<PAGE> 1
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
COMMISSION FILE NUMBER: 1-13472
* * * * * *
NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of registrant as specified in its charter)
TEXAS 74-1692337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
104 EAST MANN ROAD, LAREDO, TEXAS 78042
(Address of principal executive offices) (Zip Code)
(956) 724-2424
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,222,559 shares of Common
Stock, $.001 par value, outstanding as of October 23, 1998.
================================================================================
<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 21,374 $ 27,278
Interest-bearing accounts 999 216
Federal funds sold 27,453 29,940
Trading securities 569 3,433
Investment securities available for sale 143,704 139,771
Investment securities held to maturity 95,109 106,631
Loans, net of discounts 174,956 136,313
Allowance for possible loan losses (2,647) (2,458)
Bank premises and equipment, net 15,722 12,538
Goodwill 8,898 9,180
Other assets 6,153 7,318
------------------ ------------------
Total Assets $ 492,290 $ 470,160
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand deposits, non-interest bearing $ 62,205 $ 66,346
Interest-bearing transaction accounts (NOW) 62,263 62,633
Savings and money market accounts 90,778 88,972
Certificates and time deposits under $100,000 135,007 131,787
Certificates and time deposits $100,000 and over 81,017 64,677
------------------ ------------------
Total Deposits 431,270 414,415
------------------ ------------------
Accrued interest, taxes and other liabilities 2,894 2,001
Other borrowings 3,790 -
Long term notes payable 438 2,646
------------------ ------------------
Total Liabilities 438,392 419,062
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized, 4,661,234
issued and 4,377,459 outstanding at September 30, 1998 and
4,658,734 issued and outstanding at December 31, 1997 5 5
Surplus - Common Stock 16,355 16,341
Retained earnings 39,006 32,796
Accumulated other comprehensive income 4,279 1,956
------------------ ------------------
Treasury Stock, at cost (283,775 shares) (5,747) -
------------------ ------------------
Total Stockholders' Equity 53,898 51,098
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 492,290 $ 470,160
================== ==================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
INTEREST INCOME:
<S> <C> <C> <C> <C>
Interest and Fees on Loans $ 4,335 $ 3,437 $ 12,081 $ 9,437
Interest on Investment Securities 3,677 3,531 11,310 8,673
Interest on Federal Funds Sold 387 585 1,051 1,206
Interest on Deposits in Banks 11 36 43 86
-------------- -------------- ------------- -------------
TOTAL INTEREST INCOME 8,410 7,589 24,485 19,402
INTEREST EXPENSE:
Interest on Deposits 3,702 3,198 10,863 7,894
Interest on Debt 43 81 182 211
-------------- -------------- ------------- -------------
TOTAL INTEREST EXPENSE 3,745 3,279 11,045 8,105
NET INTEREST INCOME 4,665 4,310 13,440 11,297
Less: Provision for Possible Loan Losses 82 10 150 35
-------------- -------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,583 4,300 13,290 11,262
NON-INTEREST INCOME:
Service Charges and Fees 816 763 2,404 2,013
Net Trading Account Profit (Loss) (224) - 565 -
Net realized Gains (Losses) on Sales of Securities 325 96 959 1,189
Net Gains on Sales of Other Real Estate and Assets - - - 47
Miscellaneous Income 227 89 410 252
-------------- -------------- ------------- -------------
TOTAL NON-INTEREST INCOME 1,144 948 4,338 3,501
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 2,031 1,701 5,795 4,463
Occupancy and Equipment Expenses 659 540 1,918 1,364
Goodwill Amortization 94 76 282 97
Other Expenses 1,047 1,150 3,296 2,797
-------------- -------------- ------------- -------------
TOTAL NON-INTEREST EXPENSE 3,831 3,467 11,291 8,721
INCOME BEFORE FEDERAL INCOME TAXES 1,896 1,781 6,337 6,042
Federal Income Tax Expense 31 37 127 131
-------------- -------------- ------------- -------------
NET INCOME $ 1,865 $ 1,744 $ 6,210 $ 5,911
============== ============== ============= =============
BASIC EARNINGS PER SHARE $0.42 $0.37 $1.35 $1.27
============== ============== ============= =============
DILUTED EARNINGS PER SHARE $0.40 $0.37 $1.32 $1.24
============== ============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK (A) OTHER
--------------------------------- COMPREHENSIVE
NUMBER OF PAR RETAINED TREASURY INCOME,
SHARES VALUE SURPLUS EARNINGS STOCK NET OF TAX TOTAL
------------ -------- ----------- ------------ ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1997 4,659 $ 5 $ 16,341 $ 25,321 $ -- $ 1,242 $ 42,909
Net Income -- -- -- 7,475 -- -- 7,475
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 714 714
-----------
Total Comprehensive Income 8,189
------------ -------- ----------- ------------ ------------- ----------------- -----------
BALANCE AT DECEMBER 31, 1997 4,659 5 16,341 32,796 -- 1,956 51,098
Net Income -- -- -- 6,210 -- -- 6,210
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 2,323 2,323
-----------
Total Comprehensive Income 8,533
-----------
Exercise of stock options 2 -- 14 -- -- -- 14
Treasury stock purchased (284) -- -- -- (5,747) -- (5,747)
------------ -------- ----------- ------------ ------------- ----------------- -----------
BALANCE AT SEPTEMBER 30, 1998 4,377 $ 5 $ 16,355 $ 39,006 $ (5,747) $ 4,279 $ 53,898
============ ======== =========== ============ ============= ================= ===========
</TABLE>
(A) Common Stock with a par value of $0.001 per share, 100,000,000 shares
authorized.
Disclosure of reclassification amount:
<TABLE>
<S> <C>
Unrealized gain on securities AFS arising during period $ 1,690
Reclassification adjustment for gains included in income, net of tax of $326 633
-----------
Net unrealized gain on securities AFS, net of tax $ 2,323
===========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDING
SEPTEMBER 30,
---------------------------------------
1998 1997
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,210 $ 5,911
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,315 758
Credit for deferred federal income taxes 63 33
Provision to allowance for possible loan losses 150 35
Net realized gains on securities available for sale (959) (1,190)
Net decrease in trading account 5,223 -
Gain on sale of other real estate owned and other assets - (47)
Increase in accrued interest receivable and other assets 5 (1,770)
Increase in accrued interest payable and other liabilities 891 913
------------------ -------------------
Net cash provided by operating activities 12,898 4,643
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold 2,487 8,810
Net increase in interest-bearing accounts (783) (2,776)
Net increase in loans (38,702) (19,508)
Purchases of securities available for sale (21,274) (96,187)
Proceeds from sales of securities available for sale 12,442 29,108
Proceeds from maturities of securities available for sale 7,837 10,387
Purchases of securities held to maturity (7,035) (52,179)
Proceeds from maturities of securities held to maturity 18,506 12,611
Capital expenditures (4,102) (5,583)
Proceeds from sale of other real estate owned - 585
Net payments for acquisitions - (7,319)
------------------ -------------------
Net cash used in investing activities (30,624) (122,051)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in demand deposits, NOW accounts,
savings and money-market accounts (2,704) 54,557
Net increase in certificates of deposit and time deposits 19,560 58,582
Proceeds from advances on other borrowings 3,006 12,319
Principal payments on other borrowings (2,307) (5,147)
Purchase of treasury stock (5,747) -
Proceeds from exercise of common stock options 14 -
------------------ -------------------
Net cash provided by financing activities 11,822 120,311
Net (decrease) increase in cash and due from banks (5,904) 2,903
Cash and due from banks at beginning of period 27,278 17,305
------------------ -------------------
Cash and due from banks at end of period $ 21,374 $ 20,208
================== ===================
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Interest Paid $ 10,942 $ 7,586
Federal income taxes paid $ 64 $ 108
Loans originated to facilitate the sale of foreclosed assets $ - $ 478
Loan foreclosures $ 99 $ 94
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of National
Bancshares Corporation of Texas and its wholly-owned subsidiaries have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation S-K.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The consolidated financial statements include the accounts of the parent company
and all subsidiaries, and all significant intercompany balances and transactions
have been eliminated. Certain items in prior year's financial statements have
been reclassified in conformity with the current year's presentation. The
consolidated financial statements are unaudited, but include all adjustments
(consisting primarily of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the results of the periods
presented. The results of operations for the nine-month period ended September
30, 1998 are not necessarily indicative of the results that may be reported for
the entire year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1997.
NOTE 2 - SUBSIDIARIES
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, NBT of Delaware, Inc. and the accounts of NBT of
Delaware, Inc.'s wholly-owned subsidiaries (i) NBC Bank, N.A., Eagle Pass,
Texas; (ii) NBC Bank - Laredo, N.A., Laredo, Texas; (iii) NBC Bank, Rockdale,
Texas; (iv) NBC Bank - Central, N.A., Luling, Texas; and (v) NBC Holdings -
Texas, Inc., Laredo, Texas.
NOTE 3 - INVESTMENT SECURITIES AND OBLIGATIONS FROM SHORT-SALE TRANSACTIONS
The following tables present the amortized cost and approximate fair value of
the investment securities portfolio as of September 30, 1998 and December 31,
1997 (Dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 130,125 $ 6,938 $ - $ 137,063
U.S. Government agency and mortgage-backed securities 2,198 22 0 2,220
Other securities including Federal Reserve Bank stock 4,899 0 (478) 4,421
------------- ------------- ------------- -------------
Total $ 137,222 $ 6,960 $ (478) $ 143,704
============= ============= ============= =============
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 92,925 $ 4,413 $ - $ 97,338
U.S. Government agency and mortgage-backed securities 2,119 14 0 2,133
Foreign debt securities 65 2 (3) 64
------------- ------------- ------------- -------------
Total $ 95,109 $ 4,429 $ (3) $ 99,535
============= ============= ============= =============
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $ 133,545 $ 2,543 $ - $ 136,088
U.S. Government agency and mortgage-backed securities 1,584 17 - 1,601
Other securities including Federal Reserve Bank stock 1,677 405 - 2,082
------------- ------------- ------------- -------------
Total $ 136,806 $ 2,965 $ - $ 139,771
============= ============= ============= =============
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 103,932 $ 1,646 $ (4) $ 105,574
U.S. Government agency and mortgage-backed securities 2,635 34 - 2,669
Foreign debt securities 64 - (8) 56
------------- ------------- ------------- -------------
Total $ 106,631 $ 1,680 $ (12) $ 108,299
============= ============= ============= =============
</TABLE>
Unrealized gains and losses on investment securities held at September 30, 1998
and December 31, 1997 have been judged to be temporary market fluctuations with
no material financial impact on the Company.
The following table shows the maturity schedule of the Company's investment
portfolio as of September 30, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
--------------------------- ---------------------------
AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE
COST FAIR VALUE COST FAIR VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 18,180 $ 18,336 $ 14,991 $ 15,143
Due in one year to five years 71,894 74,947 51,542 53,597
Due from five to ten years 42,178 45,925 26,457 28,662
Due after ten years 318 322 2,119 2,133
------------- ------------- ------------- -------------
Total $ 132,570 $ 139,530 $ 95,109 $ 99,535
Equity Securities 4,312 3,834 -- --
Federal Reserve Bank Stock 340 340 -- --
------------- ------------- ------------- -------------
Total $ 137,222 $ 143,704 $ 95,109 $ 99,535
============= ============= ============= =============
</TABLE>
The carrying value of investment securities pledged to secure public funds
amounted to approximately $55,773,000 at September 30, 1998 and $36,167,000 at
December 31, 1997.
7
<PAGE> 8
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses for the nine months ended
September 30, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
----------------------------
SEPTEMBER SEPTEMBER
30, 1998 30, 1997
----------------------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of period $ 2,458 $ 2,408
Provisions to allowance for possible loan losses 150 35
Losses charged to the allowance (197) (157)
Recoveries credited to the allowance 236 166
------------- -------------
Net (charge-offs) recoveries 39 9
------------- -------------
Balance at end of period $ 2,647 $ 2,452
============= =============
</TABLE>
Impaired Loans
A loan within the scope of SFAS No. 114 is considered impaired when, based on
current information and events, it is probable that the Company will be unable
to collect all amounts due according to the contractual terms of the loan
agreement, including scheduled principal and interest payments. At September 30,
1998 and 1997, the Banks have impaired loans of $1,806,000 and $1,211,000,
respectively. The allowance for loan losses related to those loans was $144,000
and $97,000, respectively. The average recorded investment in impaired loans
during the nine months ended September 30, 1998 was $1,583,000 and $1,262,000,
respectively. Interest income of approximately $40,000 and $95,000 on impaired
loans was recognized for cash payments received during the nine months ended
September 30, 1998 and 1997, respectively.
NOTE 5 - OTHER BORROWINGS
On September 30, 1998, a subsidiary bank holding company maintained a margin
account which is secured by investment securities. The interest rate is variable
(6.75% at September 30, 1998).
NOTE 6 - NOTES PAYABLE
On September 30, 1997, the Company executed a $4 million note with Texas
Independent Bank in Dallas. The note bears a variable interest rate at New York
prime (8.25% at September 30, 1998). Principal payments of $200,000 plus
interest are due quarterly, with the balance due at maturity. The note matures
on September 30, 2000. The note is collateralized by the common stock of NBT of
Delaware, Inc. and the stock of the subsidiary banks. The note was paid in full
as of September 30, 1998.
In May 1994, July 1995, and September 1998, a subsidiary Bank borrowed $200,000,
$175,000, and $100,000, respectively, from the Federal Home Loan Bank of Dallas.
The notes bear interest rates of 7.49%, 6.393%, and 5.15%, respectively. The
maturity dates of the notes are June 1999, August 2015, and October 2018,
respectively. Principal and interest payments are due monthly in the approximate
amount of $3,570 per month in the aggregate with the remaining balances due at
maturity. These loans are secured by a certain block of fixed rate mortgage
loans carried by the subsidiary Bank.
8
<PAGE> 9
NOTE 7 - INCOME TAX EXPENSE
The provision for Federal income tax expense is less than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER SEPTEMBER
30, 1998 30, 1997
---------------------------
(Dollars in Thousands)
<S> <C> <C>
Tax based on statutory rate $ 2,154 2,054
Decrease in deferred tax asset valuation allowance (2,286) (2,200)
Alternative minimum tax 127 121
Other, net 132 156
------------- -------------
Federal income tax expense $ 127 $ 131
============= =============
</TABLE>
The Company had approximately $96 million in net operating loss carryforwards at
September 30, 1998 which will be available to reduce income tax liabilities in
future years. If unused, approximately $89 million of such carryforwards will
expire in 2005, with the remaining approximately $4 million expiring in 2006.
The net operating loss carryforwards, along with certain other items, create
deferred tax assets. A valuation allowance has been created to reduce deferred
tax assets to an amount more likely than not to be realized. During the nine
months ended September 30, 1998 and 1997, the valuation allowance has been
reduced to adjust the recorded deferred tax asset to the realizable amount.
Pursuant to Statement of Financial Accounting Standards No, 109, "Accounting for
Income Taxes", reductions to the valuation allowance are recorded as decreases
in current period income tax expense.
NOTE 8 - ACQUISITIONS
On July 18, 1997, the Company acquired three branches of Wells Fargo Bank in
Giddings, Marble Falls and Taylor, Texas. The Company acquired approximately
$103.4 million in deposits and $2.6 million in the owned branch facilities,
branch furniture, fixtures and certain equipment. The Company paid a purchase
price of approximately $9.9 million for the Wells Fargo acquisitions.
NOTE 9 - ACCOUNTING CHANGES
The Company has adopted Statement of Financial Accounting Standards No. 130
(SFAS No. 130), "Reporting Comprehensive Income." This statement establishes
standards for reporting and displaying comprehensive income and its components
in the financial statements; however, the adoption of this statement had no
impact on the Company's net income or stockholders' equity. SFAS No. 130
requires unrealized gains and losses on the Company's available for sale
securities, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Amounts in the financial
statements for earlier periods have been reclassified for comparative purposes,
as required by SFAS No. 130.
NOTE 10 - STOCK REPURCHASE PLAN
On May 15, 1997, the Board of Directors approved a stock repurchase plan. The
plan authorized management to purchase up to 500,000 shares of the Company's
common stock through the open market based on market conditions.
In the first nine months of 1998, 283,775 shares were purchased by the Company
through the open market.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the Consolidated Financial Statements, accompanying
notes, and selected financial data appearing elsewhere in this Report.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1998 was $1.9 million
or $.42 per common share compared with $1.7 million or $.37 per common share for
the three months ended September 30, 1997. The third quarter of 1998 included a
non-recurring net trading loss in the amount of $224,000 and a non-recurring
gain on investment securities of $325,000. The third quarter of 1997 included
a non-recurring investment securities gain of $96,000. With the exclusion of the
non-recurring items, net income for the third quarter of 1998 was $1.8 million,
or $.39 per share. Excluding the non-recurring item, net income for the third
quarter of 1997 was $1.6 million or $.35 per share. Net interest income for the
three months ended September 30, 1998 increased $354,000 over the same period
of 1997 which is due primarily to internal growth in the loan portfolio.
Non-interest expenses were up $364,000, or 10%, for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997, this
was primarily due to the opening of two new branches in the first quarter of
1998. Non-interest income improved $191,000 or 22% for the three months ended
September 30, 1998, excluding the non-recurring items. For the three months
ended September 30, 1998, the Company's return on average assets was 1.51%, or
1.45% adjusting for the non-recurring items. The return on average assets for
the three months ended September 30, 1997 was 1.84% or 1.54% after deducting
the securities gain.
Net income for the nine months ended September 30, 1998 was $6.2 million or
$1.35 per common share compared with $5.9 million or $1.27 per common share for
the nine months ended September 30, 1997. For the nine months ended September
30, 1998, the Company's return on average assets was 1.73%, compared to 2.14%
for the nine months ended September 30, 1997 or 1.30% and 1.71%, after
deducting the non-recurring gains on securities, respectively. Average assets
have increased $111 million or 30% over the nine months ended September 30,
1997. The Company's return on average equity for the nine months ended
September 30, 1998 was 15.77%, or 11.87% after deducting the non-recurring
gains on securities. For the nine months ended September 30, 1997 the Company's
return on average equity was 17.56% or 14.03%, after deducting the
non-recurring gain on securities. The ratio of average stockholders' equity to
total average assets was 11.0% and 12.2% for the nine months ended September
30, 1998 and 1997, respectively.
NET INTEREST INCOME
Net interest income constitutes the principal source of income for the
Banks and represents the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The increase of
$2.1 million or 19% in net interest income for the nine months ended September
30, 1998 compared to the same period in 1997 was due to internal loan growth.
Average loans increased $39 million or 33% over the third quarter of 1997. The
net interest margin for the nine months ended September 30, 1998 was 4.23%
compared to 4.56% as of September 30, 1997. The net interest margin is the net
return on earning assets which is computed by dividing taxable equivalent net
interest income by average total earning assets.
The net interest spread decreased 21 basis points to 3.60% at September 30,
1998 from 3.81% at September 30, 1997. The decrease in the net interest spread
is primarily due to the increase in rates being paid on deposits and the
decrease in the rates being received on loans.
10
<PAGE> 11
INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
- ----------------------------------------- ---------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts 769 10 5.16% 3,176 36 4.50%
Federal funds sold 26,409 387 5.81% 41,489 585 5.59%
Investment securities (F):
US Treasuries 228,080 3,597 6.26% 203,448 3,371 6.57%
US Government agencies 4,513 70 6.15% 5,122 87 6.74%
Other 647 10 6.13% 1,442 73 6.91%
---------- ---------- ---------- ----------- ---------- ----------
Total investment securities 233,240 3,677 6.25% 210,012 3,531 6.67%
Loans, net of discounts (A) 171,677 4,338 10.02% 126,819 3,441 10.76%
---------- ---------- ---------- ----------- ---------- ----------
Total interest-earning assets 432,095 8,412 7.72% 381,496 7,593 7.90%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 17,365 22,722
Allowance for possible loan losses (2,576) (2,472)
Other assets 39,745 25,563
---------- -----------
Total assets 486,629 427,309
========== ===========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 61,051 400 2.60% 53,227 365 2.72%
Savings, money market and certificates
of deposit 300,245 3,302 4.36% 248,849 2,832 4.52%
Other debt 2,536 43 6.73% 3,785 82 8.60%
---------- ---------- ---------- ----------- ---------- ----------
Total interest-bearing liabilities 363,832 3,745 4.08% 305,861 3,279 4.25%
Non-interest bearing liabilities:
Demand deposits 63,810 69,046
Other liabilities 4,792 5,508
---------- -----------
Total liabilities 432,434 380,415
STOCKHOLDERS' EQUITY (F) 54,195 46,894
---------- -----------
Total liabilities and stockholders'
equity 486,629 427,309
========== ===========
Taxable equivalent net interest income 4,667 4,314
Less: taxable equivalent adjustment 3 4
---------- ----------
Net interest income 4,664 4,310
========== ==========
Net interest spread (B) 3.64% 3.64%
========== ==========
Net interest margin (C) 4.29% 4.49%
========== ==========
SELECTED OPERATING RATIOS:
Return on assets (D) 1.51% 1.84%
========== ==========
Return on equity (E) 13.63% 13.93%
========== ==========
</TABLE>
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing net income by average
total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
11
<PAGE> 12
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
- ---------------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts 1,169 42 4.80% 2,666 86 4.31%
Federal funds sold 26,131 1,051 5.38% 28,891 1,206 5.58%
Investment securities (F):
US Treasuries 235,126 11,065 6.29% 173,017 8,287 6.40%
US Government agencies 4,501 216 6.42% 5,402 273 6.76%
Other 635 29 6.11% 1,525 113 8.07%
---------- ---------- ---------- ---------- ---------- ----------
Total investment securities 240,262 11,310 6.29% 179,944 8,673 6.44%
Loans, net of discounts (A) 157,814 12,092 10.24% 118,971 9,450 10.62%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 425,376 24,495 7.70% 330,472 19,415 7.85%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,274 19,674
Allowance for possible loan losses (2,533) (2,428)
Other assets 38,192 20,803
---------- ----------
Total assets 479,309 368,521
========== ==========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 61,772 1,217 2.63% 44,612 936 2.81%
Savings, money market and certificates
of deposit 294,796 9,645 4.37% 219,060 6,958 4.25%
Other debt 3,296 182 7.38% 3,385 211 8.33%
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 359,864 11,044 4.10% 267,057 8,105 4.06%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 62,429 53,689
Other liabilities 4,350 2,896
---------- ----------
Total liabilities 426,643 323,642
STOCKHOLDERS' EQUITY (F) 52,666 44,879
---------- ----------
Total liabilities and stockholders'
equity 479,309 368,521
========== ==========
Taxable equivalent net interest income 13,451 11,310
Less: taxable equivalent adjustment 11 13
---------- ----------
Net interest income 13,440 11,297
========== ==========
Net interest spread (B) 3.60% 3.79%
========== ==========
Net interest margin (C) 4.23% 4.56%
========== ==========
SELECTED OPERATING RATIOS:
Return on assets (D) 1.73% 2.14%
========== ==========
Return on equity (E) 15.77% 17.56%
========== ==========
</TABLE>
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing net income by average
total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
12
<PAGE> 13
The following tables analyze the increase in taxable-equivalent net interest
income stemming from changes in interest rates and from asset and liability
volume, including mix, for the three and nine months ended September 30, 1998
and 1997. Non-accruing loans have been included in assets for calculating this
table, thereby reducing the yield on loans. The changes in interest due to both
rate and volume in the table below have been allocated to volume or rate change
on a pro-rata basis.
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
<TABLE>
<CAPTION>
Three months ended September 30, 1998
vs. September 30, 1997
-------------------------------------
Due to Changes in
Increase ------------------------
(Decrease) Rates Volume
----------- ----------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ (26) $ 1 $ (27)
Federal funds sold (198) 15 (213)
Investment securities 146 (243) 389
Loans, net of discounts 897 (318) 1,215
----------- ----------- -----------
Total taxable-equivalent interest
income $ 819 $ (545) $ 1,364
INTEREST EXPENSE:
Interest-bearing deposits 505 (132) 637
Other debt (39) (12) (27)
----------- ----------- -----------
Total interest expense 466 (144) 610
----------- ----------- -----------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 353 $ (401) $ 754
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Month Periods Ended September 30, 1998
vs. September 30, 1997
------------------------------------------
Due to Changes in
Increase --------------------
(Decrease) Rates Volume
-------------------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ (44) $ 4 $ (48)
Federal funds sold (155) (40) (115)
Investment securities 2,637 (271) 2,908
Loans, net of discounts 2,642 (445) 3,087
--------- --------- ---------
Total taxable-equivalent
interest income $ 5,080 $ (752) $ 5,832
INTEREST EXPENSE:
Interest-bearing deposits 2,968 203 2,765
Other debt (29) (23) (6)
--------- --------- ---------
Total interest expense 2,939 180 2,759
--------- --------- ---------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 2,141 $ (932) $ 3,073
========= ========= =========
</TABLE>
Taxable-equivalent net interest income for the nine months ended September
30, 1998 increased $2.1 million or 19% over the same period in 1997. The
increase is reflected in the increase in the volume of earning assets and in the
increase in the volume of interest bearing liabilities.
13
<PAGE> 14
INTEREST RATE SENSITIVITY
Management seeks to maintain consistent growth of net interest income
through periods of changing interest rates by avoiding fluctuating net interest
margins. Interest rate sensitivity is the relationship between changes in market
interest rates and changes in net interest income due to repricing
characteristics of interest earning assets and liabilities.
The following table indicates the Company's interest rate sensitivity
position at September 30, 1998:
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
NON-RATE
RATE SENSITIVE SENSITIVE
------------------------------------------------------------ ---------
IMMEDIATELY WITHIN WITHIN OVER
0-30 DAYS 90 DAYS ONE YEAR TOTAL ONE YEAR TOTAL
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of discounts $ 58,875 $ 9,519 $ 23,949 $ 92,343 $ 82,613 $ 174,956
Investment securities 3,004 5,157 25,166 33,327 205,486 238,813
Federal funds sold 27,453 -- -- 27,453 -- 27,453
Interest-bearing accounts 274 -- 300 574 425 999
--------- --------- --------- --------- --------- ---------
Total earning assets $ 89,606 $ 14,676 $ 49,415 $ 153,697 $ 288,524 $ 442,221
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $ 153,041 -- -- $ 153,041 -- $ 153,041
Certificates and time deposits 39,602 45,676 116,910 202,188 13,836 216,024
Debt 3,791 3 12 3,806 422 4,228
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities $ 196,434 $ 45,679 $ 116,922 $ 359,035 $ 14,258 $ 373,293
========= ========= ========= ========= ========= =========
Interest sensitivity gap $(106,828) $ (31,003) $ (67,507) $(205,338)
========= ========= ========= =========
Cumulative gap $(106,828) $(137,831) $(205,338) $(205,338)
========= ========= ========= =========
Ratio of earning assets to
interest-bearing liabilities 45.6% 32.1% 42.3% 42.8%
</TABLE>
The interest rate sensitivity table reflects a cumulative liability
sensitive position during the one-year period shown. Generally, this indicates
that the liabilities reprice more quickly than the assets in a given period, and
that a decline in market rates will benefit net interest income. An increase in
market rates would have the opposite effect.
14
<PAGE> 15
NON-INTEREST INCOME
The major components of non-interest income are service charges and fees
earned on deposit accounts. The following table summarizes changes in
non-interest income for the nine months ended September 30, 1998 and 1997:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1998/1997
----------------------- --------------------
SEPTEMBER SEPTEMBER
30, 1998 30, 1997 $ CHANGE % CHANGE
---------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Service charges and fees $ 2,404 $ 2,013 $ 391 19.4%
Net realized gains on sales of securities 959 1,189 (230) -19.3%
Net trading profits 565 - 565 100.0%
Net gains on sales of other real estate owned - 47 (47) -100.0%
Miscellaneous income 410 252 158 62.7%
---------- ----------- --------- ---------
Total non-interest income $ 4,338 $ 3,501 $ 837 23.9%
========== =========== ========= ========
</TABLE>
The $837,000 or 23.9% increase in non-interest income for the nine months
ended September 30, 1998 is due primarily to the $391,000 increase in service
charges and fees and the $335,000 increase in net securities gains and trading
account profits over the nine months ended September 30, 1997. Excluding the
nonrecurring gains on sales of securities and other real estate owned,
non-interest income increased $549,000 or 24.2% over 1997.
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 nine months ended
September 30, 1998 and 1997:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1998/1997
----------------------------------- --------------------------------
SEPTEMBER SEPTEMBER $ CHANGE % CHANGE
30, 1998 30, 1997
----------------- ----------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 5,795 $ 4,463 $ 1,332 29.8%
Occupancy and equipment expenses 1,918 1,364 554 40.6%
Data processing fees 199 190 9 4.7%
FDIC insurance 36 24 12 50.0%
Insurance 77 78 (1) -1.3%
Office supplies 464 386 78 20.2%
Postage and courier 379 444 (65) -14.6%
Professional fees 670 578 92 15.9%
Goodwill amortization 282 97 185 190.7%
Miscellaneous other expenses 1,471 1,097 374 34.1%
----------------- ----------------- ---------------- ---------------
Total non-interest expense $ 11,291 $ 8,721 $ 2,570 29.5%
================= ================= ================ ===============
</TABLE>
Total non-interest expense for the nine months ended September 30, 1998
increased $2.6 million or 29.5% over 1997. Salaries and benefits rose $1.3
million or 29.8% in 1998. Salaries and benefits increased due to the hiring of
personnel for the San Marcos and South Laredo branches which were opened during
the first quarter of 1998 and operating the Wells Fargo branches which were
acquired in July 1997. The $554,000 or 40.6% increase in occupancy and equipment
expenses is due mainly to the (i) acquisitions of the three Wells Fargo bank
buildings, (ii) construction of two new branches and (iii) installation of
computer networks at the new locations. The $185,000 increase in goodwill is a
result of the Wells Fargo branch acquisitions.
15
<PAGE> 16
INCOME TAXES
The Company recognized income tax expense of $127,000 for the nine months
ended September 30, 1998 compared to $131,000 for the nine months ended
September 30, 1997. At September 30, 1998, the Company had approximately $96
million in net operating loss carryforwards that will be available to reduce
income tax liabilities in future years. If unused, approximately $89 million of
such carryforwards will expire in 2005, with the remaining approximately $4
million expiring in 2006.
CASH EARNINGS
The Company has historically paid cash and used the purchase method in
accounting for its acquisitions which has resulted in the creation of intangible
assets. These intangible assets are deducted from capital in the determination
of regulatory capital. Thus, "cash" or "tangible" earnings represents the
regulatory capital generated during the year and can be viewed as net income
excluding intangible amortization, net of tax. While the definition of "cash" or
"tangible" earnings may vary by company, we believe this definition is
appropriate as it measures the per share growth of regulatory capital, which
impacts the amount available for stock repurchases and acquisitions. The
following table reconciles reported earnings to net income excluding intangible
amortization ("cash" earnings
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------------------------------------------------------------
September 1998 September 1997
------------------------------------------ ------------------------------------------
Reported Intangible "Cash" Reported Intangible "Cash"
earnings amortization earnings earnings amortization earnings
-------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Income before taxes $ 6,337 $ 282 $ 6,619 $ 6,042 $ 97 $ 6,139
Income taxes 127 6 133 131 2 133
-------------- ------------- ------------- ------------- ------------- -------------
Net Income $ 6,210 $ 276 $ 6,486 $ 5,911 $ 95 $ 6,006
============== ============= ============= ============= ============= =============
Net income per diluted
common share $ 1.32 $ 1.39 $ 1.27 $ 1.29
Return on assets 1.68% 1.76% 1.73% 1.76%
Return on equity 15.36% 16.05% 16.22% 16.48%
</TABLE>
16
<PAGE> 17
LOANS
The following table presents the composition of the Company's loan
portfolio by type of loan:
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, % OF DECEMBER 31, SEPTEMBER 30,
1998 TOTAL 1997 1997
------------------ ----------- ------------------ -------------------
<S> <C> <C> <C> <C>
Commercial 28,251 16.2% 22,911 24,989
Real estate construction 12,851 7.3% 10,338 10,211
Real estate mortgage 108,627 62.1% 81,752 77,759
Consumer installment loans,
net of unearned discount 25,227 14.4% 21,312 19,722
------------------ ----------- ------------------ -------------------
Gross Loans 174,956 100.0% 136,313 132,681
================== =========== ================== ===================
</TABLE>
Real estate mortgage loans have shown a 40% increase since September 30,
1997. Real estate loan demand has increased due to the banks offering home
equity loans. Commercial loans increased $4.7 million or 16% over September 30,
1997. The increase in total loans has been from internal growth. No loans were
acquired from the Wells Fargo branch acquisitions.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to operations
in the form of a provision for loan losses. Loans, or portions thereof, which
are considered to be uncollectible are charged against the allowance and
subsequent recoveries, if any, are credited to the allowance. The allowance
represents the amount, which in the judgment of each subsidiary Bank's
management will be adequate to absorb possible losses. The adequacy of the
allowance is determined by management's continuous evaluation of the loan
portfolio and by the employment of third party loan review consultants. Industry
concentrations, specific credit risks, past loan loss experience, delinquency
ratios, current loan portfolio quality and projected economic conditions in the
Bank's market areas are pertinent factors in determining the adequacy of the
allowance for loan losses. Loans identified as losses by management, external
loan review or bank examiners are charged-off.
The Company recorded net recoveries of $39,000 for the nine months ended
September 30, 1998 compared to net recoveries of $9,000 for the nine months
ended September 30, 1997.
17
<PAGE> 18
The following table summarizes, for the periods presented, the activity in
the allowance for loan losses arising from provisions credited to operations,
loans charged off and recoveries of loans previously charged off.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Average loans outstanding $ 157,814 $ 118,971
Balance of allowance for loan losses at beginning of year $ 2,458 $ 2,408
Provision for loan losses 150 35
Charge-Offs:
Commercial 44 43
Real estate construction - -
Real estate mortgage 27 -
Consumer installment 126 114
------------------- -------------------
Total charge-offs 197 157
------------------- -------------------
Recoveries:
Commercial 17 47
Real estate construction - -
Real estate mortgage 58 28
Consumer installment 161 91
------------------- -------------------
Total recoveries 236 166
------------------- -------------------
Net charge-offs (recoveries) (39) (9)
------------------- -------------------
Balance of allowance for loan losses at end of period $ 2,647 $ 2,452
=================== ===================
Net charge-offs (recoveries) as a percentage
of average loans outstanding -0.02% -0.01%
=================== ===================
Allowance for loan losses as a percentage of:
Total loans, net of unearned discount 1.51% 1.85%
=================== ===================
Non-performing loans 121.65% 139.88%
=================== ===================
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans and foreclosed real
estate. Loans to a customer whose financial condition has deteriorated are
considered for non-accrual status whether or not the loan is ninety days or more
past due. All installment loans past due ninety days or more are placed on
non-accrual unless the loan is well secured or in the process of collection. On
non-accrual loans, interest income is not recognized until actually collected.
At the time the loan is placed on non-accrual status, interest previously
accrued but not collected is reversed and charged against current income.
Foreclosed real estate consists of property which has been acquired through
foreclosure. At the time of foreclosure, the property is recorded at the lower
of the estimated fair value less selling expenses or the loan balance with any
write down charged to the allowance for loan losses. Any future write-downs on
the property are charged to operations.
18
<PAGE> 19
The following table discloses non-performing assets and loans ninety days
past due and still accruing interest as of September 30, 1998 and December 31,
1997: (Dollars in thousands)
NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ------------------
<S> <C> <C>
Non-accrual loans $ 1,806 $ 1,314
Foreclosed real estate 370 311
------------------ ------------------
Total non-performing assets $ 2,176 $ 1,625
================== ==================
Non-performing assets as a percentage of:
Total assets 0.44% 0.34%
Total loans plus foreclosed real estate 1.24% 1.16%
Accruing loans past due 90 days or more $ 159 $ 40
</TABLE>
Independent third party loan reviews of the subsidiary Banks are performed
on an annual basis. The loans are also reviewed by banking regulators on an
eighteen-month basis. On a monthly basis, the Board of Directors' Loan Committee
of each Bank reviews new loans, renewals and delinquencies. Management of each
Bank monitors on a continuing basis those loans which it feels should be
followed closely. The Banks are required by regulation to have foreclosed real
estate appraised periodically.
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet the
commitments of the Company. Asset liquidity is provided by cash and assets which
are readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash and short-term investments in time deposits in banks,
federal funds sold and securities available for sale. Liquidity is also provided
by access to core funding sources, primarily core depositors in the Company's
trade area. The Banks have not and do not solicit brokered deposits as a funding
source. The liquidity of the Company is enhanced by the fact that 78% of total
deposits at September 30, 1998 were "core" deposits. Core deposits, for this
purpose, are defined as total deposits less public funds and certificates of
deposit greater than $100,000.
At September 30, 1998, the Company's liquid assets totaled $194 million or
39% of total gross assets, compared to 40% at September 30, 1997. Secondary
sources of liquidity include the Banks' ability to sell loan participations and
purchase federal funds. NBC-Eagle Pass has an approved federal funds line at a
correspondent bank. NBC - Laredo has an approved line of credit with the Federal
Home Loan Bank.
The Company's principal source of funds consists of dividends received from
the Banks, which derive their funds from deposits, interest and principal
payments on loans and investment securities, sales of investment securities and
borrowings.
CAPITAL RESOURCES
Total stockholders' equity increased $5.3 million to $53.9 million at
September 30, 1998 from $48.6 million at September 30, 1997. The ratio of total
stockholders' equity to total assets was 11.0% at September 30, 1998 compared
with 10.7% at September 30, 1997. The Company began a stock repurchase plan in
1997 and has repurchased 283,775 common shares at a cost of $5.7 million as of
September 30, 1998.
19
<PAGE> 20
The Company and subsidiary Banks are subject to minimum capital ratios
mandated by their respective banking industry regulators. The table below
illustrates the Company and subsidiary Bank's compliance with the risk-based
capital guidelines of the Federal Reserve Bank (FRB) and the Office of the
Comptroller of the Currency (OCC). These guidelines are designed to measure Tier
1 and total capital while taking into consideration the risk inherent in both on
and off balance sheet items. Off balance sheet items include unfunded loan
commitments and letters of credit. Currently under the regulatory guidelines,
the net unrealized gain or loss on securities available for sale is not included
in the calculation of risk-based capital and the leverage ratio. The leverage
ratio is Tier 1 capital divided by average total assets. A leverage ratio of 3.0
percent is the minimum requirement for only the most highly rated banking
organizations and all other institutions are required to maintain a leverage
ratio of 3 to 5 percent.
Tier 1 capital includes common stockholders' equity less goodwill. Total
capital includes Tier 1 capital and a portion of the allowance for loan losses.
The ratios are calculated by dividing the qualifying capital by the
risk-weighted assets.
The table below illustrates the Company and its subsidiary Banks'
compliance with the risk-based capital guidelines as of September 30, 1998:
<TABLE>
<CAPTION>
NBC NBC NBC NBC
CONSOLIDATED EAGLE PASS LAREDO ROCKDALE LULING
-------------- ------------- -------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total average assets (net of goodwill) $ 477,667 $ 247,499 $ 81,391 $ 108,590 $ 28,358
Risk weighted assets (net of goodwill) $ 186,203 $ 97,615 $ 55,202 $ 28,485 $ 17,321
Tier 1 capital $ 40,721 $ 16,788 $ 7,937 $ 6,531 $ 3,591
Total capital $ 43,044 $ 17,910 $ 8,527 $ 6,888 $ 3,811
Leverage ratio 8.52% 6.78% 9.75% 6.01% 12.66%
Risk based capital ratios:
Tier 1 21.87% 17.20% 14.38% 22.93% 20.73%
Total capital 23.12% 18.35% 15.45% 24.18% 22.00%
</TABLE>
YEAR 2000
The Company has formed a Year 2000 project team comprising of
technological, data processing, and operations personnel from each of the Banks'
management. The project team has developed and is currently executing a planned
review and risk assessment of all technology items used in the Company's
operations, including core data processing systems, as well as material
relationships with suppliers, correspondents, and customer groups. The
identification of critical items and relations, and the renovation or
replacement of items, which are non-compliant with current guidelines, is
expected to be largely complete in 1998 in accordance with regulatory agency
guidelines. Year 2000 compliance will be effected through data processing
hardware and software upgrades and purchases of new equipment with an estimated
aggregate cost of approximately $150,000. These costs are being expensed as
incurred over a three-year period beginning in 1997.
FORWARD-LOOKING INFORMATION
The Company may from time to time make "forward-looking" statements as such
term is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, the interest rate environment, governmental regulation and
supervision, technological change, one-time events and other factors described
herein and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from such forward-looking
statements.
20
<PAGE> 21
PART II - OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11.1 Statement regarding computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
21
<PAGE> 22
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
Date: November 10, 1998 By: /s/ Anne Renfroe
--------------------------------
Anne Renfroe,
Chief Accounting Officer and Principal
Financial Officer
22
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11.1 Statement regarding computation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $0.42 $0.37 $1.35 $1.27
=============== =============== =============== ===============
DILUTED EPS:
Net income $0.40 $0.37 $1.32 $1.24
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------------- --------------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 1998 30, 1997 30, 1998 30, 1997
-------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Income available to common stockholders $1,864 $1,744 $6,210 $5,911
=============== =============== =============== ===============
Weighted average number of common
shares used in Basic EPS 4,492,272 4,658,734 4,594,505 4,658,734
Effect of dilutive stock options 125,317 117,842 126,650 106,285
--------------- --------------- --------------- ---------------
Weighted number of common shares
and dilutive potential common stock
used in Diluted EPS 4,617,589 4,776,576 4,721,155 4,765,019
=============== =============== =============== ===============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 21,374
<INT-BEARING-DEPOSITS> 999
<FED-FUNDS-SOLD> 27,453
<TRADING-ASSETS> 569
<INVESTMENTS-HELD-FOR-SALE> 95,109
<INVESTMENTS-CARRYING> 143,704
<INVESTMENTS-MARKET> 99,535
<LOANS> 174,956
<ALLOWANCE> 2,647
<TOTAL-ASSETS> 492,290
<DEPOSITS> 431,270
<SHORT-TERM> 3,790
<LIABILITIES-OTHER> 2,894
<LONG-TERM> 438
0
0
<COMMON> 5
<OTHER-SE> 53,898
<TOTAL-LIABILITIES-AND-EQUITY> 492,290
<INTEREST-LOAN> 12,081
<INTEREST-INVEST> 11,310
<INTEREST-OTHER> 1,093
<INTEREST-TOTAL> 24,484
<INTEREST-DEPOSIT> 10,863
<INTEREST-EXPENSE> 182
<INTEREST-INCOME-NET> 13,439
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 1,524
<EXPENSE-OTHER> 11,291
<INCOME-PRETAX> 6,337
<INCOME-PRE-EXTRAORDINARY> 6,337
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,210
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 7.70
<LOANS-NON> 1,806
<LOANS-PAST> 159
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,017
<ALLOWANCE-OPEN> 2,458
<CHARGE-OFFS> 197
<RECOVERIES> 236
<ALLOWANCE-CLOSE> 2,647
<ALLOWANCE-DOMESTIC> 2,647
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,517
</TABLE>
