<PAGE> 1
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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)
12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811
(Address of principal executive offices)
Telephone number: (210) 403-4200
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: $ 33,062,715 (Total
Interest Income).
State the aggregate market value of voting stock held by non-affiliates
based upon the closing AMEX sale price on March 19, 1999 : $63,540,025.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of March 19, 1999 : 4,166,559 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held
May 21, 1999 (Part III).
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
PART I
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........................................................ 52
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons...................... 52
Item 11. Executive Compensation............................................................ 53
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 53
Item 13. Certain Relationships and Related Transactions.................................... 53
PART IV
Item 14. Exhibits and Reports on Form 8-K.................................................. 53
</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 "BHC 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, 1998,
the Company (on a consolidated basis) had total assets of $512.1 million, total
investments securities of $232.5 million, total loans of $192.2 million, total
deposits of $447.7 million, total stockholders' equity of $52.2 million and net
operating loss carry-forwards for federal income tax purposes of $95 million.
For the year ended December 31, 1998, the Company recorded net income of $5.3
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, 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 12400 Hwy 281 North, San
Antonio, Texas 78216-2811, and its telephone number is (210) 403-4200.
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. NBC-Luling is the only subsidiary that
provides discount brokerage services at this time. NBC-Eagle Pass operates three
branches, one located in San Antonio, Texas, one located in Marble Falls, Texas
and one in Eagle Pass, Texas. NBC-Rockdale operates two branches, located in
Giddings and Taylor, Texas. NBC-Laredo operates one branch location in South
Laredo which opened in March 1998. NBC-Luling operates one branch located 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.
3
<PAGE> 4
The following table sets forth certain financial information with respect to the
Banks as of December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
ASSETS LOANS DEPOSITS
--------- --------- ---------
<S> <C> <C> <C>
NBC - Eagle Pass $ 275,630 $ 97,943 $ 250,649
NBC - Rockdale $ 114,873 $ 27,404 $ 100,426
NBC - Laredo $ 82,650 $ 50,445 $ 71,669
NBC - Luling $ 31,332 $ 16,427 $ 25,432
</TABLE>
SERVICES OFFERED BY NBC SUBSIDIARY BANKS
COMMERCIAL BANKING
The Banks provide the following types of loans for corporations and
other business clients:
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. 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.
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.
The Banks also provide deposit products to its commercial customers, as
well as night deposit and wire transfer services.
CONSUMER SERVICES
The Banks have generated a substantial portion of its deposits from
individuals and small businesses in its immediate market areas. Other consumer
bank services include automated teller machines, installment and real estate
loans, home equity loans, drive-in services, safe deposit boxes, Internet
banking, image bank statements and credit card services. 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 (in United States dollars only). The
Banks intend to add insurance and brokerage services in 1999.
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,
4
<PAGE> 5
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, 1998 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. The Laredo market is dominated by International Bank of
Commerce with approximately 33% of the community's total deposits and Laredo
National Bank with 42% of deposits. NBC-Eagle Pass is one of four banks located
in Eagle Pass, Texas and holds in excess of 62% of the community's banking
deposits. NBC-Rockdale is the largest bank in Rockdale holding over 45% of the
total deposits in the city and is the third largest of the five banks located in
Milam County, Texas holding approximately 19% of the county's deposits.
NBC-Luling is one of three banks located in Luling, Texas, holding over 37% 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 $95 million of net operating loss carryforwards as of
December 31, 1998, 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 the (i) availability of suitable candidates, (ii) 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, 1998, the Company employed approximately 249 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 BHC 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 BHC 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 BHC 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 five percent 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 BHC Act, except in certain statutorily prescribed instances,
from acquiring direct or indirect ownership or control of more than five percent
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.
5
<PAGE> 6
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.
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, constitute 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 BHC 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 percent 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.
See page 17 under "non-interest expense" for the amount of FDIC premiums paid by
the Banks.
6
<PAGE> 7
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 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, 1998,
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 reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give ninety (90) days notice to
customers and regulatory authorities before closing any branch. The Federal
regulatory agencies have issued standards establishing loan-to-value limitations
on real estate lending.
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-San Antonio
building located at 12400 Hwy 281 North, San Antonio, Texas, occupying premises
of approximately 4,900 square feet. The Company has a lease with an indefinite
term with the Bank with monthly lease payments of $10,256 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 had entered into a 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 was used for data processing and item processing for the Banks.
The lease expired on March 31, 1999.
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. 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.
8
<PAGE> 9
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 also owns and occupies a 30,000
square foot branch in San Antonio, Texas located at Arion Parkway and Hwy 281
North. The branch was opened in March 1999.
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, 1998, the Company had approximately 891
shareholders of record.
The following table sets forth the high and low sales/bid
prices/quotations for the Company's Common Stock during 1998 and 1997. 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>
1998:
4TH QUARTER $17.37 $15.25
3RD QUARTER 21.25 16.75
2ND QUARTER 21.44 20.50
1ST QUARTER 22.94 17.88
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
</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) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest income .............................. $ 33,063 $ 27,334 $ 20,820 $ 18,955 $ 15,985
Interest expense ............................. 14,915 11,722 8,112 7,359 5,589
----------- ----------- ----------- ----------- -----------
Net interest income ........................ 18,148 15,612 12,708 11,596 10,396
Provision (credit) for loan losses ........... 232 80 (5) (855) (990)
Non-interest income .......................... 5,701 4,387 2,789 2,762 2,521
Non-interest expense ......................... 15,273 12,244 9,586 9,149 8,491
Income taxes ** .............................. 3,056 2,811 2,155 2,241 1,994
Extraordinary credit, net of tax ............. -- -- -- 219 --
----------- ----------- ----------- ----------- -----------
Net income ** .............................. $ 5,288 $ 4,864 $ 3,761 $ 4,042 $ 3,422
=========== =========== =========== =========== ===========
COMMON SHARE DATA:
Net income before extraordinary credit ** .... $ 1.17 $ 1.04 $ 0.81 $ 0.91 $ 0.95
Extraordinary credit, net of tax ............. -- -- -- 0.05 --
Book value ................................... $ 12.44 $ 10.97 $ 9.21 $ 7.94 $ 6.16
Weighted average shares outstanding .......... 4,503,427 4,658,734 4,639,955 4,443,436 3,589,524
BALANCE SHEET DATA (AT PERIOD END):
(dollars in thousands)
Total assets ................................. $ 512,078 $ 470,160 $ 327,918 $ 270,092 $ 264,487
Investments and federal funds sold ........... 272,019 279,991 184,021 152,677 155,364
Total loans .................................. 192,219 136,313 113,258 91,588 90,448
Allowance for loan losses .................... 2,670 2,458 2,408 1,906 2,495
Total deposits ............................... 447,656 414,415 279,755 231,937 229,054
Other debt ................................... 10,143 2,646 3,995 366 4,361
Total stockholders' equity ................... 52,206 51,098 42,909 35,977 29,386
PERFORMANCE DATA:
Return on average total assets ** ............ 1.09% 1.25% 1.30% 1.52% 1.42%
Return on average stockholders' equity ** .... 10.24% 10.59% 9.71% 12.04% 14.82%
Net interest margin (tax equivalent) ......... 4.24% 4.42% 4.80% 4.77% 4.70%
ASSET QUALITY RATIOS:
Non-performing loans to total loans .......... 1.08% 1.16% 1.69% 1.70% 2.00%
Net loan charge-offs (recoveries) to
average loans .............................. 0.01% 0.02% -0.04% -0.29% -0.54%
Allowance for loan losses to total loans ..... 1.39% 1.80% 2.13% 2.08% 2.76%
CAPITAL RATIOS:
Stockholders' equity to average total
assets ..................................... 10.77% 11.78% 13.35% 12.65% 9.57%
Tier 1 risk-based capital * .................. 18.37% 27.77% 33.58% 35.77% 28.14%
Total risk-based capital * ................... 19.62% 29.02% 34.84% 37.18% 29.39%
Leverage ratio * ............................. 8.12% 9.13% 13.67% 13.28% 10.57%
</TABLE>
* Calculated in accordance with Federal Reserve guidelines currently in effect
** Restated to reflect prior period adjustment, see Note 2 of the Consolidated
Financial Statements
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, 1998 and 1997. Restated to
reflect prior period adjustments, see Note 2 of the Consolidated Financial
Statements (Dollars in thousands, except per share data):
<TABLE>
<CAPTION>
------------------------------------------------------
1998 QUARTER ENDED (UNAUDITED)
------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Interest income ........................ $ 7,916 $ 8,159 $ 8,410 $ 8,578
Interest expense ....................... 3,614 3,685 3,745 3,871
-------- -------- ------------ ------------
Net interest income .................. 4,302 4,474 4,665 4,707
Provision for loan loss ................ 20 48 82 82
Gain(loss) on sales of securities ...... 526 107 325 145
Net trading profit (loss) .............. 1,313 (524) (224) 217
Non-interest income .................... 867 904 1,043 1,002
Non-interest expense ................... 3,667 3,792 3,831 3,983
-------- -------- ------------ ------------
Income before federal income taxes ... 3,321 1,121 1,896 2,006
Federal income taxes ................... 1,215 410 695 736
-------- -------- ------------ ------------
Net income ........................... $ 2,106 $ 711 $ 1,201 $ 1,270
-------- -------- ------------ ------------
Basic earnings per share ............. $ 0.45 $ 0.15 $ 0.28 $ 0.29
-------- -------- ------------ ------------
</TABLE>
<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 loss ................ 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 ................... 864 604 681 662
-------- -------- ------------ ------------
Net income ........................... $ 1,814 $ 979 $ 1,100 $ 971
-------- -------- ------------ ------------
Basic earnings per share ............. $ 0.39 $ 0.21 $ 0.23 $ 0.21
-------- -------- ------------ ------------
</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 1998 was $5.3 million, an increase of $424,000 or 8.7%
over the $4.9 million recorded in 1997 which was $1.1 million or 29.3% over
earnings of $3.8 million in 1996. Net income per diluted common share in 1998
was $1.14 compared with $1.02 in 1997 and $0.80 in 1996, an increase of 11.8%
and 27.5%, respectively. The Company's return on equity for 1998 was 10.24%
compared to 10.59% and 9.71% for 1997 and 1996, respectively. The decline in
1998 is primarily attributable to the purchase of $8.5 million of treasury stock
in 1998. The Company's return on assets for 1998 was 1.09% compared to 1.25% and
1.30% for 1997 and 1996, respectively. The decline of this ratio is primarily
attributable to the $95 million and $99 million increases in average assets for
1998 and 1997, respectively.
1998 and 1997 earnings included a net $1.2 million and $.8 million
gain, respectively, on the sale of securities. Excluding these gains, net
operating earnings for 1998 were $4.1 million or $0.87 per diluted common share
and $4.1 million or $0.85 per diluted common share for 1997.
Total assets of $512 million at December 31, 1998 grew $42 million or
9% over total assets of $470 million at December 31, 1997. Total loans at
December 31, 1998 were $192 million, 41% over the previous year end total of
$136 million. The growth in the loan portfolio was attained through internal
growth. Deposits reflect less dramatic growth, increasing 8% over the same
period to $448 million.
The following table shows selected key performance ratios over the last
three years **:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Return on average assets 1.09% 1.25% 1.30%
Return on average stockholders' equity* 10.24% 10.59% 9.71%
Average stockholders' equity* to average total assets 10.77% 11.78% 13.35%
</TABLE>
* After adjustment to exclude unrealized gains and losses on available for
sale securities.
** Restated to reflect the prior period adjustment, see Note 2 in the
Consolidated Financial Statements
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.
PRIOR PERIOD ADJUSTMENT. The Company's financial statements as of
December 31, 1998, 1997 and 1996, have been restated to correct an error in the
application of the accounting method used for income tax accounting. The Company
has various net deferred tax assets made up primarily of the expected future tax
benefit of net operating loss carryforwards and reserves not yet deductible for
tax purposes. A valuation allowance was provided against these net deferred tax
assets upon the Company's emergence from bankruptcy in May 1992 when
"fresh-start" reporting was adopted. The benefits received from subsequent
reductions in the deferred tax asset valuation allowance were recorded as
reductions of current year income tax expense, which was inconsistent with
Financial Accounting Standard No. 109 and Statement of Position No. 90-7. The
benefits from the reductions have been restated as an increase in additional
paid-in capital as directed by the accounting pronouncements listed above. The
restatement does have the effect of reducing reported net income while
increasing additional paid-in capital in an amount equal to the decrease in
retained earnings. It has no effect upon the cash on hand, book value, cash
flow, the amount of the tax loss carryforward, or the amount of taxes due or
owing.
13
<PAGE> 14
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
FOR THE YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- --------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------------- -------- -------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Additional Paid-In Capital ......... $ 16,355 $ 28,629 $ 16,341 $ 25,742 $ 16,341 $ 23,131
Retained Earnings .................. 40,957 28,683 32,796 23,395 25,321 18,531
Total Stockholders' Equity ......... 52,206 52,206 51,098 51,098 42,909 42,909
Income Statement:
Income Before
Federal Income Taxes .......... $ 8,344 $ 8,344 $ 7,675 $ 7,675 $ 5,916 $ 5,916
Federal Income Tax Expense ......... 183 3,056 200 2,811 206 2,155
-------------- -------- -------------- -------- -------------- --------
Net Income ......................... $ 8,161 $ 5,288 $ 7,475 $ 4,864 $ 5,710 $ 3,761
============== ======== ============== ======== ============== ========
Basic Earnings Per Share ........... $ 1.81 $ 1.17 $ 1.60 $ 1.04 $ 1.23 $ 0.81
Diluted Earnings Per Share ......... $ 1.76 $ 1.14 $ 1.57 $ 1.02 $ 1.22 $ 0.80
</TABLE>
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 1998 and 1997 was investment
securities with the second largest being loans. Net interest income for 1998 was
$18.1 million, an increase of $2.5 million or 16.0% compared to $15.6 million in
1997. The net increase reflected a $5.7 million increase in interest income that
was offset by a $3.2 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 1998 increased
18.5% and 33.7%, respectively, over 1997. The Company's yield on earning assets
decreased to 7.72% in 1998 from 7.74% in 1997. The rate paid on interest bearing
liabilities decreased one basis point from 4.09% in 1997 to 4.08% in 1998. 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 1998 was 4.24%
compared to 4.42% and 4.80% for 1997 and 1996, respectively. The decrease in the
net interest margin for 1998 is reflective of higher volumes of earning assets.
The net interest spread decreased one basis point to 3.64% in 1998 from 3.65% in
1997.
14
<PAGE> 15
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, 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 in
proportion to the absolute amounts of change in each.
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
------------------------------------ ----------------------------------
1998 VS. 1997 1997 VS. 1996
------------------------------------ ----------------------------------
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 ......... $ (43) $ 18 $ (61) $ 111 $ (35) $ 146
Federal funds sold ................ (9) 112 (121) 474 (60) 534
Investment securities ............. 2,177 (166) 2,343 3,523 457 3,066
Loans, net of unearned discount ... 3,600 (795) 4,395 2,412 (388) 2,800
---------- ------- -------- ---------- ------- --------
Total taxable-equivalent
interest income ............ 5,725 (831) 6,556 6,520 (26) 6,546
---------- ------- -------- ---------- ------- --------
Interest expense:
Interest-bearing accounts ......... 3,149 21 3,128 3,380 598 2,782
Other debt ........................ 43 (62) 105 230 99 131
---------- ------- -------- ---------- ------- --------
Total interest expense ......... 3,192 (41) 3,233 3,610 697 2,913
---------- ------- -------- ---------- ------- --------
Taxable-equivalent
net interest income ............... $ 2,533 $ (790) $ 3,323 $ 2,910 $ (723) $ 3,633
========== ======= ======== ========== ======= ========
</TABLE>
Taxable-equivalent net interest income for 1998 increased $2.5 million
or 16.29% over 1997. Taxable-equivalent net interest income for 1997 increased
$2.9 million or 22.9% over 1996. In 1998 and 1997, interest income and interest
expense increased as the volume of earning assets and interest bearing deposits
rose.
15
<PAGE> 16
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ----------------------------- ----------------------------
INTEREST EARNED/ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
INCURRED AND 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 $ 1,360 $ 82 6.03% $ 2,642 $ 125 4.74% $ 230 $ 14 6.08%
Federal funds sold 26,538 1,504 5.67% 28,846 1,513 5.25% 18,997 1,039 5.46%
Investment securities (F):
US Treasuries 231,356 14,527 6.28% 191,301 12,186 6.37% 141,333 8,752 6.19%
US Government agencies 4,406 279 6.33% 5,143 347 6.75% 4,280 291 6.80%
States & political
subdivisions -- -- 0.00% -- -- 0.00% 11 1 9.09%
Other 639 39 6.10% 3,056 134 4.39% 3,371 100 2.96%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total investment 236,401 14,845 6.28% 199,500 12,667 6.35% 148,995 9,144 6.13%
securities
Loans, net of discounts (A) 163,911 16,646 10.16% 122,604 13,046 10.64% 96,787 10,634 10.99%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total earning assets 428,210 33,077 7.72% 353,592 27,351 7.74% 265,009 20,831 7.86%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,204 16,433 12,829
Allowance for possible loan (2,561) (2,458) (2,117)
losses
Other assets 40,944 22,148 14,507
-------- -------- --------
$484,797 $389,715 $290,228
======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction
accounts $ 61,656 $ 1,584 2.57% $ 48,723 $ 1,347 2.77% $ 33,342 $ 953 2.86%
Savings, money market and
certificates of deposit 299,058 12,984 4.34% 234,533 10,072 4.29% 175,711 7,086 4.03%
Other debt 4,857 347 7.14% 3,606 303 8.40% 1,282 73 5.69%
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities 365,571 14,915 4.08% 286,862 11,722 4.09% 210,335 8,112 3.86%
------- ------- -------
NON-INTEREST BEARING LIABILITIES:
Demand deposits 63,402 54,723 39,489
Other liabilities 4,157 2,214 1,590
-------- -------- --------
Total liabilities 433,130 343,799 251,414
Redeemable Preferred Stock -- -- 59
STOCKHOLDERS' EQUITY (F) 51,667 45,916 38,755
-------- -------- --------
Total liabilities and
stockholders' equity
$484,797 $389,715 $290,228
======== ======== ========
Taxable equivalent net interest
income 18,162 15,629 12,719
Less: taxable equivalent
adjustment 14 17 11
------- ------- -------
Net interest income $18,148 $15,612 $12,708
======= ======= =======
Net interest spread (B) 3.64% 3.65% 3.98%
====== ====== ======
Net interest margin (C) 4.24% 4.42% 4.80%
====== ====== ======
SELECTED OPERATING RATIOS:
Return on assets (D) 1.09% 1.25% 1.30%
====== ====== ======
Return on equity (E) 10.24% 10.59% 9.71%
====== ====== ======
</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.
(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.
16
<PAGE> 17
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, 1998
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>
Loans, net of discounts $ 63,340 $ 10,994 $ 22,301 $ 96,635 $ 95,584 $192,219
Investment securities 998 4,503 26,726 32,227 200,254 232,481
Federal funds sold 37,195 -- -- 37,195 -- 37,195
Interest-bearing accounts 284 100 1,253 1,637 706 2,343
------------ --------- --------- --------- -------- --------
Total earning assets $ 101,817 $ 15,597 $ 50,280 $ 167,694 $296,544 $464,238
============ ========= ========= ========= ======== ========
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $ 161,469 -- -- $ 161,469 -- $161,469
Certificates and time deposits 42,243 50,281 113,829 206,353 12,674 219,027
Debt 8,459 41 371 8,871 1,272 10,143
------------ --------- --------- --------- -------- --------
Total interest-bearing
liabilities $ 212,171 $ 50,322 $ 114,200 $ 376,693 $ 13,946 $390,639
============ ========= ========= ========= ======== ========
Interest sensitivity gap $ (110,354) $ (34,725) $ (63,920) $(208,999)
============ ========= ========= =========
Cumulative gap $ (110,354) $(145,079) $(208,999) $(208,999)
============ ========= ========= =========
Ratio of earning assets to
interest-bearing liabilities 48.0% 31.0% 44.0% 44.5%
</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.
17
<PAGE> 18
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,
------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Service charges and fees $ 3,240 15.9% $ 2,796 17.9% $ 2,371
Net realized gains (losses) on sales of
securities 1,103 (2.6)% 1,133 18,990.4% (6)
Net trading profits 782 659.2% 103 100.0% --
Net gains on sales of other real estate owned 9 (85.5)% 62 (39.8)% 103
Miscellaneous income 567 93.5% 293 (8.8)% 321
-------- -------- -------- -------- --------
Total non-interest income $ 5,701 30.0% $ 4,387 57.3% $ 2,789
======== ======== ======== ======== ========
</TABLE>
The $1,314,000 or 30% increase in non-interest income for 1998 from
1997 is due primarily to the $679,000 increase in net trading profits and the
$444,000 increase in service charges and fees. The improvement in service
charges and fees can be partly attributed to a 21% increase in average
transaction deposit accounts in 1998. Included in 1998 is non-recurring income
of $1,894,000 due to net gains on other real estate owned and investment
securities which was higher than the $1,195,000 reported in 1997. Therefore, the
increase in 1998, disregarding the non-recurring items, would be $615,000 or
19.3% higher than 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 past
three years:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996
--------------------- --------------------- --------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 7,947 27.4% $ 6,239 28.7% $ 4,848
Occupancy and equipment expenses 2,566 33.9% 1,917 24.2% 1,544
FDIC insurance 49 44.1% 34 459.2% 6
Insurance 107 5.9% 101 (7.3)% 109
Office supplies 603 5.4% 572 52.4% 375
Postage and courier 498 (17.1)% 601 58.6% 379
Professional fees 905 15.4% 784 13.7% 689
Goodwill amortization 376 96.9% 191 448.6% 35
Miscellaneous other expenses 2,222 23.1% 1,805 12.7% 1,601
-------- --------- -------- --------- --------
Total non-interest expense $ 15,273 24.7% $ 12,244 27.7% $ 9,586
-------- --------- -------- --------- --------
</TABLE>
Non-interest expense of $15.3 million for the year ended 1998
represented an increase of 24.7% compared with 1997. However, as a percentage of
average assets, non-interest expense remained stable at 3.15% in 1998 compared
to 1997. The increase in non-interest expense is reflected in occupancy and
equipment expenses and salaries and benefit expense. The 27.4% increase in
salaries and benefits for 1998 is due to the (i) addition of employees from the
acquisitions of the three Wells Fargo branches of which only five months was
included in 1997, (ii) two new branches that were opened in 1998, and (iii)
full-time equivalent employees increased by 39 people from 210 in 1997 to 249 at
December 31, 1998. The $649,000 or 33.9% 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 two new branches opened in
1998 in San Marcos and South Laredo, and installation of computer networks at
the new locations. Goodwill expense increased $185,000 or 96.9% due to the Wells
Fargo acquisition in July 1997.
18
<PAGE> 19
INCOME TAXES. The Company recognized income tax expense of $3.1 million
in 1998 compared to $2.8 million in 1997. See Note 15 to the Consolidated
Financial Statements for details of tax expense. At December 31, 1998, the
Company had approximately $95 million in net operating loss carryforwards that
will be available to reduce income tax liabilities in future years. If unused,
approximately $91 million of such carryforwards will expire in 2005, with the
remaining approximately $4 million expiring in 2006. The preconfirmation net
operating loss carryforwards arose from the Company's emergence from bankruptcy
in May 1992.
INVESTMENT SECURITIES. Total investment securities averaged $236.4
million in 1998, an 18% increase over the 1997 average of $199.5 million. The
following table presents the consolidated investment securities portfolio as of
December 31, 1998, 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, 1998
-----------------------------------------------------------------------------------------------
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>
HELD TO MATURITY SECURITIES:
(Amortized Cost)
U.S. Treasury securities $14,028 7.02% $ 53,934 6.16% $19,923 6.25% $ -- -- $ 87,885
U.S. Government agency
and mortgage-backed
securities -- -- -- -- -- -- 1,973 6.27% 1,973
Foreign debt securities -- -- 15 6.06% 50 7.70% -- -- 65
------- ------- -------- ------- ------- ------- ------- ------- --------
Total held to maturity $14,028 7.02% $ 53,949 6.16% $19,973 6.25% $ 1,973 6.27% $ 89,923
======= ======= ======== ======= ======= ======= ======= ======= ========
AVAILABLE FOR SALE
SECURITIES:
(Fair Value)
U.S. Treasury securities $13,628 6.69% $ 74,505 6.19% $45,986 6.30% $ -- -- $134,119
U.S. Government agency
and mortgage-backed
securities -- -- 1,931 5.93% -- -- 70 8.69% 2,001
Other securities -- -- -- -- -- -- 6,438 1.65% 6,438
------- ------- -------- ------- ------- ------- ------- ------- --------
Total available for sale $13,628 6.69% $ 76,436 6.18% $45,986 6.30% $ 6,508 1.73% $142,558
======= ======= ======== ======= ======= ======= ======= ======= ========
Total investment
securities $27,656 6.86% $130,385 6.17% $65,959 6.28% $ 8,481 2.78% $232,481
======= ======= ======== ======= ======= ======= ======= ======= ========
</TABLE>
The weighted average yield on the investment security portfolio of the
Company at December 31, 1998 was 6.16% compared to a weighted average yield of
6.27% at December 31, 1997. 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 4 of the Notes to the Consolidated Financial Statements reflects
the estimated fair value for various categories of investment securities as of
December 31, 1998 and 1997.
19
<PAGE> 20
The following table summarizes the book value of the investment
portfolio at December 31, for the past three years:
BOOK VALUE OF INVESTMENT PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasury securities ........... $214,966 $237,477 $149,400
U.S. Government agencies ........... 1,503 2,990 4,132
Mortgage-backed securities ......... 2,447 1,229 1,638
Other securities ................... 8,419 1,741 4,247
-------- -------- --------
$227,335 $243,437 $159,417
======== ======== ========
</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
1998 TOTAL 1997 TOTAL 1996 TOTAL 1995 TOTAL 1994 TOTAL
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ............... $ 35,389 18.4% $ 22,911 16.8% $ 23,992 21.2% $ 13,643 14.9% $ 15,175 16.8%
Real estate
construction ........... 12,125 6.3% 10,338 7.6% 6,324 5.6% 11,868 13.0% 10,085 11.2%
Real estate mortgage ..... 119,654 62.3% 81,752 60.0% 65,556 57.9% 51,664 56.4% 49,406 54.6%
Consumer installment,
net of unearned
discount ............... 25,051 13.0% 21,312 15.6% 17,386 15.3% 14,413 15.7% 15,782 17.4%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans ........... $192,219 100.0% $136,313 100.0% $113,258 100.0% $ 91,588 100.0% $ 90,448 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The preceding loan composition table shows that in 1998 total loans
increased $55.9 million or 41.0% over 1997. At December 31, 1998, loans were
42.9% of deposits compared to 32.9% at the previous year-end.
The following table presents commercial and real estate construction
loans as of December 31, 1998, 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 ....................... $ 21,043 $12,203 $2,143 $35,389
Real estate construction ......... 7,312 3,671 1,142 12,125
-------- ------- ------ -------
Total ....................... $ 28,355 $15,874 $3,285 $47,514
======== ======= ====== =======
</TABLE>
Of the loans maturing after one year, $7,854,000 have fixed interest rates and
$11,305,000 have variable interest rates.
20
<PAGE> 21
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible 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.
The Company recorded a $232,000 provision for possible loan losses
during 1998, compared to $80,000 recorded during 1997. The provision is
reflective of the growth in the loan portfolio. 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 $20,000 for the year ended December 31, 1998
compared to net charge-offs of $30,000 for 1997.
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,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $163,911 $122,604 $ 96,787 $ 91,357 $ 89,190
======== ======== ======== ======== ========
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 2,458 $ 2,408 $ 1,906 $ 2,495 $ 3,005
Allowance on acquired loans -- -- 467 -- --
Charge-Offs:
Commercial 93 50 76 60 16
Real estate construction -- -- -- -- 10
Real estate mortgage 29 -- -- 6 45
Consumer installment 168 222 175 264 249
-------- -------- -------- -------- --------
Total charge-offs 290 272 251 330 320
-------- -------- -------- -------- --------
Recoveries:
Commercial 22 53 39 69 73
Real estate construction -- -- -- -- 100
Real estate mortgage 64 38 70 285 210
Consumer installment 184 151 182 242 417
-------- -------- -------- -------- --------
Total recoveries 270 242 291 596 800
-------- -------- -------- -------- --------
Net charge-offs (recoveries) 20 30 (40) (266) (480)
Provision charged (credited) to operating expense 232 80 (5) (855) (990)
-------- -------- -------- -------- --------
Balance at end of year $ 2,670 $ 2,458 $ 2,408 $ 1,906 $ 2,495
======== ======== ======== ======== ========
Net charge-offs (recoveries) as a percentage
of average loans outstanding during the year 0.01% 0.02% -0.04% -0.29% -0.54%
======== ======== ======== ======== ========
Allowance for loan losses as a percentage of
year end loans, net of unearned discount 1.39% 1.80% 2.13% 2.08% 2.76%
======== ======== ======== ======== ========
</TABLE>
21
<PAGE> 22
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>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ---------------- ---------------
% 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 $ 102 0.05% $ 99 0.07% $ 131 0.12% $ 306 0.33% $ 195 0.22%
Real estate construction -- 0.00% -- 0.00% -- 0.00% -- 0.00% -- 0.00%
Real estate mortgage 767 0.40% 760 0.56% 614 0.54% 729 0.80% 811 0.90%
Consumer installment 209 0.11% 192 0.14% 185 0.16% 255 0.28% 370 0.41%
Unallocated 1,592 0.83% 1,407 1.03% 1,478 1.31% 616 0.67% 1,119 1.24%
------ ------ ------ ------ ------ ------ ------ ----- ------ ----
Total $2,670 1.39% $2,458 1.80% $2,408 2.13% $1,906 2.08% $2,495 2.76%
====== ====== ====== ====== ====== ====== ====== ===== ====== ====
</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 increased 32.1% to
$2,094,000 at December 31, 1998, compared with $1,585,000 at December 31, 1997,
$1,910,000 at December 31, 1996, $2,065,000 at December 31, 1995 and $1,805,000
at December 31, 1994. Non-performing assets as a percentage of total assets
increased to .41% at December 31, 1998 up from .34% one year ago. This increase
in non-performing assets is due to real estate assets being foreclosed on at a
certain Bank.
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 90
days or more past due. All installment loans past due 90 days or more are
classified as 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 possible 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.
22
<PAGE> 23
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,
--------------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 899 $1,314 $1,195 $1,177 $1,070
Foreclosed real estate 1,195 271 715 888 735
------ ------ ------ ------ ------
Total non-performing assets $2,094 $1,585 $1,910 $2,065 $1,805
====== ====== ====== ====== ======
Non-performing assets as a percentage of:
Total assets 0.41% 0.34% 0.58% 0.76% 0.68%
Total loans plus foreclosed real estate 1.08% 1.16% 1.68% 2.23% 1.98%
Accruing loans past due 90 days or more $ 311 $ 40 $ 182 $ 383 $ 151
</TABLE>
Interest income that would have been earned in 1998 on non-accrual
loans had such loans performed in accordance with the original contracted terms
was $185,000. The amounts related to 1997 and 1996 were $151,000 and $187,000,
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>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 63,402 -- $ 54,723 -- $ 39,489 --
INTEREST-BEARING DEPOSITS:
Interest-bearing transaction (NOW) accounts 61,656 2.57% 48,723 2.77% 33,342 2.85%
Savings and money market accounts 91,054 3.16% 70,559 3.14% 54,928 2.90%
Certificates and time deposits under $100,000 132,623 4.74% 103,982 4.67% 76,248 4.36%
Certificates and time deposits $100,000 and greater 75,381 5.07% 59,993 5.01% 44,535 4.86%
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 360,714 283,257 209,053
-------- -------- --------
Weighted average rate paid 4.04% 4.03% 3.85%
======= ======== ========
Total average deposits $424,116 $337,980 $248,542
======== ======== ========
</TABLE>
Total average deposits increased $86 million or 25.5% due to internal
growth. 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 deposits are $103,768,000,
$94,477,000, and $83,677,000 of Mexican National deposits at December 31, 1998,
1997, and 1996, respectively (in United States dollars only).
23
<PAGE> 24
The remaining maturity on certificates of deposit greater than $100,000
as of December 31, 1998 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 $34,267 $21,872 $23,583 $ 2,309 $82,031
======= ======= ======= ======= =======
</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 77.9% of total deposits at December 31,
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.
Net cash provided by operating activities at December 31, 1998,
includes a $4.9 million decrease in investment securities held in a trading
account. See Note 1 of the Consolidated Financial Statements for the accounting
treatment of a trading account.
At December 31, 1998, the Company's liquid assets amounted to $199
million or 39% of total gross assets, down from $201 million or 43% at December
31, 1997. 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 $1.1 million to $52.2 million at
December 31, 1998 from $51.1 million at December 31, 1997. In addition to net
income of $5.3 million, stockholders' equity increased $2.9 million due to the
reduction in the deferred tax asset valuation allowance and $1.4 million due to
an improvement in the net fair value of securities available for sale.
Stockholders' equity was reduced by the 463,675 shares of common stock
repurchased at a cost of $8.5 million, or an average of $18.35 per share, as
part of a stock repurchase plan approved by the Board of Directors in 1997. The
Board had authorized the repurchase of 500,000 shares. As of March 23, 1999, the
Company has repurchased 494,674 shares. The ratio of total stockholders' equity
to total assets was 10.2% at December 31, 1998 compared with 10.9% at December
31, 1997.
The Company and the Banks are subject to minimum capital ratios
mandated by their respective banking industry regulators. The table in Note 19
in the Consolidated Financial Statements illustrates the Company's and the
Banks' 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, 1998 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. For the Company's capital
ratios at December 31, 1998 and 1997, see Note 19 in the Consolidated Financial
Statements.
ACCOUNTING MATTERS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." The statement provides that all items
that are required to be recognized under accounting standards as
24
<PAGE> 25
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income includes
net income as well as certain items that are reported directly within a separate
component of stockholders' equity and bypass net income. The provisions of SFAS
No. 130 are effective for fiscal years beginning after December 15, 1997. The
adoption of this statement did not have a material impact on financial position
or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 establishes standards for the way that public business enterprises
report information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. SFAS No. 131 also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The adoption of this
statement did not have an impact on financial position or results of operation.
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.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
is required to be adopted in years beginning after June 15, 1999. The Company
expects to adopt the new Statement effective January 1, 2000. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on the Company's
earnings or financial position.
YEAR 2000
The Year 2000 (Y2K) issue centers on the inability of computer systems
to recognize the year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather that the year 2000.
The Company has formed a Y2K project team comprising 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 were complete in 1998 in accordance with
regulatory agency guidelines. Y2K compliance will be effected through data
processing hardware and software upgrades and purchases of new equipment with an
estimated aggregate cost of approximately $573,000. Approximately $80,000 was
expensed for the year ended December 31, 1998 for the Y2K project.
The three core systems, or mission critical systems, were implemented
and tested for Y2K compliance in December 1998. These three systems include the
deposit and loan systems, any ancillary or interface programs and the imaging
software. The ATM software and the NT Server software will both be upgraded and
tested by the end of the second quarter of 1999.
25
<PAGE> 26
The Company has initiated formal communications with all of its
significant suppliers to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Y2K issue. The Company
presently believes that with modifications to existing software and conversions
to new software, the Y2K issue will be mitigated without causing a material
adverse impact on the operations of the Company. However, if such modifications
and conversions are not made, or are not completed timely, the Y2K issue could
have an impact on the operations of the Company. At this time, management does
not believe that the impact and any resulting costs will be material.
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.
26
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
National Bancshares Corporation of Texas and Subsidiaries
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of National
Bancshares Corporation of Texas and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1998,
1997, and 1996. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these 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 financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall 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, 1998 and 1997, and the
results of operations and its cash flows for the years ended December 31, 1998,
1997, and 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, such statements
have been restated to correct the method of accounting for income taxes pursuant
to the principles of fresh-start accounting contained in Statement of Position
90-7 of the American Institute of Certified Public Accountants.
/s/ Padgett, Stratemann & Co., L.L.P.
Padgett, Stratemann & Co., L.L.P.
Certified Public Accountants
March 18, 1999, except for Note 2,
As to which the date is April 19, 1999
27
<PAGE> 28
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
(Restated, See Note 2)
<TABLE>
<CAPTION>
ASSETS
1998 1997
--------- ---------
<S> <C> <C>
Cash and due from banks $ 16,473 $ 27,278
Interest-bearing accounts 2,343 216
Federal funds sold 37,195 29,940
Trading securities -- 3,433
Investment securities available for sale 142,558 139,771
Investment securities held to maturity 89,923 106,631
Loans, net of discounts 192,219 136,313
Allowance for possible loan losses (2,670) (2,458)
Bank premises and equipment, net 17,793 12,538
Goodwill 8,804 9,180
Other assets 7,440 7,318
--------- ---------
Total Assets $ 512,078 $ 470,160
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits - non-interest bearing $ 67,160 $ 66,346
Interest-bearing transaction accounts (NOW) 65,847 62,633
Savings and money market accounts 95,622 88,972
Certificates and time deposits under $100,000 136,996 131,787
Certificates and time deposits $100,000 and over 82,031 64,677
--------- ---------
Total Deposits 447,656 414,415
--------- ---------
Accrued interest payable and other liabilities 2,073 2,001
Other borrowings 8,459 --
Long term notes payable 1,684 2,646
--------- ---------
Total Liabilities 459,872 419,062
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized, 4,661,234
issued and 4,197,559 outstanding at December 31, 1998 and
4,658,734 issued and outstanding at December 31, 1997 5 5
Additional paid-in capital 28,629 25,742
Retained earnings 28,683 23,395
Accumulated other comprehensive income 3,395 1,956
Treasury Stock, at cost (463,675 shares in 1998) (8,506) --
--------- ---------
Total Stockholders' Equity 52,206 51,098
--------- ---------
Total Liabilities and Stockholders' Equity $ 512,078 $ 470,160
========= =========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
28
<PAGE> 29
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Restated, See Note 2)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 16,632 $ 13,029 $ 10,623
Interest on Investment Securities - Taxable 14,845 12,667 9,144
Interest on Investment Securities - Nontaxable -- -- 1
Interest on Federal Funds Sold 1,504 1,513 1,038
Interest on Deposits in Banks 82 125 14
-------- -------- --------
TOTAL INTEREST INCOME 33,063 27,334 20,820
INTEREST EXPENSE:
Interest on Deposits 14,568 11,419 8,039
Interest on Debt 347 303 73
-------- -------- --------
TOTAL INTEREST EXPENSE 14,915 11,722 8,112
NET INTEREST INCOME 18,148 15,612 12,708
Less: Provision for (Recovery of)Possible Loan Losses 232 80 (5)
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF)
POSSIBLE LOAN LOSSES 17,916 15,532 12,713
NON-INTEREST INCOME:
Service Charges and Fees 3,240 2,796 2,371
Net Trading Account Profit (Loss) 782 103 --
Net Realized Gains (Losses) on Sales of Securities 1,103 1,133 (6)
Net Gains on Sales of Other Real Estate and Assets 9 62 103
Miscellaneous Income 567 293 321
-------- -------- --------
TOTAL NON-INTEREST INCOME 5,701 4,387 2,789
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 7,947 6,239 4,848
Occupancy and Equipment Expenses 2,566 1,917 1,544
Goodwill Amortization 376 191 35
Other Expenses 4,384 3,897 3,159
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 15,273 12,244 9,586
INCOME BEFORE FEDERAL INCOME TAXES 8,344 7,675 5,916
Federal Income Tax Expense 3,056 2,811 2,155
-------- -------- --------
NET INCOME $ 5,288 $ 4,864 $ 3,761
======== ======== ========
BASIC EARNINGS PER SHARE $ 1.17 $ 1.04 $ 0.81
======== ======== ========
DILUTED EARNINGS PER SHARE $ 1.14 $ 1.02 $ 0.80
======== ======== ========
</TABLE>
Notes to consolidated financial statements form an integral part of these
statements.
29
<PAGE> 30
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
------------------------------ COMPREHENSIVE
NUMBER OF PAID IN RETAINED TREASURY INCOME,
SHARES PAR CAPITAL EARNINGS STOCK NET OF TAX TOTAL
---------- ------ -------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995, AS PREVIOUSLY 4,530 $ 4 $ 15,619 $ 19,611 $ -- $ 743 $ 35,977
REPORTED
Prior period adjustment (see Note 2) -- -- 4,841 (4,841) -- -- --
------ ------ -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1995, AS RESTATED 4,530 4 20,460 14,770 -- 743 35,977
Net Income -- -- -- 3,761 -- -- 3,761
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 499 499
--------
Total Comprehensive Income 4,260
--------
Reduction of deferred tax valuation allowance -- -- 1,949 -- -- -- 1,949
Conversion of Series B Preferred to Common 128 1 714 -- -- -- 715
Exercise of Common Stock options 1 -- 8 -- -- -- 8
------ ------ -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1996 4,659 5 23,131 18,531 -- 1,242 42,909
Net Income -- -- -- 4,864 -- -- 4,864
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 714 714
--------
Total Comprehensive Income 5,578
--------
Reduction of deferred tax valuation allowance -- -- 2,611 -- -- -- 2,611
------ ------ -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997 4,659 5 25,742 23,395 -- 1,956 51,098
Net Income -- -- -- 5,288 -- -- 5,288
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 1,439 1,439
--------
Total Comprehensive Income 6,727
--------
Reduction of deferred tax valuation allowance -- -- 2,873 -- -- -- 2,873
Exercise of Common Stock Options 2 -- 14 -- -- -- 14
Treasury stock purchased (464) -- -- -- (8,506) -- (8,506)
------ ------ -------- --------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998 4,197 $ 5 $ 28,629 $ 28,683 $(8,506) $ 3,395 $ 52,206
====== ====== ======== ========= ======= ======= ========
Disclosure of reclassification amount:
Unrealized gain on securities AFS arising during period $ 711
Reclassification adjustment for gains included in income, net of tax of $375 728
--------
Net unrealized gain on securities AFS, net of tax $ 1,439
========
</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, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
(Restated, See Note 2)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,288 $ 4,864 $ 3,761
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,798 1,159 944
Tax benefit realized from utilization of deferred tax assets 2,888 2,657 2,010
Provision to (recovery of) allowance for possible loan losses 232 80 (5)
Net realized (gains) losses on securities available for sale (1,103) (1,133) 6
Net decrease (increase) in trading account 4,908 (3,433) --
Gain on sale of other real estate owned and other assets (9) (62) (103)
Increase in accrued interest receivable and other assets 46 (1,944) (238)
Increase in accrued interest payable and other liabilities 70 764 39
Write-down of other real estate owned -- -- 18
--------- --------- ---------
Net cash provided by operating activities 14,118 2,952 6,432
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (7,255) (7,290) 2,320
Net (increase) decrease in interest-bearing accounts (2,125) 312 (40)
Net increase in loans (56,876) (23,179) (6,624)
Purchases of securities available for sale (27,939) (98,351) (44,009)
Proceeds from sales of securities available for sale 15,240 33,739 10,226
Proceeds from maturities of securities available for sale 11,619 15,679 16,225
Purchases of securities held to maturity (7,035) (52,179) (23,865)
Proceeds from maturities of securities held to maturity 23,649 17,710 17,811
Proceeds from sales of securities held to maturity -- 539 --
Capital expenditures (6,480) (6,551) (730)
Proceeds from sale of other real estate owned 32 600 431
Net payments for cash acquired from acquisitions -- (7,319) (46)
--------- --------- ---------
Net cash used in investing activities (57,170) (126,290) (28,301)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
savings and money-market accounts 10,678 73,463 10,206
Net increase in certificates of deposit and time deposits 22,563 61,197 14,263
Proceeds from advances on other borrowings and long term debt 10,641 12,319 140
Principal payments on other borrowings and long term debt (3,143) (13,668) (150)
Purchase of treasury stock (8,506) -- --
Proceeds from exercise of common stock options 14 -- 8
--------- --------- ---------
Net cash provided by financing activities 32,247 133,311 24,467
Net (decrease) increase in cash and due from banks (10,805) 9,973 2,598
Cash and due from banks at beginning of year 27,278 17,305 14,707
========= ========= =========
Cash and due from banks at end of year $ 16,473 $ 27,278 $ 17,305
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid:
Interest $ 14,776 $ 11,206 $ 7,988
Income taxes 71 128 126
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets 22 155 130
Loan foreclosures 947 94 66
</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
and seven branches located in Central Texas and South Texas 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.
INVESTMENTS IN 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. 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. 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 with the exception of
the investment portfolio maintained at NBT of Delaware, Inc. in which the
average cost method is used to compute gains and losses on sales. The
transfer of a security between categories of investments is accounted for
at fair value.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance is maintained at a level considered adequate by management 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. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Banks allowances for possible loan losses. Loans deemed
uncollectible are charged to the allowance. The allowance is increased by
provisions charged to operating expense and recoveries on loans previously
charged off.
32
<PAGE> 33
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impaired loans are measured based on (1) the present value of expected
future cash flows discounted at the loan's effective interest rate; (2) the
loan's observable market price; or (3) the fair value of the collateral if
the loan is collateral dependent.
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 under the sum-of-the-digits (Rule of 78's) method. Income
recognized under the sum-of-the-digits method is not materially different
than income that would be recognized under the level yield or "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 financial statements. Deferred
tax assets and liabilities are included in the consolidated financial
statements at currently
33
<PAGE> 34
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. In accordance with AICPA Statement of Position (SOP) No. 90-7,
income tax benefits recognized from preconfirmation net operating loss
carryforwards were used first to reduce reorganization value in excess of
amounts allocable to identifiable assets and thereafter to increase
additional paid-in capital (See Note 15).
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.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operation segments in annual
financial statements and requires that those enterprises report selected
information about operation segments in interim financial reports issued to
shareholders.
34
<PAGE> 35
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption
of this statement did not have an impact on financial position or results
of operations.
RECLASSIFICATIONS
Certain amounts have been reclassified from prior presentations at December
31, 1997 and 1996 to conform to classifications at December 31, 1998. There
is no effect on previously reported net income or retained earnings.
2. PRIOR PERIOD ADJUSTMENT
The Company's financial statements as of December 31, 1998, 1997 and 1996,
have been restated to correct an error in the application of the accounting
method used for income tax accounting. The Company has various net deferred
tax assets made up primarily of the expected future tax benefit of net
operating loss carryforwards and reserves not yet deductible for tax
purposes. A valuation allowance was provided against these net deferred tax
assets upon the Company's emergence from bankruptcy in May 1992 when
"fresh-start" reporting was adopted. The benefits received from subsequent
reductions in the deferred tax asset valuation allowance were recorded as
reductions of current year income tax expense, which was inconsistent with
Financial Accounting Standard No. 109 and Statement of Position No. 90-7.
The benefits from the reductions have been restated as an increase in
additional paid-in capital as directed by the accounting pronouncements
listed above. The restatement does have the effect of reducing reported net
income while increasing additional paid-in capital in an amount equal to
the decrease in retained earnings. It has no effect upon the cash on hand,
book value, cash flow, the amount of the tax loss carryforward, or the
amount of taxes due or owing.
The effect of the restatement is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER 31,
-----------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- ------------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet:
Additional Paid-In Capital $ 16,355 $ 28,629 $ 16,341 $ 25,742 $ 16,341 $ 23,131
Retained Earnings 40,957 28,683 32,796 23,395 25,321 18,531
Total Stockholders' Equity 52,206 52,206 51,098 51,098 42,909 42,909
Income Statement:
Income Before
Federal Income Taxes $ 8,344 $ 8,344 $ 7,675 $ 7,675 $ 5,916 $ 5,916
Federal Income Tax Expense 183 3,056 200 2,811 206 2,155
-------- -------- -------- -------- -------- --------
Net Income $ 8,161 $ 5,288 $ 7,475 $ 4,864 $ 5,710 $ 3,761
======== ======== ======== ======== ======== ========
Basic Earnings Per Share $ 1.81 $ 1.17 $ 1.60 $ 1.04 $ 1.23 $ 0.81
Diluted Earnings Per Share $ 1.76 $ 1.14 $ 1.57 $ 1.02 $ 1.22 $ 0.80
</TABLE>
3. 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.
35
<PAGE> 36
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
4. 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, 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 $127,081 $ 7,038 $ -- $134,119
U.S. Government agency and mortgage-backed securities 1,977 24 -- 2,001
Other securities including Federal Reserve Bank stock 8,354 -- (1,916) 6,438
======== ======== ======== ========
Total $137,412 $ 7,062 $ (1,916) $142,558
======== ======== ======== ========
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 87,885 $ 4,464 $ -- $ 92,349
U.S. Government agency and mortgage-backed securities 1,973 13 -- 1,986
Foreign debt securities 65 2 (3) 64
======== ======== ======== ========
Total $ 89,923 $ 4,479 $ (3) $ 94,399
======== ======== ======== ========
</TABLE>
<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>
During the year ended December 31, 1998, the Company transferred securities
with a fair value of $1,475,425 from the available for sale category into
the trading category. A gain of $430,325 was realized upon the transfer.
During the year ended December 31, 1997, the Company did not transfer any
securities between the held to maturity and available for sale categories.
36
<PAGE> 37
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unrealized gains and losses on investment securities held at December
31, 1998 and 1997 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
1998 and 1996)
Investment securities carried at approximately $55,824,000 and $36,167,000
at December 31, 1998 and 1997, respectively, were pledged to secure public
funds.
The scheduled maturities of securities to be held to maturity and
securities available for sale at December 31, 1998 were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 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 $ 17,026 $ 17,191 $ 15,035 $ 15,252
Due in one year to five years 69,397 72,457 52,940 55,276
Due from five to ten years 42,162 45,986 19,974 21,884
Due after ten years 316 320 -- --
-------- -------- -------- --------
Total $128,901 $135,954 $ 87,949 $ 92,412
Equity Securities 7,764 5,848 -- --
Mortgage-backed securities 407 416 1,974 1,987
Federal Reserve Bank Stock 340 340 -- --
======== ======== ======== ========
Total $137,412 $142,558 $ 89,923 $ 94,399
======== ======== ======== ========
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale were $1,128,294 and $25,148, respectively, in 1998,
$1,412,000 and $279,000, respectively, in 1997, and $13,000 and $19,000,
respectively, in 1996.
37
<PAGE> 38
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Commercial Loans $ 30,242 $ 17,347
Real Estate - Construction 12,125 10,338
Real Estate - Commercial 56,420 35,929
Real Estate - Residential 63,234 45,823
Agriculture Loans 3,712 4,809
Consumer Loans 26,277 22,395
Other Loans 1,435 755
--------- ---------
193,445 137,396
Unearned Discount (1,226) (1,083)
--------- ---------
192,219 136,313
Allowance for Possible Loan Losses (2,670) (2,458)
--------- ---------
$ 189,549 $ 133,855
========= =========
</TABLE>
Changes in the allowance for possible loan losses were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 2,458 $ 2,408 $ 1,906
Provisions (credits) for possible loan losses
232 80 (5)
Allowance on acquired loans
-- -- 467
Losses charged to the allowance
(290) (272) (251)
Recoveries credited to the allowance
270 242 291
------- ------- -------
Balance at end of year $ 2,670 $ 2,458 $ 2,408
======= ======= =======
</TABLE>
The restoration of loan loss provision of $5,000 for the year ended
December 31, 1996 resulted from significant collections of previously
charged-off loans, and from improved performance and quality of the loan
portfolio.
Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected.
The Company has identified these loans through its normal loan review
procedures. Impaired loans include (1) all non-accrual loans, (2) loans
which are 90 days or more past due, unless they are well secured (i.e. the
collateral value is sufficient to cover principal and accrued interest) and
are in the process of collection, and (3) other loans which management
believes are impaired. Substantially all of the Company's impaired loans
are measured at the fair value of the collateral. In limited cases the
Company may use other methods to determine the level of impairment of a
loan if such loan is not collateral dependent.
As of December 31, 1998, 1997, and 1996, the Banks have impaired loans of
$899,000, $1,314,000, and $1,195,000, respectively. The allowance for loan
losses related to those loans was $75,000, $117,000, and $97,300 at
December 31, 1998, 1997, and 1996, respectively. The average recorded
investment in impaired loans during the year ended December 31, 1998, 1997,
and 1996 was $1,546,000, $1,254,000, and $1,186,000, respectively. Interest
income of approximately $50,000, $287,000, and $478,000 on impaired loans
was recognized for cash payments received during the year ended December
31, 1998, 1997, and 1996, respectively. Management of the Company
recognizes the risks
38
<PAGE> 39
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
associated with these impaired loans. However, management's decision to
place loans in this category does not necessarily mean that the Company
expects losses to occur.
The Banks' nonperforming loans at December 31, 1998 consisted of $311,000
in accruing loans over 90 days past due and $899,000 in nonaccrual loans.
The reduction in interest income associated with nonaccrual loans during
the year ended December 31, 1998, 1997, and 1996 was approximately
$185,000, $151,000, and $187,000, respectively.
6. 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,
-------------------
1998 1997
------- -------
<S> <C> <C>
Land $ 4,345 $ 3,517
Buildings and Leasehold Improvements 12,881 8,694
Equipment and Furniture 7,296 5,859
------- -------
Total Cost 24,522 18,070
Less: Accumulated Depreciation 6,729 5,532
------- -------
Net Book Value $17,793 $12,538
======= =======
</TABLE>
Depreciation expense totaled $1,197,000, $919,000, and $705,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. NBC-Eagle Pass
has committed to spend approximately $5 million to build and equip a 30,000
square foot branch in San Antonio, Texas. The branch was completed during
the first quarter of 1999. Capitalized interest on three branch
construction projects totaled $87,230 for the year ended December 31, 1998.
7. OTHER ASSETS
Other assets include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
------- -------
<S> <C> <C>
Accrued Interest Receivable $ 4,750 $ 4,757
Deferred Tax Asset 900 1,751
Other Real Estate Owned 1,195 271
Other 595 539
------- -------
Total $ 7,440 $ 7,318
======= =======
</TABLE>
8. DEPOSITS
Included in total deposits are $103,768,000 and $94,477,000 of Mexican
National deposits at December 31, 1998 and 1997, respectively.
The aggregate amount of short-term jumbo certificates of deposit (CDs),
each with a minimum denomination of $100,000, was approximately $79,722,000
and $65,763,000 at December 31, 1998 and 1997, respectively.
39
<PAGE> 40
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, the scheduled maturities of CDs are as follows
(Dollars in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 206,354
2000 10,167
2001 1,797
2002 321
2003 and thereafter 388
----------
$ 219,027
==========
</TABLE>
9. OTHER BORROWINGS AND LONG-TERM NOTES PAYABLE
On December 31, 1998, a subsidiary bank holding company maintained a margin
account which is secured by investment securities. The interest rate is
variable (6.25% at December 31, 1998).The balance at December 31, 1998 was
$2,272,061.
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, 1998 and 1997 was approximately
$177,000 and $182,000, 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, 1998 and 1997 was approximately $159,000 and $164,000,
respectively. In September 1998, Laredo borrowed $100,000 from the Federal
Home Loan Bank of Dallas. This advance bears an interest rate of 5.15% and
has a maturity date of October 2018. Principal and interest payments are
due monthly in the approximate amount of $668. The outstanding balance at
December 31, 1998 was $99,500. In December 1998, Laredo borrowed $1,250,000
from the Federal Home Loan Bank of Dallas. This advance bears an interest
rate of 5.13% and has a maturity date of January 2004. Principal and
interest payments are due monthly in the approximate amount of $24,000. The
outstanding balance at December 31, 1998 was $1,250,000.
On October 2, 1998, the Company executed a $7.5 million revolving line of
credit with The Independent Bankers Bank in Dallas. The note bears a
variable interest rate at New York prime (8.00% at December 31, 1998).
Interest only payments are due quarterly beginning January 2, 1999 with the
balance of unpaid principal plus accrued interest due at maturity. The note
matures on October 2, 1999. 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, 1998 was $6,187,000.
Aggregate maturities at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 8,849,817
2000 244,913
2001 257,847
2002 271,463
2003 and thereafter 519,534
-----------
$10,143,574
===========
</TABLE>
40
<PAGE> 41
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. 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 17 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. This lease expires on
March 31, 1999. The Company also entered into a twelve month lease for a
loan production office which expired on January 31, 1999. Gross rental
expense for the year ended December 31, 1998, 1997, and 1996 was $134,738,
$108,458, and $76,040, respectively.
Future minimum lease payments at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1999 $ 56,242
2000 --
2001 --
----------
$ 56,242
==========
</TABLE>
11. 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 No. 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.
41
<PAGE> 42
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
---------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 5,288 $ 4,864 $ 3,761
Weighted average shares outstanding:
Basic 4,503,427 4,658,734 4,639,955
Diluted 4,625,323 4,749,200 4,696,521
Earnings per share - Basic $ 1.17 $ 1.04 $ 0.81
============= ============= =============
Effect of diluted securities:
stock options (0.03) (0.02) (0.01)
------------- ------------- -------------
Earnings per share - Diluted $ 1.14 $ 1.02 $ 0.80
============= ============= =============
</TABLE>
12. 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,
1998, 1997 and 1996 totaled $140,767, $104,873, and $49,515, respectively.
13. 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 1998 and 1996, 2,500
and 1,200 of these options were exercised, respectively. None of these
granted options were exercised in 1997, 1995 or 1994. 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
42
<PAGE> 43
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998, options representing 40,850 shares were granted to certain
officers and directors of the Company at an option price of $13.25 per
share, after the approval of 230,000 additional shares of common stock
being added to the 1995 plan. Also in 1998, 850 shares included in the 1995
plan were reacquired by the Company.
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-fifth increments commencing one
year after the grant date and subject to any longer or shorter periods the
Administrator may impose. The option, however, may not be exercised, in
whole or in part, after five years from the date of grant.
At December 31, 1998, there were 204,100 shares available for future grants
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 at $13.25) 50,000
--------
Options outstanding as of December 31, 1997 198,700
Options granted under the 1995 Plan (exercisable at $13.25) 40,850
Options reacquired (850)
Options exercised in 1998 (2,500)
--------
Options outstanding as of December 31, 1998 236,200
========
</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 1998, 1997, and 1996.
43
<PAGE> 44
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. OTHER OPERATING EXPENSES
Other operating expenses include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Data processing expenses $ 267 $ 247 $ 418
FDIC insurance 49 34 6
Insurance 107 101 109
Office supplies 603 572 375
Postage and courier 498 601 379
Professional fees 905 784 689
Miscellaneous 1,955 1,558 1,183
------- ------- -------
Total $ 4,384 $ 3,897 $ 3,159
======= ======= =======
</TABLE>
15. FEDERAL INCOME TAX
The provision for federal income tax consisted of the following (Dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Currently Paid or Payable $ 168 $ 154 $ 145
Deferred Expense 2,888 2,657 2,010
------- ------- -------
Total $ 3,056 $ 2,811 $ 2,155
======= ======= =======
</TABLE>
The provision for federal income tax is less than that computed by applying
the federal statutory rate of 34% to income before income taxes as
indicated in the following analysis (Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Tax Based on Statutory Rate $ 2,837 $ 2,610 $ 2,011
Effect of Tax-exempt Income (15) (26) (33)
Interest and other Nondeductible Expenses 9 8 7
Alternative Minimum Tax 167 156 132
Goodwill 28 24 12
Other - Net 30 39 26
------- ------- -------
$ 3,056 $ 2,811 $ 2,155
======= ======= =======
</TABLE>
44
<PAGE> 45
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred income tax assets and liabilities consist of
the following (Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets Related to:
Net Operating Loss Carryforward $ 30,928 $ 33,788
Other Real Estate Owned 72 78
Allowance for Loan Losses -- 89
Securities Valuation Reserve 55 64
Non-accrual Loan Interest 140 135
Other 40 74
-------- --------
31,235 34,228
Less: Valuation Allowance 27,919 30,792
-------- --------
Total Deferred Tax Assets 3,316 3,436
-------- --------
Deferred Tax Liabilities Related to:
Allowance for Loan Losses (31) (189)
Depreciation (146) (203)
Bond Accretion (395) (225)
Goodwill (94) --
Other -- (60)
Net Unrealized Appreciation on Securities Available for Sale (1,750) (1,008)
-------- --------
Total Deferred Tax Liabilities (2,416) (1,685)
-------- --------
Net Deferred Tax Asset $ 900 $ 1,751
======== ========
</TABLE>
For federal income tax purposes, the Company had approximately $95 million
in net operating loss carryforwards as of December 31, 1998 which will be
available to reduce income tax liabilities in future years. The
preconfirmation net operating loss carryforwards arose from the Company's
emergence from a reorganization under Chapter 11 of the United States
Bankruptcy Code in May 1992. If unused, approximately $91 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, 1998 and 1997, the deferred
tax asset valuation allowance was reduced by $2,873,000 and $2,611,000,
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
$900,000 at December 31, 1998. 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.
In accordance with AICPA SOP No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", income tax benefits recognized
from preconfirmation net operating loss carryforwards and other tax assets
are used first to reduce the reorganization value in excess of amounts
allocable to identifiable assets and then to increase additional paid-in
capital.
45
<PAGE> 46
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. 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 amount of loans to such related
parties at December 31, 1998 and 1997 was $5,906,000 and $4,203,000,
respectively. During the year ended December 31, 1998 and 1997, new loans
to such related parties amounted to $2,884,000 and $1,405,000,
respectively, and repayments amounted to $1,181,000 and $904,000,
respectively. No outside directors of the Company have any outstanding
loans.
During 1998 and 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 traders
at the brokerage firm, excluding the Company Chairman, related to
investment transactions by the Company in 1998 and 1997 totaled $35,918 and
$1,579 on purchase and sale transactions of $78,810,916 and $6,137,000,
respectively.
17. 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.
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
<S> <C>
Commitments to extend credit $17,194,000
Commitments to extend credit - Credit Cards 269,000
Financial standby letters of credit 1,236,000
Performance standby letters of credit 131,000
</TABLE>
46
<PAGE> 47
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
The estimated fair values of the Company's financial instruments were as
Follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------- ---------------------
(Dollars in Thousands)
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due from Banks $ 16,473 $ 16,473 $ 27,278 $ 27,278
Interest Bearing Deposits in Banks 2,343 2,343 216 216
Federal Funds sold 37,195 37,195 29,940 29,940
Trading Securities -- -- 3,433 3,433
Securities Available for Sale 142,558 142,558 139,771 139,771
Securities Held to Maturity 89,923 94,399 106,631 108,299
Loans - net 189,549 191,160 133,855 132,924
Accrued Interest Receivable 4,750 4,750 4,757 4,757
Financial Liabilities:
Demand Deposits 67,160 67,160 66,346 66,346
NOW, Money market, and
Savings Accounts 161,469 161,469 151,605 151,605
Time Deposits 219,027 260,056 196,464 196,956
Accrued Interest Payable 1,429 1,429 1,291 1,291
Other Debt 10,143 10,143 2,646 2,646
</TABLE>
47
<PAGE> 48
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of off-balance sheet assets and liabilities is not
considered significant.
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.
18. 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 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 5. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Standby letters of credit are granted primarily to
commercial borrowers.
19. 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, 1998, that the Company and its subsidiary
banks meet all capital adequacy requirements to which it is subject.
48
<PAGE> 49
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998, 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.
The Company and its subsidiary banks actual capital amounts and ratios are
also presented in the table (Dollars in thousands).
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
AS OF DECEMBER 31, 1998: 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 $ 41,033 19.62% $ 16,730 => 8.00% $ 20,912 => 10.00%
Eagle Pass 18,656 16.36% 9,120 => 8.00 11,400 => 10.00
Laredo 8,638 16.78% 4,119 => 8.00 5,149 => 10.00
Rockdale 7,112 24.36% 2,336 => 8.00 2,920 => 10.00
Luling 3,933 21.31% 1,477 => 8.00 1,846 => 10.00
Tier 1 Capital to Risk Weighted Assets:
CONSOLIDATED $ 38,418 18.37% $ 8,365 => 4.00% $ 12,547 => 6.00%
Eagle Pass 17,231 15.11% 4,560 => 4.00 6,840 => 6.00
Laredo 8,040 15.61% 2,060 => 4.00 3,089 => 6.00
Rockdale 6,747 23.11% 1,168 => 4.00 1,752 => 6.00
Luling 3,699 20.04% 738 => 4.00 1,108 => 6.00
Tier 1 Capital to Average Assets:
CONSOLIDATED $ 38,418 8.12% $ 19,707 => 4.00% $ 24,633 => 5.00%
Eagle Pass 17,231 6.49% 10,622 => 4.00 13,277 => 5.00
Laredo 8,040 9.95% 3,233 => 4.00 4,041 => 5.00
Rockdale 6,747 6.12% 4,408 => 4.00 5,510 => 5.00
Luling 3,699 13.03% 1,135 => 4.00 1,419 => 5.00
</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>
49
<PAGE> 50
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed balance sheet information of National Bancshares Corporation of
Texas (The Parent Company) at December 31, 1998 and 1997, and the related
statements of income and cash flows for the years ended December 31, 1998,
1997 and 1996 are as follows (Restated, see Note 2) (Dollars in thousands):
BALANCE SHEETS:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS:
Cash $ 360 $ 616
Investment in Subsidiaries 54,389 49,025
Fixed Assets - net 166 58
Federal Tax Benefits Due 827 679
Deferred Tax Asset 3,117 2,995
Other assets 199 112
-------- --------
Total Assets $ 59,058 $ 53,485
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes Payable $ 6,187 $ 2,300
Accrued Interest Payable and Other Liabilities 240 87
-------- --------
Total Liabilities 6,427 2,387
-------- --------
Common Stock 5 5
Surplus - Common Stock 28,629 25,742
Retained Earnings 28,683 23,395
Accumulated Other Comprehensive Income 3,395 1,956
Treasury Stock, at cost (463,675 shares in 1998) (8,081) --
-------- --------
Total Stockholders' Equity 52,631 51,098
-------- --------
$ 59,058 $ 53,485
======== ========
</TABLE>
STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
INCOME:
Dividends from Subsidiaries $2,300 $1,535 $2,697
Undistributed Earnings of Subsidiaries 3,924 4,245 1,543
Other Income 412 40 352
Net Realized Gains on Sales of Securities -- -- 11
Gain on Sale of Other Real Estate Owned -- -- 17
Interest Income -- -- 61
------ ------ ------
6,636 5,820 4,681
------ ------ ------
EXPENSES:
Salaries and Employee Benefits 690 498 404
Occupancy and Equipment Expenses 141 91 217
Interest Expense 202 275 47
Other Operating Expenses 487 325 298
------ ------ ------
1,520 1,189 966
------ ------ ------
INCOME BEFORE FEDERAL INCOME TAX BENEFIT 5,116 4,631 3,715
Federal Income Tax Benefit 172 233 46
------ ------ ------
NET INCOME $5,288 $4,864 $3,761
====== ====== ======
</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 CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,288 $ 4,864 $ 3,761
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of subsidiaries (6,224) (5,780) (4,240)
Dividends received 2,300 1,535 2,697
Depreciation and amortization 28 16 109
Tax benefit realized from utilization of deferred tax assets 2,873 2,611 1,949
Net realized gains on securities available for sale -- -- (11)
Gain on sale of other real estate owned and other assets -- -- (17)
Increase in accrued interest receivable and other assets (357) 3 (307)
Increase in accrued interest payable and other liabilities 153 (255) 99
------- ------- -------
Net cash provided by operating activities 4,061 2,994 4,040
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest bearing accounts -- 32 283
Purchases of securities available for sale -- -- (3,657)
Proceeds from sales of securities available for sale -- -- 1,042
Proceeds from maturities of securities available for sale -- -- 74
Capital expenditures (136) (38) (188)
Proceeds from sale of other real estate owned -- -- 266
Contribution to subsidiary -- (2,500) --
Net payments for acquisitions -- -- (1,209)
------- ------- -------
Net cash used in investing activities (136) (2,506) (3,389)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances on debt 6,386 5,500 140
Principal payments on other debt (2,500) (6,839) (140)
Exercise of common stock options 14 -- 8
Purchase of treasury stock (8,081) -- --
------- ------- -------
Net cash (used in) provided by financing activities (4,181) (1,339) 8
Net (decrease) increase in cash and due from banks (256) (851) 659
Cash and due from banks at beginning of year 616 1,467 808
------- ------- -------
Cash and due from banks at end of year 360 $ 616 $ 1,467
======= ======= =======
</TABLE>
51
<PAGE> 52
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
1999 Annual Meeting of Shareholders to be held May 21, 1999.
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 34, 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 39, 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 eight 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 54, has been Chairman of the Board and President of
NBC-Rockdale since 1986.
MARIO J. GONZALEZ, age 35, has been President and Chief Executive Officer of
NBC-Laredo since March 1998. Formerly, Mr. Gonzalez was Executive Vice President
of NBC-Laredo from April 1993 to March 1998. In addition, Mr. Gonzalez was a
National Bank Examiner with the OCC, from October 1986 until April 1993.
WILLIAM D. HALES, age 52, has been President of NBC-Luling since March 1988.
R. SAMUEL JUVE, age 46, 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.
DWAYNE J. KOLLY, age 46, has been Executive Vice President, Chief Operations
Officer and Information Services Coordinator of NBC-Laredo since March 1998.
Formerly, Mr. Kolly was Senior Vice President Information Services Coordinator
and Cashier for NBC-Laredo from October 1993 to March 1998. In addition, Mr.
Kolly was Vice President and Cashier of First National Bank, Uvalde, Texas, from
1986 to 1993.
THOMAS MCMORRIS, age 58, 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 52, 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.
52
<PAGE> 53
HECTOR VASQUEZ, JR., age 45, has been Senior Vice President and Information
Services Manager of NBC Holdings - Texas, Inc. since February 1997. Formerly Mr.
Vasquez was Senior Vice President and Management Information Services Director
for Citizens Bank of Corpus Christi, Texas from July 1973 to February 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders
to be held May 21, 1999.
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 1999 Annual Meeting of Shareholders
to be held May 21, 1999.
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 1999 Annual Meeting of Shareholders
to be held May 21, 1999.
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 ................................. *
10.7 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 .................................................................. *
27 Restated Financial Data Schedule .............................................................
99.1 First Amended Disclosure Statement with Respect to the Second Amended
Joint Plan of Reorganization ................................................................. **
</TABLE>
53
<PAGE> 54
* 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.
54
<PAGE> 55
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 23rd day of
April, 1999, 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 April 23, 1999
- -------------------------
Jay H. Lustig
/s/ Marvin E. Melson Director, President April 23, 1999
- ------------------------- Chief Executive Officer
Marvin E. Melson
/s/ H. Gary Blankenship Director April 23, 1999
- -------------------------
H. Gary Blankenship
/s/ John W. Lettunich Director April 23, 1999
- -------------------------
John W. Lettunich
/s/ Charles T. Meeks Director April 23, 1999
- -------------------------
Charles T. Meeks
</TABLE>
55
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C> <C> <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 ..............................*
10.7 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 .............................................................*
27 Restated Financial Data Schedule ........................................................
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.
<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,
------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ----------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ----------- ------ --------- ----------- ------ --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income $ 5,287 $ 4,864 $ 3,761
--------- ----------- ------ --------- ----------- ------ --------- ----------- ------
BASIC EPS
Income available
to common shareholders $ 5,287 $ 4,503 $ 1.17 $ 4,864 4,659 $ 1.04 $ 3,761 4,640 $ 0.81
====== ====== ======
EFFECT OF DILUTIVE SECURITIES
Stock options 122 90 57
------- ------ ------- ------ ------- ------
DILUTED EPS
Income available to common
shareholders + assumed
conversions $ 5,287 4,625 $ 1.14 $ 4,864 4,749 $ 1.02 $ 3,761 4,697 $ 0.80
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 16,473
<INT-BEARING-DEPOSITS> 2,343
<FED-FUNDS-SOLD> 37,195
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,558
<INVESTMENTS-CARRYING> 89,923
<INVESTMENTS-MARKET> 94,399
<LOANS> 192,219
<ALLOWANCE> 2,670
<TOTAL-ASSETS> 512,078
<DEPOSITS> 447,656
<SHORT-TERM> 8,459
<LIABILITIES-OTHER> 2,073
<LONG-TERM> 1,684
0
0
<COMMON> 5
<OTHER-SE> 52,201
<TOTAL-LIABILITIES-AND-EQUITY> 512,078
<INTEREST-LOAN> 16,632
<INTEREST-INVEST> 14,845
<INTEREST-OTHER> 1,586
<INTEREST-TOTAL> 33,063
<INTEREST-DEPOSIT> 14,568
<INTEREST-EXPENSE> 347
<INTEREST-INCOME-NET> 18,148
<LOAN-LOSSES> 232
<SECURITIES-GAINS> 1,885
<EXPENSE-OTHER> 15,273
<INCOME-PRETAX> 8,344
<INCOME-PRE-EXTRAORDINARY> 8,344
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,288
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 7.72
<LOANS-NON> 899
<LOANS-PAST> 311
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 6,076
<ALLOWANCE-OPEN> 2,458
<CHARGE-OFFS> 290
<RECOVERIES> 269
<ALLOWANCE-CLOSE> 2,670
<ALLOWANCE-DOMESTIC> 2,670
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,592
</TABLE>
