,361 $ 1,252 $ 1,518 $ 1,578
-------- -------- -------- --------
Basic earnings per share ............... $ 0.29 $ 0.27 $ 0.32 $ 0.33
-------- -------- -------- --------
</TABLE>
12
<PAGE> 13
ITEM 7. 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 1997 was $7.5 million, an increase of $1.8 million or
30.9% over the $5.7 million recorded in 1996. A non-recurring $1.1 million gain
on the sale of securities is included in 1997. Excluding this non-recurring
item, net income increased $632,000 or 11.1% over 1996. The major contribution
to the improved earnings during 1997 was a 22.9% increase in net interest income
over 1996. Offsetting this positive contribution to earnings was an increase in
non-interest expense of 27.7%, over 1996 which was primarily due to the salaries
and operating expenses of the acquisitions. On a weighted average share basis,
net income per share for 1997 was $1.60 compared to $1.23 for 1996.
Loan growth was strong in 1997, increasing 20.4% over the previous
year-end to $136 million. Deposits experienced dramatic growth increasing 48.1%
to $414 million in 1997 from $280 million in 1996. Approximately 75% of the
growth in deposits was a result of the Wells Fargo branch acquisitions in July
1997. There were no loans acquired in the Wells Fargo branch acquisitions.
During 1997, the Company's Return on Assets was 1.92% compared to 1.97%
and 2.31% for 1996 and 1995, respectively. The Company's Return on Equity for
1997 was 16.28% compared to 14.73% and 18.25% for 1996 and 1995, respectively.
The Company's strong capital position is reflected in the ratio of average
stockholders' equity to average total assets which was 11.78%, 13.35%, and
12.65% for 1997, 1996 and 1995, respectively. The decline in this ratio is
primarily attributable to the $99.5 million increase in average assets.
Net income for 1996 was $5.7 million compared to $6.1 million in 1995.
The $414,000 decrease was primarily attributable to two nonrecurring items in
1995; a $223,000 extraordinary gain on the prepayment of debt and an $855,000
credit to the provision for loan losses. Net income in 1996 reflects an increase
of $665,000 or 14% over 1995, excluding the 1995 nonrecurring items.
The following table shows selected key performance ratios over the last
three years:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Return on average assets 1.92% 1.97% 2.31%
Return on average stockholders' equity* 16.28% 14.73% 18.25%
Average stockholders' equity* to average
total assets 11.78% 13.35% 12.65%
</TABLE>
* Before adjustment for unrealized gains and losses on available for sale
securities.
The return on average assets ratio is calculated by dividing net income
by average total assets for the year. The return on average stockholders' equity
ratio is calculated by dividing net income by average stockholders' equity for
the year, excluding the effect of the net unrealized gain or loss on available
for sale securities. The average stockholders' equity to average total assets
ratio is calculated by dividing average stockholders' equity for the year by
average total assets for the year.
NET INTEREST INCOME. Net interest income constitutes the principal
source of income for the Company and represents the difference between interest
income on earning assets and interest expense on interest-bearing liabilities.
The largest category of earning assets for 1997 was investment securities with
the second largest being loans. Net interest income for 1997 was $15.6 million,
an increase of $2.9 million or 22.8% compared to 1996. The net increase
reflected a $6.5 million increase in interest income that was offset by a $3.6
million increase in interest expense. The interest income increase was due
primarily to an increase in the investment security and loan portfolios. Average
investment securities and average loans in 1997 increased 34% and 27%,
respectively, over 1996. The Company's yield on earning assets decreased to
13
<PAGE> 14
7.74% from 7.86% in 1996. The rate paid on interest bearing liabilities
increased 23 basis points from 3.86% in 1996 to 4.09% in 1997. The net interest
margin is the net effective yield on earning assets, calculated as net interest
income on a taxable-equivalent basis expressed as a percentage of average total
earning assets. The net interest margin for 1997 was 4.42% compared to 4.80% and
4.77% for 1996 and 1995, respectively. The decrease in the net interest margin
for 1997 is reflective of higher volumes of earning assets as well as higher
volumes of deposits. The net interest spread decreased thirty-three basis points
to 3.65% in 1997 from 3.98% in 1996.
The following table analyzes the increases in taxable-equivalent net
interest income stemming from changes in interest rates and from asset and
liability volume, including mix, for the years ended December 31, 1997 and 1996.
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 in
proportion to the absolute amounts of change in each.
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------- -----------------------------------
1997 VS. 1996 1996 VS. 1995
----------------------------------- -----------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
INCREASE --------------------- INCREASE ---------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- --------- --------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts ........ $ 111 $ (35) $ 146 $ (12) $ -- $ (12)
Federal funds sold ............... 474 (60) 534 (53) (70) 17
Investment securities ............ 3,523 457 3,066 1,235 238 997
Loans, net of unearned discount .. 2,412 (388) 2,800 686 93 593
------- ------- ------- ------- ------- -------
Total taxable-equivalent
interest income .......... 6,520 (26) 6,546 1,856 261 1,595
------- ------- ------- ------- ------- -------
INTEREST EXPENSE:
Interest-bearing deposits ........ 3,380 598 2,782 840 112 728
Other debt ....................... 230 99 131 (87) (29) (58)
------- ------- ------- ------- ------- -------
Total interest expense ....... 3,610 697 2,913 753 83 670
------- ------- ------- ------- ------- -------
TAXABLE-EQUIVALENT
NET INTEREST INCOME ............. $ 2,910 $ (723) $ 3,633 $ 1,103 $ 178 $ 925
======= ======= ======= ======= ======= =======
</TABLE>
Taxable-equivalent net interest income for 1997 increased $2.9 million
or 22.9% over 1996. Taxable-equivalent net interest income for 1996 increased
$1.1 million or 9.5% over 1995. In 1997 and 1996, interest income and interest
expense increased as the volume of earning assets and interest bearing deposits
rose. Also reflected in the above table are increased rates being paid on
deposits.
14
<PAGE> 15
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ------------------------------ ----------------------------
INTEREST EARNED/ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
INCURRED & RATES AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD
(Dollars in thousands) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ---------------------- -------- --------- -------- ------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing accounts.... $ 2,642 $ 125 4.74% $ 230 $ 14 6.08% $ 423 $ 26 6.15%
Federal funds sold........... 28,846 1,513 5.25% 18,997 1,039 5,46% 18,701 1,097 5.84%
Investment securities
US Treasuries............... 191,301 12,186 6.37% 141,333 8,752 6.19% 127,502 7,569 5.94%
US Government agencies...... 5,143 347 6.75% 4,280 291 6.80% 4,867 320 6.57%
States & political
subdivisions............... -- -- 11 1 9.09% 30 2 6.67%
Other........................ 3,056 134 4.39% 3,371 100 2.96% 281 18 6.41%
-------- ------- ------ -------- ------- ------- -------- ------- ------
Total investment securities.. 199,500 12,667 6.35% 148,995 9,144 6.13% 132,680 7,909 5.96%
Loans, net of discounts (A).. 122,604 13,046 10.64% 96,787 10,634 10.99% 91,357 9,948 10.89%
-------- ------- ------ -------- ------- ------- -------- ------- ------
Total earning assets......... 353,592 27,351 7.74% 265,009 20,831 7.86% 243,161 18,975 7.80%
NON-INTEREST BEARING ASSETS:
Cash and due from banks...... 16,433 12,829 12,048
Allowance for loan losses.... (2,458) (2,117) (2,353)
Other assets................. 22,148 14,507 12,411
-------- -------- ---------
Total assets................. $389,715 $290,228 $ 265,267
======== ======== =========
INTEREST-BEARING
LIABILITIES:
NOW accounts................. 48,723 1,347 2.77% $ 33,342 953 2.86% $ 32,127 985 3.05%
Savings, money market
& CD's...................... 234,534 10,072 4.29% 175,711 7,086 4.03% 157,910 6,214 3.94%
Other debt................... 3,605 303 8.41% 1,282 73 5.69% 2,022 160 7.91%
-------- ------- ----- -------- ------- ------- --------- ------- -----
Total interest-bearing
liabilities................. 286,862 11,722 4.09% 210,335 8,112 3.86% 192,059 7,359 3.83%
------- ------- -------
NON-INTEREST BEARING
LIABILITIES:
Demand deposits.............. 54,723 39,489 37,667
Other liabilities............ 2,214 1.590 1,261
-------- -------- ---------
Total liabilities............ 343,799 251.414 230,987
-------- -------- ---------
Redeemable Preferred
Stock....................... -- 59 715
Stockholders' equity........ 45,916 38,755 33,565
-------- -------- ---------
Total liabilities and
stockholders' equity........ $389,715 $290,228 $ 265,267
======== ======== =========
Taxable-equivalent
net interest income......... 15,629 12,719 11,616
Taxable equivalent
adjustment.................. 17 11 20
------- ------- -------
Net interest income.......... $15,612 $12,708 $11,596
======= ======= =======
Net interest spread (B)...... 3.65% 3.98% 3.97%
===== ======= =====
Net interest margin (C)...... 4.42% 4.80% 4.77%
===== ======= =====
</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 earning assets.
15
<PAGE> 16
INTEREST RATE SENSITIVITY. The Company continuously monitors and manages the
balance between interest rate-sensitive assets and liabilities. Management seeks
to maintain consistent growth of net interest income through periods of changing
interest rates by avoiding fluctuating net interest margins and to maintain
consistent growth of net interest income through periods of changing interest
rates.
Interest rate sensitivity is the relationship between changes in market
interest rates and changes in net interest income due to repricing
characteristics of assets and liabilities.
The following table commonly referred to as a "static gap report,"
indicates the Company's interest rate sensitivity position at December 31, 1997
and may not be reflective of positions in subsequent periods:
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>
EARNING ASSETS:
Loans ............................ $ 53,133 $ 12,856 $ 20,451 $ 86,440 $ 49,873 $ 136,313
Investment securities ............ 3,001 5,536 27,781 36,318 210,084 246,402
Federal funds sold ............... 29,940 -- -- 29,940 -- 29,940
Interest-bearing accounts ........ 116 100 -- 216 -- 216
--------- --------- --------- --------- --------- ---------
Total earning assets ....... $ 86,190 $ 18,492 $ 48,232 $ 152,914 $ 259,957 $ 412,871
========= ========= ========= ========= ========= =========
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction,
Savings and money market ....... $ 151,605 $ -- $ -- $ 151,605 $ -- $ 151,605
Certificates and time deposits ... 32,324 47,321 104,335 183,980 12,484 196,464
Other debt ....................... 2,301 2 6 2,309 337 2,646
--------- --------- --------- --------- --------- ---------
Total interest-bearing
Liabilities ............. $ 186,230 $ 47,323 $ 104,341 $ 337,894 $ 12,821 $ 350,715
========= ========= ========= ========= ========= =========
INTEREST SENSITIVITY GAP ............. $(100,040) $ (28,831) $ (56,109) $(184,980)
========= ========= ========= =========
CUMULATIVE GAP ....................... $(100,040) $(129,871) $(184,980) $(184,980)
========= ========= ========= =========
RATIO OF EARNING ASSETS TO
INTEREST-BEARING LIABILITIES ..... 46.3% 39.1% 46.2% 45.3%
</TABLE>
The interest rate sensitivity table reflects that the Company is
liability sensitive, on a cumulative basis, 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.
16
<PAGE> 17
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 during the past three years:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
-------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
-------------------- ----------------- --------
% %
AMOUNT CHANGE AMOUNT CHANGE AMOUNT
-------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Service charges and fees............................... $ 2,796 17.9% $ 2,371 8.6% $ 2,184
Net trading account profit............................. 103 100.0% -- -- --
Net realized gains (losses) on sales of securities..... 1,133 18,990.4% (6) 535.1% (1)
Net gains on sales of other real estate owned.......... 62 -39.8% 103 -71.6% 365
Miscellaneous income................................... 293 -8.8% 321 49.7% 214
-------- ---------- -------- ------- --------
Total non-interest income.......................... $ 4,387 57.3% $ 2,789 1.0% $ 2,762
======== ========== ======== ======= ========
</TABLE>
The $1,598,000 or 57.3% increase in non-interest income for 1997 from
1996 is due primarily to the $1,133,000 increase in net realized gains on sales
of securities. During the first quarter of 1997, the Company realized a
$1,091,000 gain on the sale of certain equity securities. The improvement in
service charges and fees can be partly attributed to a 37% increase in average
deposits in 1997 which is partly attributable to the Wells Fargo branch
acquisitions. Included in 1997 is non-recurring income of $1,195,000 due to net
gains on other real estate owned and investment securities which was higher than
the $97,000 reported in 1996. Therefore, the increase in 1997, disregarding the
non-recurring items, would be $500,000 or 18.6% over 1996.
Non-interest income for 1996 was $27,000 or 1% higher than 1995
primarily due to an 8.6% increase 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 past
three years:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------
% %
AMOUNT CHANGE AMOUNT CHANGE AMOUNT
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits ....... $ 6,239 28.7% $ 4,848 9.7% $ 4,420
Occupancy and equipment expenses ..... 1,917 24.2% 1,544 28.8% 1,198
FDIC insurance ....................... 34 459.2% 6 (97.7%) 257
Insurance ............................ 101 (7.3%) 109 (10.7%) 122
Office supplies ...................... 572 52.4% 375 27.1% 295
Postage and courier .................. 601 58.6% 379 13.8% 333
Professional fees .................... 784 13.7% 689 (17.3%) 833
Goodwill amortization ................ 191 448.6% 35 100.0% --
Miscellaneous other expenses ......... 1,805 12.7% 1,601 (5.3%) 1,691
------- ----- ------- ----- -------
Total non-interest expense ....... $12,244 27.7% $ 9,586 4.8% $ 9,149
======= ===== ======= ===== =======
</TABLE>
17
<PAGE> 18
Total non-interest expense for 1997 increased 27.7% over 1996. However,
as a percentage of average assets, non-interest expense declined slightly from
3.3% in 1996 to 3.1% in 1997. The increase in non-interest expenses is reflected
in occupancy and equipment expenses and salaries and benefit expense. The 28.7%
increase in salaries and benefits for 1997 is due to the addition of employees
from the acquisitions and salary merit increases. The number of full-time
equivalent employees increased by 41 employees in 1997 from 1996 to a total of
210. The 24.2% increase in occupancy and equipment expenses is due to the
depreciation expense related to the three buildings acquired in the Wells Fargo
branch acquisitions. The increase in supplies expense is also a reflection of
the cost of the acquisitions.
Non-interest expense of $9.6 million for the year ended 1996 represented
an increase of 4.8% compared with 1995. The majority of the increase was due to
the new branch built in Eagle Pass which opened in December 1995 and the data
processing equipment purchased to go "in-house".
INCOME TAXES. The Company recognized income tax expense of $200,000 in
1997 compared to $206,000 in 1996. See Note 16 to the Consolidated Financial
Statements for details of tax expense. At December 31, 1997, 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.
INVESTMENT SECURITIES. Total investment securities averaged $199.5
million in 1997, a 34% increase over the 1996 average of $149 million. The
following table presents the consolidated investment securities portfolio as of
December 31, 1997, by stated maturity with the weighted average interest yield
for each range of maturities. Federal Reserve Bank stock and other equity
securities are included in the classification "over ten years" in the available
for sale category.
INVESTMENT PORTFOLIO MATURITY AND YIELDS
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
DECEMBER 31, 1997
----------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE TO OVER TEN
OR LESS FIVE YEARS TEN YEARS YEARS
--------------- ---------------- ----------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
------- ----- -------- ----- --------- ----- ------ ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY SECURITIES:
(Amortized Cost)
U.S. Treasury securities ............ $21,919 6.21% $ 47,042 6.62% $ 34,971 6.14% $ -- -- $103,932
U.S. Government agency and
Mortgage backed securities ........ -- -- -- -- -- -- 2,635 6.64% 2,635
State and Municipal securities ...... -- -- -- -- -- -- -- -- --
Foreign debt securities ............. -- -- 14 6.06% 50 7.70% -- -- 64
------- ---- -------- ---- --------- ----- ------ ---- --------
Total held to maturity ............ $21,919 6.21% $ 47,056 6.62% $ 35,021 6.14% $2,635 6.64% $106,631
======= ==== ======== ==== ========= ===== ====== ==== ========
AVAILABLE FOR SALE SECURITIES:
(Fair Value)
U.S. Treasury securities ............ $10,515 6.56% $46,115 6.20% $ 79,458 6.15% $ -- -- $136,088
U.S. Government agency and
Mortgage backed securities ........ 635 6.66% 851 6.98% -- -- 115 9.21% 1,601
Other securities .................... -- -- -- -- 335 12.88% 1,747 2.57% 2,082
------- ---- -------- ---- --------- ----- ------ ----- --------
Total available for sale .......... $11,150 6.57% $ 46,966 6.21% $ 79,793 6.18% $1,862 2.98% $139,771
======= ==== ======== ==== ========= ===== ====== ==== ========
Total investment securities $33,069 6.33% $ 94,022 6.42% $ 114,814 6.17% $4,497 5.12% $246,402
======= ==== ======== ==== ========= ===== ====== ==== =========
</TABLE>
The weighted average yield on the investment security portfolio of the
Company at December 31, 1997 was 6.27% compared to a weighted average yield of
6.13% at December 31, 1996. See Note 1 of the Notes to the Consolidated
Financial Statements for a discussion regarding the investment classifications
held to maturity and available for sale.
Note 3 to this report reflects the estimated fair value for various
categories of investment securities as of December 31, 1997 and 1996.
18
<PAGE> 19
The following table summarizes the book value of the investment
portfolio at December 31, for the past three years (Dollars in thousands):
<TABLE>
<CAPTION>
------------------------------------
DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasury securities ........... $237,477 $149,400 $125,537
U.S. Government agencies ........... 2,990 4,132 --
Mortgage backed securities ......... 1,229 1,638 4,529
Other securities ................... 1,741 4,247 1,464
-------- -------- --------
$243,437 $159,417 $131,530
======== ======== ========
</TABLE>
LOANS. The following table presents the composition of the Company's
loan portfolio by type of loan:
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
1997 TOTAL 1996 TOTAL 1995 TOTAL 1994 TOTAL 1993 TOTAL
--------- ----- -------- ------ ------- ----- ------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ........................ $ 22,911 16.8% $ 23,992 21.2% $13,643 14.9% $15,175 16.8% $13,095 14.4%
Real estate construction .......... 10,338 7.6% 6,324 5.6% 11,868 13.0% 10,085 11.2% 8,329 9.2%
Real estate mortgage .............. 81,752 60.0% 65,556 57.9% 51,664 56.4% 49,406 54.6% 47,347 52.1%
Consumer installment loans
net of unearned discount........ 21,312 15.6% 17,386 15.3% 14,413 15.7% 15,782 17.4% 22,043 24.3%
-------- ----- -------- ----- ------- ----- ------- ----- ------- -----
Total loans ................... $136,313 100.0% $113,258 100.0% $91,588 100.0% $90,448 100.0% $90,814 100.0%
======== ===== ======== ===== ======= ===== ======= ===== ======= =====
</TABLE>
The preceding loan composition table shows that in 1997 total loans
increased $23.1 million or 20.4% over 1996. At December 31, 1997, loans were
32.9% of deposits compared to 40.5% at the previous year-end. The Wells Fargo
acquisition only included deposits with no loans being acquired.
The following table presents commercial and real estate construction
loans as of December 31, 1997, based on scheduled principal repayments and the
total amounts of loans due after one year classified according to sensitivity to
changes in interest rates:
MATURITIES AND RATE SENSITIVITY OF LOANS
(Dollars in thousands)
<TABLE>
<CAPTION>
OVER ONE YEAR OVER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
-------- ------------- -------- --------
<S> <C> <C> <C> <C>
Commercial........................ $ 13,628 $ 7,062 $ 2,221 $ 22,911
Real estate construction.......... 5,115 3,606 1,617 10,338
-------- --------- -------- --------
Total......................... $ 18,743 $ 10,668 $ 3,838 $ 33,249
======== ========= ======== ========
</TABLE>
Of the loans maturing after one year, $4,520,000 have fixed interest
rates and $9,986,000 have variable interest rates.
ALLOWANCE FOR POSSIBLE 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 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 possible loan losses. Loans identified as losses by management,
external loan review or bank examiners are charged-off.
19
<PAGE> 20
Despite loan growth in 1996, a credit to the provision for loan losses
of $5,000 was made to reduce the allowance for loan losses to an appropriate
level. Credits to the provision for loan losses were also made in 1995 and 1994
in the amounts of $855,000 and $990,000, respectively. The aggregate total of
credits made to the provision for loan losses since the 1992 reorganization
amounts to $5,680,000 and was a significant contribution to the improved
capitalization of the Company. The improvement in credit quality of the loan
portfolio and recoveries of previously charged-off loans that provided
unanticipated additions to the allowance for possible loan losses justify the
credits made to the allowance. The Company recorded net charge-offs of $30,000
for the year ended December 31, 1997 compared to net recoveries of $40,000 for
1996.
The following table summarizes, for the periods presented, the activity
in the allowance for possible loan losses arising from provisions credited to
operations, loans charged off and recoveries of loans previously charged off:
ANALYSIS OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Average loans outstanding during year................ $122,604 $ 96,787 $ 91,357 $ 89,190 $ 91,233
======== ========= ========= ========= ========
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year......................... $ 2,408 $ 1,906 $ 2,495 $ 3,005 $ 4,415
Allowance on acquired loans.......................... -- 467 -- -- --
Charge-Offs:
Commercial....................................... 50 76 60 16 286
Real estate construction......................... -- -- -- 10 12
Real estate mortgage............................. -- -- 6 45 2
Consumer installment............................. 222 175 264 249 680
--------- -------- --------- --------- --------
Total charge-offs........................... 272 251 330 320 980
Recoveries:
Commercial....................................... 53 39 69 73 133
Real estate construction......................... -- -- -- 100 56
Real estate mortgage............................. 38 70 285 210 159
Consumer installment............................. 151 182 242 417 512
--------- -------- --------- --------- --------
Total recoveries............................ 242 291 596 800 860
--------- -------- --------- --------- --------
Net charge-offs (recoveries)........................ 30 (40) (266) (480) 120
Provision charged (credited) to operating expense.... 80 (5) (855) (990) (1,290)
--------- -------- --------- --------- --------
Balance at end of year............................... $ 2,458 $ 2,408 $ 1,906 $ 2,495 $ 3,005
========= ======== ========= ========= ========
Net charge-offs (recoveries) as a percentage of
average loans outstanding during year.............. 0.02% (0.04%) (0.29%) (0.54%) 0.13%
========= ======== ========= ========= ========
Allowance for possible loan losses as a percentage
of year-end loans, net of unearned discount......... 1.80% 2.13% 2.08% 2.76% 3.31%
========= ======== ========= ========= ========
</TABLE>
20
<PAGE> 21
The following table reflects the allocation of the allowance for
possible loan losses to the various loan categories and the corresponding
percentage of total loans that it represents. Management believes that the
allowance can be allocated by category only on an approximate basis.
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 99 0.07% $ 131 0.12% $ 306 0.33% $ 195 0.22% $ 243 0.27%
Real estate construction -- -- -- -- -- -- -- -- -- --
Real estate mortgage 760 0.56% 614 0.54% 729 0.80% 811 0.90% 729 0.80%
Consumer installment 192 0.14% 185 0.16% 255 0.28% 370 0.41% 658 0.72%
Unallocated 1,407 1.03% 1,478 1.31% 616 0.67% 1,119 1.24% 1,375 1.51%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $2,458 1.80% $2,408 2.13% $1,906 2.08% $2,495 2.76% $3,005 3.31%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
Allocation of a portion of the allowance does not preclude its
availability to absorb losses in other categories. The allocation is determined
by providing specific reserves against each criticized loan plus an unallocated
portion against the remaining portfolio based on experience factors.
NON-PERFORMING ASSETS. Non-performing assets decreased 7.4% to
$1,853,000 at December 31, 1997, compared with $2,000,000 at December 31, 1996.
Non-performing assets as a percentage of total assets decreased to .39% at
December 31, 1997 down from .61% one year ago.
Non-performing assets consist of non-accrual loans, restructured 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 non-accrual status,
interest previously accrued but not collected is reversed and charged against
current income.
Restructured loans are loans on which the interest and/or the principal
has been reduced due to deterioration in the borrower's financial condition.
Even though these loans are performing, they are included in non-performing
assets because of the loss of revenue related to the reduction in interest
and/or principal.
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,
expenses related to the property, and any gain or loss resulting from the sale
of the property are charged to operations.
21
<PAGE> 22
The following table discloses non-performing assets and loans 90 days
past due and still accruing interest as of December 31:
NON-PERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Non-accrual loans ........................... $ 1,314 $ 1,195 $ 1,177 $ 1,070 $ 1,350
Foreclosed real estate ...................... 271 715 888 735 1,307
---------- ---------- ---------- ---------- ----------
Total non-performing assets ............. $ 1,585 $ 1,910 $ 2,065 $ 1,805 $ 2,657
========== ========== ========== ========== ==========
NON-PERFORMING ASSETS AS A PERCENTAGE OF:
Total assets .......................... 0.34% 0.58% 0.76% 0.68% 1.15%
Total loans plus foreclosed real estate 1.16% 1.68% 2.23% 1.98% 2.88%
Accruing loans past due 90 days or more ..... $ 40 $ 182 $ 383 $ 151 $ 154
</TABLE>
Interest income that would have been earned in 1997 on non-accrual loans
had such loans performed in accordance with the original contracted terms was
$151,000. The amounts related to 1996 and 1995 were $187,000 and $115,000,
respectively.
Independent third party loan reviews of the 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' of each Bank reviews
new loans, renewals and delinquencies. Management of each Bank monitors, on a
continuing basis, loans which it feels should be followed closely. The Banks are
required by the regulatory authorities to have foreclosed real estate appraised
periodically.
DEPOSITS. The primary source of funds for the Company is the deposits of
the Banks. The Company does not accept brokered deposits. The following table
presents average balances and the corresponding average rate paid for the
deposit categories:
AVERAGE DEPOSITS AND AVERAGE RATES PAID
(Dollars in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------------ ------------------------
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
--------- ------ --------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits .............. $ 54,723 -- $ 39,489 -- $ 37,667 --
INTEREST-BEARING DEPOSITS:
Interest-bearing transaction (NOW) accounts .... 48,723 2.77% 33,342 2.85% 32,127 3.05%
Savings and money market accounts .............. 70,559 3.14% 54,928 2.90% 51,992 2.81%
Certificates of deposits under $100,000 ........ 103,982 4.67% 76,248 4.36% 68,654 4.30%
Certificates of deposits of $100,000 and
greater....................................... 59,993 5.01% 44,535 4.86% 37,264 4.85%
--------- ------ --------- --------- --------- ------
Total interest-bearing deposits ................ 283,257 209,053 190,037
--------- --------- ---------
Weighted average rate paid ..................... 4.03% 3.85% 3.79%
====== ========= ======
Total average deposits .................. $ 337,980 $ 248,542 $ 227,704
========= ========= =========
</TABLE>
Total average deposits increased $89 million or 36% with the majority of
the increase due to the acquisition of the three Wells Fargo branches in July
1997. Mexico is part of the natural trade territory of the Banks. Thus,
dollar-denominated deposits from Mexican sources have traditionally been a
significant source of deposits. Included in total
22
<PAGE> 23
deposits are $94,477,000, $83,677,000, and $77,731,000 of Mexican National
deposits at December 31, 1997, 1996, and 1995, respectively.
The remaining maturity on certificates of deposit greater than $100,000
as of December 31, 1997 is presented below: (Dollars in thousands)
<TABLE>
<CAPTION>
THREE OVER THREE OVER SIX OVER
MONTHS THROUGH THROUGH TWELVE
OR LESS SIX MONTHS TWELVE MONTHS MONTHS TOTAL
---------- ---------- ------------- ------- -------
<S> <C> <C> <C> <C> <C>
Certificates of deposit of
$100,000 and greater $ 18,233 $ 19,224 $ 23,532 $ 3,688 $64,677
========= ========= ========= ======= =======
</TABLE>
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, trading account securities 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 82% of total deposits at December 31,
1997 were "core" deposits. Core deposits, for this purpose, are defined as total
deposits less public funds and certificates of deposit greater than $100,000.
Net cash provided by operating activities at December 31, 1997,
includes a $3.4 million decrease for the addition of an investment securities
trading account. The Company has not had a trading account in the past. See
Note 1 of the consolidated financial statements for the accounting treatment of
a trading account.
At December 31, 1997, the Company's liquid assets amounted to $201
million or 43% of total gross assets, up from $129 million or 39% at December
31, 1996. Secondary sources of liquidity include the Company's ability to sell
loan participations and purchase federal funds. In addition, NBC-Eagle Pass has
an approved federal funds line at a correspondent bank and NBC-Laredo has an
approved line of credit with the Federal Home Loan Bank.
CAPITAL RESOURCES
Total stockholders' equity increased $8.2 million to $51.1 million at
December 31, 1997 from $42.9 million at December 31, 1996. In addition to net
income of $7.5 million, stockholders' equity increased $.7 million due to an
improvement in the net fair value of securities available for sale. The ratio of
total stockholders' equity to total assets was 10.9% at December 31, 1997
compared with 13.1% at December 31, 1996.
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 FRB and the 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 at
December 31, 1997 include unfunded loan commitments and letters of credit.
Pursuant to the current 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 quarterly average total assets. A leverage ratio of 3.0% 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 for the Company 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 minimum ratio for qualifying total capital is 8.0%
of which 4.0% must be Tier 1 capital.
23
<PAGE> 24
The table below illustrates the Company and the Bank's compliance with
the risk-based capital guidelines as of December 31, 1997 (Dollars in
thousands):
<TABLE>
<CAPTION>
NBC NBC NBC NBC
CONSOLIDATED EAGLE PASS LAREDO ROCKDALE LULING
------------ --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Total average assets (less goodwill) ... $437,720 $ 232,673 $ 69,184 $111,080 $26,903
Risk weighted assets (net of goodwill) . $143,913 $ 70,213 $ 51,744 $ 21,360 $15,542
Tier 1 capital ......................... $ 39,960 $ 15,554 $ 7,622 $ 5,911 $ 3,352
Total capital .......................... $ 41,767 $ 16,478 $ 8,166 $ 6,178 $ 3,550
Leverage ratio ......................... 9.13% 6.69% 11.02% 5.32% 12.46%
Risk based capital ratios:
Tier 1 ............................. 27.77% 22.15% 14.73% 27.67% 21.57%
Total capital ...................... 29.02% 23.47% 15.78% 28.92% 22.84%
</TABLE>
The Company and the Banks exceed the risk-based capital and leverage
requirements set by the regulators as evidenced in the above table. As of
December 31, 1997, the Company and its subsidiary Banks met the criteria for
classification as a "well-capitalized" institution under the rules of FDICIA.
ACCOUNTING MATTERS
SFAS No. 123 "Accounting for Stock-Based Compensation," issued in
October 1995, and effective beginning in 1996, will allow companies to adopt a
fair value based method of accounting for employee stock option plans, or to
continue on the intrinsic value based method currently prescribed by Accounting
Principals Board ("APB") Opinion No. 25. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period. Under the intrinsic value based
method, compensation cost is the excess, if any, of the quoted market price of
the stock at grant date over the amount the employee must pay for the stock. If
a company continues to use the intrinsic value based method, it must make
certain pro forma disclosures of net income and earnings per share as if the
fair value method of accounting for stock options as prescribed by APB Opinion
No. 25 was used. The Company has determined that it will continue to account for
stock-based compensation using APB Opinion No. 25 for both stock option plans
and, accordingly, no compensation cost will be recognized for stock options in
the consolidated financial statements. In determining compensation cost based on
the fair value method at the date of grant for stock options under SFAS No. 123,
the Company's net income and net income per share would have been reduced by
less than 1% for 1997, 1996 and 1995.
SFAS No. 128 "Earnings Per Share", issued in February 1997, and
effective December 31, 1997, establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. This statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
per Share, and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Opinion No.15.
24
<PAGE> 25
YEAR 2000
The Company has formed a Year 2000 project team comprising
technological, data processing, and operation 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.
FORWARD-LOOKING INFORMATION
This Form 10-K contains certain "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, customer relations, relationships with vendors, the
interest rate environment, governmental regulation and supervision,
seasonality, technological change, changes in industry practices, 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 those described herein as anticipated, believed, estimated,
expected, or intended. The Company does not intend to update these
forward-looking statements.
25
<PAGE> 26
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
National Bancshares Corporation of Texas and Subsidiaries
Laredo, Texas
We have audited the accompanying consolidated balance sheets of National
Bancshares Corporation of Texas and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Bancshares
Corporation of Texas and Subsidiaries as of December 31, 1997 and 1996, and the
results of operations and its cash flows for the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Padgett, Stratemann & Co., L.L.P.
Padgett, Stratemann & Co., L.L.P.
Certified Public Accountants
March 6, 1998
26
<PAGE> 27
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash and Due from Banks $ 27,278 $ 17,305
Interest Bearing Deposits in Banks 216 529
Federal Funds Sold 29,940 22,650
Trading Securities 3,433 --
Securities Available for Sale 139,771 88,193
Securities Held to Maturity 106,631 72,649
Loans - Net of Unearned Discount and Allowance for Loan Losses 133,855 110,850
Bank Premises and Equipment 12,538 6,978
Other Assets 16,498 8,764
======== ========
$470,160 $327,918
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS:
Demand - Non-interest Bearing $ 66,346 $ 46,617
NOW, Money Market, and Savings Accounts 151,605 97,871
Time - $100,000 and over 64,677 52,651
Other Time 131,787 82,616
-------- --------
TOTAL DEPOSITS 414,415 279,755
Accrued Interest Payable and Other Liabilities 2,001 1,259
Other Debt 2,646 3,995
-------- --------
TOTAL LIABILITIES 419,062 285,009
-------- --------
STOCKHOLDERS' EQUITY:
Common Stock - $.001 par value; 100,000,000 shares authorized; 4,658,734
shares in 1997 and 1996, issued and outstanding 5 5
Surplus 16,341 16,341
Retained Earnings 32,796 25,321
Net Unrealized Appreciation on Securities Available
for sale, net of tax of $1,008 in 1997 and $182 in 1996 1,956 1,242
-------- --------
TOTAL STOCKHOLDERS' EQUITY 51,098 42,909
-------- --------
$470,160 $327,918
======== ========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
27
<PAGE> 28
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 13,029 $ 10,623 $ 9,928
Interest on Investment Securities - Taxable 12,667 9,144 7,907
Interest on Investment Securities - Nontaxable -- 1 2
Interest on Federal Funds Sold 1,513 1,038 1,092
Interest on Deposits in Banks 125 14 26
---------- ---------- ----------
TOTAL INTEREST INCOME 27,334 20,820 18,955
INTEREST EXPENSE:
Interest on Deposits 11,419 8,039 7,199
Interest on Debt 303 73 160
---------- ---------- ----------
TOTAL INTEREST EXPENSE 11,722 8,112 7,359
---------- ---------- ----------
NET INTEREST INCOME 15,612 12,708 11,596
---------- ---------- ----------
Provision (Credit) for Possible Loan Losses 80 (5) (855)
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION (CREDIT) FOR
POSSIBLE LOAN LOSSES 15,532 12,713 12,451
NON-INTEREST INCOME:
Service Charges and Fees 2,796 2,371 2,184
Net Trading Account Profit 103 -- --
Net Realized (Losses) Gains on Sales of Securities 1,133 (6) (1)
Net Gains on Sales of Other Real Estate Owned and Other Assets 62 103 365
Miscellaneous Income 293 321 214
---------- ---------- ----------
TOTAL NON-INTEREST INCOME 4,387 2,789 2,762
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 6,239 4,848 4,420
Occupancy and Equipment Expenses 1,917 1,544 1,198
Other Operating Expenses 4,088 3,194 3,531
---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 12,244 9,586 9,149
INCOME BEFORE FEDERAL INCOME TAXES AND
EXTRAORDINARY ITEM 7,675 5,916 6,064
Federal Income Tax Expense 200 206 159
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 7,475 5,710 5,905
Gain Realized on Prepayment of Debt, net of tax of $4 -- -- 219
---------- ---------- ----------
NET INCOME $ 7,475 $ 5,710 $ 6,124
========== ========== ==========
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 1.60 $ 1.23 $ 1.33
Extraordinary Item -- -- 0.05
---------- ---------- ----------
NET INCOME PER SHARE $ 1.60 $ 1.23 $ 1.38
========== ========== ==========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
28
<PAGE> 29
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE PREFERRED STOCK
------------------------------------------------
NUMBER OF
SHARES PAR SURPLUS
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 2,193 $ 22 $ 2,171
Net income
Redemption of Preferred Stock (1,270) (13) (1,257)
Conversion of Preferred to Common (923) (9) (914)
Net change in unrealized appreciation on securities
available for sale, net of tax of $797 -- -- --
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 -- -- --
Net income
Conversion of Series B Preferred to Common -- -- --
Exercise of Common Stock option -- -- --
Net change in unrealized appreciation on securities
available for sale, net of tax of $183 -- -- --
------------ ------------ ------------
BALANCE AT DECEMBER 31, 1996 -- -- --
Net Income -- -- --
Net change in unrealized appreciation on securities
Available for sale, net of tax of $826 -- -- --
============ ============ ============
BALANCE AT DECEMBER 31, 1997 -- $ -- $ --
============ ============ ============
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
29
<PAGE> 30
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
COMMON STOCK (DEPRECIATION)
- ----------------------------------------------- ON SECURITIES
NUMBER OF RETAINED AVAILABLE
SHARES PAR SURPLUS EARNINGS FOR SALE TOTAL
- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
4,414 $ 4 $ 14,537 $ 13,487 $ (835) $ 29,386
6,124 6,124
-- -- 159 -- -- (1,111)
116 -- 923 -- -- --
-- -- -- -- 1,578 1,578
- ------------ ------------ ------------ ------------ ------------ ------------
4,530 4 15,619 19,611 743 35,977
-- -- -- 5,710 -- 5,710
128 1 714 -- -- 715
1 -- 8 -- -- 8
-- -- -- -- 499 499
- ------------ ------------ ------------ ------------ ------------ ------------
4,659 5 16,341 25,321 1,242 42,909
-- -- -- 7,475 -- 7,475
-- -- -- 714 714
- ------------ ------------ ------------ ------------ ------------ ------------
4,659 $ 5 $ 16,341 $ 32,796 $ 1,956 $ 51,098
============ ============ ============ ============ ============ ============
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
30
<PAGE> 31
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,475 $ 5,710 $ 6,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,159 944 613
Deferred federal income taxes 46 61 38
Provision (Restoration) of loan loss provision 80 (5) (855)
Net realized loss (gain) on sales of securities (1,133) 6 1
Gain on sale on other real estate owned and other assets (62) (103) (365)
Extraordinary gain on prepayment of debt (gross) -- -- (223)
Increase in trading account (3,433) -- --
Increase in accrued interest receivable (1,806) (196) (96)
(Increase) decrease in prepaid expenses and other assets (138) (42) 1
Increase (decrease) in accrued interest payable and other 764 39 126
liabilities
Write-down of other real estate owned -- 18 72
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,952 6,432 5,436
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (7,290) 2,320 (445)
Net decrease (increase) in interest bearing deposits in banks 312 (40) 70
Purchases of securities available for sale (98,351) (44,009) (16,872)
Proceeds from maturities of securities available for sale 15,679 16,225 9,238
Proceeds from sales of securities available for sale 33,739 10,226 6,356
Purchases of securities to be held to maturity (52,179) (23,865) (16,251)
Proceeds from maturities of securities to be held to maturity 17,710 17,811 22,877
Proceeds from sales of securities to be held to maturity 539 -- --
Net increase in loans (23,179) (6,624) (1,260)
Capital expenditures (6,551) (730) (2,664)
Capital expenditures on other real estate owned -- -- 1
Proceeds from sale of other real estate owned 600 431 524
Net (payments for) cash acquired from acquisitions (7,319) (46) --
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (126,290) (28,301) 1,574
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from principal advances on other debt 12,319 140 175
Principal payments on other debt (13,668) (150) (4,044)
Net increase (decrease) in demand deposits, NOW accounts,
money market accounts, and savings accounts 73,463 10,206 (4,933)
Net increase in time deposits 61,197 14,263 7,816
Exercise of Common Stock options -- 8 --
Redemption of Series A Preferred Stock -- -- (1,111)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 133,311 24,467 (2,097)
--------- --------- ---------
Net increase in cash and due from banks 9,973 2,598 4,913
Cash and due from banks at beginning of year 17,305 14,707 9,794
========= ========= =========
Cash and due from banks at end of year $ 27,278 $ 17,305 $ 14,707
========= ========= =========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
31
<PAGE> 32
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of National Bancshares Corporation of
Texas (the Company) and its wholly-owned subsidiaries conform to generally
accepted accounting principles and to general practices within the banking
industry. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Following is a summary of
the Company's more significant accounting and reporting policies:
NATURE OF OPERATIONS
The Company is a bank holding company which operates four commercial banks.
Two banks are located in Central Texas and the other two banks are located
on the Texas-Mexico border.
CONSOLIDATION
The consolidated financial statements include the accounts of National
Bancshares Corporation of Texas and its wholly-owned subsidiary, NBT of
Delaware, Inc. (the Delaware Company) and the accounts of the Delaware
Company's wholly-owned subsidiaries, NBC Bank, N.A. (Eagle Pass), NBC Bank
Laredo, N.A. (Laredo), NBC Bank (Rockdale), NBC Bank-Central, N.A.
(Luling), and NBC-Holdings-Texas, Inc., collectively referred to as the
"Banks." Significant intercompany accounts and transactions have been
eliminated in consolidation.
The Delaware Company was formed during 1995 as a bank holding company. It
acquired all of the common stock of the Banks in a stock exchange with the
Company in a business combination accounted for similar to a pooling of
interests. The transaction does not affect any previously reported
consolidated financial statement amounts.
INVESTMENTS IN SECURITIES
Pursuant to SFAS No. 115, the Company's investments in securities are
classified in three categories and accounted for as follows:
o TRADING SECURITIES. Securities held principally for resale in the near
term are classified as trading securities and recorded at their fair
values. Unrealized gains and losses on trading securities are included
in other income.
o SECURITIES TO BE HELD TO MATURITY. Bonds, notes, and debentures for
which the Company has the positive intent and ability to hold to
maturity are reported at cost adjusted for amortization of premiums and
accretion of discounts, which are recognized in interest income using
the interest method over the period to maturity.
o SECURITIES AVAILABLE FOR SALE. Securities available for sale consist of
bonds, notes, and debentures not classified as trading securities nor
as securities to be held to maturity. These securities are recorded at
their fair values. Unrealized holding gains and losses, net of tax, on
securities for sale are reported as a net amount in a separate
component of stockholders' equity.
Declines in the fair market value of individual held to maturity and
available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
The transfer of a security between categories of investments is accounted
for at fair value. For a debt security transferred into the available for
sale category from the held to maturity category, the unrealized holding
gain or loss at
32
<PAGE> 33
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the date of the transfer is recognized in a separate component of
stockholders' equity.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans, and other
pertinent factors. Loans deemed uncollectible are charged to the allowance.
Provisions for loan losses and recoveries on loans previously charged off
are added to the allowance.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is recognized on
straight-line and accelerated methods over the estimated useful lives of
the assets. The estimated useful lives range from 3 to 50 years.
Amortization of leasehold improvements is computed using the straight-line
method over the primary term of the lease.
INTEREST INCOME ON LOANS
Unearned income on discounted loans is credited to the unearned discount
account when the loan is made and is recorded as interest income over the
term of the loan based on methods that approximate the interest method.
Interest on other loans is accrued and credited to income based on the
principal amount outstanding. Generally, the accrual of interest on
impaired loans is discontinued when principal or interest payments become
90 days past due, and/or in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become
due. Upon such discontinuance, all unpaid accrued interest is reversed and
charged to current year operations. Interest income is subsequently
recognized only to the extent cash payments are received.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct origination costs are deferred and
recognized as an adjustment of the yield over the contractual term of the
related loan.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure is carried in other assets at the lower
of the recorded investment in the property or the fair value of the
property less estimated selling costs. Prior to foreclosure, the value of
the underlying loan is written down to the fair value of the real estate to
be acquired by a charge to the allowance for loan losses, if necessary. Any
subsequent write-downs are charged against operating expenses. Operating
expenses of such properties, net of related income, are included in other
expenses.
INTANGIBLE ASSETS
The excess cost over fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over twenty-five years.
Intangible assets are included in other assets. All such intangible assets
are periodically evaluated as to the recoverability of their carrying
value.
INCOME TAXES
The Company and its subsidiaries file an income tax return on a
consolidated basis. Provisions for income taxes are based on taxes payable
or refundable for the current year (after exclusion of nontaxable income
such as interest on state and municipal securities) and deferred taxes on
temporary differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities and
their reported amounts in the consolidated
33
<PAGE> 34
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
financial statements. Deferred tax assets and liabilities are included in
the consolidated financial statements at currently enacted income tax rates
applicable to the period in which the deferred tax assets and liabilities
are expected to be realized or settled as prescribed in SFAS No. 109,
"Accounting for Income Taxes." As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the provisions for
income taxes.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in
the consolidated balance sheet caption "cash and due from banks."
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the subsidiary Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the consolidated financial statements when they are funded or
related fees are incurred or received.
The Company or its subsidiaries are not a party to any off-balance-sheet
derivative financial instruments such as interest rate futures or swap
contracts.
NET INCOME PER SHARE OF COMMON STOCK
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share, (SFAS No. 128) effective December 31, 1997. This
Statement requires the computation and presentation of both "basic" and
"diluted" earnings per share for all companies with complex capital
structures.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No.
107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CARRYING AMOUNTS APPROXIMATE FAIR VALUES for cash and due from banks;
interest bearing deposits in banks; federal funds sold; trading securities,
securities available for sale; variable rate loans; accrued interest
receivable and payable; demand deposits; NOW, money market, and savings
accounts; and variable rate time deposits.
QUOTED MARKET PRICES, where available, or if not available, based on
quoted market prices of comparable instruments for securities to be held to
maturity.
34
<PAGE> 35
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DISCOUNTED CASH FLOWS using interest rates currently being offered on
instruments with similar terms and with similar credit quality, including
fixed rate loans; fixed rate time deposits; and other debt.
QUOTED FEES CURRENTLY BEING CHARGED for off-balance-sheet instruments,
including letters of credit and loan commitments.
RECLASSIFICATIONS
Certain amounts have been reclassified from prior presentations at December
31, 1996 to conform to classifications at December 31, 1997. There is no
effect on previously reported net income or retained earnings.
2. ACQUISITIONS
On September 30, 1996, the Company acquired Luling Bancshares, Inc.,
including its subsidiary, The First National Bank in Luling, in Luling,
Texas. The transaction was accounted for as a purchase. The purchase price
has been allocated to the underlying assets and liabilities based on
estimated fair value at the date of acquisition. Results of operations are
included from the date of acquisition. The Company acquired approximately
$26 million in total assets and assumed liabilities of approximately $24
million. The Company paid a premium of approximately $2 million over the
book value of the net assets. The Company paid approximately $1.2 million
in cash and executed short-term notes payable of $3.6 million due January
2, 1997 for the remainder of the purchase price.
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
acquisitions.
3. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of investment
securities of the Company and their approximate fair values at December 31
were as follows: (Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury securities $ 133,545 $ 2,543 $ -- $ 136,088
U.S. Government Agency securities 355 8 -- 363
Mortgage-backed securities 1,229 9 -- 1,238
Debt and equity securities 1,677 405 -- 2,082
------------ ------------ ------------ ------------
Total $ 136,806 $ 2,965 $ -- $ 139,771
============ ============ ============ ============
</TABLE>
35
<PAGE> 36
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
U.S. Treasury securities $ 103,932 $ 1,646 $ (4) $ 105,574
U.S. Government Agency securities 2,635 34 -- 2,669
Other securities 64 -- (8) 56
------------ ------------ ------------ ------------
Total $ 106,631 $ 1,680 $ (12) $ 108,299
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities:
U.S. Treasury securities $ 80,199 $ 645 $ 198 $ 80,646
U.S. Government Agency securities 948 20 -- 968
Mortgage-backed securities 1,638 13 -- 1,651
Equity securities 3,780 945 -- 4,725
Federal Reserve Bank stock 203 -- -- 203
------------ ------------ ------------ ------------
Total $ 86,768 $ 1,623 $ 198 $ 88,193
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Held-to-Maturity Securities:
U.S. Treasury securities $ 69,201 $ 756 $ 58 $ 69,899
U.S. Government Agency Securities 3,184 25 -- 3,209
Other securities 264 10 254
------------ ------------ ------------ ------------
Total $ 72,649 $ 781 $ 68 $ 73,362
============ ============ ============ ============
</TABLE>
During the year ended December 31, 1997, the Company did not transfer any
securities between the held to maturity and available for sale categories.
The unrealized gains and losses on investment securities held at December
31, 1997 and 1996 have been judged to be temporary market fluctuations with
no material financial impact on the Company. Unrealized net holding gains
on trading securities of $103,000 were included in earnings in 1997. ($0 in
1996 and 1995)
Investment securities carried at approximately $36,167,000 and $35,634,000
at December 31, 1997 and 1996, respectively, were pledged to secure public
funds.
36
<PAGE> 37
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The scheduled maturities of securities to be held to maturity and
securities available for sale at December 31, 1997 were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
----------------------------- -----------------------------
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less $ 22,914 $ 22,986 $ 12,719 $ 12,765
Due in one year to five years 57,173 58,140 63,268 64,273
Due from five to ten years 23,909 24,504 58,450 60,008
Due after ten years 2,635 2,669 108 115
------------ ------------ ------------ ------------
Total 106,631 108,299 134,545 137,161
------------ ------------ ------------ ------------
Equity securities -- -- 692 1,032
Mortgage-backed securities -- -- 1,229 1,238
Federal Reserve Bank stock -- -- 340 340
============ ============ ============ ============
$ 106,631 $ 108,299 $ 136,806 $ 139,771
============ ============ ============ ============
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were $1,412,000 and $279,000, respectively, in 1997,
$13,000 and $19,000, respectively, in 1996, and $1,200 and $2,000,
respectively, in 1995.
4. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The components of loans in the consolidated balance sheets were as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Commercial Loans $ 17,347 $ 20,303
Real Estate - Construction 10,338 6,324
Real Estate - Commercial 35,929 25,766
Real Estate - Residential 45,823 39,790
Agriculture Loans 4,809 3,013
Consumer Loans 22,395 18,288
Other Loans 755 676
--------- ---------
137,396 114,160
Unearned Discount (1,083) (902)
--------- ---------
136,313 113,258
Allowance for Possible Loan Losses (2,458) (2,408)
--------- ---------
$ 133,855 $ 110,850
========= =========
</TABLE>
Changes in the allowance for possible loan losses were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Balance at Beginning of Period $ 2,408 $ 1,906 $ 2,495
Loan Loss Provision (Credit) 80 (5) (855)
Allowance on Acquired Loans -- 467 --
Loans Charged Off (272) (252) (330)
Recoveries 242 291 596
--------- --------- ---------
========= =========
Balance at End of Period $ 2,458 $ 2,408 $ 1,906
========= ========= =========
</TABLE>
The restoration of loan loss provision of $5,000 and $855,000 for the years
ended December 31, 1996, and 1995,
37
<PAGE> 38
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively, resulted from significant collections of previously
charged-off loans, and from improved performance and quality of the loan
portfolio.
Effective January 1, 1995, the Banks adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure." Adoption of SFAS No. 114 and SFAS No. 118 was not material to
the financial condition or results of operations of the Banks.
As of December 31, 1997, 1996, and 1995, the Banks have impaired loans of
$1,314,000, $1,195,000, and $1,177,000, respectively. The allowance for
loan losses related to those loans was $117,000, $97,300, and $169,600 at
December 31, 1997, 1996, and 1995, respectively. The average recorded
investment in impaired loans during the year ended December 31, 1997, 1996,
and 1995 was $1,254,000, $1,186,000, and $1,123,500, respectively. Interest
income of approximately $287,000, $478,000, and $308,000 on impaired loans
was recognized for cash payments received during the year ended December
31, 1997, 1996, and 1995, respectively.
The Banks' nonperforming loans at December 31, 1997 consisted of $40,000 in
accruing loans over 90 days past due and $1,314,000 in nonaccrual loans.
The reduction in interest income associated with nonaccrual loans during
the year ended December 31, 1997, 1996, and 1995 was approximately
$151,000, $187,000, and $115,000, respectively.
5. BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment included in the consolidated
balance sheets were as follows (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Land $ 3,517 $ 1,157
Buildings and Leasehold Improvements 8,694 5,894
Equipment and Furniture 5,859 4,540
--------- ---------
18,070 11,591
Less: Accumulated Depreciation 5,532 4,613
--------- ---------
$ 12,538 $ 6,978
========= =========
</TABLE>
Depreciation expense totaled $919,000, $705,000, and $427,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. NBC-Eagle Pass has
committed to spend approximately $4.5 million to build and equip a 30,000
square foot branch in San Antonio, Texas. The branch is expected to be
completed during the fourth quarter of 1998.
38
<PAGE> 39
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. OTHER ASSETS
Other assets include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Accrued Interest Receivable $ 4,757 $ 2,951
Deferred Tax Asset 1,751 2,645
Other Real Estate Owned 271 715
Goodwill 9,180 2,052
Other 539 401
---------- ----------
Total $ 16,498 $ 8,764
========== ==========
</TABLE>
Changes in the allowance for losses on other real estate owned are as
follows (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---------- ----------
<S> <C> <C>
Balance at Beginning of Year $ -- $ 3,891
Provision for Losses on Other Real Estate Owned -- --
Disposition of Property -- (3,891)
========== ==========
Balance at End of Year $ -- $ --
========== ==========
</TABLE>
7. DEPOSITS
Included in total deposits are $94,477,000 and $83,677,000 of Mexican
National deposits at December 31, 1997 and 1996, respectively.
The aggregate amount of short-term jumbo certificates of deposit (CDs),
each with a minimum denomination of $100,000, was approximately $65,763,000
and $50,481,000 at December 31, 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of CDs are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1998 $ 183,884
1999 8,880
2000 2,852
2001 522
326
2002 and thereafter
==========
$ 196,464
==========
</TABLE>
8. OTHER DEBT
As a result of the Luling acquisition (see Note 2), the Company entered
into short-term note payables with three individuals in the aggregate
amount of $3,638,746. The notes bear interest rates of 5%. The maturity
dates of the notes were January 2, 1997. These notes were paid in full on
their due date with funds received from the Company's line of credit.
In May 1994, Laredo borrowed $200,000 from the Federal Home Loan Bank of
Dallas. This advance bears an interest rate of 7.49% and has a maturity
date of June 1999. Principal and interest payments are due monthly in the
approximate amount of $1,600 with the remaining balance due at maturity.
The outstanding balance at December 31, 1997 and 1996
39
<PAGE> 40
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was approximately $182,000 and $188,000, respectively. In July 1995,
$175,000 was advanced to Laredo from the Federal Home Loan Bank of Dallas.
This note bears an interest rate of 6.393% and has a maturity date of
August 2015. Principal and interest payments are due monthly in the
approximate amount of $1,300 with the remaining balance due at maturity.
The outstanding balance at December 31, 1997 and 1996 was approximately
$164,000 and $169,000, respectively. Both of these loans are secured by a
certain block of fixed rate mortgage loans carried by Laredo.
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 (8.50% at December 31, 1997). 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. The
outstanding balance at December 31, 1997 was $2,300,000.
Aggregate maturities at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1998 $ 811,016
1999 982,387
2000 705,888
2001 6,276
2002 and thereafter 140,486
-----------
$ 2,646,053
===========
</TABLE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk, and
liquidity risk. These commitments and contingent liabilities are described
in Note 18 as financial instruments with off-balance sheet risk.
The Company and its wholly owned subsidiaries are defendants in legal
actions arising from normal business activities. Management believes that
those actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial
position, results of operations, cash flows, or liquidity.
The Company has a forty-two month sub-lease agreement for general corporate
office space. The commencement date of the sub-lease was July 1, 1996. The
Company also leases property which is used as a data processing center. The
commencement date of this lease was October 1, 1995. The Company has also
entered into a twelve month lease for a loan production office. The
commencement date of the lease was July 1, 1997. The Company also has an
indefinite lease with Laredo with monthly lease payments of $1,500. Gross
rental expense for the year ended December 31, 1997, 1996, and 1995 was
$108,458, $76,040, and $121,897, respectively.
Future minimum lease payments at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
1998 $ 89,712
1999 42,000
2000 21,000
---------
$ 152,712
=========
</TABLE>
40
<PAGE> 41
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EARNINGS PER SHARE
In 1997, The Financial Standards Board issued Statement No. 128, "Earnings
Per Share." Statement 128 replaced the calculation of primary and fully
diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the Statement 128 requirements.
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares outstanding.
Diluted earnings per share is determined by dividing net income for the
year by the weighted average number of shares of common stock and common
stock equivalents outstanding. Common stock equivalents assume exercise of
stock options and use of proceeds to purchase treasury stock at the average
market price for the period.
The following provides a reconciliation of basic and diluted earnings per
share (Dollars in thousands, except shares and per share amounts):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net income before extraordinary credit $ 7,475 $ 5,710 $ 5,905
Weighted average shares outstanding
Basic 4,658,734 4,639,955 4,443,436
Diluted 4,749,200 4,696,521 4,785,132
Earnings per share - Basic $ 1.60 $ 1.23 $ 1.33
============= ============= =============
Effect of diluted securities:
stock options $ (0.03) $ (0.01) $ (0.01)
Convertible preferred stock (0.09)
------------- ------------- -------------
Earnings per share - Diluted $ 1.57 $ 1.22 $ 1.23
============= ============= =============
</TABLE>
11. CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 20,000,000 shares of preferred stock
with a par value of $.01 per share. During 1992, the Company issued a
series of 2,604,153 shares of preferred stock, designated as Series A
Convertible Preferred Stock.
On March 31, 1994, 401,595 shares represented by senior debentures not
surrendered to the Company by the holders for conversion into Series A
Convertible Preferred Stock reverted to the Company pursuant to a motion
granted by the United States Bankruptcy Court of Western District of Texas,
San Antonio Division.
During 1995 and 1994, 922,976 and 9,243 shares, respectively, of Series A
Convertible Preferred Stock were converted to Common Stock. In late 1994,
the Company made available to the Series A Preferred shareholders a tender
offer to sell their shares at $.70 per share. As a result of this tender
offer, 537,305 shares were tendered for cash. In November 1995, the Company
notified all remaining Series A Preferred shareholders that the remaining
shares would be redeemed by the Company on December 1, 1995 at $1 per
share. As a result, 733,034 shares were redeemed and no Series A Preferred
Stock was outstanding at December 31, 1995.
41
<PAGE> 42
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. BOOK VALUE PER SHARE
Book value per share has been calculated as follows:
<TABLE>
<CAPTION>
Common
Stock
-----------
<S> <C>
DECEMBER 31, 1997:
Par $ 4,659
Ascribed Surplus 16,340,541
Retained Earnings 32,796,138
Net Unrealized Appreciation on Securities Available for Sale 1,956,810
-----------
51,098,148
Number of Shares Outstanding /4,658,734
-----------
$ 10.97
===========
DECEMBER 31, 1996:
Par $ 4,659
Ascribed Surplus 16,340,541
Retained Earnings 25,320,787
Net Unrealized Appreciation on Securities Available for Sale 1,243,018
-----------
42,909,005
Number of Shares Outstanding /4,658,734
-----------
$ 9.21
===========
</TABLE>
13. EMPLOYEE BENEFITS
The Company has a defined contribution plan for the benefit of
substantially all employees. The plan includes a 401(k) retirement plan
feature. Employees are allowed to make contributions to the plan. Each
subsidiary Bank's contribution to the plan is determined annually by that
Bank's Board of Directors. Plan expense for the years ended December 31,
1997, 1996 and 1995 totaled $104,873, $49,515, and $63,778, respectively.
14. MANAGEMENT AND DIRECTOR STOCK OPTION PLAN
Effective March 31, 1994, the Company adopted the 1994 Nonqualified Stock
Option Plan (the 1994 Plan). Options representing 80,000 shares available
under the 1992 Plan were transferred to the 1994 Plan. In addition, 8,334
shares representing unexercised options under the 1992 Plan of an officer
who resigned, were added to the 1994 Plan. The maximum number of shares for
which the options could be granted and sold under the 1994 Plan was 88,334
shares of Common Stock.
The 1994 Plan shall be administered by the Board of Directors of the
Company, or an administrator designated by the Board of Directors. The
Board of Directors or the administrator is authorized to determine the
terms and conditions of all options granted. The Board of Directors or the
applicable administrator may adopt such rules and regulations for carrying
out the 1994 Plan as it may deem best.
Each option under the 1994 Plan shall terminate and be unexercisable upon
the date specified by the applicable administrator, however, this date
shall not exceed ten years from the grant date of the options.
In 1994, options representing 29,000 shares included in the 1994 Plan were
granted to certain officers and employees of the Company at an option price
of $5.68 per share. The grant date of these options is March 31, 1994, with
a vesting period of 20% per year for five years. In 1996, 1,200 of these
options were exercised. None of these granted options were exercised in
1995 or 1994.
42
<PAGE> 43
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1994, there were 59,334 shares as to which options could be
granted in the future under the 1994 Plan.
Effective March 1, 1995, the Company adopted the 1995 Stock Option Plan
(the 1995 Plan), which includes the "Outside Director's Stock Option
Agreement" and the "Nonqualified Stock Option Agreement." The maximum
number of shares for which options could be granted or sold under the 1995
Plan was 214,000 shares of Common Stock. This number is limited by the
29,000 options which were granted under the 1994 Plan. Shares of Common
Stock subject to options which for any reason expire or terminate
unexercised, and shares which are reacquired by the Company after issuance
under the 1995 Plan, may again be available for grant or purchase under the
1995 Plan. The number of shares of Common Stock available for issuance
under the 1995 Plan are subject to adjustment in the event of certain
corporate transactions, including stock dividends, mergers,
recapitalizations, or similar events.
In 1997, options representing 50,000 shares were granted to certain
officers and directors of the Company at an option price of $13.25 per
share.
In 1996, options representing 1,800 shares included in the 1995 plan were
reacquired by the Company. On March 1, 1996, options representing 14,000
shares were granted to the outside directors of the Company at an option
price of $11.25 per share. On September 30, 1996, options representing
5,700 shares were granted to certain officers of the Company at an option
price of $11.00 per share. In 1995, options representing 103,000 shares
included in the 1995 Plan were granted to certain directors and officers of
the Company at an option price of $6.25 per share. The grant date of these
options is March 1, 1995. Under the "Outside Director's Stock Option
Agreement," the outside director shall have a right to exercise the option
at any time after the date of grant or the date the Company's shareholders
approve the 1995 Plan, whichever is later, but the option may not be
exercised, in whole or in part, after the seventh anniversary of the date
of grant. Under the "Nonqualified Stock Option Agreement," options are
exercisable in one-third increments commencing one year after the grant
date. The option, however, may not be exercised, in whole or in part, after
five years from the date of grant.
At December 31, 1997, there were 14,100 shares as to which options could be
granted in the future under the 1995 Plan.
Following is a summary of changes in the number of shares of Common Stock
represented by options granted:
<TABLE>
<CAPTION>
Number of
Shares
------------
<S> <C>
Options outstanding as of December 31, 1994 29,000
Options granted under the 1995 Plan (exercisable at $6.25 per share) 103,000
-------
Options outstanding as of December 31, 1995 132,000
-------
Options granted under the 1995 Plan (exercisable at $11.25 and $11.00) 19,700
Options exercised in 1996 (1,200)
Options reacquired (1,800)
-------
Options outstanding as of December 31, 1996 148,700
Options granted under the 1995 Plan (exercisable @ $13.25) 50,000
-------
198,700
=======
</TABLE>
Effective January 1, 1996, the Company adopted the disclosure provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," however, the
Company will continue to account for stock-based compensation using APB
Opinion No. 25 for both stock option plans and, accordingly, no
compensation cost will be recognized for stock options in the consolidated
financial statements. In determining compensation cost based on the fair
value method at the date of grant for stock options under SFAS No. 123, the
Company's net income and net income per share would have been reduced by
less than 1% for 1997, 1996, and 1995.
43
<PAGE> 44
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. OTHER OPERATING EXPENSES
Other operating expenses include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Data processing expenses $ 247 $ 418 $ 648
FDIC insurance 34 6 257
Insurance 101 109 122
Office supplies 572 375 295
Postage and courier 601 379 333
Professional fees 784 689 833
Goodwill amortization 191 35 --
Miscellaneous 1,558 1,183 1,043
---------- ---------- ----------
Total $ 4,088 $ 3,194 $ 3,531
========== ========== ==========
</TABLE>
16. FEDERAL INCOME TAX
The provision for federal income tax consisted of the following (Dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Currently Paid or Payable $ 154 $ 145 $ 121
Deferred Expense 46 61 38
---------- ---------- ----------
$ 200 $ 206 $ 159
========== ========== ==========
</TABLE>
The provision for federal income tax is less than that computed by applying
the federal statutory rate of 34% as indicated in the following analysis
(Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax Based on Statutory Rate $ 2,610 $ 2,011 $ 2,062
Effect of Tax-exempt Income (26) (33) (28)
Interest and Other Nondeductible Expenses 8 7 98
Decrease in Deferred Tax Asset Valuation Allowance (2,611) (1,949) (2,082)
Alternative Minimum Tax 156 132 125
Goodwill 24 12 --
Other - Net 39 26 (16)
---------- ---------- ----------
$ 200 $ 206 $ 159
========== ========== ==========
</TABLE>
44
<PAGE> 45
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred income tax asset included in other assets were as
follows (Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets Related to:
Net Operating Loss Carryforward $ 33,788 $ 36,478
Other Real Estate Owned 78 71
Allowance for Loan Losses 89 1
Securities Valuation Reserve 64 72
Non-accrual Loan Interest 135 69
Other 74 76
---------- ----------
34,228 36,767
Less Valuation Allowance 30,792 33,403
---------- ----------
Total Deferred Tax Assets 3,436 3,364
---------- ----------
Deferred Tax Liabilities Related to:
Allowance for Loan Losses (189) (122)
Depreciation (203) (121)
Bond Accretion (225) (83)
Other (60) (210)
Net Unrealized Appreciation on Securities Available for Sale (1,008) (183)
---------- ----------
Total Deferred Tax Liabilities (1,685) (719)
---------- ----------
Net Deferred Tax Asset $ 1,751 $ 2,645
========== ==========
</TABLE>
For federal income tax purposes, the Company had approximately $103 million
in net operating loss carryforwards as of December 31, 1997 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.
Pursuant to SFAS No. 109, the Company had available certain deductible
temporary differences and net operating loss carryforwards for use in
future tax reporting periods, which created deferred tax assets. SFAS No.
109, requires that deferred tax assets be reduced by a valuation allowance
if, based on the weight of the available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized.
During the year ended December 31, 1997 and 1996, the deferred tax asset
valuation allowance was reduced by $2,611,000 and $1,949,000, respectively,
to adjust the recorded net deferred tax asset to an amount considered more
likely than not to be realized. The deferred tax asset net of the valuation
allowance and recorded on the books of the Company was $1,751,000 at
December 31, 1997. Realization of this asset is dependent on generating
sufficient taxable income prior to the expiration of the loss
carryforwards. Realization could also be affected by a significant
ownership change of the Company over a period of three years as prescribed
by income tax law. Although realization of the net deferred tax asset is
not assured because of these uncertainties, management believes it is more
likely than not that all of the recorded deferred tax asset will be
realized.
17. RELATED PARTY TRANSACTIONS
The Banks have entered into transactions with their directors, executive
officers, and their affiliates. Such transactions were made in the ordinary
course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features. The aggregate
45
<PAGE> 46
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount of loans to such related parties at December 31, 1997 and 1996 was
$4,203,000 and $3,702,000. During the year ended December 31, 1997 and
1996, new loans to such related parties amounted to $1,405,000 and
$1,580,000 and repayments amounted to $904,000 and $2,725,000. No outside
directors of the Company have any outstanding loans.
During 1997, the Company utilized a stock brokerage firm, which is 100%
owned by the Company's Chairman, to execute certain transactions on its
behalf. The Company uses an unrelated company to act as custodian and
clearing firm for its investment assets. Net revenues earned by the
brokerage firm related to investment transactions by the Company in 1997
totaled $1,579 on purchase and sale transactions of $6,137,000.
18. FINANCIAL INSTRUMENTS
The Banks are party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated financial statements. The contract or
notional amounts of those instruments reflect the extent of the Banks'
involvement in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Banks evaluate
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Banks upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable; inventory;
property, plant, and equipment; and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
46
<PAGE> 47
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- -----------------------------
(Dollars in Thousands)
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due from Banks $ 27,278 $ 27,278 $ 17,305 $ 17,305
Interest Bearing Deposits in Banks 216 216 529 529
Federal Funds Sold 29,940 29,940 22,650 22,650
Trading Securities 3,433 3,433 -- --
Securities Available for Sale 139,771 139,771 88,193 88,193
Securities Held to Maturity 106,631 108,299 73,362 73,362
Loans - net 133,855 132,924 110,850 111,114
Accrued Interest Receivable 4,757 4,757 2,951 2,951
Financial Liabilities:
Demand Deposits 66,346 66,346 46,617 46,617
NOW, Money Market, and
Savings Accounts 151,605 151,605 97,871 97,871
Time Deposits 196,464 196,956 135,267 136,032
Accrued Interest Payable 1,291 1,291 865 865
Other Debt 2,646 2,646 3,995 3,995
</TABLE>
The fair value of off-balance sheet assets and liabilities is not
considered significant.
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Notional Amount
-------------------
<S> <C>
Commitments to Extend Credit $ 14,376,000
Standby Letters of Credit 1,427,000
</TABLE>
LIMITATIONS:
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include
the deferred tax asset, bank premises and equipment, other real estate
owned, and other assets. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
47
<PAGE> 48
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------
1997 1996 1995
------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash paid:
Interest $11,206 $7,988 $7,267
Income taxes 128 126 166
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets 155 130 416
Loan foreclosures 94 66 385
</TABLE>
20. CONCENTRATIONS OF CREDIT
Substantially all of the Banks' loans, commitments, and standby letters of
credit have been granted to customers in the Banks' market areas which
include South and South Central Texas. Substantially all of these customers
are depositors of the Banks. Investments in state and municipal securities
also involve governmental entities within the Banks' market areas. The
concentrations of credit by type of loan are set forth in note 4. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Standby letters of credit are granted primarily to
commercial borrowers.
21. REGULATORY MATTERS
The amount of dividends that may be declared by the Banks without prior
approval of the various regulatory agencies is limited by statutory and
regulatory rules.
The Company and its subsidiary Banks are required to maintain minimum
ratios of Tier 1 capital to total average assets and minimum ratios of Tier
1 and total capital to risk weighted assets, as defined by the banking
regulators.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its subsidiary banks must
meet specific capital guidelines that involve quantitative measures of the
Company and its subsidiary banks assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company and its subsidiary banks capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1997, that the Company and its subsidiary
banks meet all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Banking
regulators categorized the Company and its subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. To
be categorized as well capitalized the Company and its subsidiary banks
must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' categories.
48
<PAGE> 49
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiary banks actual capital amounts and ratios are
also presented in the table.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
AS OF DECEMBER 31, 1997: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- -------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
CONSOLIDATED $41,767 29.02% $11,513 >8.00% $14,391 >10.00%
- -
Eagle Pass 16,478 23.47 5,617 >8.00 7,021 >10.00
- -
Laredo 8,166 15.78 4,140 >8.00 5,174 >10.00
- -
Rockdale 6,178 28.92 1,709 >8.00 2,136 >10.00
- -
Luling 3,550 22.84 1,243 >8.00 1,554 >10.00
- -
Tier 1 Capital to Risk Weighted Assets:
CONSOLIDATED $39,960 27.77% $5,757 >4.00% $8,635 >6.00%
- -
Eagle Pass 15,554 22.15 2,809 >4.00 4,213 >6.00
- -
Laredo 7,622 14.73 2,070 >4.00 3,105 >6.00
- -
Rockdale 5,911 27.67 855 >4.00 1,282 >6.00
- -
Luling 3,352 21.57 622 >4.00 933 >6.00
- -
Tier 1 Capital to Average Assets:
CONSOLIDATED $39,960 9.13% $17,509 >4.00% $21,886 >5.00%
- -
Eagle Pass 15,554 6.69 9,307 >4.00 11,634 >5.00
- -
Laredo 7,622 11.02 2,767 >4.00 3,459 >5.00
- -
Rockdale 5,911 5.32 4,443 >4.00 5,554 >5.00
- -
Luling 3,352 12.46 1,076 >4.00 1,345 >5.00
- -
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
AS OF DECEMBER 31, 1996: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- -------------------------- --------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
CONSOLIDATED $41,100 34.84% $9,439 >8.00% $11,799 >10.00%
- -
Eagle Pass 17,305 34.60 4,001 >8.00 5,000 >10.00
- -
Laredo 7,645 19.67 3,110 >8.00 3,887 >10.00
- -
Rockdale 7,247 46.14 1,257 >8.00 1,571 >10.00
- -
Luling 3,108 18.35 1,355 >8.00 1,693 >10.00
- -
Tier 1 Capital to Risk Weighted Assets:
CONSOLIDATED $39,614 33.58% $4,719 >4.00% $7,079 >6.00%
- -
Eagle Pass 16,674 33.34 2,000 >4.00 3,001 >6.00
- -
Laredo 7,159 18.42 1,555 >4.00 2,332 >6.00
- -
Rockdale 7,051 44.89 628 >4.00 942 >6.00
- -
Luling 2,896 17.10 677 >4.00 1,016 >6.00
- -
Tier 1 Capital to Average Assets:
CONSOLIDATED $39,614 13.67% $11,588 >4.00% $14,486 >5.00%
- -
Eagle Pass 16,674 10.27 6,496 >4.00 8,120 >5.00
- -
Laredo 7,159 11.63 2,462 >4.00 3,078 >5.00
- -
Rockdale 7,051 13.32 2,118 >4.00 2,647 >5.00
- -
Luling 2,896 11.25 1,030 >4.00 1,288 >5.00
- -
</TABLE>
49
<PAGE> 50
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed balance sheet information of National Bancshares Corporation of
Texas (The Parent Company) at December 31, 1997 and 1996, and the related
statements of income and cash flows for the years then ended are as
follows:
NATIONAL BANCSHARES CORPORATION OF TEXAS
(PARENT COMPANY ONLY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
1997 1996
---------- ----------
<S> <C> <C>
Cash $ 616 $ 1,467
Interest Bearing Deposits in Banks -- 32
Investment in Subsidiaries 49,025 41,390
Fixed Assets - net 58 36
Other Real Estate Owned -- --
Federal Tax Benefits Due 679 599
Deferred Tax Asset 2,995 3,074
Other Assets 112 136
---------- ----------
$ 53,485 $ 46,734
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 13 $ 104
Notes Payable - net 2,300 3,639
Accrued Interest Payable and Other Liabilities 74 82
---------- ----------
Total Liabilities 2,387 3,825
---------- ----------
Common Stock 5 5
Surplus - Common Stock 16,341 16,341
Retained Earnings 32,796 25,321
Net Unrealized Appreciation on Securities Available
for Sale, net of tax of $1,008 in 1997 and $182 in 1996 1,956 1,242
---------- ----------
Total Stockholders' Equity 51,098 42,909
---------- ----------
$ 53,485 $ 46,734
========== ==========
</TABLE>
50
<PAGE> 51
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL BANCSHARES CORPORATION OF TEXAS
(PARENT COMPANY ONLY)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
Income:
<S> <C> <C> <C>
Dividends from Subsidiaries $ 1,535 $ 2,697 $--
Undistributed Earnings of Subsidiaries 4,245 1,543 4,613
Other Income 40 352 90
Net Realized Gains on Sales of Securities -- 11 1
Gain on Sale of Other Real Estate Owned -- 17 --
Interest on Deposits in Banks -- 14 18
Interest and Dividends on Investment Securities -- 47 154
---------- ---------- ----------
5,820 4,681 4,876
---------- ---------- ----------
Expenses:
Salaries and Employee Benefits 498 404 349
Occupancy and Equipment Expenses 91 217 131
Interest Expense 275 47 141
Other Operating Expenses 325 298 547
---------- ---------- ----------
1,189 966 1,168
---------- ---------- ----------
Income Before Federal Income Tax and Extraordinary Item 4,631 3,715 3,708
Federal Income Tax Benefit 2,844 1,995 2,197
---------- ---------- ----------
Income Before Extraordinary Item 7,475 5,710 5,905
---------- ---------- ----------
Extraordinary Item - Gain on Extinguishment of Debt,
Net of income tax of $4 -- -- 219
---------- ---------- ----------
Net Income $ 7,475 $ 5,710 $ 6,124
========== ========== ==========
Basic Earnings Per Share:
Income Before Extraordinary Item $ 1.60 $ 1.23 $ 1.33
Extraordinary Item -- -- 0.05
---------- ---------- ----------
Net Income $ 1.60 $ 1.23 $ 1.38
========== ========== ==========
</TABLE>
51
<PAGE> 52
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 7,475 $ 5,710 $ 6,124
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of subsidiaries (5,780) (4,240) (4,613)
Dividends received 1,535 2,697 --
Depreciation and amortization 16 109 (33)
Net realized gains on securities available for sale -- (11) (1)
Direct write-downs of other real estate owned -- -- 50
Gain on sale of other real estate owned and other assets -- (17) --
Extraordinary gain on prepayment of debt (gross) -- -- (223)
(Increase) decrease in accrued interest receivable and other assets 3 (307) (390)
Increase (decrease) in accrued interest payable and other
liabilities (255) 99 (107)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,994 4,040 807
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in interest bearing accounts 32 283 (36)
Purchases of securities available for sale -- (3,657) (6,425)
Proceeds from sales of securities available for sale -- 1,042 2,377
Proceeds from maturities of securities available for sale -- 74 3,334
Proceeds from maturities of securities to be held to maturity -- -- 5,566
Capital expenditures (38) (188) (608)
Proceeds from sale of other real estate owned -- 266 --
Net payments for investment in subsidiary -- (1,209) --
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (6) (3,389) 4,208
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances on debt 5,500 140 --
Principal payments on other debt (6,839) (140) (4,037)
Exercise of Common Stock options -- 8 --
Capital injection to subsidiary (2,500) -- --
Redemption of Series A Preferred Stock -- -- (1,111)
---------- ---------- ----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,839) 8 (5,148)
---------- ---------- ----------
Net increase (decrease) in cash and due from banks (851) 659 133
Cash and due from banks at beginning of year 1,467 808 941
---------- ---------- ----------
Cash and due from banks at end of year $ 616 $ 1,467 $ 808
========== ========== ==========
</TABLE>
52
<PAGE> 53
ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors of the
Company as well as executive officers who are also directors of the Company is
incorporated by reference from the Company's definitive proxy statement for its
1997 Annual Meeting of Shareholders to be held May 29, 1998.
Information required by this Item with respect to executive officers of
the Company who are not also directors of the Company is set forth below.
ANNE R. RENFROE, age 33, has been the Chief Financial Officer of the Company
since May 1995. Formerly, Ms. Renfroe was Vice-President and Controller of Texas
Independent Bank, Dallas, Texas from December 1992 to January 1995. In addition,
from August 1989 to December 1992 Ms. Renfroe was an audit supervisor with Fisk
Robinson, P.C., Dallas, Texas. From 1986 to 1989, Ms. Renfroe was assistant
controller for NorthPark National Bank in Dallas, Texas. Ms. Renfroe is a
certified public accountant.
MORRIS D. WEISS, age 38, has been Senior Vice President and General Counsel for
the Company since April 1997 with responsibilities for overseeing and managing
the legal affairs of the Company. Prior to joining the Company, Mr. Weiss was a
partner with the law firm of Weil, Gotshal & Manges, LLP from January 1994 until
April 1997 in the Business Finance and Restructuring Department, and had been an
associate as such firm since October 1985. In addition, Mr. Weiss has been
General Counsel of Equibond, Inc., a stock brokerage firm, and Senior Vice
President and General Counsel of NBI, Inc., since April 1997.
The Company also employs nine significant employees who are not
directors or executive officers of the Company but who make or are expected to
make significant contributions to the business of the Company. The following
sets forth biographical information of the persons:
FRANK D. BARROW, age 53, has been Chairman of the Board and President of
NBC-Rockdale since 1986.
N. VICTOR FELAN, age 40, has been Senior Vice President of NBC-Eagle Pass since
April 1996. Mr. Felan oversees the San Antonio loan production office. Formerly,
Mr. Felan was Vice President of First Commercial Bank, Sequin, Texas from
January 1994 until April 1996. In addition, Mr. Felan was Senior Vice President
of International Bank of Commerce, Laredo, Texas from 1986 to 1994.
MARIO J. GONZALEZ, age 34, has been Executive Vice President of NBC-Laredo since
April 1993. Formerly, Mr. Gonzalez was a National Bank Examiner with the OCC,
from October 1986 until April 1993.
WILLIAM D. HALES, age 51, has been President of FNB-Luling since March 1988.
JEFFREY J. HASSMANN, age 36, has been Executive Vice President of NBC-Eagle Pass
and President of NBC Marble Falls since July 1997. Mr. Hassmann was Senior Vice
President of NBC-Eagle Pass since July 1996. Formerly, Mr. Hassmann was City
President of the Giddings bank and branch manager of the Bee Caves branch of The
Bank of the West in Austin, Texas from 1990 to 1996. From 1987 to 1990, Mr.
Hassmann was Vice President of lending at The Capital National Bank in Austin.
R. SAMUEL JUVE, age 45, has been President of NBC-Eagle Pass since January 1997.
Formerly, Mr. Juve has been Executive Vice President of NBC-Eagle Pass, since
April 1993 and Senior Vice President of NBC-Eagle Pass from February 1990 until
March 1993.
53
<PAGE> 54
DWAYNE J. KOLLY, age 45, has been Senior Vice President and Cashier for
NBC-Laredo since October 1993. Formerly, Mr. Kolly was Vice President and
Cashier of First National Bank, Uvalde, Texas, from 1986 to 1993.
THOMAS MCMORRIS, age 57, has been Executive Vice President of NBC-Eagle Pass and
President of NBC-San Antonio since February 1998. Formerly, Mr. McMorris was
Senior Vice President/Community Investment Group of NationsBank of Texas, San
Antonio from 1990 to 1998.
GEORGE W. SCHUH, age 51, has been Executive Vice President, Cashier and
Secretary of NBC-Eagle Pass since March 1994. Formerly, Mr. Schuh was Senior
Vice President, Cashier and Secretary of NBC-Eagle Pass from June 1992 to March
1994. In addition, from August 1991 to June 1992, Mr. Schuh was Senior Vice
President & Cashier for The Bank of the West, Austin, Texas.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be held May 29, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be held May 29, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 1998 Annual Meeting of Shareholders
to be held May 29, 1998.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C>
2.1 Third Amended Joint Plan of Reorganization, as approved by U.S. Bankruptcy Court,
effective May 26, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
3.1 Restated Articles of Incorporation and Statement of Relative Rights and Preferences
of Preferred Stock, filed December 29, 1994 . . . . . . . . . . . . . . . . . . . . . **
3.2 Bylaws of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.1 Employment Agreement between the Company and Jay H. Lustig, dated October 1, 1992. . . *
10.2 Employment Agreement between the Company
and Marvin E. Melson dated July 26, 1994 . . . . . . . . . . . . . . . . . . . . . . . **
10.3 1994 Non-Qualified Stock Option Plan, adopted March 30, 1994 . . . . . . . . . . . . . *
10.4 FDIC Note I, dated May 11, 1992 and related Deeds of Trust . . . . . . . . . . . . . . *
</TABLE>
54
<PAGE> 55
<TABLE>
<S> <C> <C>
10.5 FDIC Note II, dated May 11, 1992
(related Deeds of Trust under Exhibit 10.4) . . . . . . . . . . . . . . . . . . . . . *
10.6 Stock Pledge Agreement between the Company and the FDIC, dated May 11, 1992 . . . . . *
10.7 Office Lease for 100 Wilshire Boulevard, Santa Monica, CA . . . . . . . . . . . . . . **
10.8 Sublease for 100 Wilshire Boulevard . . . . . . . . . . . . . . . . . . . . . . . . . ***
10.9 Form of Stock Subscription Agreement for 1994 Private Placement . . . . . . . . . . . ***
10.10 1995 Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
10.11 Form of Outside Director's Stock Option Agreement for 1995 Stock Option Plan . . . . . ***
10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan. . . . . . . . ***
11.1 Computation of Earnings Per Share. . . . . . . . . . . . . . . . . . . . . . . . . . .
21.1 Subsidiaries of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
99.1 First Amended Disclosure Statement with Respect to the Second Amended
Joint Plan of Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
</TABLE>
* Previously filed on November 14, 1994, with the Company's Form 10-SB.
** Previously filed on March 2, 1995, with the Company's Amendment No. 1
to Form 10-SB.
*** Previously filed on June 19, 1995, with the Company's Form SB-2, File
no. 33-93638.
B. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.
55
<PAGE> 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, National Bancshares Corporation of Texas has duly caused
this report to be signed on its behalf by the undersigned, this 26th day of
March, 1998, thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
By: /s/ Anne R. Renfroe
-------------------------------------
Anne R. Renfroe
Chief Financial Officer and Chief
Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jay H. Lustig Chairman of the Board March 26, 1998
- --------------------------------
Jay H. Lustig
/s/ Marvin E. Melson Director, President March 26, 1998
- -------------------------------- Chief Executive Officer
Marvin E. Melson
/s/ H. Gary Blankenship Director March 26, 1998
- --------------------------------
H. Gary Blankenship
/s/ John W. Lettunich Director March 26, 1998
- --------------------------------
John W. Lettunich
/s/ Charles T. Meeks Director March 26, 1998
- --------------------------------
Charles T. Meeks
</TABLE>
56
<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>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1996
-------------------------------------- -----------------------------------
INCOME SHARES PRE-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary credit $7,475 $5,710
BASIC EPS
Income available
to common shareholders $7,475 4,659 $1.60 $5,710 4,640 $1.23
===== =====
EFFECT OF DILUTIVE SECURITIES
Stock options 90 57
Convertible Preferred A
Convertible Preferred B
------ ----- ------ -----
DILUTED EPS
Income available to common
shareholders + assumed
conversions $7,475 4,749 $1.57 $5,710 4,697 $1.22
====== ===== ===== ====== ===== =====
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
1995
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Income before
extraordinary credit $5,905
BASIC EPS
Income available
to common shareholders $5,905 4,443 $1.33
=====
EFFECT OF DILUTIVE SECURITIES
Stock options 40
Convertible Preferred A 174
Convertible Preferred B 128
------ -----
DILUTED EPS
Income available to common
shareholders + assumed
conversions $5,905 4,785 $1.23
====== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 27,278
<INT-BEARING-DEPOSITS> 216
<FED-FUNDS-SOLD> 29,940
<TRADING-ASSETS> 3,433
<INVESTMENTS-HELD-FOR-SALE> 106,631
<INVESTMENTS-CARRYING> 139,771
<INVESTMENTS-MARKET> 108,299
<LOANS> 136,313
<ALLOWANCE> 2,458
<TOTAL-ASSETS> 470,160
<DEPOSITS> 414,415
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,001
<LONG-TERM> 2,646
0
0
<COMMON> 5
<OTHER-SE> 51,093
<TOTAL-LIABILITIES-AND-EQUITY> 470,160
<INTEREST-LOAN> 13,029
<INTEREST-INVEST> 12,667
<INTEREST-OTHER> 1,638
<INTEREST-TOTAL> 27,334
<INTEREST-DEPOSIT> 11,419
<INTEREST-EXPENSE> 303
<INTEREST-INCOME-NET> 15,612
<LOAN-LOSSES> 80
<SECURITIES-GAINS> 1,133
<EXPENSE-OTHER> 12,244
<INCOME-PRETAX> 7,675
<INCOME-PRE-EXTRAORDINARY> 7,675
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,475
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 7.74
<LOANS-NON> 1,314
<LOANS-PAST> 40
<LOANS-TROUBLED> 271
<LOANS-PROBLEM> 5,582
<ALLOWANCE-OPEN> 2,403
<CHARGE-OFFS> 272
<RECOVERIES> 242
<ALLOWANCE-CLOSE> 2,458
<ALLOWANCE-DOMESTIC> 2,458
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,407
</TABLE>
