<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
COMMISSION FILE NUMBER: 1-13472
* * * * * *
NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of registrant as specified in its charter)
TEXAS 74-1692337
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811
(Address of principal executive offices)
(210) 403-4200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
----- ----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 4,140,734 shares of Common
Stock, $.001 par value, outstanding as of November 8, 1999.
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash and due from banks $ 20,476 $ 16,473
Interest-bearing accounts 2,230 2,343
Federal funds sold 28,474 37,195
Investment securities available for sale 232,152 142,558
Investment securities held to maturity 66 89,923
Loans, net of discounts 233,161 192,219
Allowance for possible loan losses (3,072) (2,670)
Bank premises and equipment, net 19,682 17,793
Goodwill 8,521 8,804
Other assets 9,509 7,440
--------- ---------
Total Assets $ 551,199 $ 512,078
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits - non-interest bearing $ 74,242 $ 67,160
Interest-bearing transaction accounts (NOW) 77,619 65,847
Savings and money market accounts 107,321 95,622
Certificates and time deposits under $100,000 135,476 136,996
Certificates and time deposits $100,000 and over 92,661 82,031
--------- ---------
Total Deposits 487,319 447,656
--------- ---------
Accrued interest payable and other liabilities 2,666 2,073
Other borrowings 6,883 8,459
Long term notes payable 2,249 1,684
--------- ---------
Total Liabilities 499,117 459,872
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized, 4,662,234
issued and 4,140,734 outstanding at September 30, 1999 and
4,661,234 issued and 4,197,559 outstanding at December 31, 1998 5 5
Additional paid-in-capital 30,086 28,629
Retained earnings 31,717 28,683
Accumulated other comprehensive income (305) 3,395
Treasury Stock, at cost (521,500 shares in 1999, 463,675 in 1998) (9,421) (8,506)
--------- ---------
Total Stockholders' Equity 52,082 52,206
--------- ---------
Total Liabilities and Stockholders' Equity $ 551,199 $ 512,078
--------- ---------
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September September September September
30, 1999 30, 1998 30, 1999 30, 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 5,160 $ 4,335 $14,543 $12,081
Interest on Investment Securities 3,547 3,677 10,683 11,310
Interest on Federal Funds Sold 316 387 898 1,051
Interest on Deposits in Banks 28 11 87 43
------- ------- ------- -------
TOTAL INTEREST INCOME 9,051 8,410 26,211 24,485
INTEREST EXPENSE:
Interest on Deposits 3,779 3,702 10,924 10,863
Interest on Debt 173 43 559 182
------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,952 3,745 11,483 11,045
NET INTEREST INCOME 5,099 4,665 14,728 13,440
Less: Provision for Possible Loan Losses 185 82 460 150
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,914 4,583 14,268 13,290
NON-INTEREST INCOME:
Service Charges and Fees 946 816 2,608 2,404
Net Trading Account Profit (Loss) - (224) - 565
Net realized Gains (Losses) on Sales of Securities 8 325 43 959
Net Gains on Sales of Other Real Estate and Assets 7 - 14 -
Miscellaneous Income 104 227 525 410
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 1,065 1,144 3,190 4,338
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 2,290 2,031 6,728 5,795
Occupancy and Equipment Expenses 863 659 2,398 1,918
Goodwill Amortization 94 94 282 282
Other Expenses 1,169 1,047 3,448 3,296
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSE 4,416 3,831 12,856 11,291
INCOME BEFORE FEDERAL INCOME TAXES 1,563 1,896 4,602 6,337
Federal Income Tax Expense 518 695 1,568 2,320
------- ------- ------- -------
NET INCOME $ 1,045 $ 1,201 $ 3,034 $ 4,017
------- ------- ------- -------
------- ------- ------- -------
BASIC EARNINGS PER SHARE $ 0.25 $ 0.27 $ 0.73 $ 0.87
------- ------- ------- -------
------- ------- ------- -------
DILUTED EARNINGS PER SHARE $ 0.24 $ 0.26 $ 0.71 $ 0.85
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other
---------------------------- Comprehensive
Number of Par Paid-in- Retained Treasury Income, Total
Shares Capital Earnings Stock Net of Tax
----- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1998 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 -- -- 2,873 -- -- -- 2,873
----- -------- -------- -------- -------- -------- --------
allowance
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
Net income -- -- -- 3,034 -- -- 3,034
Unrealized loss on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- (3,700) (3,700)
----- -------- -------- -------- -------- -------- --------
Total comprehensive income (loss) (666)
----- -------- -------- -------- -------- -------- --------
Reduction of deferred tax valuation allowance -- -- 1,451 -- -- -- 1,451
Exercise of common stock options 1 -- 6 -- -- -- 6
Treasury stock purchased (58) -- -- -- (915) -- (915)
----- -------- -------- -------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 4,140 $ 5 $ 30,086 $ 31,717 $ (9,421) $ (305) $ 52,082
----- -------- -------- -------- -------- -------- --------
----- -------- -------- -------- -------- -------- --------
Disclosure of reclassification amount:
Unrealized loss on securities AFS arising
during period $ (3,728)
Reclassification adjustment for gains
included in income, net of tax of $15 28
--------
Net unrealized loss on securities AFS,
net of tax $ (3,700)
--------
--------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending
September 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,034 $ 4,017
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,666 1,315
Tax benefit realized from utilization of deferred tax assets 1,451 2,256
Provision for possible loan losses 460 150
Net realized gains on securities available for sale (43) (959)
Net increase in trading account - 5,223
Write-down of other real estate owned 52 -
Gain on sale of other real estate owned and other assets (14) -
(Increase) decrease in accrued interest receivable and other (392) 5
assets
Increase in accrued interest payable and other liabilities 593 891
-------- --------
Net cash provided by operating activities 6,807 12,898
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold 8,721 2,487
Net decrease (increase) in interest-bearing accounts 113 (783)
Net increase in loans (40,999) (38,702)
Purchases of securities available for sale (38,543) (21,274)
Proceeds from sales of securities available for sale 11,031 12,442
Proceeds from maturities of securities available for sale 17,729 7,837
Purchases of securities held to maturity - (7,035)
Proceeds from maturities of securities held to maturity 4,234 18,506
Capital expenditures (3,024) (4,102)
Proceeds from sale of other real estate owned 191 -
-------- --------
Net cash used in investing activities (40,547) (30,624)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts,
savings and money-market accounts 30,553 (2,704)
Net increase in certificates of deposit and time deposits 9,110 19,560
Proceeds from advances on other borrowings and long term debt 2,413 3,006
Principal payments on other borrowings and long term debt (3,424) (2,307)
Purchase of treasury stock (915) (5,747)
Proceeds from exercise of common stock options 6 14
-------- --------
Net cash provided by financing activities 37,743 11,822
Net increase (decrease) in cash and due from banks 4,003 (5,904)
Cash and due from banks at beginning of period 16,473 27,278
-------- --------
Cash and due from banks at end of period $ 20,476 $ 21,374
-------- --------
-------- --------
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 11,557 $ 10,942
Federal income taxes paid 182 64
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets 90 -
Loan foreclosures - 99
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of National
Bancshares Corporation of Texas and its wholly-owned subsidiaries have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation S-K.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The consolidated financial statements include the accounts of the parent company
and all subsidiaries. All significant intercompany balances and transactions
have been eliminated. Certain items in prior period financial statements have
been reclassified in conformity with the current period presentation. The
consolidated financial statements are unaudited, but include all adjustments
(consisting primarily of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the results of the periods
presented. The results of operations for the nine-month period ended September
30, 1999 are not necessarily indicative of the results that may be reported for
the entire year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K/A for the
year ended December 31, 1998.
NOTE 2 - SUBSIDIARIES
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, NBT Securities Holdings, Inc. and NBT of
Delaware, Inc. It also includes the accounts of NBT Securities Holdings,
Inc.'s wholly-owned subsidiary, NBC Financial, Inc. and the accounts of NBT
of Delaware, Inc.'s wholly-owned subsidiaries (i) NBC Bank, N.A., (Eagle Pass,
Texas); (ii) NBC Bank - Laredo, N.A., (Laredo, Texas); (iii) NBC Bank,
(Rockdale, Texas); (iv) NBC Bank - Central, N.A., (Luling, Texas); and (v)
NBC Holdings - Texas, Inc., (San Antonio, Texas).
NBC Financial, Inc. was approved by all appropriate regulatory authorities as
a fully-disclosed introducing broker/dealer, and began operations in
September 1999. All securities transactions for NBC Financial, Inc. are being
cleared through Pershing, a division of Donaldson, Lufkin & Jenrette
Securities Corporation. NBC Financial, Inc. provides general securities
services for customers of our banks and the general public, and will operate
pursuant to a leasing arrangement in several of the banks or branches.
NOTE 3 - INVESTMENT SECURITIES
The following tables present the amortized cost and approximate fair value of
the investment securities portfolio as of September 30, 1999 and December 31,
1998 (Dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Approximate
Cost Gains Losses Fair Value
------------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $182,604 $ 2,042 $ (94) $184,552
U.S. Government agency and mortgage-backed securities 41,084 92 (794) 40,382
Other securities including Federal Reserve Bank stock 8,925 530 (2,237) 7,218
-------- -------- -------- --------
Total $232,613 $ 2,664 $ (3,125) $232,152
-------- -------- -------- --------
-------- -------- -------- --------
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ - $ - $ - $ -
U.S. Government agency and mortgage-backed securities - - - -
Foreign debt securities 66 - (4) 62
-------- -------- -------- --------
Total $ 66 $ - $ (4) $ 62
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
6
<PAGE>
<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>
Unrealized gains and losses on investment securities held at September 30, 1999
and December 31, 1998 have been determined to be temporary market fluctuations.
During the period ended September 30, 1999, pursuant to SFAS No. 133 "Accounting
for Derivative Instruments and Hedging Activities," the Company transferred
securities with a fair value of $103,644,000 from the held to maturity category
into the available for sale category.
The following table shows the maturity schedule of the Company's investment
portfolio as of September 30, 1999 (Dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------------------
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 $ 21,520 $ 21,618 $ -- $ --
Due in one year to five years 133,685 134,663 41 40
Due from five to ten years 64,504 64,732 25 22
Due after ten years 1,992 1,992 -- --
-------- -------- -------- --------
Total $221,701 $223,005 $ 66 $ 62
Equity Securities 8,293 6,586 -- --
Mortgage backed securities 2,279 2,221 -- --
Federal Reserve Bank Stock 340 340 -- --
-------- -------- -------- --------
Total $232,613 $232,152 $ 66 $ 62
======== ======== ======== ========
</TABLE>
The carrying value of investment securities pledged to secure public funds
amounted to approximately $84,697,000 at September 30, 1999 and $55,824,000 at
December 31, 1998.
7
<PAGE>
NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses for the nine months ended
September 30, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------- -------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of year $ 2,670 $ 2,458
Provisions for possible loan losses 460 150
Losses charged to the allowance (138) (197)
Recoveries credited to the allowance 80 236
------- -------
Net (charge-offs) recoveries (58) 39
------- -------
Balance at end of period $ 3,072 $ 2,647
======= =======
</TABLE>
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement, including scheduled principal
and interest payments. At September 30, 1999 and 1998, the Banks have impaired
loans of $2,404,000 and $1,806,000, respectively. The allowance for loan losses
related to those loans was $488,000 and $144,000, respectively. The average
recorded investment in impaired loans during the nine months ended September 30,
1999 and 1998, was $1,500,000 and $1,583,000, respectively. Interest income of
approximately $47,000 and $40,000 on impaired loans was recognized for cash
payments received during the nine months ended September 30, 1999 and 1998,
respectively.
NOTE 5 - OTHER BORROWINGS AND NOTES PAYABLE
On September 30, 1999, a subsidiary bank holding company maintained a margin
account which is secured by investment securities. The interest rate is variable
(6.625% at September 30, 1999). The balance at September 30, 1999 was
$3,647,000.
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 prime rate as published by the Wall Street Journal (8.25% at
September 30, 1999). 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 balance at September 30, 1999 was $3,236,000. The
note was renewed on October 2, 1999.
In July 1995, September 1998, December 1998 and January 1999, a subsidiary
Bank borrowed $175,000, $100,000, $1,250,000 and $1,000,000, respectively,
from the Federal Home Loan Bank of Dallas. The notes bear interest rates of
6.393%, 5.15%, 5.126%, and 5.216%, respectively. The maturity dates of the
notes are August 2015, October 2018, January 2004, and February 2004,
respectively. Principal and interest payments are due monthly in the
approximate amount of $44,781 per month in the aggregate with the remaining
balances due at maturity. The aggregate balance outstanding at September 30,
1999 was $2,249,000.
8
<PAGE>
NOTE 6 - INCOME TAX EXPENSE
The provision for Federal income tax expense is less than that computed by
applying the federal statutory rate of 34% as indicated in the following
analysis:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------- -------
(Dollars in Thousands)
<S> <C> <C>
Tax based on statutory rate $ 1,565 $ 2,154
Effect of tax-exempt income (12) (12)
Alternative minimum tax 92 127
Goodwill 21 21
Other, net (98) 30
------- -------
Federal income tax expense $ 1,568 $ 2,320
======= =======
</TABLE>
For Federal income tax purposes, the Company has approximately $99 million in
net operating loss carryforwards as of September 30, 1999 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 $95 million of such carryforwards will expire in
2005, with the remaining approximately $4 million expiring in 2006.
Pursuant to SFAS No. 109, the Company has 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 nine months ended September
30, 1999 and 1998, the deferred tax asset valuation allowance was reduced by
$1,451,000 and $2,254,000, 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 September 30, 1999. 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 set forth in the
Internal Revenue Code. Although realization of the net deferred tax asset is not
assured because of these uncertainties, management believes it is more likely
than not that a significant portion 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.
NOTE 7 - 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. The Company acquired
three Wells Fargo branches in July 1997 and the First National Bank in Luling in
September 1996 to create the goodwill.
NOTE 8 - STOCK REPURCHASE PLAN
On May 15, 1997, the Board of Directors approved a stock repurchase plan. The
plan authorized management to purchase up to 500,000 shares of the Company's
common stock through the open market based on market conditions. On May 20,
1999, the Board of Directors approved the buyback of an additional
9
<PAGE>
400,000 shares. In 1999 and 1998, 57,825 and 463,675 shares were purchased,
respectively, by the Company through the open market at an average cost of
$15.85 and $18.35 per share, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMPANY ANALYZES THE MAJOR ELEMENTS OF THE COMPANY'S
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME. THIS DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, ACCOMPANYING
NOTES, AND SELECTED FINANCIAL DATA APPEARING ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 1999 was $1,045,000 or
$.24 per diluted share compared with $1,201,000 or $.26 per diluted share for
the three months ended September 30, 1998. The third quarter of 1999 included
net investment and other real estate gains in the amount of $10,000, net of
tax, and the third quarter of 1998 included net investment gains and
miscellaneous income of $171,000, net of tax. With the exclusion of such
items, net income for the third quarter of 1999 and 1998 was $1,035,000, or
$.24 per diluted share and $1,030,000 or $.22 per diluted share,
respectively. Net interest income for the three months ended September 30,
1999 increased $434,000 over the same period of 1998 which is due primarily
to internal growth of 33% in the loan portfolio. Non-interest expenses were
up $585,000, or 15%, for the three months ended September 30, 1999 compared
to the three months ended September 30, 1998. This was primarily due to
salary and occupancy expenses involved with the opening of a new branch in
San Antonio in the first quarter of 1999. Non-interest income increased
$165,000 or 19% for the three months ended September 30, 1999, excluding the
non-operating items, which is primarily from an increase in service charge
income. The provision for possible loan losses was $103,000 higher for the
three months ended September 30, 1999 than in the corresponding period last
year to bring the loan loss reserve to an adequate level attributable to loan
growth in the quarter. For the three months ended September 30, 1999, the
Company's return on average assets was .77% or .76%, excluding the
non-operating items. The return on average assets for the three months ended
September 30, 1998 was .99% or .85% after excluding the non-operating items.
Net income for the nine months ended September 30, 1999 was $3,034,000, or
$.71 per diluted share compared to $4,017,000, or $.85 per diluted share for
the nine months ended September 30, 1998. For the nine months ended September
30, 1999 and 1998, the Company had $122,000 and $1,192,000 of non-operating
items, net of tax. Excluding such items, net income for such nine month
period was $2,912,000 or $.68 per diluted share, up from $2,825,000, or $.60
per diluted share for the nine months ended September 30, 1998. Average
assets have increased $48 million or 10% to $527 million at September 30,
1999 from an average of $479 million at September 30, 1998.
NET INTEREST INCOME
Net interest income constitutes the principal source of income for the Banks
and represents the difference between interest income on interest-earning
assets and interest expense on interest-bearing liabilities. The increase of
$1,288,000 or 9.6% in net interest income for the nine months ended September
30, 1999 compared to the same period in 1998 was due primarily to internal
loan growth. Average loans increased $56 million or 35% over the third
quarter of 1998. Interest income increased $1,726,000 or 7% over the same
period in 1998 due primarily to internal loan growth. Interest expense
increased $438,000 or 4% over the same period in 1998 due primarily to the
$377,000 increase in interest expense on indebtedness which was incurred to
repurchase shares of Company stock pursuant to the plan discussed in Note 8.
The net interest margin for the nine months ended September 30, 1999 was
unchanged at 4.23% when compared to September 30, 1998. The net interest
margin is the net return on earning assets which is computed by dividing
taxable equivalent net interest income by average total earning assets.
The net interest spread increased ten basis points to 3.70% for the nine months
ended September 30, 1999 from 3.60% at September 30, 1998. The increase in the
net interest spread is primarily due to the decrease in rates being paid on
deposits.
10
<PAGE>
INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- --------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts $ 2,193 $ 28 5.07% $ 769 $ 10 5.16%
Federal funds sold 24,676 316 5.08% 26,409 387 5.81%
Investment securities (F):
US Treasuries 188,736 2,960 6.22% 228,080 3,597 6.26%
US Government agencies 35,046 516 5.84% 4,513 70 6.15%
Other 1,737 71 16.22% 647 10 6.13%
--------- --------- ---- --------- --------- ----
Total investment securities 225,519 3,547 6.24% 233,240 3,677 6.25%
Loans, net of discounts (A) 226,388 5,165 9.05% 171,677 4,338 10.02%
--------- --------- ---- --------- --------- ----
Total interest-earning assets 478,776 9,056 7.50% 432,095 8,412 7.72%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 20,440 17,365
Allowance for possible loan losses (2,956) (2,576)
Other assets 45,408 39,745
--------- --------
Total assets $ 541,668 $486,629
========= ========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 69,474 431 2.46% 61,051 400 2.60%
Savings, money market and certificates
of deposit 332,918 3,348 3.99% 300,245 3,302 4.36%
Other debt 10,277 173 6.68% 2,536 43 6.73%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 412,669 3,952 3.80% 363,832 3,745 4.08%
Non-interest bearing liabilities:
Demand deposits 73,613 63,810
Other liabilities 3,250 4,792
--------- --------
Total liabilities 489,532 432,434
STOCKHOLDERS' EQUITY (F) 52,136 54,195
--------- --------
Total liabilities and stockholders'
equity $ 541,668 $486,629
========= ========
Taxable equivalent net interest income 5,104 4,667
Less: taxable equivalent adjustment 5 3
--------- ---------
Net interest income $ 5,099 $ 4,664
========= =========
Net interest spread (B) 3.70% 3.64%
==== ====
Net interest margin (C) 4.23% 4.29%
==== ====
SELECTED OPERATING RATIOS:
Return on assets (D) 0.77% 0.99%
==== ====
Return on equity (E) 8.02% 8.86%
==== ====
</TABLE>
- ----------------------
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing annualized net income
by average total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
11
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
---------------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
------- ------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Interest-bearing accounts $ 2,265 $ 87 5.14% $ 1,169 $ 42 4.80%
Federal funds sold 23,431 898 5.12% 26,131 1,051 5.38%
Investment securities (F):
US Treasuries 201,051 9,421 6.26% 235,126 11,065 6.29%
US Government agencies 24,304 1,050 5.78% 4,501 216 6.42%
Other 1,675 212 16.92% 635 29 6.11%
--------- --------- ---- --------- --------- ----
Total investment securities 227,030 10,683 6.29% 240,262 11,310 6.29%
Loans, net of discounts (A) 213,543 14,558 9.11% 157,814 12,092 10.24%
--------- --------- ---- --------- --------- ----
Total interest-earning assets 466,269 26,226 7.52% 425,376 24,495 7.70%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,946 18,274
Allowance for possible loan losses (2,829) (2,533)
Other assets 45,076 38,192
--------- --------
Total assets $ 527,462 $479,309
========= ========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 66,766 1,210 2.42% 61,772 1,217 2.63%
Savings, money market and certificates
of deposit 323,838 9,714 4.01% 294,796 9,646 4.37%
Other debt 11,162 559 6.70% 3,296 182 7.38%
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities 401,766 11,483 3.82% 359,864 11,045 4.10%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 71,963 62,429
Other liabilities 3,091 4,350
--------- --------
Total liabilities 476,820 426,643
STOCKHOLDERS' EQUITY (F) 50,642 52,666
--------- --------
Total liabilities and stockholders'
equity $ 527,462 $479,309
========= ========
Taxable equivalent net interest income 14,743 13,450
Less: taxable equivalent adjustment 15 11
--------- ---------
Net interest income $ 14,728 $ 13,439
========= =========
Net interest spread (B) 3.70% 3.60%
==== ====
Net interest margin (C) 4.23% 4.23%
==== ====
SELECTED OPERATING RATIOS:
Return on assets (D) 0.77% 1.12%
==== ====
Return on equity (E) 8.01% 10.20%
==== =====
</TABLE>
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average interest-earning assets.
(D) The return on assets ratio was computed by dividing annualized net income
by average total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
12
<PAGE>
The following table analyzes the increase in taxable-equivalent net interest
income stemming from changes in interest rates and from asset and liability
volume, including mix, for the three and nine months ended September 30, 1999
and 1998. Non-accruing loans have been included in assets for calculating this
table, thereby reducing the yield on loans. The changes in interest due to both
rate and volume in the table below have been allocated to volume or rate change
on a pro-rata basis.
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1999 VS. SEPTEMBER 30, 1998
------------------------------------
Due to Changes in
Increase --------------------
(Decrease) Rates Volume
---------- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ 18 $ (1) $ 19
Federal funds sold (71) (45) (26)
Investment securities (130) (8) (122)
Loans, net of discounts 827 (551) 1,378
------- ------- -------
Total taxable-equivalent interest income $ 644 $ (605) $ 1,249
INTEREST EXPENSE:
Interest-bearing deposits 77 (336) 413
Other debt 130 (1) 131
------- ------- -------
Total interest expense 207 (337) 544
------- ------- -------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 437 $ (268) $ 705
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 VS. SEPTEMBER 30, 1998
------------------------------------
Due to Changes in
Increase --------------------
(Decrease) Rates Volume
---------- ----- ------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ 45 $ 4 $ 41
Federal funds sold (153) (30) (123)
Investment securities (627) (3) (624)
Loans, net of discounts 2,466 (1,206) 3,672
------- ------- -------
Total taxable-equivalent interest income $ 1,731 $(1,235) $ 2,966
INTEREST EXPENSE:
Interest-bearing deposits 62 (660) 722
Other debt 377 (38) 415
------- ------- -------
Total interest expense 439 (698) 1,137
------- ------- -------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 1,292 $ (537) $ 1,829
======= ======= =======
</TABLE>
Taxable-equivalent net interest income for the nine months ended September 30,
1999 increased $1.3 million or 9.6% over the same period in 1998. The increase
is reflected in the increase in the volume of earning assets and in the increase
in the volume of interest bearing liabilities.
13
<PAGE>
INTEREST RATE SENSITIVITY
Management seeks to maintain consistent growth of net interest income through
periods of changing interest rates by avoiding fluctuating net interest margins.
Interest rate sensitivity is the relationship between changes in market interest
rates and changes in net interest income due to repricing characteristics of
interest earning assets and liabilities.
The following table indicates the Company's interest rate sensitivity position
at September 30, 1999:
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 $ 64,171 $ 10,288 $ 22,672 $ 97,131 $ 136,030 $ 233,161
Investment securities 2,006 4,025 15,587 21,618 210,600 232,218
Federal funds sold 28,474 -- -- 28,474 -- 28,474
Interest-bearing accounts 310 885 585 1,780 450 2,230
--------- --------- --------- --------- --------- ---------
Total earning assets $ 94,961 $ 15,198 $ 38,844 $ 149,003 $ 347,080 $ 496,083
========= ========= ========= ========= ========= =========
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $ 184,940 -- -- $ 184,940 -- $ 184,940
Certificates and time deposits 47,227 49,886 119,630 216,743 11,394 228,137
Debt 6,918 70 322 7,310 1,822 9,132
--------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities $ 239,085 $ 49,956 $ 119,952 $ 408,993 $ 13,216 $ 422,209
========= ========= ========= ========= ========= =========
Interest sensitivity gap $(144,124) $ (34,758) $ (81,108) $(259,990)
========= ========= ========= =========
Cumulative gap $(144,124) $(178,882) $(259,990) $(259,990)
========= ========= ========= =========
Ratio of earning assets to
interest-bearing liabilities 39.7% 30.4% 32.4% 36.4%
</TABLE>
The interest rate sensitivity table reflects a cumulative liability sensitive
position during the one-year period shown. Generally, this indicates that the
liabilities reprice more quickly than the assets in a given period, and that a
decline in market rates will benefit net interest income. An increase in market
rates would have the opposite effect.
14
<PAGE>
NON-INTEREST INCOME
The major components of non-interest income are service charges and fees earned
on deposit accounts. The following table summarizes changes in non-interest
income for the nine months ended September 30, 1999 and 1998:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1999/1998
---------------------- ---------------------
SEPTEMBER SEPTEMBER
30, 1999 30, 1998 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Service charges and fees $ 2,608 $ 2,404 $ 204 8.5%
Net realized gains on sales of securities 43 565 (522) -92.4%
Net trading profits -- 959 (959) -100.0%
Net gains on sales of other real estate owned 14 -- 14 100.0%
Miscellaneous income 525 410 115 28.0%
------- ------- ------- ----
Total non-interest income $ 3,190 $ 4,338 $(1,148) -26.5%
======= ======= ======= ====
</TABLE>
The $1.1 million or 26.5% decrease in non-interest income for the nine months
ended September 30, 1999 is due primarily to the $1.5 million decrease in net
securities gains and trading account profits over the nine months ended
September 30, 1998. Excluding the gains on sales of securities and other real
estate owned, non-interest income increased $333,000 or 11.8% over the nine
months ended September 30, 1998. Service charges on deposit accounts increased
$204,000 or 8.5% over the nine months ended September 30, 1998. This increase is
a result of some fee increases and broad based deposit growth.
NON-INTEREST EXPENSE
Non-interest expense includes all expenses of the Company other than interest
expense, loan loss provision and income tax expense. The following table
summarizes the changes in non-interest expense for the nine months ended
September 30, 1999 and 1998:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 1999/1998
-------------------------- --------------------------
SEPTEMBER SEPTEMBER
30, 1999 30, 1998 $ CHANGE % CHANGE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 6,728 $ 5,795 $ 933 16.1%
Occupancy and equipment expenses 2,398 1,918 480 25.0%
Data processing fees 244 199 45 22.6%
FDIC insurance 38 36 2 5.6%
Insurance 101 77 24 31.2%
Office supplies 523 464 59 12.7%
Postage and courier 390 379 11 2.9%
Professional fees 570 670 (100) -14.9%
Goodwill amortization 282 282 0 0.0%
Miscellaneous other expenses 1,582 1,471 111 7.5%
------- ------- ------- ----
Total non-interest expense $12,856 $11,291 $ 1,565 13.9%
======= ======= ======= ====
</TABLE>
Total non-interest expense for the nine months ended September 30, 1999
increased $1.6 million or 13.9% over 1998. Salaries and benefits rose $933,000
or 16.1% in 1999. Salaries and benefits increased due primarily to the hiring of
personnel for the San Antonio branch which was opened during the first quarter
of 1999 and to the opening of the San Marcos and South Laredo branches in March
1998. The $480,000 or 25% increase in occupancy and equipment expenses is due to
the construction of the new 30,000 square foot
15
<PAGE>
building and associated equipment costs for the San Antonio branch in addition
to the new facilities and equipment associated with the San Marcos and South
Laredo branches.
INCOME TAXES
The Company recognized income tax expense of $1,568,000 for the nine months
ended September 30, 1999 compared to $2,320,000 for the nine months ended
September 30, 1998. At September 30, 1999, the Company had approximately $99
million in net operating loss carryforwards that will be available to reduce
income tax liabilities in future years. If unused, approximately $95 million of
such carryforwards will expire in 2005, with the remaining approximately $4
million expiring in 2006.
LOANS
The following table presents the composition of the Company's loan portfolio by
type of loan:
LOAN PORTFOLIO
(Dollars in thousands)
<TABLE>
<CAPTION>
SEPTEMBER % OF DECEMBER 31, % OF SEPTEMBER
30, 1999 TOTAL 1998 TOTAL 30, 1998
-------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C>
Commercial $ 40,008 17.1% $ 35,389 18.4% $ 28,251
Real estate construction 19,731 8.5% 12,125 6.3% 12,851
Real estate mortgage 146,958 63.0% 119,654 62.3% 108,627
Consumer installment, net of unearned
discount 26,464 11.4% 25,051 13.0% 25,227
-------- ----- -------- ----- --------
Total loans $233,161 100.0% $192,219 100.0% $174,956
======== ===== ======== ===== ========
</TABLE>
Total loans have increased 21.2% and 33.2% since December 31, 1998 and September
30, 1998, respectively. Real estate mortgage loans have shown a 22.8% and 35.2%
increase since December 31, 1998 and September 30, 1998, respectively. The
increase in total loans has been from loan originations at existing locations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges to operations in
the form of a provision for loan losses. Loans, or portions thereof, which are
considered to be uncollectible are charged against the allowance and subsequent
recoveries, if any, are credited to the allowance. The allowance represents the
amount, which in the judgment of each subsidiary Bank's management will be
adequate to absorb possible losses. The adequacy of the allowance is determined
by management's continuous evaluation of the loan portfolio and by the
employment of third party loan review consultants. Industry concentrations,
specific credit risks, past loan loss experience, delinquency ratios, current
loan portfolio quality and projected economic conditions in the Bank's market
areas are pertinent factors in determining the adequacy of the allowance for
loan losses. Loans identified as losses by management, external loan review or
bank examiners are charged-off.
The Company recorded net charge-offs of $58,000 for the nine months ended
September 30, 1999 compared to net recoveries of $39,000 for the nine months
ended September 30, 1998.
16
<PAGE>
The following table summarizes, for the periods presented, the activity in the
allowance for loan losses arising from provisions credited to operations, loans
charged off and recoveries of loans previously charged off.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Average loans outstanding $ 213,543 $ 157,814
Balance of allowance for loan losses at beginning of year $ 2,670 $ 2,458
Provision for loan losses 460 150
Charge-Offs:
Commercial 49 44
Real estate construction -- --
Real estate mortgage -- 27
Consumer installment 89 126
--------- ---------
Total charge-offs 138 197
--------- ---------
Recoveries:
Commercial 15 17
Real estate construction -- --
Real estate mortgage 20 58
Consumer installment 45 161
--------- ---------
Total recoveries 80 236
--------- ---------
Net charge-offs (recoveries) 58 (39)
--------- ---------
Balance of allowance for loan losses at end of period $ 3,072 $ 2,647
========= =========
Net charge-offs (recoveries) as a percentage
of average loans outstanding 0.03% -0.02%
========= =========
Allowance for loan losses as a percentage of:
Total loans, net of unearned discount 1.32% 1.51%
========= =========
</TABLE>
NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans and foreclosed real estate.
Loans to a customer whose financial condition has deteriorated are considered
for non-accrual status whether or not the loan is ninety days or more past due.
All installment loans past due ninety days or more are placed on non-accrual,
unless the loan is well secured or in the process of collection. On non-accrual
loans, interest income is not recognized until actually collected. At the time
the loan is placed on non-accrual status, interest previously accrued but not
collected is reversed and charged against current income.
Foreclosed real estate consists of property which has been acquired through
foreclosure. At the time of foreclosure, the property is recorded at the lower
of the estimated fair value less selling expenses or the loan balance with any
write down charged to the allowance for loan losses. Any future write-downs on
the property are charged to operations.
17
<PAGE>
The following table discloses non-performing assets and loans 90 days past due
and still accruing interest as of September 30, 1999 and December 31, 1998:
(Dollars in thousands)
NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------ ------
<S> <C> <C>
Non-accrual loans $2,404 $ 899
Foreclosed real estate 965 1,195
------ ------
Total non-performing assets $3,369 $2,094
====== ======
Non-performing assets as a percentage of:
Total assets 0.61% 0.41%
Total loans plus foreclosed real estate 1.44% 1.08%
Accruing loans past due 90 days or more $ 182 $ 311
</TABLE>
Independent third party loan reviews of the subsidiary Banks are performed on
an annual basis. The loans are also reviewed by banking regulators, typically
on an eighteen-month basis. On a monthly basis, the Board of Directors' Loan
Committee of each Bank reviews new loans, renewals and delinquencies.
Management of each Bank monitors on a continuing basis those loans which it
feels should be followed closely. The Banks are required by regulation to
periodically appraise foreclosed real estate.
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet the
commitments of the Company. Asset liquidity is provided by cash and assets which
are readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash and short-term investments in time deposits in banks,
federal funds sold and securities available for sale. Liquidity is also provided
by access to core funding sources, primarily core depositors in the Company's
trade area. The Banks have not and do not solicit brokered deposits as a funding
source. The liquidity of the Company is enhanced by the fact that 75% of total
deposits at September 30, 1999 were "core" deposits. Core deposits, for this
purpose, are defined as total deposits less public funds and certificates of
deposit greater than $100,000.
At September 30, 1999, the Company's liquid assets totaled $283 million or 51.4%
of total gross assets, compared to 39% at September 30, 1998. Secondary sources
of liquidity include the Banks' ability to sell loan participations and purchase
federal funds. NBC-Eagle Pass has an approved federal funds line at a
correspondent bank. NBC-Laredo has an approved line of credit with the Federal
Home Loan Bank.
The Company's principal source of funds consists of dividends received from the
Banks, which derive their funds from deposits, interest and principal payments
on loans and investment securities, sales of investment securities and
borrowings.
CAPITAL RESOURCES
Total stockholders' equity decreased $1.8 million to $52.1 million at
September 30, 1999 from $53.9 million at September 30, 1998. The ratio of
total stockholders' equity to total assets was 9.5% at September 30, 1999
compared with 11.0% at September 30, 1998. The Company began a stock
repurchase plan in 1997 and has repurchased 521,500 common shares at a cost
of $9.4 million as of September 30, 1999, which is one of the reasons for the
decrease the unrealized gain in the available for sale securities porfolio in
total stockholders' equity. The other reason for the decline is that the
unrealized gain in the available for sale securities portfolio declined $4.6
million due to market fluctuations.
18
<PAGE>
The Company and subsidiary Banks are subject to minimum capital ratios mandated
by their respective banking industry regulators. The table below illustrates the
Company and subsidiary Bank's compliance with the risk-based capital guidelines
of the Federal Reserve Bank (FRB) and the Office of the Comptroller of the
Currency (OCC). These guidelines are designed to measure Tier 1 and total
capital while taking into consideration the risk inherent in both on and off
balance sheet items. Off balance sheet items include unfunded loan commitments
and letters of credit. Currently under the regulatory guidelines, the net
unrealized gain or loss on securities available for sale is not included in the
calculation of risk-based capital and the leverage ratio. The leverage ratio is
Tier 1 capital divided by average total assets. A leverage ratio of 3.0 percent
is the minimum requirement for only the most highly rated banking organizations
and all other institutions are required to maintain a leverage ratio of 3 to 5
percent.
Tier 1 capital includes common stockholders' equity less goodwill. Total capital
includes Tier 1 capital and a portion of the allowance for loan losses. The
ratios are calculated by dividing the qualifying capital by the risk-weighted
assets.
The table below illustrates the Company and its subsidiary Banks' compliance
with the risk-based capital guidelines as of September 30, 1999:
<TABLE>
<CAPTION>
NBC NBC NBC NBC
CONSOLIDATED EAGLE PASS LAREDO ROCKDALE LULING
------------ ---------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total average assets (net of goodwill) $533,090 $291,282 $ 92,227 $108,522 $ 29,873
Risk weighted assets (net of goodwill) $253,564 $146,214 $ 59,722 $ 32,611 $ 18,731
Tier 1 capital $ 42,388 $ 17,821 $ 8,268 $ 7,051 $ 3,998
Total capital $ 45,460 $ 19,316 $ 8,943 $ 7,459 $ 4,236
Leverage ratio 7.95% 6.12% 8.96% 6.50% 13.38%
Risk based capital ratios:
Tier 1 16.72% 12.19% 13.84% 21.62% 21.34%
Total capital 17.93% 13.21% 14.97% 22.87% 22.61%
</TABLE>
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 may recognize "00" as the year 1900 rather that the year 2000.
The Company has a Y2K project team comprising technological, data processing,
and operations personnel from each of the Banks' management. The project team
has developed and has executed 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 was effected through data processing hardware
and software upgrades and purchases of new equipment with an estimated aggregate
cost of approximately $600,000. The Company's regulators, the Federal Reserve
Bank, the Office of the Comptroller of Currency, and the Federal Deposit
Insurance Corporation regularly review the Company's Y2K program and progress.
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 were also upgraded and tested for Y2K
compliance. The ATM software testing was completed in March 1999 and the NT
Server software testing was completed in June 1999 and are deemed to be
compliant with Y2K.
19
<PAGE>
In an effort to avoid any adverse effects of a power outage, the Company has
purchased a generator which will be installed and tested in December 1999.
The Company has successfully completed its Y2K effort on the non-mission
critical items. The Company business resumption contingency plan is complete
and successfully tested. However, it is subject to unique risks and
uncertainties due to the interdependencies in business and financial markets,
and the numerous activities and events outside of its control. The Company
has substantially completed the external testing and monitoring and
re-testing of third parties, however, it is unable to make assumptions as to
the extent of Y2K failures that could result, nor quantify the potential
adverse effect that such failures could have on the Company's operations,
liquidity, and financial condition. Y2K risks will be continually evaluated
and contingency plans revised throughout 1999.
FORWARD-LOOKING INFORMATION
The Company may from time to time make "forward-looking" statements as such term
is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, the interest rate environment, governmental regulation and
supervision, technological change, one-time events and other factors described
herein and in other filings made by the Company with the Securities and Exchange
Commission. Based upon changing conditions, should any one or more of these
risks or uncertainties materialize, or should any underlying assumptions prove
incorrect, actual results may vary materially from such forward-looking
statements.
20
<PAGE>
PART II - OTHER INFORMATION:
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 11.1 Statement regarding computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
21
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
Date: November 11, 1999 By: /s/ Anne R. Renfroe
----------------------------------------
Anne Renfroe, Chief Accounting Officer and
Principal Financial Officer
22
<PAGE>
EXHIBIT 11.1
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $0.25 $0.27 $0.73 $0.87
===== ===== ===== =====
DILUTED EPS:
Net income $0.24 $0.26 $0.71 $0.85
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income available to common stockholders $ 1,045 $ 1,201 $ 3,034 $ 4,017
Weighted average number of common
shares used in Basic EPS 4,150,726 4,492,272 4,161,711 4,594,505
Effect of dilutive stock options 120,048 125,317 121,277 126,650
--------- --------- --------- ---------
Weighted number of common shares
and dilutive potential common stock
used in Diluted EPS 4,270,774 4,617,589 4,282,988 4,721,155
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 20,476
<INT-BEARING-DEPOSITS> 2,230
<FED-FUNDS-SOLD> 28,474
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 232,152
<INVESTMENTS-CARRYING> 66
<INVESTMENTS-MARKET> 62
<LOANS> 233,161
<ALLOWANCE> 3,072
<TOTAL-ASSETS> 551,199
<DEPOSITS> 487,319
<SHORT-TERM> 6,883
<LIABILITIES-OTHER> 2,666
<LONG-TERM> 2,249
0
0
<COMMON> 5
<OTHER-SE> 52,082
<TOTAL-LIABILITIES-AND-EQUITY> 551,199
<INTEREST-LOAN> 14,543
<INTEREST-INVEST> 10,683
<INTEREST-OTHER> 8,985
<INTEREST-TOTAL> 26,211
<INTEREST-DEPOSIT> 10,924
<INTEREST-EXPENSE> 559
<INTEREST-INCOME-NET> 14,728
<LOAN-LOSSES> 460
<SECURITIES-GAINS> 43
<EXPENSE-OTHER> 3,190
<INCOME-PRETAX> 4,602
<INCOME-PRE-EXTRAORDINARY> 4,602
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,034
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.71
<YIELD-ACTUAL> 7.52
<LOANS-NON> 2,404
<LOANS-PAST> 182
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,180
<ALLOWANCE-OPEN> 2,670
<CHARGE-OFFS> 138
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 3,072
<ALLOWANCE-DOMESTIC> 3,072
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,030
</TABLE>
