<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, 2000
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: 3,877,569 shares of Common
Stock, $.001 par value, outstanding as of October 31, 2000.
================================================================================
<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
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------ -----------------
<S> <C> <C>
Cash and due from banks $ 19,704 $ 30,394
Interest-bearing accounts 3,515 2,306
Federal funds sold 22,413 11,949
Investment securities available for sale 245,986 221,268
Investment securities held to maturity 2,042 66
Loans, net of discounts 253,126 247,406
Allowance for possible loan losses (3,270) (2,841)
Bank premises and equipment, net 19,721 19,784
Goodwill 8,145 8,427
Other assets 9,706 11,025
------------------ -----------------
Total Assets $ 581,088 $ 549,784
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits - non-interest bearing $ 84,473 $ 70,629
Interest-bearing transaction accounts (NOW) 84,153 82,717
Savings and money market accounts 116,800 110,433
Certificates and time deposits under $100,000 140,729 131,322
Certificates and time deposits $100,000 and over 92,664 94,639
------------------ -----------------
Total Deposits 518,819 489,740
------------------ -----------------
Accrued interest payable and other liabilities 3,162 2,394
Other borrowings 1,195 2,317
Long term notes payable 3,176 4,700
------------------ -----------------
Total Liabilities 526,352 499,151
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized,
4,751,834 issued and 3,973,001 outstanding at September 30, 2000
and 4,669,834 issued and 4,111,834 outstanding at December 31, 1999 5 5
Additional paid-in capital 33,266 30,909
Retained earnings 35,222 31,421
Accumulated other comprehensive loss (747) (1,751)
Treasury Stock, at cost (778,833 shares in 2000, 558,000 in 1999) (13,010) (9,951)
------------------ -----------------
Total Stockholders' Equity 54,736 50,633
------------------ -----------------
Total Liabilities and Stockholders' Equity $ 581,088 $ 549,784
================== =================
</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 30, SEPTEMBER SEPTEMBER 30, SEPTEMBER 30,
2000 30, 1999 2000 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 5,844 $ 5,160 $ 17,131 $ 14,543
Interest on investment securities 3,719 3,547 10,580 10,683
Interest on federal funds sold 590 316 1,594 898
Interest on deposits in banks 55 28 138 87
--------------- ------------ -------------- ---------------
TOTAL INTEREST INCOME 10,208 9,051 29,443 26,211
INTEREST EXPENSE:
Interest on deposits 4,886 3,779 13,583 10,924
Interest on debt 98 173 356 559
--------------- ------------ -------------- ---------------
TOTAL INTEREST EXPENSE 4,984 3,952 13,939 11,483
NET INTEREST INCOME 5,224 5,099 15,504 14,728
Less: Provision for possible loan losses 153 185 481 460
--------------- ------------ -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 5,071 4,914 15,023 14,268
NON-INTEREST INCOME:
Service charges and fees 1,222 946 3,381 2,608
Net realized gains (losses) on sales of 48 8 574 43
securities
Net gains on sales of other real estate and - 7 11 14
assets
Miscellaneous income 509 104 637 525
--------------- ------------ -------------- ---------------
TOTAL NON-INTEREST INCOME 1,779 1,065 4,603 3,190
NON-INTEREST EXPENSE:
Salaries and employee benefits 2,477 2,290 7,349 6,728
Occupancy and equipment expenses 887 863 2,580 2,398
Goodwill amortization 94 94 282 282
Other expenses 1,053 1,169 3,459 3,448
--------------- ------------ -------------- ---------------
TOTAL NON-INTEREST EXPENSE 4,511 4,416 13,670 12,856
INCOME BEFORE FEDERAL INCOME TAXES 2,339 1,563 5,956 4,602
Federal income tax expense 839 518 2,155 1,568
--------------- ------------ -------------- ---------------
NET INCOME $ 1,500 $ 1,045 $ 3,801 $ 3,034
=============== ============ ============== ===============
BASIC EARNINGS PER SHARE $ 0.37 $ 0.25 $ 0.93 $ 0.73
=============== ============ ============== ===============
DILUTED EARNINGS PER SHARE $ 0.37 $ 0.24 $ 0.92 $ 0.71
=============== ============ ============== ===============
</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 Paid-in- Retained Treasury Income(loss), net
Shares Par Capital Earnings Stock of tax Total
--------- -------- --------- --------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 4,197 $ 5 $ 28,629 $ 28,683 $ (8,506) $ 3,395 $52,206
Net income -- -- -- 2,738 -- -- 2,738
Unrealized loss on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- (5,146) (5,146)
---------
Total comprehensive loss (2,408)
---------
Reduction of deferred tax valuation
allowance -- -- 2,227 -- -- -- 2,227
Exercise of Common Stock options 9 -- 53 -- -- -- 53
Treasury stock purchased (94) -- -- -- (1,445) -- (1,445)
--------- -------- --------- --------- --------- ----------------- ---------
BALANCE AT DECEMBER 31, 1999 4,112 5 30,909 31,421 (9,951) (1,751) 50,633
Net income -- -- -- 3,801 -- -- 3,801
Unrealized gain on securities AFS,
net of tax and reclassification
adjustment -- -- -- -- -- 1,004 1,004
---------
Total comprehensive income 4,805
---------
Reduction of deferred tax valuation
allowance -- -- 1,845 -- -- -- 1,845
Exercise of Common Stock options 82 -- 512 -- -- -- 512
Treasury stock purchased (221) -- -- -- (3,059) -- (3,059)
--------- -------- --------- --------- --------- ----------------- ---------
BALANCE AT SEPTEMBER 30, 2000 3,973 $ 5 $ 33,266 $ 35,222 $(13,010) $ (747) $54,736
========= ======== ========= ========= ========= ================= ========
Disclosure of reclassification amount:
2000
Unrealized gain on securities arising during period $ 625
Reclassification adjustment for gains included in income, net of tax of $195 379
---------
Net unrealized gain on securities, net of tax $ 1,004
=========
1999
Unrealized loss on securities arising during period $(4,063)
Reclassification adjustment for losses included in income, net of tax benefit of
($558) (1,083)
---------
Net unrealized loss on securities, net of tax $(5,146)
=========
</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 ENDED
SEPTEMBER 30,
--------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,801 $ 3,034
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,753 1,666
Tax benefit realized from utilization of deferred tax assets 1,845 1,451
Provision for possible loan losses 481 460
Net realized gain on securities available for sale (574) (43)
Write-down of other real estate owned - 52
Gain on sale of other real estate owned and other assets (11) (14)
(Increase) decrease in accrued interest receivable and other assets 107 (392)
Increase in accrued interest payable and other liabilities 769 593
--------------- ---------------
Net cash provided by operating activities 8,171 6,807
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold (10,464) 8,721
Net (increase) decrease in interest-bearing accounts (1,216) 113
Net (increase) decrease in loans (5,772) (40,999)
Purchases of securities available for sale (70,356) (38,543)
Proceeds from sales of securities available for sale 43,879 11,031
Proceeds from maturities of securities available for sale 3,697 17,729
Purchases of securities held to maturity (1,973) -
Proceeds from maturities of securities held to maturity - 4,234
Capital expenditures (1,254) (3,024)
Proceeds from sale of other real estate owned 713 191
--------------- ---------------
Net cash used in investing activities (42,746) (40,547)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
savings and money-market accounts 21,647 30,553
Net increase in certificates of deposit and time deposits 7,432 9,110
Proceeds from advances on other borrowings and long term debt 2,468 2,413
Principal payments on other borrowings and long term debt (5,115) (3,424)
Purchase of treasury stock (3,059) (915)
Proceeds from exercise of common stock options 512 6
--------------- ---------------
Net cash provided by financing activities 23,885 37,743
Net (decrease) increase in cash and due from banks (10,690) 4,003
Cash and due from banks at beginning of year 30,394 16,473
--------------- ---------------
Cash and due from banks at end of year $ 19,704 $ 20,476
=============== ===============
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 13,712 $ 11,557
Federal income taxes paid 80 182
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets - 90
Loan foreclosures - -
</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 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's financial statements have
been reclassified in conformity with the current year's presentation. The
consolidated financial statements are unaudited, but include all adjustments
(consisting primarily of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the results of the periods
presented. The results of operations for the nine month period ended September
30, 2000 are not necessarily indicative of the results that may be reported for
the entire period. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 1999.
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). As of October 1, 2000, NBC Bank - Central,
N.A. was merged into NBC Bank, N.A.
NOTE 3 - INVESTMENT SECURITIES
The following tables present the amortized cost and approximate fair value of
the investment securities portfolio as of September 30, 2000 and December 31,
1999 (Dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
--------------------------------------------------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE:
U.S. Treasury securities $125,227 $ 633 $ (202) $ 125,658
U.S. Government agency and mortgage-backed securities 118,169 423 (1,065) 117,527
Other securities including Federal Reserve Bank stock 3,721 - (920) 2,801
---------- ----------- ----------- --------------
Total $247,117 $ 1,056 $ (2,187) $ 245,986
========== =========== =========== ===============
SECURITIES HELD TO MATURITY:
U.S. Government agency and mortgage-backed securities $ 1,975 $ 54 $ - $ 2,029
Foreign debt securities 67 1 - 68
---------- ----------- ----------- --------------
Total $ 2,042 $ 55 $ - $ 2,097
========== =========== =========== ===============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 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 $163,546 $ 214 $ (523) $ 163,237
U.S. Government agency and mortgage-backed securities 54,665 7 (1,257) 53,415
Other securities including Federal Reserve Bank stock 5,710 - (1,094) 4,616
---------- ----------- ----------- --------------
Total $223,921 $ 221 $ (2,874) $ 221,268
============ ========== =========== ===============
SECURITIES HELD TO MATURITY:
Foreign debt securities 66 - (5) 61
---------- ----------- ----------- --------------
Total $ 66 $ - $ (5) $ 61
============ ========== =========== ===============
</TABLE>
Unrealized gains and losses on investment securities held at September
30, 2000 and December 31, 1999 have been determined to be temporary
market fluctuations.
The following table shows the maturity schedule of the Company's
investment portfolio as of September 30, 2000 (Dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------------------------------------
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 $ 1,504 $ 1,499 $ - $ -
Due in one year to five years 158,031 158,054 1,057 1,078
Due from five to ten years 73,493 73,332 - -
Due after ten years 1,365 1,359 - -
------------ ---------------- ------------ ----------------
Total $ 234,393 $ 234,244 $ 1,057 $ 1,078
Equity Securities 3,351 2,431 - -
Mortgage backed securities 9,003 8,941 985 1,019
Federal Reserve Bank Stock 370 370 - -
------------ ---------------- ------------ ----------------
Total $ 247,117 $ 245,986 $ 2,042 $ 2,097
============ ================ ============ ================
</TABLE>
The carrying value of investment securities pledged to secure public funds
amounted to approximately $89,194,000 at September 30, 2000 and $92,225,000 at
December 31, 1999.
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, 2000 and 1999 is presented below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
2000 1999
-------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Balance at beginning of year $ 2,841 $ 2,670
Provisions for possible loan losses 481 460
Losses charged to the allowance (208) (138)
Recoveries credited to the allowance 156 80
-------------- ---------------
Net charge-offs (52) (58)
-------------- ---------------
Balance at end of period $ 3,270 $ 3,072
============== ===============
</TABLE>
7
<PAGE>
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, 2000 and 1999, the Banks had impaired
loans of $1,638,000 and $2,404,000, respectively. The allowance for loan losses
related to those loans was $271,000 and $488,000, respectively. The average
recorded investment in impaired loans during the nine months ended September 30,
2000 and 1999, was $1,831,000 and $1,500,000, respectively. Interest income of
approximately $71,000 and $47,000 on impaired loans was recognized for cash
payments received during the nine months ended September 30, 2000 and 1999,
respectively.
NOTE 5 - OTHER BORROWINGS AND NOTES PAYABLE
On September 30, 2000, NBT of Delaware, Inc. maintained a margin account which
is secured by investment securities. The interest rate is variable (7.75% at
September 30, 2000). The balance at September 30, 2000 was $749,000.
On October 2, 1999, the Company executed a $3,237,000 note with The Independent
BankersBank in Dallas. The note bears a variable interest rate at prime rate as
published by the Wall Street Journal (9.50% at September 30, 2000). Principal
payments of $161,825 plus interest are due quarterly beginning January 2, 2000
with unpaid principal plus accrued interest due at maturity. The note matures on
October 2, 2002. 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, 2000 was $1,354,000. The Company also executed a one year $4 million
revolving line of credit dated October 29, 1999 with The Independent
BankersBank. The line bears interest at Wall Street Journal prime (9.50% at
September 30, 2000) with any outstanding interest to be paid quarterly. The
outstanding balance at September 30, 2000 was $446,000. The Company has met or
obtained waivers for all debt covenants at September 30, 2000.
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
$45,000 per month in the aggregate with the remaining balances due at maturity.
The aggregate balance outstanding at September 30, 2000 was $1,823,000.
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,
------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Tax Based on Statutory Rate $ 2,025 $ 1,565
Effect of Tax-exempt Income (10) (12)
Interest and other Nondeductible Expenses 7 6
Alternative Minimum Tax 105 92
Goodwill 21 21
Other, net 7 (104)
-------------- -------------
$ 2,155 $ 1,568
============== =============
</TABLE>
For Federal income tax purposes, the Company has approximately $84 million in
net operating loss carryforwards as of September 30, 2000 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 $80 million of such
carryforwards will expire in 2005, with the remaining approximately $4
million expiring in 2006.
8
<PAGE>
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, 2000 and 1999, the deferred tax
asset valuation allowance was reduced by $1,845,000 and $1,451,000,
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
$3,668,000 at September 30, 2000. 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 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 25 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 which created the goodwill.
NOTE 8 - STOCK REPURCHASE PLAN
The Company has a stock repurchase plan authorizing management to purchase up to
900,000 shares of the Company's common stock through the open market based on
market conditions. In the first nine months of 2000 and 1999, 220,833 shares and
57,825 shares were purchased by the Company through the open market at an
average cost of $13.85 and $15.85 per share, respectively.
NOTE 9 - RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133"
("Statement 137") was issued in June 1999. Statement 137 defers the effective
date of FASB Statement 133 "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133") for one year. Statement 133, as amended, is
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. Statement 133 generally requires that changes in fair value of a
derivative be recognized currently in earnings unless specific hedge acquisition
criteria are met. Upon implementation of Statement 133, hedging relationships
may be redesignated and securities held-to-maturity may be transferred to
available-for-sale or trading. In June 2000, FASB Statement 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" ("Statement 138")
was issued. Statement 138 adds to the guidance related to accounting for
derivative instruments and trading activities. Statement 133, as amended by
Statement 138 is intended to be comprehensive guidance on accounting for
derivatives and hedging activities. The Company is continuing to evaluate the
impact that Statement 133, as amended, will have on its future consolidated
financial statements.
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 AND ACCOMPANYING
NOTES APPEARING ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS
Net income for the three months ended September 30, 2000 was $1,500,000 or
$0.37 per diluted share compared with $1,045,000 or $0.24 per diluted share for
the three months ended September 30, 1999. Net interest income for the three
months ended September 30, 2000 increased $125,000 over the same period of 1999
which is due primarily to 8.6% growth in the loan portfolio. Non-interest
expenses were up $95,000, or 2.2%, for the three months ended September 30, 2000
compared to the three months ended September 30, 1999. This was due in part to
salaries and benefits associated with the opening of the broker-dealer, NBC
Financial, Inc., which began operations in September 1999 in addition to
occupancy and salary expenses of a third branch opened in Laredo, Texas in April
2000. Non-interest income increased $714,000 for the three months ended
September 30, 2000 compared to the three months ended September 30, 1999. The
non-interest income increase included non-recurring items of $283,000 of
miscellaneous income associated with the resolution of certain contested
matters, $50,000 of other miscellaneous income and realized gains on the sale of
securities of $48,000 for the three months ended September 30, 2000. The third
quarter of 1999 included $15,000 for the gains on the sales of securities and
other real estate. Excluding the non-recurring items, non-interest income
increased $348,000 or 33% due primarily to the increase in service charges and
fee income from $946,000 for the period ended September 1999 to $1,222,000 for
the period ended September 2000. Non-interest income also improved $83,000 from
income generated from the broker-dealer. Excluding the non-recurring items, net
income for the three months ended September 30, 2000 and September 30, 1999 was
$1,248,000, net of tax, or $0.31 per diluted share and $1,035,000, net of tax,
or $0.24 per diluted share, respectively. The return on average assets for the
three months ended September 20, 2000 was 1.03% compared to .77% for the three
months ended September 30, 1999.
Net income for the nine months ended September 30, 2000 was $3,801,000 or
$0.92 per diluted share compared to $3,034,000 or $0.71 per diluted share for
the nine months ended September 30, 1999. Excluding non-recurring items of
$606,000, net of tax, and $122,000, net of tax, as of September 30, 2000 and
1999, respectively, net income for the nine months ended September 30, 2000 and
1999 was $3,195,000 or $0.77 per diluted share compared to $2,912,000 or $0.68
per diluted share, respectively.
Average assets have increased $41 million or 7.8% to $568 million for the
nine months ended September 30, 2000 from an average of $527 million for the
nine months ended September 30, 1999. Average earning assets increased 9% for
the nine months ended September 30, 2000 compared to September 30, 1999.
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 $776,000
or 5.3% in net interest income for the nine months ended September 30, 2000
compared to the same period in 1999 was due primarily to internal loan growth.
For the nine months ended September 30, 2000 average loans increased $32 million
or 15% over the same period in 1999. Interest income increased $3,228,000 or
12.3% over the same period in 1999 due primarily to internal loan growth.
Interest expense increased $2,456,000 or 21.4% over the same period in 1999 due
primarily to an increase in the rates being paid on deposits. The net interest
margin for the nine months ended September 30, 2000 decreased 16 basis points to
4.07% when compared to September 30, 1999. The net interest margin is the net
return on earning assets which is computed by dividing taxable equivalent net
interest income by average total earning assets.
The net interest spread decreased 27 basis points to 3.43% for the nine
months ended September 30, 2000 from 3.70% at September 30, 1999. The decrease
in the net interest spread is primarily due to the increase in rates being paid
on deposits.
10
<PAGE>
INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------- -------------------------------
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 $ 3,794 $ 55 5.75% $ 2,193 $ 28 5.07%
Federal funds sold 35,746 590 6.55% 24,676 316 5.08%
Investment securities (F):
US Treasuries 150,636 2,321 6.11% 188,736 2,960 6.22%
US Government agencies 83,385 1,379 6.56% 35,046 516 5.84%
Other 745 19 10.12% 1,737 71 16.22%
--------------------------------- -------------------------------
Total investment securities 234,766 3,719 6.28% 225,519 3,547 6.24%
Loans, net of discounts (A) 246,004 5,851 9.44% 226,388 5,165 9.05%
--------------------------------- -------------------------------
Total interest-earning assets 520,310 10,215 7.79% 478,776 9,056 7.50%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 18,987 20,440
Allowance for possible loan losses (3,219) (2,956)
Other assets 40,484 45,408
---------- ---------
Total assets $ 576,562 $541,668
========== =========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 81,088 634 3.10% 69,474 431 2.46%
Savings, money market and certificates
of deposit 352,324 4,252 4.79% 332,918 3,348 3.99%
Other debt 5,010 98 7.76% 10,277 173 6.68%
--------------------------------- -------------------------------
Total interest-bearing liabilities 438,422 4,984 4.51% 412,669 3,952 3.80%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 79,870 73,613
Other liabilities 3,901 3,250
---------- ---------
Total liabilities 522,193 489,532
STOCKHOLDERS' EQUITY (F) 54,369 52,136
---------- ---------
Total liabilities and stockholders'
equity $ 576,562 $541,668
========== =========
Taxable equivalent net interest income 5,231 5,104
Less: taxable equivalent adjustment 7 5
----------- ----------
Net interest income $ 5,224 $ 5,099
=========== ==========
Net interest spread (B) 3.28% 3.70%
============ ============
Net interest margin (C) 3.99% 4.23%
============ ============
SELECTED OPERATING RATIOS:
Return on assets (D) 1.03% 0.77%
============ ============
Return on equity (E) 11.04% 8.02%
============ ============
</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 annualized 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 annualized 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>
INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
FOR NINE MONTHS ENDED FOR NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------------------- -------------------------------
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 $ 3,146 $ 138 5.84% $ 2,265 $ 87 5.14%
Federal funds sold 33,984 1,594 6.25% 23,431 898 5.12%
Investment securities (F):
US Treasuries 155,739 7,211 6.17% 201,051 9,421 6.26%
US Government agencies 69,143 3,320 6.40% 24,304 1,050 5.78%
Other 722 49 9.04% 1,675 212 16.92%
--------------------------------- -------------------------------
Total investment securities 225,604 10,580 6.25% 227,030 10,683 6.29%
Loans, net of discounts (A) 245,627 17,142 9.30% 213,543 14,558 9.11%
--------------------------------- -------------------------------
Total interest-earning assets 508,361 29,454 7.72% 466,269 26,226 7.52%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 20,750 18,946
Allowance for possible loan losses (3,072) (2,829)
Other assets 42,364 45,076
---------- ---------
Total assets $ 568,403 $527,462
========== =========
INTEREST-BEARING LIABILITIES:
Interest bearing transaction accounts 79,831 1,780 2.97% 66,766 1,210 2.42%
Savings, money market and certificates
of deposit 346,790 11,803 4.53% 323,838 9,714 4.01%
Other debt 6,326 356 7.50% 11,162 559 6.70%
--------------------------------- -------------------------------
Total interest-bearing liabilities 432,947 13,939 4.29% 401,766 11,483 3.82%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 77,841 71,963
Other liabilities 3,787 3,091
---------- ---------
Total liabilities 514,575 476,820
STOCKHOLDERS' EQUITY (F) 53,828 50,642
---------- ---------
Total liabilities and stockholders'
equity $ 568,403 $527,462
========== =========
Taxable equivalent net interest income 15,515 14,743
Less: taxable equivalent adjustment 11 15
----------- ----------
Net interest income $ 15,504 $14,728
=========== ==========
Net interest spread (B) 3.43% 3.70%
============ ============
Net interest margin (C) 4.07% 4.23%
============ ============
SELECTED OPERATING RATIOS:
Return on assets (D) 0.89% 0.77%
============ ============
Return on equity (E) 9.41% 8.01%
============ ============
</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 annualized 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 annualized 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, 2000
and 1999. 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, 2000
VS. SEPTEMBER 30, 1999
-----------------------------------------
INCREASE DUE TO CHANGE IN
---------------------------
(DECREASE) RATE VOLUME
---------------------------- -----------
<S> <C> <C> <C>
Taxable-equivalent interest income:
Interest-bearing accounts ..... $ 27 $ 4 $ 23
Federal funds sold ............ 274 107 167
Investment securities ......... 172 26 146
Loans, net of unearned discount 686 226 460
------- ------- -------
Total taxable-equivalent
interest income ......... 1,159 363 796
------- ------- -------
Interest expense:
Interest-bearing accounts ..... 1,107 823 284
Other debt .................... (75) 151 (226)
------- ------- -------
Total interest expense ..... 1,032 974 58
------- ------- -------
Taxable-equivalent
net interest income ........... $ 127 $ (611) $ 738
======= ======= =======
NINE MONTHS ENDED SEPTEMBER 30, 2000
VS. SEPTEMBER 30, 1999
------------------------------------------
INCREASE DUE TO CHANGE IN
----------------------------
(DECREASE) RATE VOLUME
---------------------------- ------------
Taxable-equivalent interest income:
Interest-bearing accounts ..... $ 51 $ 13 $ 38
Federal funds sold ............ 696 228 468
Investment securities ......... (103) (54) (49)
Loans, net of unearned discount 2,584 303 2,281
------- ------- -------
Total taxable-equivalent
interest income ......... 3,228 490 2,738
------- ------- -------
Interest expense:
Interest-bearing accounts ..... 2,659 1,711 948
Other debt .................... (203) 96 (299)
------- ------- -------
Total interest expense ..... 2,456 1,807 649
------- ------- -------
Taxable-equivalent
net interest income ........... $ 772 $(1,317) $ 2,089
======= ======= =======
</TABLE>
Taxable-equivalent net interest income for the nine months ended September
30, 2000 increased $772,000 or 5.2% over the same period in 1999. The increase
is reflected in the increase in the volume of earning assets offset by the
increase in the volume and rate of interest bearing liabilities.
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.
13
<PAGE>
The following table indicates the Company's interest rate sensitivity
position at September 30, 2000:
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in thousands)
<TABLE>
<CAPTION>
NON-RATE
RATE SENSITIVE SENSITIVE
-------------------------------------------------- -----------
IMMEDIATELY WITHIN WITHIN OVER
0-30 DAYS 90 DAYS ONE YEAR TOTAL ONE YEAR TOTAL
------------ ------------ ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans, net of discounts $ 69,636 $ 9,702 $ 23,405 $ 102,743 $ 150,383 $ 253,126
Investment securities 2,118 107 1,499 3,724 244,304 248,028
Federal funds sold 22,413 -- -- 22,413 -- 22,413
Interest-bearing accounts 414 1,287 1,526 3,227 288 3,515
------------ ------------ ----------- ------------ ----------- -------------
Total earning assets $ 94,581 $ 11,096 $ 26,430 $ 132,107 $ 394,975 $ 527,082
============ ============ =========== ============ =========== =============
Interest-bearing liabilities:
Interest-bearing
transaction,
savings and money market 200,953 -- -- 200,953 -- 200,953
Certificates and time 41,132 55,164 127,312 223,608 9,785 233,393
deposits Debt 2,585 73 338 2,996 1,375 4,371
------------ ------------ ----------- ------------ ----------- -------------
Total
interest-bearing Liabilities $ 244,670 $ 55,237 $ 127,650 $ 427,557 $ 11,160 $ 438,717
============ ============ =========== ============ =========== =============
Interest sensitivity gap $(150,089) $ (44,141) $(101,220) $ (295,450)
============ ============ =========== ============
Cumulative gap $ (150,089) $ (194,230) $ (295,450) $ (295,450)
============ ============ =========== ============
Ratio of earning assets to
interest-bearing
liabilities 38.7% 20.1% 20.7% 30.9%
</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, 2000 and 1999:
NON-INTEREST INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 2000/1999
--------------------------- -------------------------
SEPTEMBER SEPTEMBER
30, 2000 30, 1999 $ CHANGE % CHANGE
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Service charges and fees $ 3,381 $ 2,608 $ 773 29.6%
Net realized gains on sales of securities 574 43 531 12.35%
Net gains on sales of other real estate owned and 11 14 (3) -21.4%
assets Miscellaneous income 637 525 112 21.3%
============= ============= ========== =============
Total non-interest income $ 4,603 $ 3,190 $ 1,413 44.3%
============= ============= ========== =============
</TABLE>
The $1,413,000 or 44.3% increase in non-interest income for the nine months
ended September 30, 2000 over the nine months ended September 30, 1999 is due to
a $773,000 increase in service charges and fees. In addition, there was a
$531,000 increase in non-recurring gains on the sales of securities and other
real estate. The nine months ended September 30, 2000 and 1999 included
miscellaneous income of $283,000 and $185,000, respectively, which were also
non-recurring items. Excluding the non-recurring items, non-interest income
increased $787,000 or 26.7% over the nine months ended September 30, 1999.
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, 2000 and 1999:
NON-INTEREST EXPENSE
(Dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED 2000/1999
------------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER
2000 30, 1999 $ CHANGE % CHANGE
---------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 7,349 $ 6,728 $ 621 9.2%
Occupancy and equipment expenses 2,580 2,398 182 7.6%
Data processing fees 293 244 49 20.1%
FDIC insurance 76 38 38 100.0%
Insurance 103 101 2 2.0%
Office supplies 433 523 (90) -17.2%
Postage and courier 408 390 18 4.6%
Professional fees 633 570 63 11.1%
Advertising/Marketing 224 265 (41) -15.5%
Goodwill amortization 282 282 0 0.0%
Miscellaneous other expenses 1,289 1,317 (28) -2.1%
---------------- -------------- ------------ -------------
Total non-interest expense $ 13,670 $ 12,856 $ 814 6.3%
================ ============== ============ =============
</TABLE>
Total non-interest expense for the nine months ended September 30, 2000
increased $814,000 or 6.3% over 1999. Salaries and benefits rose $621,000 or
9.2% in 2000. Salaries and benefits increased due to the hiring of personnel for
NBC Financial, Inc., the broker-dealer that began operations in September 1999,
in addition to the hiring of additional personnel for a new branch opened in
Laredo, Texas in April 2000. The $182,000 or 7.6% increase in occupancy and
equipment expenses is due to increased equipment costs and rent for the
15
<PAGE>
Company's data center and the expenses associated with the new equipment and
building at the new branch opened in Laredo, Texas in April 2000.
INCOME TAXES
The Company recognized income tax expense of $2,155,000 for the nine
months ended September 30, 2000 compared to $1,568,000 for the nine months
ended September 30, 1999. At September 30, 2000, the Company had
approximately $84 million in net operating loss carryforwards that will be
available to reduce income tax liabilities in future years. If unused,
approximately $80 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 30, % OF DECEMBER 31, % OF SEPTEMBER 30,
2000 TOTAL 1999 TOTAL 1999
-------------- -------- -------------- -------- ----------------
<S> <C> <C> <C> <C> <C>
Commercial $ 42,866 16.9% $ 46,203 18.7% $ 40,008
Real estate construction 22,751 9.0% 21,959 8.9% 19,731
Real estate mortgage 159,902 63.2% 152,292 61.6% 146,958
Consumer installment,
net of unearned discount 27,607 10.9% 26,952 10.9% 26,464
-------------- -------- -------------- -------- ----------------
Total loans $ 253,126 100.0% $ 247,406 100.0% $ 233,161
============== ======== ============== ======== ================
</TABLE>
Total loans have increased 2.3% since December 31, 1999 and 8.6% since
September 30, 1999, respectively. Real estate mortgage loans have shown a 4.9%
and 8.8% increase since December 31, 1999 and September 30, 1999, respectively.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is established through charges to
operations in the form of a provision for loan losses. Loans, or portions
thereof, which are considered to be uncollectible are charged against the
allowance and subsequent recoveries, if any, are credited to the allowance. The
allowance represents the amount, which in the judgment of the Company'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
Banks' market areas are pertinent factors in determining the adequacy of the
allowance for possibleloan losses. Loans identified as losses by management,
external loan review or bank examiners are charged-off.
The Company recorded net charge-offs of $52,000 for the nine months ended
September 30, 2000 compared to net charge-offs of $58,000 for the nine months
ended September 30, 1999.
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,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Average loans outstanding $ 245,627 $ 213,543
Balance of allowance for loan losses at beginning of year $ 2,841 $ 2,670
Provision for loan losses 481 460
Charge-Offs:
Commercial 72 49
Real estate construction - -
Real estate mortgage - -
Consumer installment 136 89
------------ ------------
Total charge-offs 208 138
------------ ------------
Recoveries:
Commercial 96 15
Real estate construction - -
Real estate mortgage 16 20
Consumer installment 44 45
------------ ------------
Total recoveries 156 80
------------ ------------
Net charge-offs (recoveries) 52 58
------------ ------------
Balance of allowance for loan losses at end of period $ 3,270 $ 3,072
============ ============
Net charge-offs (recoveries) as a percentage
of average loans outstanding 0.02% 0.03%
============ ============
Allowance for loan losses as a percentage of:
Total loans, net of unearned discount 1.29% 1.32%
============ ============
</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 90 days or more
past due. All installment loans past due 90 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, 2000 and December 31, 1999:
(Dollars in thousands)
NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Non-accrual loans $ 1,638 $ 2,095
Foreclosed real estate 204 906
------------ ------------
Total non-performing assets $ 1,842 $ 3,001
============ ============
Non-performing assets as a percentage of:
Total assets 0.32% 0.55%
Total loans plus foreclosed real estate 0.73% 1.21%
Accruing loans past due 90 days or more $ 592 $ 239
</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 a twelve to 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
believes 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, 2000 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, 2000, the Company's liquid assets totaled $292 million or
50% of total gross assets, compared to 51% at September 30, 1999. Secondary
sources of liquidity include the Banks' ability to sell loan participations and
purchase federal funds. NBC-Eagle Pass has an approved federal funds line at a
correspondent bank. NBC-Laredo has an approved line of credit with the Federal
Home Loan Bank.
The Company's principal source of funds consists of dividends received from
the Banks, which derive their funds from deposits, interest and principal
payments on loans and investment securities, sales of investment securities and
borrowings.
CAPITAL RESOURCES
Total stockholders' equity increased $2.6 million to $54.7 million at
September 30, 2000 from $52.1 million at September 30, 1999. The ratio of total
stockholders' equity to total assets was 9.4% at September 30, 2000 compared
with 9.5% at September 30, 1999. The Company began a stock repurchase plan in
1997 and has repurchased 778,833 common shares at a cost of $13 million through
September 30, 2000 of which $3.6 million has been purchased since September 30,
1999. Total stockholders' equity has been affected by the $427,000 increase in
the unrealized loss on available for sale securities portfolio since September
30, 1999.
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 Banks' 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 each of its subsidiary Banks'
compliance with the risk-based capital guidelines as of September 30, 2000:
<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) $ 568,362 $ 309,583 $ 109,136 $ 109,230 $ 32,181
Risk weighted assets (net of goodwill) $ 280,002 $ 150,707 $ 67,523 $ 33,818 $ 19,010
Tier 1 capital $ 46,730 $ 20,268 $ 8,859 $ 7,646 $ 4,473
Total capital $ 50,000 $ 21,809 $ 9,601 $ 8,069 $ 4,714
Leverage ratio 8.22% 6.55% 8.12% 7.00% 13.90%
Risk based capital ratios:
Tier 1 16.69% 13.45% 13.12% 22.61% 23.53%
Total capital 17.86% 14.47% 14.22% 23.86% 24.80%
</TABLE>
FINANCIAL MODERNIZATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act ("GLBA"). This comprehensive legislation eliminates the
barriers to affiliations among banks, securities firms, insurance companies and
other financial service providers. GLBA provides for a new type of financial
holding company structure under which affiliations among these entities may
occur, subject to the "umbrella" regulation of the FRB and regulation of
affiliates by the functional regulators, including the Securities and Exchange
Commission ("SEC") and state insurance regulators. Under GLBA, a financial
holding company may engage in a broad list of financial activities and any
non-financial activity that the FRB determines is complementary to a financial
activity and poses no substantial risk to the safety and soundness of depository
institutions or the financial system. In addition, GLBA permits certain
non-banking financial and financially related activities to be conducted by
financial subsidiaries of a national bank. In addition, GLBA imposes strict new
privacy disclosure and opt-out requirements regarding the ability of financial
institutions to share personal non-public customer information with third
parties.
Under GLBA, a bank holding company may become certified as a financial
holding company by filing a declaration with the FRB, together with a
certification that each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the Community Reinvestment
Act of 1977 ("CRA"). The Company has elected to become a financial holding
company under GLBA and the election was made effective by the FRB as of March
11, 2000. The Company is engaging in certain insurance related activities
permitted by GLBA.
19
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
There has been no material change in the market risks faced by the Company
since December 31, 1999. For information regarding the Company's market risk,
refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1999.
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.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
Date: November 10, 2000 By: /s/ ANNE R. RENFROE
--------------------------------------
Anne Renfroe, Chief Accounting Officer
and Principal Financial Officer
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