<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 June 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: 4,150,734 shares of
Common Stock, $.001 par value, outstanding as of July 30, 1999.
===============================================================================
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash and due from banks $ 18,233 $ 16,473
Interest-bearing accounts 2,242 2,343
Federal funds sold 22,063 37,195
Investment securities available for sale 205,166 142,558
Investment securities held to maturity 25,771 89,923
Loans, net of discounts 222,221 192,219
Allowance for possible loan losses (2,896) (2,670)
Bank premises and equipment, net 19,089 17,793
Goodwill 8,616 8,804
Other assets 9,713 7,440
----------- -----------
Total Assets $ 530,218 $ 512,078
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits - non-interest bearing $ 74,087 $ 67,160
Interest-bearing transaction accounts (NOW) 64,588 65,847
Savings and money market accounts 102,949 95,622
Certificates and time deposits under $100,000 137,188 136,996
Certificates and time deposits $100,000 and over 87,489 82,031
----------- -----------
Total Deposits 466,301 447,656
----------- -----------
Accrued interest payable and other liabilities 2,379 2,073
Other borrowings 7,921 8,459
Long term notes payable 2,352 1,684
----------- -----------
Total Liabilities 478,953 459,872
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized,
4,661,234 issued and 4,164,059 outstanding at June 30, 1999
and 4,661,234 issued and 4,197,559 outstanding at
December 31, 1998 5 5
Additional paid-in-capital 29,606 28,629
Retained earnings 30,673 28,683
Accumulated other comprehensive income 51 3,395
Treasury Stock, at cost (498,175 shares in 1999, 463,675 in 1998) (9,070) (8,506)
Total Stockholders' Equity 51,265 52,206
----------- -----------
Total Liabilities and Stockholders' Equity $ 530,218 $ 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 SIX MONTHS ENDED
-------------------------- ---------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and Fees on Loans $ 4,895 $ 4,024 $ 9,383 $ 7,746
Interest on Investment Securities 3,595 3,803 7,136 7,633
Interest on Federal Funds Sold 202 305 582 664
Interest on Deposits in Banks 29 28 59 32
------------- ------------ ------------ --------------
TOTAL INTEREST INCOME 8,721 8,160 17,160 16,075
INTEREST EXPENSE:
Interest on Deposits 3,574 3,613 7,145 7,160
Interest on Debt 194 72 386 139
------------- ------------ ------------ --------------
TOTAL INTEREST EXPENSE 3,768 3,685 7,531 7,299
NET INTEREST INCOME 4,953 4,475 9,629 8,776
Less: Provision for Possible Loan Losses 151 48 275 68
------------- ------------ ------------ --------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 4,802 4,427 9,354 8,708
NON-INTEREST INCOME:
Service Charges and Fees 870 794 1,662 1,588
Net Trading Account Profit (Loss) - (524) - 789
Net realized Gains on Sales of Securities 6 107 35 634
Net Gains on Sales of Other Real Estate and Assets 29 - 55 -
Miscellaneous Income 86 110 374 183
------------- ------------ ------------ --------------
TOTAL NON-INTEREST INCOME 991 487 2,126 3,194
NON-INTEREST EXPENSE:
Salaries and Employee Benefits 2,215 1,932 4,438 3,764
Occupancy and Equipment Expenses 815 689 1,535 1,259
Goodwill Amortization 94 94 188 188
Other Expenses 1,122 1,078 2,279 2,249
------------- ------------ ------------ --------------
TOTAL NON-INTEREST EXPENSE 4,246 3,793 8,440 7,460
INCOME BEFORE FEDERAL INCOME TAXES 1,547 1,121 3,040 4,442
Federal Income Tax Expense 394 410 1,050 1,625
------------- ------------ ------------ --------------
NET INCOME $ 1,153 $ 711 $ 1,990 $ 2,817
============= ============ ============ ==============
BASIC EARNINGS PER SHARE $ 0.28 $ 0.15 $ 0.48 $ 0.60
============= ============ ============ ==============
DILUTED EARNINGS PER SHARE $ 0.27 $ 0.15 $ 0.47 $ 0.59
============= ============ ============ ==============
</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
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
Net Income -- -- -- 1,990 -- -- 1,990
Unrealized loss on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- (3,344) (3,344)
--------
Total Comprehensive Income (Loss) (1,354)
--------
Reduction of Deferred tax valuation
allowance -- -- 971 -- -- -- 971
Exercise of Common Stock Options 1 -- 6 -- -- -- 6
Treasury stock purchased (34) -- -- -- (564) -- (564)
------ ----- -------- -------- ------- --------- --------
BALANCE AT JUNE 30, 1999 4,164 $ 5 $ 29,606 $ 30,673 $(9,070) $ 51 $ 51,265
====== ===== ======== ======== ======== ========= ========
Disclosure of reclassification amount:
Unrealized loss on securities AFS arising during period $ (3,367)
Reclassification adjustment for gains included in income, net of tax of $12 23
--------
Net unrealized loss on securities AFS, net of tax $ (3,344)
========
</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>
SIX MONTHS ENDING
JUNE 30,
-------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,990 $ 2,817
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,085 1,030
Tax benefit realized from utilization of deferred tax assets 971 1,569
Provision for possible loan losses 275 68
Net realized gains on securities available for sale (35) (634)
Net decrease in trading account - 5,449
Write-down of other real estate owned 23 -
Gain on sale of other real estate owned and other assets (55) -
Increase in accrued interest receivable and other assets (699) (40)
Increase in accrued interest payable and other liabilities 306 437
-------------- ---------------
Net cash provided by operating activities 3,861 10,696
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold 15,132 13,130
Net (increase) decrease in interest-bearing accounts 101 (3,098)
Net increase in loans (30,050) (31,450)
Purchases of securities available for sale (23,571) (17,282)
Proceeds from sales of securities available for sale 2,584 10,004
Proceeds from maturities of securities available for sale 13,090 5,304
Purchases of securities held to maturity - (7,035)
Proceeds from maturities of securities held to maturity 4,234 12,315
Capital expenditures (2,019) (3,469)
Proceeds from sale of other real estate owned 180 -
-------------- ---------------
Net cash used in investing activities (20,319) (21,581)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts,
savings and money-market accounts 12,995 (549)
Net increase in certificates of deposit and time deposits 5,650 7,532
Proceeds from advances on other borrowings and long term debt 2,413 -
Principal payments on other borrowings and long term debt (2,282) (1,755)
Purchase of treasury stock (564) (1,331)
Proceeds from exercise of common stock options 6 14
-------------- ---------------
Net cash provided by financing activities 18,218 3,911
Net increase (decrease) in cash and due from banks 1,760 (6,974)
Cash and due from banks at beginning of period 16,473 27,278
-------------- ---------------
Cash and due from banks at end of period $ 18,233 $ 20,304
============== ===============
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,575 $ 7,222
Federal income taxes paid 142 56
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets 87 -
Loan foreclosures - 97
</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, and all significant intercompany balances and transactions
have been eliminated. Certain items in prior year's financial statements
have been reclassified in conformity with the current year's
presentation. The consolidated financial statements are unaudited, but
include all adjustments (consisting primarily of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the results of the periods presented. The results of
operations for the six-month period ended June 30, 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.
NOTE 3 - INVESTMENT SECURITIES
The following tables present the amortized cost and approximate fair
value of the investment securities portfolio as of June 30, 1999 and
December 31, 1998 (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 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 $171,303 $ 2,489 $ (104) $ 173,688
U.S. Government agency and mortgage-backed securities 24,521 8 (616) 23,913
Other securities including Federal Reserve Bank stock 9,264 - (1,699) 7,565
------------ ---------- ----------- ---------------
Total $205,088 $ 2,497 $ (2,419) $ 205,166
============ ========== =========== ===============
SECURITIES HELD TO MATURITY:
U.S. Treasury securities $ 23,967 $ 328 $ - $ 24,295
U.S. Government agency and mortgage-backed securities 1,738 5 (3) 1,740
Foreign debt securities 66 - (4) 62
------------ ---------- ----------- ---------------
Total $ 25,771 $ 333 $ (7) $ 26,097
============ ========== =========== ===============
</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 June 30,
1999 and December 31, 1998 have been determined to be temporary market
fluctuations.
During the period ended June 30, 1999, pursuant to SFAS No. 133
"Accounting for Derivative Instrument and Hedging Activities,"
the Company transferred securities with a fair value of $59,873,000
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 June 30, 1999 (Dollars in thousands):
<TABLE>
<CAPTION>
JUNE 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 $ 21,030 $ 21,179 $ 3,013 $ 3,035
Due in one year to five years 116,300 117,379 11,031 11,134
Due from five to ten years 58,109 58,651 9,989 10,188
Due after ten years 289 288 - -
------------ ---------------- ------------ ----------------
Total $ 195,728 $ 197,497 $ 24,033 $ 24,357
Equity Securities 8,635 6,936 - -
Mortgage backed securities 385 393 1,738 1,740
Federal Reserve Bank Stock 340 340 - -
------------ ---------------- ------------ ----------------
Total $ 205,088 $ 205,166 $ 25,771 $ 26,097
============ ================ ============ ================
</TABLE>
The carrying value of investment securities pledged to secure public
funds amounted to approximately $60,635,000 at June 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 six
months ended June 30, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, 1999 JUNE 30, 1998
-------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of year $ 2,670 $ 2,458
Provisions for possible loan losses 275 68
Losses charged to the allowance (101) (131)
Recoveries credited to the allowance 52 156
-------------- ---------------
Net (charge-offs) recoveries (49) 25
-------------- ---------------
Balance at end of year $ 2,896 $ 2,551
============== ===============
</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 June 30, 1999
and 1998, the Banks have impaired loans of $1,884,000 and $1,964,000,
respectively. The allowance for loan losses related to those loans was
$242,000 and $312,000, respectively. The average recorded investment
in impaired loans during the six months ended June 30, 1999 and 1998,
was $1,189,000 and $1,366,000, respectively. Interest income of
approximately $27,000 and $25,000 on impaired loans was recognized for
cash payments received during the six months ended June 30, 1999 and
1998, respectively.
NOTE 5 - OTHER BORROWINGS AND NOTES PAYABLE
On June 30, 1999, a subsidiary bank holding company maintained a margin
account which is secured by investment securities. The interest rate is
variable (6.875% at June 30, 1999). The balance at June 30, 1999 was
$3,685,000.
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 (7.75% at June 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 June 30, 1999 was $4,237,000.
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 at
June 30, 1999 was $2,352,000.
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>
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
1999 1998
-------------- --------------
(Dollars in Thousands)
<S> <C> <C>
Tax based on statutory rate $ 1,034 $ 1,510
Effect of tax-exempt income (9) (9)
Alternative minimum tax 61 89
Goodwill 12 12
Other, net (48) 23
-------------- --------------
Federal income tax expense $ 1,050 $ 1,625
============== ==============
</TABLE>
For Federal income tax purposes, the Company has approximately $94
million in net operating loss carryforwards as of June 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 $90 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 six months ended June 30, 1999 and 1998, the
deferred tax asset valuation allowance was reduced by $971,000 and
$1,569,000, 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 June 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 400,000 shares. In 1999 and 1998, 34,500 and 463,675
shares were purchased, respectively, by the Company through the open
market at an average cost of $16.34 and $18.35 per share, respectively.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF THE COMPANY ANALYZES THE MAJOR ELEMENTS OF THE COMPANY'S
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME. THIS DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS,
ACCOMPANYING NOTES, AND SELECTED FINANCIAL DATA APPEARING ELSEWHERE IN
THIS REPORT.
RESULTS OF OPERATIONS
Net income for the three months ended June 30, 1999 was $1,153,000
or $.27 per diluted share compared with $711,000 or $.15 per diluted
share for the three months ended June 30, 1998. The second quarter of
1999 included net investment gains in the amount of $4,000, net of
tax, and the second quarter of 1998 included a net investment loss of
$275,000, net of tax. With the exclusion of such items, net income for
the second quarter of 1999 and 1998 was $1,149,000, or $.27 per
diluted share and $986,000 or $.21 per diluted share, respectively.
Net interest income for the three months ended June 30, 1999 increased
$478,000 over the same period of 1998 which is due primarily to
internal growth of 33% in the loan portfolio. Non-interest expenses
were up $453,000, or 12%, for the three months ended June 30, 1999
compared to the three months ended June 30, 1998. This was primarily
due to salaries and occupancy expenses involved with the opening of a
new branch in San Antonio during the first quarter of 1999.
Non-interest income increased $81,000 or 9% for the three months ended
June 30, 1999, excluding the non-recurring items. For the three months
ended June 30, 1999, the Company's return on average assets was .88%.
The return on average assets for the three months ended June 30, 1998
was .59% or .82% after excluding the net investment items.
Net income for the six months ended June 30, 1999 was $1,990,000,
or $.47 per diluted share compared to $2,817,000, or $.59 per diluted
share for June 30, 1998. As of June 30, 1999 and 1998, the Company had
$23,000 and $939,000 of securities gains, net of tax. Excluding the
securities gains, net income for the six months ended was $1,967,000
or $.46 per diluted share, up from $1,878,000, or $.39 per diluted
share at June 30, 1998. Average assets have increased $45.2 million or
10% over the six months ended June 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 $854,000 or 9.7% in net interest income for
the six months ended June 30, 1999 compared to the same period in 1998
was due primarily to internal loan growth. Average loans increased $56
million or 37% over the second quarter of 1998. Interest income increased
$1,085,000 or 6.7% over the same period in 1998 due primarily to internal
loan growth. Interest expense increased $232,000 or 3.1% over the same
period in 1998 due primarily to the $247,000 increase in interest expense
on other debt. The net interest margin for the six months ended June 30,
1999 was 4.19% compared to 4.18% as of June 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 eleven basis points to 3.70% for
the six months ended June 30, 1999 from 3.59% at June 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
--------------------------------- --------------------------------
JUNE 30, 1999 JUNE 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 $ 2,282 $ 29 5.10% $ 1,709 $ 28 6.57%
Federal funds sold 17,427 202 4.65% 22,415 304 5.44%
Investment securities (F):
US Treasuries 202,031 3,170 6.29% 236,754 3,718 6.30%
US Government agencies 24,698 354 5.75% 4,890 76 6.23%
Other 1,696 71 16.79% 644 10 6.23%
---------- ---------- ----------- ---------- --------- -----------
Total investment securities 228,425 3,595 6.31% 242,288 3,804 6.30%
Loans, net of discounts (A) 216,250 4,902 9.09% 158,993 4,028 10.16%
---------- ---------- ----------- ---------- --------- -----------
Total interest-earning assets 464,384 8,728 7.54% 425,405 8,164 7.70%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 17,853 17,676
Allowance for possible loan losses (2,808) (2,518)
Other assets 45,133 39,695
---------- ----------
Total assets $ 524,562 $ 480,258
========== ==========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 65,183 387 2.38% 61,193 401 2.63%
Savings, money market and certificates
of deposit 322,041 3,187 3.97% 294,363 3,212 4.38%
Other debt 11,440 194 6.80% 4,518 73 6.39%
---------- ---------- ----------- ---------- --------- -----------
Total interest-bearing liabilities 398,664 3,768 3.79% 360,074 3,686 4.11%
Non-interest bearing liabilities:
Demand deposits 72,192 64,402
Other liabilities 3,052 3,296
---------- ----------
Total liabilities 473,908 427,772
STOCKHOLDERS' EQUITY (F) 50,654 52,486
---------- ----------
Total liabilities and stockholders'
equity $ 524,562 $ 480,258
========== ==========
Taxable equivalent net interest income 4,960 4,478
Less: taxable equivalent adjustment 7 4
---------- ---------
Net interest income $ 4,953 $ 4,474
========== =========
Net interest spread (B) 3.75% 3.59%
=========== ===========
Net interest margin (C) 4.27% 4.22%
=========== ===========
SELECTED OPERATING RATIOS:
Return on assets (D) 0.88% 0.59%
=========== ===========
Return on equity (E) 9.13% 5.42%
=========== ===========
</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 SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 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 $ 2,304 $ 59 5.16% $ 969 $ 32 6.62%
Federal funds sold 22,577 582 5.20% 24,211 664 5.50%
Investment securities (F):
US Treasuries 207,368 6,462 6.28% 238,666 7,468 6.28%
US Government agencies 18,682 534 5.76% 4,498 146 6.51%
Other 1,644 141 17.30% 629 19 6.06%
----------- ---------- -------- ---------- ----------- --------
Total investment securities 227,694 7,137 6.32% 243,793 7,633 6.28%
Loans, net of discounts (A) 207,091 9,393 9.15% 150,847 7,754 10.31%
----------- ---------- -------- ---------- ----------- --------
Total interest-earning assets 459,666 17,171 7.53% 419,820 16,083 7.68%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,185 18,729
Allowance for possible loan losses (2,764) (2,511)
Other assets 44,856 38,747
---------- ----------
Total assets $ 519,943 $ 474,785
========== ==========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 65,127 778 2.41% 62,135 817 2.64%
Savings, money market and certificates
of deposit 319,223 6,367 4.02% 292,025 6,343 4.36%
Other debt 11,601 386 6.71% 3,897 139 7.15%
----------- ---------- -------- ---------- ----------- --------
Total interest-bearing liabilities 395,951 7,531 3.84% 358,057 7,299 4.09%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 71,057 61,732
Other liabilities 3,025 3,126
---------- ----------
Total liabilities 470,033 422,915
STOCKHOLDERS' EQUITY (F) 49,910 51,870
---------- ----------
Total liabilities and stockholders'
equity $ 519,943 $ 474,785
========== ==========
Taxable equivalent net interest income 9,640 8,784
Less: taxable equivalent adjustment 11 8
----------- ---------
Net interest income $ 9,629 $ 8,776
=========== =========
Net interest spread (B) 3.70% 3.59%
============ ============
Net interest margin (C) 4.19% 4.18%
============ ============
SELECTED OPERATING RATIOS:
Return on assets (D) 0.77% 1.19%
============ ============
Return on equity (E) 8.04% 10.86%
============ ============
</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.
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 six months ended
June 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 JUNE 30,
1999 VS. JUNE 30, 1998
---------------------------------------------
Due to Changes in
Increase ------------------------------
(Decrease) Rates Volume
-------------- -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ 1 $ (8) $ 9
Federal funds sold (102) (34) (68)
Investment securities (209) 9 (218)
Loans, net of discounts 874 (578) 1,452
-------------- -------------- ---------------
Total taxable-equivalent interest income $ 564 $ (611) $ 1,175
INTEREST EXPENSE:
Interest-bearing deposits (39) (368) 329
Other debt 121 12 109
-------------- -------------- ---------------
Total interest expense 82 (356) 438
-------------- -------------- ---------------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 482 $ (255) $ 737
============== ============== ===============
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
VS. JUNE 30, 1998
---------------------------------------------
Due to Changes in
Increase ------------------------------
(Decrease) Rates Volume
-------------- -------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C>
TAXABLE-EQUIVALENT INTEREST INCOME:
Interest-bearing accounts $ 27 $ (17) $ 44
Federal funds sold (82) (34) (48)
Investment securities (496) 48 (544)
Loans, net of discounts 1,639 (1,204) 2,843
-------------- -------------- ---------------
Total taxable-equivalent interest income $ 1,088 $ (1,207) $ 2,295
INTEREST EXPENSE:
Interest-bearing deposits (15) (607) 592
Other debt 247 (26) 273
-------------- -------------- ---------------
Total interest expense 232 (633) 865
-------------- -------------- ---------------
TAXABLE-EQUIVALENT NET INTEREST INCOME $ 856 $ (574) $ 1,430
============== ============== ===============
</TABLE>
Taxable-equivalent net interest income for the six months ended June
30, 1999 increased $856,000 or 9.7% 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 June 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 $ 66,970 $ 11,510 $ 20,894 $ 99,374 $122,847 $222,221
Investment securities 1,003 4,523 18,666 24,192 206,745 230,937
Federal funds sold 22,063 -- -- 22,063 -- 22,063
Interest-bearing accounts 143 0 1,374 1,517 725 2,242
------------ ------------ ----------- ------------ ----------- -------------
Total earning assets $ 90,179 $ 16,033 $ 40,934 $147,146 $330,317 $477,463
============ ============ =========== ============ =========== =============
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $167,537 -- -- $167,537 -- $167,537
Certificates and time deposits 51,030 60,779 101,820 213,629 11,048 224,677
Debt 7,955 69 105 8,129 2,144 10,273
------------ ------------ ----------- ------------ ----------- -------------
Total interest-bearing
liabilities $226,522 $ 60,848 $101,925 $389,295 $ 13,192 $402,487
============ ============ =========== ============ =========== =============
Interest sensitivity gap $(136,343) $(44,815) $(60,991) $(242,149)
============ ============ =========== ============
Cumulative gap $(136,343) $(181,158) $(242,149) $(242,149)
============ ============ =========== ============
Ratio of earning assets to
interest-bearing liabilities 39.8% 26.4% 40.2% 37.8%
</TABLE>
The interest rate sensitivity table reflects a cumulative liability
sensitive position during the one-year period shown. Generally, this
indicates that the liabilities reprice more quickly than the assets in a
given period, and that a decline in market rates will benefit net
interest income. An increase in market rates would have the opposite
effect.
14
<PAGE>
NON-INTEREST INCOME
The major components of non-interest income are service charges and
fees earned on deposit accounts. The following table summarizes changes
in non-interest income for the six months June 30, 1999 and 1998:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED 1999/1998
------------------------------- --------------------------
JUNE 30, JUNE 30,
1999 1998 $ CHANGE % CHANGE
---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Service charges and fees $ 1,662 $ 1,588 $ 74 4.7%
Net realized gains on sales of securities 35 634 (599) -94.5%
Net trading profits - 789 (789) -100.0%
Net gains on sales of other real estate owned 55 - 55 100.0%
Miscellaneous income 374 183 191 104.4%
---------------- -------------- ----------- --------------
Total non-interest income $ 2,126 $ 3,194 $ (1,068) -33.4%
================ ============== =========== ==============
</TABLE>
The $1.1 million or 33.4% decrease in non-interest income for the six
months ended June 30, 1999 is due primarily to the $1.4 million decrease
in net securities gains and trading account profits over the six months
ended June 30, 1998. Excluding the nonrecurring gains on sales of
securities and other real estate owned, non-interest income increased
$265,000 or 15% over the six months ended June 30, 1998.
NON-INTEREST EXPENSE
Non-interest expense includes all expenses of the Company other than
interest expense, loan loss provision and income tax expense. The
following table summarizes the changes in non-interest expense for the
six months ended June 30, 1999 and 1998:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED 1999/1998
------------------------------- --------------------------
JUNE 30, JUNE 30,
1999 1998 $ CHANGE % CHANGE
---------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 4,438 $ 3,764 $ 674 17.9%
Occupancy and equipment expenses 1,535 1,259 276 21.9%
Data processing fees 164 133 31 23.3%
FDIC insurance 26 24 2 8.3%
Insurance 67 51 16 31.4%
Office supplies 355 319 36 11.3%
Postage and courier 258 260 (2) -0.8%
Professional fees 388 424 (36) -8.5%
Goodwill amortization 188 188 0 0.0%
Miscellaneous other expenses 1,021 1,038 (17) -1.6%
---------------- -------------- ----------- -------------
Total non-interest expense $ 8,440 $ 7,460 $ 980 13.1%
================ ============== =========== =============
</TABLE>
Total non-interest expense for the six months ended June 30, 1999
increased $980,000 or 13.1% over 1998. Salaries and benefits rose
$674,000 or 17.9% 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 $276,000 or 21.9% increase in
occupancy and equipment expenses is due to the construction of the new
30,000 square foot 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.
15
<PAGE>
INCOME TAXES
The Company recognized income tax expense of $1,050,000 for the six
months ended June 30, 1999 compared to $1,625,000 for the six months
ended June 30, 1998. At June 30, 1999, the Company had approximately $94
million in net operating loss carryforwards that will be available to
reduce income tax liabilities in future years. If unused, approximately
$90 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>
JUNE 30, % OF DECEMBER 31, % OF JUNE 30,
1999 TOTAL 1998 TOTAL 1998
------------ --------- --------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Commercial $ 37,407 16.8% $ 35,389 18.4% $ 25,749
Real estate construction 18,704 8.4% 12,125 6.3% 14,830
Real estate mortgage 139,160 62.6% 119,654 62.3% 101,241
Consumer installment,
net of unearned discount 26,950 12.1% 25,051 13.0% 25,872
------------ --------- --------------- -------- -----------
Total loans $222,221 100.0% $ 192,219 100.0% $167,692
============ ========= =============== ======== ===========
</TABLE>
Total loans have increased 15.6% and 32.5% since December 31, 1998 and
June 30, 1998, respectively. Real estate mortgage loans have shown a
16.3% and 37.4% increase since December 31, 1998 and June 30, 1998,
respectively. The increase in total loans has been from internal growth.
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 $49,000 for the six months
ended June 30, 1999 compared to net recoveries of $25,000 for the six
months ended June 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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1999 1998
------------------- -------------------
<S> <C> <C>
Average loans outstanding $ 207,091 $ 150,847
Balance of allowance for loan losses at beginning of year $ 2,670 $ 2,458
Provision for loan losses 275 68
Charge-Offs:
Commercial 43 12
Real estate construction - -
Real estate mortgage - 28
Consumer installment 58 91
------------------- -------------------
Total charge-offs 101 131
------------------- -------------------
Recoveries:
Commercial 7 10
Real estate construction - -
Real estate mortgage 13 30
Consumer installment 32 116
------------------- -------------------
Total recoveries 52 156
------------------- -------------------
Net charge-offs (recoveries) 49 (25)
------------------- -------------------
Balance of allowance for loan losses at end of period $ 2,896 $ 2,551
=================== ===================
Net charge-offs (recoveries) as a percentage
of average loans outstanding 0.02% -0.02%
=================== ===================
Allowance for loan losses as a percentage of:
Total loans, net of unearned discount 1.30% 1.52%
=================== ===================
</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 June 30, 1999 and December 31,
1998: (Dollars in thousands)
NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Non-accrual loans $ 1,884 $ 899
Foreclosed real estate 1,046 1,195
------------------- -------------------
Total non-performing assets $ 2,930 $ 2,094
=================== ===================
Non-performing assets as a percentage of:
Total assets 0.55% 0.41%
Total loans plus foreclosed real estate 1.31% 1.08%
Accruing loans past due 90 days or more $ 141 $ 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 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 77% of total deposits at June
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 June 30, 1999, the Company's liquid assets totaled $248 million or
47% of total gross assets, compared to 38% at June 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 $2.9 million to $51.3 million at
June 30, 1999 from $54.2 million at June 30, 1998. The ratio of total
stockholders' equity to total assets was 9.7% at June 30, 1999 compared
with 11.3% at June 30, 1998. The Company began a stock repurchase plan in
1997 and has repurchased 498,175 common shares at a cost of $9.1 million
as of June 30, 1999, which is one of the reasons for the decrease in
total stockholders' equity. The other reason for the decline is that
accumulated other comprehensive income declined $2 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 June 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) $ 515,933 $ 282,268 $ 85,809 $ 111,306 $29,918
Risk weighted assets (net of goodwill) $ 239,404 $ 137,563 $ 53,092 $ 31,827 $18,557
Tier 1 capital $ 41,068 $ 17,606 $ 8,186 $ 6,980 $ 3,896
Total capital $ 43,964 $ 18,978 $ 8,831 $ 7,365 $ 4,131
Leverage ratio 7.96% 6.24% 9.54% 6.27% 13.02%
Risk based capital ratios:
Tier 1 17.15% 12.80% 15.42% 21.93% 20.99%
Total capital 18.36% 13.80% 16.63% 23.14% 22.26%
</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 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 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>
The Company expects to successfully complete its Y2K effort on the
non-mission critical items by September 30, 1999. Our business resumption
contingency plan will also be complete by the beginning of the fourth
quarter. 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. Since the Company is still
conducting external testing and monitoring of third parties, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Corporation was held on May
21, 1999. The following matters were submitted to a vote of the
Corporation's shareholders.
1. Election of Directors:
Election of all five director nominees to serve until the 2000 Annual
Meeting of Shareholders.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------
NOMINEE TOTAL VOTES FOR TOTAL VOTES ABSTAINED
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
H. Gary Blankenship 3,759,432 1,200
John W. Lettunich 3,759,432 1,200
Jay H. Lustig 3,759,432 1,200
Charles T. Meeks 3,759,432 1,200
Marvin E. Melson 3,759,432 1,200
</TABLE>
2. Ratification of Independent Auditors:
Total Votes For 3,745,911
Total Votes Against 12,321
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: August 13, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
BASIC EPS:
Net income $0.28 $0.15 $0.48 $0.60
============== ============== ============= ==============
DILUTED EPS:
Net income $0.27 $0.15 $0.47 $0.59
============== ============== ============= ==============
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1999 1998 1999 1998
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Income available to common stockholders $1,153 $711 $1,990 $2,817
============== ============== ============= ==============
Weighted average number of common
shares used in Basic EPS 4,167,021 4,661,234 4,168,426 4,660,383
Effect of dilutive stock options 89,777 131,818 93,527 127,314
-------------- -------------- ------------- --------------
Weighted number of common shares
and dilutive potential common stock
used in Diluted EPS 4,256,798 4,793,052 4,261,953 4,787,697
============== ============== ============= ==============
</TABLE>
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,233
<INT-BEARING-DEPOSITS> 2,242
<FED-FUNDS-SOLD> 22,063
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 205,166
<INVESTMENTS-CARRYING> 25,771
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<TOTAL-ASSETS> 530,218
<DEPOSITS> 466,300
<SHORT-TERM> 7,921
<LIABILITIES-OTHER> 2,379
<LONG-TERM> 2,352
0
0
<COMMON> 5
<OTHER-SE> 51,265
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<INTEREST-LOAN> 9,383
<INTEREST-INVEST> 7,136
<INTEREST-OTHER> 641
<INTEREST-TOTAL> 17,160
<INTEREST-DEPOSIT> 7,145
<INTEREST-EXPENSE> 386
<INTEREST-INCOME-NET> 9,629
<LOAN-LOSSES> 275
<SECURITIES-GAINS> 35
<EXPENSE-OTHER> 2,126
<INCOME-PRETAX> 3,039
<INCOME-PRE-EXTRAORDINARY> 3,039
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,990
<EPS-BASIC> .28
<EPS-DILUTED> .27
<YIELD-ACTUAL> 7.54
<LOANS-NON> 1,884
<LOANS-PAST> 141
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,109
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<RECOVERIES> 52
<ALLOWANCE-CLOSE> 2,896
<ALLOWANCE-DOMESTIC> 2,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,657
</TABLE>
