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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-13472
* * * * * *
NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of business issuer as specified in its charter)
TEXAS 74-1692337
(State of Incorporation) (I.R.S. Employer Identification Number)
12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811
(Address of principal executive offices)
TELEPHONE NUMBER: (210) 403-4200
Securities registered under Section 12(b) of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Securities registered under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K / /.
Issuer's revenues for its most recent fiscal year: $35,666,323
(Total Interest Income).
State the aggregate market value of voting stock held by
non-affiliates based upon the closing AMEX sale price on March 20, 2000:
$61,256,037
State the number of shares outstanding of each of the issuer's
classes of common equity, as of March 20, 2000: 4,188,447 shares of Common
Stock
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held
May 19, 2000.
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TABLE OF CONTENTS
PART I
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Item 1. Description of Business.......................................................... 3
Item 2. Description of Property.......................................................... 8
Item 3. Legal Proceedings................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............................. 9
PART II
Item 5. Market for Common Equity and Related Shareholder Matters......................... 9
Item 6. Selected Consolidated Financial Data............................................. 11
Item 7. Management's Discussion and Analysis............................................. 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk....................... 26
Item 8. Financial Statements............................................................. 29
Item 9. Changes and/or Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 53
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons..................... 53
Item 11. Executive Compensation........................................................... 54
Item 12. Security Ownership of Certain Beneficial Owners and Management................... 54
Item 13. Certain Relationships and Related Transactions................................... 54
PART IV
Item 14. Exhibits and Reports on Form 8-K................................................. 54
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
National Bancshares Corporation of Texas (the "Company") is a bank
holding company incorporated in Texas on June 14, 1971, and registered under
the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company
made the election to become a financial holding company under the
Gramm-Leach-Bliley Act and the election was made effective by the Federal
Reserve Bank on March 11, 2000. The Company successfully emerged from
reorganization (the "Reorganization") under Chapter 11 of the United States
Bankruptcy Code in May 1992. As a result of the Reorganization, the Company
came under new management and control and its assets and liabilities were
substantially restructured. The Company now conducts its banking operations
through eleven locations which are owned by four separately chartered banks;
NBC Bank-Laredo, N.A., Laredo, Texas, ("NBC-Laredo"), NBC Bank, N.A., Eagle
Pass, Texas ("NBC-Eagle Pass"), NBC Bank, Rockdale, Texas ("NBC-Rockdale") and
NBC Bank Central, N.A., Luling, Texas ("NBC-Luling"), (collectively, the
"Banks"). NBC-Laredo, NBC-Eagle Pass, and NBC-Rockdale are wholly-owned
subsidiaries of NBT of Delaware, Inc., a Delaware corporation that is a
wholly-owned subsidiary of the Company. NBC-Luling is majority-owned by NBT of
Delaware, Inc. The Company operates its data and item processing for the Banks
through NBC Holdings-Texas, Inc., a wholly-owned subsidiary of NBT of
Delaware, Inc. The Company operates a broker-dealer subsidiary, NBC Financial,
Inc., a wholly-owned subsidiary of NBT Securities Holdings, Inc. NBT
Securities Holdings, Inc. is a Delaware corporation that is a wholly-owned
subsidiary of the Company. At December 31, 1999, the Company (on a
consolidated basis) had total assets of $549.8 million, total investments
securities of $221.3 million, total loans of $247.4 million, total deposits of
$489.7 million, total stockholders' equity of $50.6 million and net operating
loss carry-forwards for federal income tax purposes of $89 million. For the
year ended December 31, 1999, the Company recorded net income of $2.7 million.
The Company's executive offices are located at 12400 Hwy 281 North,
San Antonio, Texas 78216-2811, and its telephone number is (210) 403-4200.
THE BANKS
Each of the Banks is a separate entity which operates under the
day-to-day management of its own board of directors and officers. The Banks
grant agribusiness, commercial, residential and installment loans to customers
primarily in Central and South Texas. The Banks also offer a range of
commercial banking services, including acceptance of deposits. Deposit
services include certificates of deposit, individual retirement accounts,
checking accounts, interest-bearing checking accounts, savings accounts and
money market accounts. In addition, the Banks provide traveler's checks, safe
deposit boxes and other customary nondeposit banking services. The Banks
provide limited escrow services. Loans consist of real estate loans,
residential mortgages, construction loans, commercial loans directed at small
to middle market businesses and loans to individuals. In addition, each of the
Banks is subject to legal lending limits. Such limits generally restrict loans
to any one customer in an amount not to exceed 15% of any one Bank's total
capital plus the allowance for possible loan losses. NBC-Eagle Pass operates
three branches, one located in San Antonio, Texas, one located in Marble
Falls, Texas and one in Eagle Pass, Texas. NBC-Rockdale operates two branches,
located in Giddings and Taylor, Texas. NBC-Laredo operates one branch location
in South Laredo and will open a second branch in Laredo in April 2000.
NBC-Luling operates one branch located in San Marcos, Texas which opened
during the first quarter of 1998.
The following table sets forth certain financial information with respect to
the Banks as of December 31, 1999 (Dollars in thousands):
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ASSETS LOANS DEPOSITS
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NBC - Eagle Pass $ 296,604 $ 133,203 $ 274,583
NBC - Rockdale $ 113,209 $ 34,961 $ 101,536
NBC - Laredo $ 99,401 $ 60,636 $ 88,461
NBC - Luling $ 31,593 $ 18,606 $ 25,468
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SERVICES OFFERED BY NBC SUBSIDIARY BANKS
COMMERCIAL BANKING
The Banks provide the following types of loans for corporations and
other business clients:
REAL ESTATE LOANS. The Banks have historically engaged in real estate
lending through construction and term mortgage loans, all of which are secured
by deeds of trust on underlying real estate. The majority of the Banks' real
estate loans are small to medium sized real estate loans.
COMMERCIAL LOANS. Commercial loans include loans made primarily to
small to medium sized businesses and professionals for working capital.
Construction financing loans are secured by a lien on the real estate and the
improvements.
INSTALLMENT LOANS. Installment loans consist primarily of automobile
loans, loans made to finance small equipment acquisitions, small loans for
personal and household needs and home improvement loans. These loans are made
primarily as an accommodation to existing customers and are not a substantial
part of the Banks lending strategy.
The Banks also provide deposit products to its commercial customers,
as well as night deposit and wire transfer services.
CONSUMER SERVICES
The Banks have generated a substantial portion of their deposits from
individuals and small businesses in their respective market areas. Other
consumer bank services include automated teller machines, installment and real
estate loans, home equity loans, drive-in services, safe deposit boxes,
Internet banking, image bank statements and credit and debit card services.
The Banks offer competitive interest rates on money market accounts, savings
accounts and certificates of deposit. NBC-Eagle Pass and NBC-Laredo enjoy
long-term deposit relationships with many Mexican Nationals (in United States
dollars only).
SERVICES OFFERED BY NBC NON-BANK SUBSIDIARIES
NBC Financial, Inc., a wholly-owned indirect subsidiary of the
Company, is a fully disclosed introducing broker-dealer which began operations
in September 1999. All securities transactions for NBC Financial, Inc. are
being cleared through Pershing, a division of Donaldson, Lufkin & Jenrette
Securities Corporation. NBC Financial, Inc. provides general securities
services for customers of the Banks and the general public, and operates
pursuant to a market-based leasing arrangement in each of the Banks and
branches.
COMPETITION
The Banks face substantial competition for deposits and loans
throughout their market areas. Competition comes primarily from other
commercial banks, savings and loans, credit unions, mutual funds and other
financial intermediaries. The Banks face competition for deposits and loans
throughout their market areas not only from local institutions but also from
out-of-state financial intermediaries which have opened loan production
offices which solicit deposits in its market areas. Many of the financial
intermediaries operating in the Banks' market areas offer certain services,
such as trust, investment and international banking services, which the
Company does not offer directly. Additionally, banks with larger
capitalization and financial intermediaries, not subject to bank regulatory
restrictions, have larger lending limits and are thereby able to serve the
needs of larger customers. Management believes, however, that the Banks'
long-term presence, local expertise and ongoing commitment to the community,
as well as their commitment to quality and personalized banking services, are
the key factors that contribute to their competitiveness.
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GROWTH OBJECTIVES
The Company intends to grow its business in the State of Texas by
adding additional branches and through possible bank or branch acquisitions.
Because the Company has $89 million of net operating loss carryforwards as of
December 31, 1999, which will not begin to expire until 2005, the Company
believes it is well positioned to grow its business by acquiring additional
banks. The Company's ability and willingness to acquire additional banks is
dependent upon the (i) availability of suitable candidates, (ii) price, and
(iii) strategic fit for such additional banks and/or branches. Acquiring
additional banks or adding additional branches is also subject to certain
federal and state regulatory approvals. See "Supervision and Regulation -- The
Company" and "Supervision and Regulation -- Interstate Banking and Branching."
There can be no assurance, however, that the Company will obtain the required
regulatory approvals or that the Company will be able to successfully add
additional branches or acquire additional banks.
EMPLOYEES
At December 31, 1999, the Company employed approximately 269
full-time equivalent employees. Management believes that its relations with
its employees are satisfactory. Employees of the Company enjoy a variety of
employee benefit programs, including a 401(k) plan, paid vacations and
comprehensive medical, life and accident insurance plans.
SUPERVISION AND REGULATION
THE COMPANY. The Company, as a registered bank holding company, is
subject to regulation under the BHC Act. The Company is required to file with
the Federal Reserve Board ("FRB") quarterly and annually and also reports such
additional information as the FRB may require pursuant to the BHC Act. The
Company is subject to examination by the FRB. The FRB may require the Company
to terminate an activity or terminate control of or liquidate or divest
certain subsidiaries or affiliates when the FRB believes the activity or the
control of the subsidiary or affiliate constitutes a significant risk to the
financial safety, soundness or stability of any of its banking subsidiaries.
The FRB also has the authority to regulate provisions of certain bank holding
company debt, including authority to impose interest ceilings and reserve
requirements on such debt. Under certain circumstances, the Company must file
written notice and obtain approval from the FRB prior to purchasing or
redeeming its equity securities. Under the BHC Act and regulations adopted by
the FRB, a bank holding company and its nonbanking subsidiaries are prohibited
from requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the FRB to maintain certain levels of capital. See
"Supervision and Regulation--Capital Adequacy Guidelines."
The Company is required to obtain prior approval of the FRB for the
acquisition of more than five percent of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the FRB is also required for the merger or
consolidation of the Company and another bank holding company. The Company is
prohibited by the BHC Act, except in certain statutorily prescribed instances,
from acquiring direct or indirect ownership or control of more than five
percent of the outstanding voting shares of any company that is not a bank or
bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company may, subject to the prior
approval of the FRB, engage in any, or acquire shares of companies engaged in,
activities that are deemed by the FRB to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. The FRB is
also empowered to differentiate between activities commenced DE NOVO and
activities commenced by acquisition, in whole or in part, of a going concern
and is generally prohibited from approving an application by a bank holding
company to acquire voting shares of any commercial bank in another state
unless such acquisition is specifically authorized by the laws of such other
state.
Under FRB regulations, a bank holding company is required to serve as
a source of financial and managerial strength to its subsidiary banks and may
not conduct its operations in an unsafe or unsound manner. In addition, it is
the FRB's policy that in serving as a source of strength to its subsidiary
banks, a bank holding company should stand ready to use available resources to
provide adequate capital funds to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility
and capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB's regulations or both.
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THE BANKS. Banks are extensively regulated under federal and state
law. NBC-Laredo, NBC-Eagle Pass and NBC-Luling, as national banks, are subject
to primary supervision, periodic examination and regulation by the Office of
the Comptroller of the Currency (the "OCC"). NBC-Rockdale, a Texas state
chartered bank, is subject to examination and regulation by the Texas State
Banking Department.
The deposits of the Banks are insured by the Federal Deposit
Insurance Corporation ("FDIC"), which currently insures deposits of each
member bank to a maximum of $100,000 per depositor. For this protection, the
Banks, as is the case with all insured banks, pay a semi-annual statutory
assessment and are subject to the rules and regulations of the FDIC. See
"Supervision and Regulation - FDIC Insurance."
The regulations promulgated by these federal agencies govern most
aspects of the Banks business, including, without limitation, capital to
assets ratios, reserves against deposits, maximum lending limitations,
investments, mergers and acquisitions, borrowings, dividends and locations of
branch offices. The Banks are also subject to applicable provisions of Texas
law, insofar as they do not conflict with or are not preempted by federal law.
Supervision, legal action and examination of the Banks by the regulatory
agencies are generally intended to protect depositors, and are not intended
for the protection of shareholders. The OCC also has the authority to prohibit
national banks from engaging in what, in the OCC's opinion, constitutes an
unsafe or unsound practice in conducting its business. It is possible,
depending upon the financial condition of the bank in question and other
factors, that the OCC could assert that the payment of dividends or other
payments might, under some circumstances, constitute an unsafe or unsound
practice.
CONTROL ISSUES. Investors in the Common Stock of the Company are
potentially subject to certain change of bank control laws; those contained in
the BHC Act, the Federal Deposit Insurance Act (the "FDIA") and applicable
Texas laws. In general, persons who wish to acquire a number of shares of
Common Stock that, when aggregated with that person's other holdings of common
stock, if any, would equal or exceed 10 percent of the Company's Common Stock,
or who otherwise might be subject to the change of bank control rules, should
consult with their legal counsel regarding the applicability of the provisions
of any of these laws.
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. To date, the Company has not engaged in any
additional financial activities permitted by GLBA.
INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate
Branching Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions
of banks and bank holding companies without geographic limitation beginning
one year after enactment. In addition, beginning June 1, 1997, IBBEA
authorizes a bank to merge with a bank in another state as long as neither of
the states has opted out of interstate branching between the date of enactment
of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws
permitting interstate bank merger transactions prior to June 1, 1997. A bank
may establish a de novo branch in a state in which the bank does not maintain
a branch if the state expressly permits de novo branching. Once a bank has
established branches in a state through an interstate merger transaction, the
bank may establish and acquire additional branches at any location in the
state where any bank involved in the merger transaction could have established
or acquired branches under applicable federal or state law. A bank that has
established a branch in a state through de novo branching may establish and
acquire additional branches in such state in the same manner and to the same
extent as a bank having a branch in such state as a result of an interstate
merger. If a state opts out of interstate branching within the specified time
period, no bank in any other state may establish a branch in the opting out
state, whether through an
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acquisition or de novo. On August 28, 1995, Texas enacted legislation opting
out of interstate branching.
FDIC INSURANCE. The deposits of the Banks are insured by the FDIC.
For this protection, the Banks are subject to the rules and regulations of the
FDIC. The Banks also pay FDIC insurance premiums based on each Bank's annual
assessment rate assigned to it by the FDIC. The assessment rate is based on
the institution's capitalization risk category and "supervisory subgroup." An
institution's capitalization risk category is based on the FDIC's
determination of whether the institution is well capitalized, adequately
capitalized or less than adequately capitalized. An institution's supervisory
subgroup is based on the FDIC's assessment of the financial condition of the
institution and the probability that FDIC intervention or other corrective
action will be required. See page 17 under "non-interest expense" for the
amount of FDIC premiums paid by the Banks.
FDICIA REGULATION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") requires, among other things, the federal
banking regulators to take "prompt and corrective action" in respect of
depository institutions insured by the FDIC that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: `"well capitalized,"
"adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." As of December 31, 1999,
all of the Banks were classified as "well capitalized".
FDICIA directs that each federal banking agency prescribe standards,
by regulation or guidelines, for depository institutions relating to internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, asset
quality, earnings, stock valuation, and such other operational and managerial
standards as the agency deems appropriate. The FDIC, in consultation with the
other federal banking agencies, has adopted a final rule and guidelines with
respect to internal and external audit procedures and internal controls in
order to implement those provisions of FDICIA intended to facilitate the early
identification of problems in financial management of depository institutions.
FDICIA also contains a variety of other provisions that may effect
the operations of the Company, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give ninety (90) days notice to
customers and regulatory authorities before closing any branch. The Federal
regulatory agencies have issued standards establishing loan-to-value
limitations on real estate lending.
CAPITAL ADEQUACY GUIDELINES. The federal banking agencies have issued
guidelines for risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, and takes off-balance sheet items into account in assessing
capital adequacy and minimizes disincentives to holding liquid, low-risk
assets. Under these guidelines, assets and credit equivalent amounts of
off-balance sheet items, such as letters of credit and outstanding loan
commitments, are assigned to one of several risk categories, which range from
0% for risk-free assets, such as cash and certain U.S. government securities,
to 100% for relatively high-risk assets, such as loans, investments in fixed
assets, premises and other real estate owned. The aggregated dollar amount of
each category is then multiplied by the risk-weight associated with that
category. The resulting weighted values from each of the risk categories are
then added together to determine the total risk-weighted assets.
The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier 1
capital. A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus,
retained earnings, and qualifying preferred stock. Intangibles, such as
goodwill, as well as the unrealized gain or loss on available for sale
securities, are generally deducted from Tier 1 capital. At least 50% of the
banking organization's total regulatory capital must consist of Tier 1
capital. Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk-weighted assets; (ii) preferred
stock not qualifying as Tier 1 capital plus related surplus; and, (iii)
mandatory convertible debt. The inclusions of the foregoing elements of Tier 2
capital are subject to certain requirements and limitations of the federal
banking agencies. The federal banking agencies have also adopted a minimum
leverage ratio of Tier 1 capital to total assets of 3% for banks that have a
uniform composite ("CAMEL") rating of 1. All other institutions and
institutions experiencing or anticipating significant growth are expected to
maintain capital at least 100 to 200 basis points above the minimum level.
Furthermore, higher leverage ratios are required to be considered well
capitalized or adequately capitalized under the prompt corrective action
provisions of the FDICIA. See "Management's Discussion and Analysis- Capital
Resources."
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CRA AND FAIR LENDING DEVELOPMENTS. The Banks are subject to certain
fair lending requirements and reporting obligations involving home mortgage
lending operations and Community Reinvestment Act ("CRA") activities. The CRA
generally requires the federal banking agencies to evaluate the record of a
financial institution in meeting the credit needs of their local communities,
including low and moderate income neighborhoods. In addition to substantial
penalties and corrective measures that may be required for a violation of
certain fair lending laws, the federal banking agencies may take compliance
with such laws and CRA into account when regulating and supervising other
activities.
ENVIRONMENTAL LAWS. Under various federal, state and local laws,
ordinances and regulations, a current or previous owner, developer or operator
of real estate may be liable for the cost of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. The cost of
such removal or remediation of such substances can be substantial. These laws
often impose liability without regard to whether the owner or operator knew
of, or was responsible for, the release or presence of such substances. As a
result, the presence of such substances on any of the real property collateral
securing any of the Banks' loans may render such collateral less valuable or
worthless or may result in the Banks being unwilling to foreclose upon such
collateral. In addition, the Banks may incur substantial environmental
liabilities and costs from owning any collateral previously foreclosed upon
that is later determined to contain such substances. The Banks attempt to
reduce this risk by making inquiry with respect to environmental matters in
connection with the extension of credit; however, there can be no assurance
that environmental liabilities do not or will not exist with respect to the
Banks' collateral.
EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on rate differentials. In general,
the difference between the interest rate paid by the Banks on their deposits
and other borrowings and the interest rate received by the Banks on loans
extended to their customers and securities held in the Banks portfolio
comprise the major portion of the Banks earnings. These rates are highly
sensitive to many factors that are beyond the control of the Banks.
Accordingly, the earnings and growth of the Banks are subject to the influence
of local, domestic and foreign economic conditions, including recession,
unemployment and inflation.
The commercial banking business is not only affected by general
economic conditions but is also influenced by the monetary and fiscal policies
of the federal government and the policies of regulatory agencies,
particularly the FRB. The FRB implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its
open-market operations in United States Government securities, by adjusting
the required level of reserves for financial intermediaries subject to its
reserve requirements and by varying the discount rate applicable to borrowings
by depository institutions. The actions of the FRB in these areas influence
the growth of bank loans, investments and deposits and also affect the
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations
governing the operations and taxation of banks, bank holding companies and
other financial intermediaries are frequently made in Congress, in the Texas
legislature and before various bank regulatory and other professional
agencies. The likelihood of any major changes and the impact such changes
might have on the Company and/or the Banks are impossible to predict. Certain
of the potentially significant changes which have been enacted and proposals
which have been made recently are discussed above.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters are currently located in the NBC-San
Antonio building located at 12400 Hwy 281 North, San Antonio, Texas, occupying
premises of approximately 4,900 square feet. The Company has a lease with an
indefinite term with NBC-Eagle Pass with monthly lease payments of $10,256 per
month.
The Company has entered into a forty-two month sublease for 1,429
square feet in Suite 1700 at 100 Wilshire Boulevard, Santa Monica, California,
with lease payments of $3,500 per month. The lease expired on December 31,
1999, but was renewed for a one year term. This property is for office use.
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NBC-Laredo's main banking facility is located at 104 East Mann Road,
Laredo, Texas. The Bank owns and occupies a 12,000 square foot, two story
building situated on approximately two acres. NBC-Laredo leases a 1,200 square
foot motor bank approximately one-half mile south of its main location at Mall
Del Norte, Laredo, Texas. NBC-Laredo also owns and occupies a 2,761 square
foot branch located at 2302 Blaine Street, Laredo, Texas which was opened in
March 1998. NBC-Laredo is in the process of building a 6,000 square foot
branch located at McPherson Road at Welby Court Laredo, Texas which is
scheduled to open in April 2000.
NBC-Eagle Pass' main banking facility is located at 439 Main Street,
Eagle Pass, Texas, which is within five blocks of the international bridge
into Piedras Negras, Coahuila, Mexico. The Bank owns and occupies a two-story,
22,434 square foot building situated on one city block at this address.
NBC-Eagle Pass also owns and occupies a 4,000 square foot branch bank,
NBC-East, located approximately one mile east of the main bank at 2538 E. Main
Street. NBC-Eagle Pass also owns and occupies a two-story 19,761 square foot
branch located at 700 Hwy 281, Marble Falls, Texas. NBC-Eagle Pass also owns
and occupies a 30,000 square foot branch in San Antonio, Texas located at
12400 Hwy 281 North. The branch was opened in March 1999.
NBC-Rockdale's main banking facility is located at 401 E. Cameron
Street, Rockdale, Texas. The Bank owns and occupies a 22,000 square foot two
story building at this location. NBC-Rockdale also owns and occupies a 1,700
square foot motor bank located at 1401 W. Cameron Street, Rockdale, Texas.
NBC-Rockdale also owns and occupies a 14,524 square foot branch located at 104
W. Austin, Giddings, Texas and a 15,136 square foot branch located at 316 N.
Main Street, Taylor Texas.
NBC-Luling's main banking facility is located at 200 S. Pecan Ave.,
Luling, Texas. The bank owns and occupies a 5,500 square foot one story
building at this location. In March, 1998, NBC-Luling opened a 2,925 square
foot branch which it owns and occupies at 1081 Wonder World Drive, San Marcos,
Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company and the Banks from time to time are involved in legal
actions arising from normal business activities. Management believes that
those actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial
position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
MARKET PRICE OF COMMON STOCK
The Common Stock of the Company has been listed on the American Stock
Exchange since April 28, 1995 under the symbol "NBT." Prior to that date, the
Common Stock of the Company was not listed on any stock exchange nor quoted on
the National Association of Securities Dealers Automated Quotation Systems. As
of December 31, 1999, the Company had approximately 903 shareholders of record.
The following table sets forth the high and low sales/bid
prices/quotations for the Company's Common Stock during 1999 and 1998. These
bid quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions:
<TABLE>
<CAPTION>
SALES/BID PRICES
--------------------------------
HIGH LOW
-------------- ---------------
<S> <C> <C>
1999:
4TH QUARTER $15.13 $14.25
3RD QUARTER 15.88 14.75
2ND QUARTER 15.88 14.13
1ST QUARTER 16.63 15.00
1998:
4th Quarter $ 17.37 $ 15.25
3rd Quarter 21.25 16.75
2nd Quarter 21.44 20.50
1st Quarter 22.94 17.88
</TABLE>
DIVIDENDS
Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Company's Board of Directors out of funds legally available
therefore. The Company has not previously paid any dividends on the Common
Stock. The Company currently intends to retain all future earnings for use in
the expansion and operation of its business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, future
earnings, capital requirements, the general financial condition of the
Company, as well as other relevant factors. The Company's principal source of
funds to pay dividends on the Common Stock is the cash dividends the Company
receives from the Banks. The payment of dividends by the Banks to the Company
is subject to certain restrictions imposed by federal banking laws,
regulations and authorities.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (dollars in thousands) 1999 1998 1997 1996 1995
--------------- -------------- --------------- -------------- -----------
Interest income...............................$ 35,666 $ 33,063 $ 27,334 $ 20,820 $ 18,955
Interest expense.............................. 15,707 14,915 11,722 8,112 7,359
--------------- -------------- --------------- -------------- -----------
Net interest income......................... 19,959 18,148 15,612 12,708 11,596
Provision (credit) for loan losses............ 625 232 80 (5) (855)
Non-interest income........................... 2,614 5,701 4,387 2,789 2,762
Non-interest expense.......................... 17,586 15,273 12,244 9,586 9,149
Income taxes.................................. 1,624 3,056 2,811 2,155 2,241
Extraordinary credit, net of tax.............. - - - - 219
--------------- -------------- --------------- -------------- -----------
Net income..................................$ 2,738 $ 5,288 $ 4,864 $ 3,761 $ 4,042
=============== ============== =============== ============== ===========
COMMON SHARE DATA:
Basic earnings per share before extraordinary
credit......................................$ 0.66 $ 1.17 $ 1.04 $ 0.81 $ 0.91
Extraordinary credit, net of tax.............. - - - - 0.05
Book value....................................$ 12.31 $ 12.44 $ 10.97 $ 9.21 $ 7.94
Weighted average shares outstanding........... 4,154,529 4,503,427 4,658,734 4,639,955 4,443,436
BALANCE SHEET DATA (AT PERIOD END): (dollars in thousands)
Total assets..................................$ 549,784 $ 512,078 $ 470,160 $ 327,918 $ 270,092
Investments and federal funds sold............ 235,582 272,019 279,991 184,021 152,677
Total loans................................... 247,406 192,219 136,313 113,258 91,588
Allowance for loan losses..................... 2,841 2,670 2,458 2,408 1,906
Total deposits................................ 489,740 447,656 414,415 279,755 231,937
Other debt.................................... 7,017 10,143 2,646 3,995 366
Total stockholders' equity.................... 50,633 52,206 51,098 42,909 35,977
PERFORMANCE DATA:
Return on average total assets................ 0.51% 1.09% 1.25% 0.72% 1.52%
Return on average stockholders' equity........ 5.35% 10.24% 10.59% 9.70% 12.05%
Net interest margin (tax equivalent).......... 4.23% 4.24% 4.42% 4.80% 4.77%
ASSET QUALITY RATIOS:
Non-performing loans to total loans........... 1.21% 1.08% 1.16% 1.69% 1.70%
Net loan charge-offs (recoveries) to average
loans........................................ 0.21% 0.01% 0.02% -0.04% -0.29%
Allowance for loan losses to total loans...... 1.15% 1.39% 1.80% 2.13% 2.08%
CAPITAL RATIOS:
Stockholders' equity to average total assets.. 9.47% 10.77% 11.78% 13.35% 12.65%
Tier 1 risk-based capital *................... 16.40% 18.37% 27.77% 33.58% 35.77%
Total risk-based capital *.................... 17.47% 19.62% 29.02% 34.84% 37.18%
Leverage ratio *.............................. 7.86% 8.12% 9.13% 13.67% 13.28%
* Calculated in accordance with Federal Reserve guidelines currently in effect
</TABLE>
11
<PAGE>
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
Selected quarterly consolidated financial data is presented in the
following tables for the years ended December 31, 1999 and 1998. (Dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 QUARTER ENDED (UNAUDITED)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------- ----------------- ----------------------------------
Interest income...................................... $ 8,439 $ 8,721 $ 9,051 $ 9,455
Interest expense..................................... 3,763 3,768 3,952 4,225
---------------- ----------------- ---------------- -----------------
Net interest income................................ 4,676 4,953 5,099 5,230
Provision for loan loss.............................. 123 153 185 165
Gain(loss) on securities............................. 29 6 7 (1,683)
Non-interest income.................................. 1,105 986 1,058 1,107
Non-interest expense................................. 4,194 4,246 4,416 4,729
---------------- ----------------- ---------------- -----------------
Income before federal income taxes................. 1,493 1,546 1,563 (240)
Federal income taxes................................. 656 394 518 56
---------------- ----------------- ---------------- -----------------
Net income......................................... $ 837 $ 1,152 $ 1,045 $ (296)
---------------- ----------------- ---------------- -----------------
Basic earnings per share........................... $ 0.20 $ 0.28 $ 0.25 $ (0.07)
---------------- ----------------- ---------------- -----------------
Diluted earnings per share......................... $ 0.20 $ 0.27 $ 0.24 $ (0.07)
---------------- ----------------- ---------------- -----------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1998 QUARTER ENDED (UNAUDITED)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------------- ----------------- ----------------------------------
Interest income...................................... $ 7,916 $ 8,159 $ 8,410 $ 8,578
Interest expense..................................... 3,614 3,685 3,745 3,871
---------------- ----------------- ---------------- -----------------
Net interest income................................ 4,302 4,474 4,665 4,707
Provision for loan loss.............................. 20 48 82 82
Gain (loss) on sales of securities................... 526 107 325 145
Net trading profit (loss)............................ 1,313 (524) (224) 217
Non-interest income.................................. 867 904 1,043 1,002
Non-interest expense................................. 3,667 3,792 3,831 3,983
---------------- ----------------- ---------------- -----------------
Income before federal income taxes................. 3,321 1,121 1,896 2,006
Federal income taxes................................. 1,215 410 695 736
---------------- ----------------- ---------------- -----------------
Net income......................................... $ 2,106 $ 711 $ 1,201 $ 1,270
---------------- ----------------- ---------------- -----------------
Basic earnings per share........................... $ 0.45 $ 0.15 $ 0.28 $ 0.30
---------------- ----------------- ---------------- -----------------
Diluted earnings per share......................... $ 0.44 $ 0.15 $ 0.26 $ 0.29
---------------- ----------------- ---------------- -----------------
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY ANALYZES THE MAJOR ELEMENTS OF THE
COMPANY'S CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME. THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS, ACCOMPANYING NOTES, AND SELECTED FINANCIAL DATA APPEARING
ELSEWHERE IN THIS REPORT.
RESULTS OF OPERATIONS
Net income for 1999 was $2.7 million, compared to $5.3 million
recorded in 1998 and $4.9 million in 1997. Net income per diluted common
share in 1999 was $.64 compared with $1.14 in 1998 and $1.02 in 1997. The
earnings for 1999, 1998 and 1997 included a $1.1 million net after tax loss,
a $1.2 million net after tax gain and an $828,000 net after tax gain, on
securities, respectively. Included in the $1.1 million net after tax loss
recorded in 1999 was a $1.5 million net after tax loss taken on the
write-down of the common stock of an investment in an insurance holding
company. (For more information on this investment please refer to the
investment securities section of this report.) Excluding these gains and
losses, net operating earnings for 1999 were $3.8 million or $0.90 per
diluted common share compared with $4.1 million or $0.87 per diluted common
share for 1998 and $4 million or $0.85 per diluted common share for 1997. The
$300,000 decrease in net income from 1998 to 1999, excluding the securities
gains and losses, can be primarily attributed to the $361,000 increase in
interest expense on other debt which was used to purchase treasury stock.
Earnings were also affeced by the opening of a new branch in San Antonio
during March 1999 which increased salaries and occupancy expenses by
approximately $1.5 million during 1999. Much of the loan growth the Company
has experienced has been in the San Antonio market area, thereby increasing
interest income to partially offset the additional expenses of the new branch.
The Company's return on equity for 1999 was 5.35% compared to 10.24%
and 10.59% for 1998 and 1997, respectively. The Company's return on assets for
1999 was .51% compared to 1.09% and 1.25% for 1998 and 1997, respectively. The
Company's return on equity, excluding the securities gains and losses, was
7.42%, 7.93%, and 8.71% for 1999, 1998, and 1997, respectively. The Company's
return on assets, excluding the securities gains and losses was .71%, .85%,
and 1.03% for 1999, 1998, and 1997, respectively.
Total year-end assets reached $549.8 million at December 31, 1999 from
$512.1 million at December 31, 1998, an increase of $37.7 million or 7.4%. Total
loans at December 31, 1999 grew to $247.4 million, or 28.7% over the previous
year end total of $192.2 million. The growth in the loan portfolio was
attained through internal growth. Deposits reflect less significant growth,
increasing 9.4% over the same period to $489.7 million from $447.7 million at
December 31, 1998.
NET INTEREST INCOME. Net interest income constitutes the principal
source of income for the Company and represents the difference between
interest income on earning assets and interest expense on interest-bearing
liabilities. Investment securities accounted for 48% and 55% of average
earning assets in 1999 and 1998, respectively. Loans accounted for 47% and 38%
of average earning assets in 1999 and 1998, respectively. Net interest income
for 1999 was $19.9 million, an increase of $1.8 million or 10% compared to
$18.1 million in 1998. The net increase reflected a $2.6 million increase in
interest income that was offset by a $792,000 increase in interest expense.
The increase was due primarily to a $56.2 million or 34% increase in average
loans. Average earning assets were $422.3 million, an increase of 10.3% over
1998 primarily because of the loan growth. The Company's yield on earning
assets decreased to 7.55% in 1999 from 7.72% in 1998 primarily due to the
decrease in the yield on the loan portfolio. The rate paid on interest bearing
liabilities decreased twenty-three basis points from 4.08% in 1998 to 3.85% in
1999. The net interest margin is the net effective yield on earning assets,
calculated as net interest income on a taxable-equivalent basis expressed as a
percentage of average total earning assets. The net interest margin for 1999
was 4.23% compared to 4.24% and 4.42% for 1998 and 1997, respectively. The
decrease in the net interest margin for 1999 and 1998 is reflective of higher
volumes of earning assets. The net interest spread increased six basis point
to 3.70% in 1999 from 3.64% in 1998.
<PAGE>
The following table analyzes the increases in taxable-equivalent net
interest income stemming from changes in interest rates and from asset and
liability volume, including mix, for the years ended December 31, 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 in proportion to the absolute amounts of change in each.
<TABLE>
<CAPTION>
ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
(Dollars in thousands)
------------------------------------------ -----------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------------ -----------------------------------------
DUE TO CHANGE IN DUE TO CHANGE IN
INCREASE --------------------------- INCREASE ---------------------------
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------------------------- ------------- --------------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Taxable-equivalent interest income:
Interest-bearing accounts.......... $ 31 $ (12) $ 43 $ (43) $ 28 $ (71)
Federal funds sold................. (257) (119) (138) (9) 117 (126)
Investment securities.............. (682) (33) (649) 2,178 (141) 2,319
Loans, net of unearned discount.... 3,515 (1,758) 5,273 3,600 (619) 4,219
------------- ------------- ------------- ------------ ------------- -------------
Total taxable-equivalent
interest income............. 2,607 (1,922) 4,529 5,726 (615) 6,341
------------- ------------- ------------- ------------ ------------- -------------
Interest expense:
Interest-bearing accounts.......... 431 (1,535) 1,966 3,149 (591) 3,740
Other debt......................... 361 (20) 381 44 (50) 94
------------- ------------- ------------- ------------ ------------- -------------
Total interest expense......... 792 (1,555) 2,347 3,193 (641) 3,834
------------- ------------- ------------- ------------ ------------- -------------
Taxable-equivalent
net interest income................ $ 1,815 $ (367) $ 2,182 $ 2,533 $ 26 $ 2,507
============= ============= ============= ============ ============= =============
</TABLE>
Taxable-equivalent net interest income for 1999 increased $1.8 million
or 10.0% over 1998. Taxable-equivalent net interest income for 1998 increased
$2.5 million or 16.3% over 1997. As the chart above indicates, interest income
and interest expense increased in 1999 and 1998 primarily due to the growth in
earning assets and interest-bearing liabilities. Average earning assets grew
10.3% while interest-bearing liabilities grew 11.5%.
14
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ----------------------------- ------------------------------
INTEREST EARNED/ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
INCURRED AND RATES AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
- ----------------------------------- ----------- --------- --------- ---------- -------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing accounts $ 2,171 $ 113 5.20% $ 1,360 $ 82 6.03% $ 2,642 $ 125 4.74%
Federal funds sold 23,988 1,247 5.20% 26,538 1,504 5.67% 28,846 1,513 5.25%
Investment securities (F):
US Treasuries 195,093 12,174 6.24% 231,356 14,527 6.28% 191,301 12,186 6.37%
US Government agencies 29,375 1,729 5.89% 4,406 279 6.33% 5,143 347 6.75%
Other 1,580 260 16.46% 639 39 6.10% 3,056 134 4.39%
----------- --------- --------- ---------- -------- --------- ---------- --------- ---------
Total investment securities 226,048 14,163 6.27% 236,401 14,845 6.28% 199,500 12,667 6.35%
Loans, net of discounts (A) 220,123 20,161 9.16% 163,911 16,646 10.16% 122,604 13,046 10.64%
----------- --------- --------- ---------- -------- --------- ---------- --------- ---------
Total earning assets 472,330 35,684 7.55% 428,210 33,077 7.72% 353,592 27,351 7.74%
NON-INTEREST BEARING ASSETS:
Cash and due from banks 20,321 18,204 16,433
Allowance for possible loan losses (2,849) (2,561) (2,458)
Other assets 45,103 40,944 22,148
----------- ---------- ----------
Total assets $534,905 $ 484,797 $ 389,715
=========== ========== ==========
INTEREST-BEARING LIABILITIES:
Interest-bearing transaction
accounts 69,974 1,761 2.52% 61,656 1,584 2.57% 48,723 1,347 2.77%
Savings, money market and
certificates of deposit 327,232 13,238 4.05% 299,058 12,984 4.34% 234,533 10,072 4.29%
Other debt 10,485 708 6.75% 4,857 347 7.14% 3,606 303 8.40%
----------- --------- --------- ---------- -------- --------- ---------- --------- ---------
Total interest-bearing
liabilities 407,691 15,707 3.85% 365,571 14,915 4.08% 286,862 11,722 4.09%
NON-INTEREST BEARING LIABILITIES:
Demand deposits 72,752 63,402 54,723
Other liabilities 3,244 4,157 2,214
----------- ---------- ----------
Total liabilities 483,687 433,130 343,799
STOCKHOLDERS' EQUITY (F) 51,218 51,667 45,916
----------- ---------- ----------
Total liabilities and
stockholders' equity $534,905 $ 484,797 $ 389,715
=========== ========== ==========
Taxable equivalent net interest
income 19,977 18,162 15,629
Less: taxable equivalent adjustment 18 14 17
--------- -------- ---------
Net interest income $19,959 $18,148 $ 15,612
========= ======== =========
Net interest spread (B) 3.70% 3.64% 3.65%
========= ========= =========
Net interest margin (C) 4.23% 4.24% 4.42%
========= ========= =========
SELECTED OPERATING RATIOS:
Return on assets (D) 0.51% 1.09% 1.25%
========= ========= =========
Return on equity (E) 5.35% 10.24% 10.59%
========= ========= =========
</TABLE>
(A) Non-accrual loans are included in the average balances used in calculating
this table.
(B) The net interest spread is the difference between the average rate on total
interest-earning assets and interest-bearing liabilities.
(C) The net interest margin is the taxable-equivalent net interest income
divided by average earning assets.
(D) The return on assets ratio was computed by dividing net income by average
total assets.
(E) The return on equity ratio was computed by dividing net income by average
total stockholders' equity.
(F) The average balance has been adjusted to exclude the effect of the
unrealized gain or loss on securities available for sale.
15
<PAGE>
MARKET RISK DISCLOSURE - INTEREST RATE SENSITIVITY. Market risk is
the potential loss arising from adverse changes in the fair value of a
financial instrument due to the changes in market rates and prices. In the
ordinary course of business, the Company's market risk is primarily that of
interest rate risk. The Company's interest rate sensitivity and liquidity are
monitored by management on an ongoing basis. A variety of measures are used
to provide for a comprehensive view of the magnitude of interest rate risk,
the distribution of risk, level of risk over time and exposure to changes in
certain interest rate relationships. The Company continuously monitors and
manages the balance between interest rate-sensitive assets and liabilities.
Management seeks to maintain consistent growth of net interest income through
periods of changing interest rates by avoiding fluctuating net interest
margins and to maintain consistent growth of net interest income through
periods of changing interest rates.
Interest rate sensitivity is the relationship between changes in
market interest rates and changes in net interest income due to repricing
characteristics of assets and liabilities.
The following table commonly referred to as a "static gap report,"
indicates the Company's interest rate sensitivity position at December 31,
1999 and may not be reflective of positions in subsequent periods:
<TABLE>
<CAPTION>
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in thousands)
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 $ 71,835 $ 11,643 $ 25,248 $ 108,726 $ 138,680 $ 247,406
Investment securities -- 499 18,272 18,771 202,563 221,334
Federal funds sold 11,949 -- -- 11,949 -- 11,949
Interest-bearing accounts 25 -- 1,819 1,844 455 2,299
-------------- ------------- ------------- ------------- ------------- -----------
Total earning assets $ 83,809 $ 12,142 $ 45,339 $ 141,290 $ 341,698 $ 482,988
============== ============= ============= ============= ============= ===========
Interest-bearing liabilities:
Interest-bearing transaction,
savings and money market $ 193,150 $ -- $ -- $ 193,150 $ -- $ 193,150
Certificates and time deposits 42,905 54,146 116,819 213,870 12,091 225,961
Debt 4,908 71 327 5,306 1,711 7,017
-------------- ------------- ------------- ------------- ------------- -----------
Total interest-bearing
Liabilities $ 240,963 $ 54,217 $ 117,146 $ 412,326 $ 13,802 $ 426,128
============== ============= ============= ============= ============= ===========
Interest sensitivity gap $(157,154) $ (42,075) $ (71,807) $(271,036)
============== ============= ============= =============
Cumulative gap $(157,154) $(199,229) $(271,036) $(271,036)
============== ============= ============= =============
Ratio of earning assets to
interest-bearing liabilities 34.8% 22.4% 38.7% 34.3%
</TABLE>
The interest rate sensitivity table reflects that the Company is
liability sensitive, on a cumulative basis, during the one year period shown.
This gap analysis is based on a point in time and may not be meaningful
because assets and liabilities must be categorized according to contractual
maturities and repricing periods rather than estimating more realistic
behaviors. 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.
The Banks utilize earnings simulation models as the primary
quantitative tool in measuring the amount of interest rate risk associated
with changing market rates. The model quantifies the effects of various
interest rate scenarios on the projected net interest income and net income
over the ensuing 12 month period. The model was used to measure the impact on
net interest income relative to a base case scenario, of rates increasing or
decreasing ratably 100 basis points ("bp") over the next 12 months. These
simulations incorporate assumptions regarding balance sheet growth and mix,
pricing and the repricing and maturity characteristics of the existing and
projected balance sheet. All off-balance sheet financial instruments are
included in the model. The Company's earnings sensitivity profile as of
year-end 1999 and 1998 is stated below.
<TABLE>
<CAPTION>
IMMEDIATE CHANGE IN RATES
---------------------------------
AFTER TAX EARNINGS CHANGE -100 BP +100 BP
---------------- ---------------
<S> <C> <C>
December 31, 1999 18.39% 4.07%
December 31, 1998 14.63% 4.30%
</TABLE>
16
<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 during the past three years:
<TABLE>
<CAPTION>
NON-INTEREST INCOME
(Dollars in thousands)
------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 1998 1997
------------------------------------------------------------------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
------------ -------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Service charges and fees $ 3,627 11.9% $ 3,240 15.9% $ 2,796
Net realized (losses) gains on sales of securities (1,640) -248.7% 1,103 -2.6% 1,133
Net trading profits - -100.0% 782 659.2% 103
Net gains on sales of other real estate owned 35 100.0% 9 -85.5% 62
Miscellaneous income 592 4.6% 567 93.5% 293
------------ -------------- -------------- ------------- ---------------
Total non-interest income $ 2,614 -54.1% $ 5,701 30.0% $ 4,387
============ ============== ============== ============= ===============
</TABLE>
The $3,086,000 or 54.1% decrease in non-interest income for 1999
from 1998 is due primarily to the $1,640,000 net realized loss compared to
$1,885,000 net realized securities gain in 1998 combined with the $387,000
increase in service charges and fees. The improvement in service charges and
fees can be partly attributed to an increase in NSF fees. Included in 1999 is
a non-recurring loss of $1,605,000 due to net gains and losses on other real
estate owned and investment securities which was lower than the $1,894,000
net gain reported in 1998. Therefore, the increase in 1999, disregarding the
non-recurring items, would be $412,000 or 10.8% higher than 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 past three years:
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE
(Dollars in thousands)
--------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- --------------
AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT
--------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 9,192 15.7% $ 7,947 27.4% $ 6,239
Occupancy and equipment expenses 3,273 27.6% 2,566 33.9% 1,917
Data processing fees 319 19.5% 267 8.1% 247
FDIC insurance 51 4.1% 49 44.1% 34
Insurance 133 24.3% 107 5.9% 101
Office supplies 685 13.6% 603 5.4% 572
Postage and courier 526 5.6% 498 -17.1% 601
Professional fees 837 -7.5% 905 15.4% 784
Goodwill amortization 376 0.0% 376 96.9% 191
Miscellaneous other expenses 2,194 12.2% 1,955 25.5% 1,558
--------------- ------------- -------------- ------------- --------------
Total non-interest expense $ 17,586 15.1% $ 15,273 24.7% $ 12,244
=============== ============= ============== ============= ==============
</TABLE>
Non-interest expense of $17.6 million for the year ended 1999
represented an increase of 15.1% compared with 1998. However, as a percentage
of average assets, non-interest expense remained stable at 3.29% in 1999
compared to 1998. The increase in non-interest expense is reflected primarily
in occupancy and equipment expenses and salaries and benefit expense. The
15.7% increase in salaries and benefits for 1999 is due to full-time
equivalent employees increasing by 20 people from 249 in 1998 to 269 at
December 31, 1999 most of which were added to staff the San Antonio branch
which was opened in March 1999. The $707,000 or 27.6% increase in occupancy
and equipment expenses is also due to the opening of the San Antonio branch
which is a 30,000 square foot facility.
INCOME TAXES. The Company recognized income tax expense of $1.6
million in 1999 compared to $3.1 million in 1998. See Note 14 to the
Consolidated Financial Statements for details of tax expense. At December 31,
1999, the Company had approximately $89 million in net operating loss
carryforwards that will be available to reduce income tax liabilities in
future years. If unused, approximately $85 million of such carryforwards will
expire in 2005, with the remaining approximately $4 million expiring in 2006.
The preconfirmation net operating loss carryforwards arose from the
17
<PAGE>
Company's emergence from bankruptcy in May 1992.
INVESTMENT SECURITIES. Total investment securities averaged $226.0
million in 1999, a 4.3% decrease over the 1998 average of $236.4 million. The
following table presents the consolidated investment securities portfolio as
of December 31, 1999, by stated maturity with the weighted average interest
yield for each range of maturities. Federal Reserve Bank stock and other
equity securities are included in the classification "over ten years" in the
available for sale category.
The Company made an investment in the common stock and two classes of
preferred stock of a life insurance holding company. On February 7, 2000, the
insurance holding company filed for chapter 11 and the Company wrote off its
investment in the common stock in the amount of $2,189,000 in December 1999.
The preferred stock investment should realize some value as may be distributed
pursuant to a confirmed plan of reorganization.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO MATURITY AND YIELDS
(Dollars in thousands)
------------------------------------------------------------------------------------------------
DECEMBER 31, 1999
------------------------------------------------------------------------------------------------
ONE YEAR ONE TO FIVE TO OVER TEN
OR LESS FIVE YEARS TEN YEARS YEARS
-------------------- ----------- ---------- -------------------- ---------- ---------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL
---------- --------- ----------- ---------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY SECURITIES:
(Amortized Cost)
Foreign debt securities $ - -- $ 66 7.30% $ - -- $ - -- $ 66
-------- -------- ---------- --------- --------- -------- --------- -------- -----------
Total held to maturity $ - -- $ 66 7.30% $ - -- $ - -- $ 66
======== ======== ========== ========= ========= ======== ========= ======== ===========
AVAILABLE FOR
SALE SECURITIES:
(Fair Value)
U.S. Treasury securities $ 17,007 6.19% $ 104,059 6.12% $ 42,178 6.29% $ - -- $ 163,244
U.S. Government agency
and mortgage-backed
securities 1,764 5.79% 30,685 5.17% 19,394 6.14% 1,563 6.17% 53,406
Other securities -- -- -- -- -- -- 4,618 -- 4,618
-------- -------- ---------- --------- --------- -------- --------- -------- -----------
Total available for sale $ 18,771 6.15% $ 134,744 5.90% $ 61,572 6.24% $ 6,181 2.13% $ 221,268
======== ======== ========== ========= ========= ======== ========= ======== ===========
Total investment securities $ 18,771 6.15% $ 134,810 5.90% $ 61,572 6.24% $ 6,181 2.13% $ 221,334
======== ======== ========== ========= ========= ======== ========= ======== ===========
</TABLE>
The weighted average yield on the investment security portfolio of
the Company at December 31, 1999 was 5.91% compared to a weighted average
yield of 6.16% at December 31, 1998. See Note 1 of the Notes to the
Consolidated Financial Statements for a discussion regarding the investment
classifications held to maturity and available for sale.
Note 3 of the Notes to the Consolidated Financial Statements reflects
the estimated fair value for various categories of investment securities as of
December 31, 1999 and 1998.
The following table summarizes the book value of the investment
portfolio at December 31, for the past three years:
<TABLE>
<CAPTION>
BOOK VALUE OF INVESTMENT PORTFOLIO
(Dollars in thousands)
----------------------------------------------------
DECEMBER 31,
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
U.S. Treasury securities.............................................. $ 163,546 $ 214,966 $ 237,477
U.S. Government agencies.............................................. 52,784 1,503 2,990
Mortgage-backed securities............................................ 1,881 2,447 1,229
Other securities...................................................... 5,776 8,419 1,741
---------------- ---------------- ----------------
$ 223,987 $ 227,335 $ 243,437
================ ================ ================
</TABLE>
18
<PAGE>
LOANS. The following table presents the composition of the
Company's loan portfolio by type of loan:
<TABLE>
<CAPTION>
LOAN PORTFOLIO
(Dollars in thousands)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL 1996 TOTAL 1995 TOTAL
---------- --------- -------------------- -------------------- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............. $ 46,203 18.7% $ 35,389 18.4% $ 22,911 16.8% $ 23,992 21.2% $ 13,643 14.9%
Real estate
construction ...... 21,959 8.9% 12,125 6.3% 10,338 7.6% 6,324 5.6% 11,868 13.0%
Real estate mortgage... 152,292 61.6% 119,654 62.2% 81,752 60.0% 65,556 57.9% 51,664 56.4%
Consumer installment,
net of unearned
Discount............ 26,952 10.9% 25,051 13.0% 21,312 15.6% 17,386 15.3% 14,413 15.7%
---------- --------- -------------------- -------------------- ---------- --------- ---------- --------
Total loans......... $247,406 100.0% $ 192,219 100.0% $ 136,313 100.0% $113,258 100.0% $ 91,588 100.0%
========== ========= ==================== ==================== ========== ========= ========== ========
</TABLE>
The preceding loan composition table shows that in 1999 total loans
increased $55.2 million or 28.7% over 1998. At December 31, 1999, loans were
50.5% of deposits compared to 42.9% at the previous year-end. 59% or $32.6
million of the growth was in real estate mortgages, and 19.6% or $10.8 million
of the growth was in commercial loans. Much of this growth is due to the
opening of the San Antonio, branch location which focuses on commercial
lending. All of the increase is due to internally generated growth.
The following table presents commercial and real estate construction
loans as of December 31, 1999, based on scheduled principal repayments and the
total amounts of loans due after one year classified according to sensitivity
to changes in interest rates:
<TABLE>
<CAPTION>
MATURITIES AND RATE SENSITIVITY OF LOANS
(Dollars in thousands)
OVER ONE YEAR OVER
ONE YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Commercial....................................... $ 22,969 $ 21,483 $ 1,751 $ 46,203
Real estate construction......................... 13,809 5,755 2,395 21,959
================= ================= ================= =================
Total....................................... $ 36,778 $ 27,238 $ 4,146 $ 68,162
================= ================= ================= =================
</TABLE>
Of the loans maturing after one year, $16,119,000 have fixed interest rates
and $15,265,000 have variable interest rates.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan
losses is established through charges to operations in the form of a provision
for loan losses. Loans, or portions thereof, which are considered to be
uncollectible are charged against the allowance and subsequent recoveries, if
any, are credited to the allowance. The allowance represents the amount, which
in the judgment of each Bank's management, will be adequate to absorb possible
losses. The adequacy of the allowance is determined by management's continuous
evaluation of the loan portfolio and by the employment of third party loan
review consultants. Industry concentrations, specific credit risks, past loan
loss experience, delinquency ratios, current loan portfolio quality and
projected economic conditions in the Bank's market areas are pertinent factors
in determining the adequacy of the allowance for possible loan losses. Loans
identified as losses by management, external loan review or bank examiners are
charged-off.
The Company recorded a $625,000 provision for possible loan losses
during 1999, compared to $232,000 recorded during 1998. The provision is
reflective of the growth in the loan portfolio. Despite loan growth in 1996, a
credit to the provision for loan losses of $5,000 was made to reduce the
allowance for loan losses to an appropriate level. Credits to the provision
for loan losses were also made in 1995 in the amount of $855,000. The
aggregate total of credits made to the provision for loan losses since the
1992 reorganization amounts to $5,680,000 and was a significant contribution
to the improved capitalization of the Company. The improvement in credit
quality of the loan portfolio and recoveries of previously charged-off loans
that provided unanticipated additions to the allowance for possible loan
losses justified the
19
<PAGE>
credits made to the allowance. The Company recorded net charge-offs of $454,000
for the year ended December 31, 1999 compared to net charge-offs of $20,000 for
1998.
The following table summarizes, for the periods presented, the activity in the
allowance for possible loan losses arising from provisions credited to
operations, loans charged off and recoveries of loans previously charged off:
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in thousands)
-------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 220,123 $ 163,911 $122,604 $ 96,787 $ 91,357
=========== =========== ========== =========== ==========
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year $ 2,670 $ 2,458 $ 2,408 $ 1,906 $ 2,495
Allowance on acquired loans - - - 467 -
Charge-Offs:
Commercial 468 93 50 76 60
Real estate construction - - - - -
Real estate mortgage - 29 - - 6
Consumer installment 129 168 222 175 264
----------- ----------- ---------- ----------- ----------
Total charge-offs 597 290 272 251 330
----------- ----------- ---------- ----------- ----------
Recoveries:
Commercial 27 22 53 39 69
Real estate construction - - - - -
Real estate mortgage 53 64 38 70 285
Consumer installment 91 184 151 182 242
----------- ----------- ---------- ----------- ----------
Total recoveries 143 270 242 291 596
----------- ----------- ---------- ----------- ----------
Net charge-offs (recoveries) 454 20 30 (40) (266)
Provision charged (credited) to operating expense 625 232 80 (5) (855)
----------- ----------- ---------- ----------- ----------
Balance of at end of year $ 2,841 $ 2,670 $ 2,458 $ 2,408 $ 1,906
=========== =========== ========== =========== ==========
Net charge-offs (recoveries) as a percentage
of average loans outstanding during year 0.21% 0.01% 0.02% -0.04% -0.29%
=========== =========== ========== =========== ==========
Allowance for loan losses as a percentage of
year end loans, net of unearned discount 1.15% 1.39% 1.80% 2.13% 2.08%
=========== =========== ========== =========== ==========
</TABLE>
20
<PAGE>
The following table reflects the allocation of the allowance for
possible loan losses to the various loan categories and the corresponding
percentage of total loans that it represents. Management believes that the
allowance can be allocated by category only on an approximate basis.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
(Dollars in thousands)
--------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------ ------------------- ------------------- -------------------
% OF % OF % OF % OF % OF
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
---------- -------- ---------- ------- ---------- ------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 300 0.12% $ 102 0.05% $ 99 0.07% $ 131 0.12% $ 306 0.33%
Real estate construction - 0.00% - 0.00% - 0.00% - 0.00% - 0.00%
Real estate mortgage 536 0.22% 767 0.40% 760 0.56% 614 0.54% 729 0.80%
Consumer installment 161 0.07% 209 0.11% 192 0.14% 185 0.16% 255 0.28%
Unallocated 1,844 0.75% 1,592 0.83% 1,407 1.03% 1,478 1.31% 616 0.67%
---------- -------- ---------- ------- ---------- ------- ---------- -------- ---------- --------
Total $ 2,841 1.15% $ 2,670 1.39% $ 2,458 1.80% $ 2,408 2.13% $ 1,906 2.08%
========== ======== ========== ======= ========== ======= ========== ======== ========== ========
</TABLE>
Allocation of a portion of the allowance does not preclude its
availability to absorb losses in other categories. The allocation is
determined by providing specific reserves against each criticized loan plus an
unallocated portion against the remaining portfolio based on experience
factors.
NON-PERFORMING ASSETS. Non-performing assets increased to $3,001,000
at December 31, 1999, compared with $2,094,000 at December 31, 1998,
$1,585,000 at December 31, 1997, $1,910,000 at December 31, 1996 and
$2,065,000 at December 31, 1995. Non-performing assets as a percentage of
total assets increased to .55% at December 31, 1999 up from .41% one year ago.
Non-performing assets consist of non-accrual loans, restructured
loans and foreclosed real estate. Loans to a customer whose financial
condition has deteriorated are considered for non-accrual status whether or
not the loan is 90 days or more past due. All installment loans past due 90
days or more are classified as non-accrual unless the loan is well secured or
in the process of collection. On non-accrual loans, interest income is not
recognized until actually collected. At the time the loan is placed on
non-accrual status, interest previously accrued but not collected is reversed
and charged against current income.
Restructured loans are loans on which the interest and/or the
principal has been reduced due to deterioration in the borrower's financial
condition. Even though these loans are performing, they are included in
non-performing assets because of the loss of revenue related to the reduction
in interest and/or principal.
Foreclosed real estate consists of property which has been acquired
through foreclosure. At the time of foreclosure, the property is recorded at
the lower of the estimated fair value less selling expenses or the loan
balance with any write-down charged to the allowance for possible loan losses.
Any future write-downs, expenses related to the property, and any gain or loss
resulting from the sale of the property are charged to operations.
21
<PAGE>
The following table discloses non-performing assets and loans 90 days
past due and still accruing interest as of December 31:
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
(Dollars in thousands)
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
-------------- ------------ ------------- -------------- ------------
Non-accrual loans $ 2,095 $ 899 $ 1,314 $ 1,195 $ 1,177
Foreclosed real estate 906 1,195 271 715 888
-------------- ------------ ------------- -------------- ------------
Total non-performing assets $ 3,001 $ 2,094 $ 1,585 $ 1,910 $ 2,065
============== ============ ============= ============== ============
Non-performing assets as a percentage of:
Total assets 0.55% 0.41% 0.34% 0.58% 0.76%
Total loans plus foreclosed real estate 1.21% 1.08% 1.16% 1.68% 2.23%
Accruing loans past due 90 days or more $ 239 $ 311 $ 40 $ 182 $ 383
</TABLE>
Interest income that would have been earned in 1999 on non-accrual
loans, had such loans performed in accordance with the original contracted
terms, was $89,000. The amounts related to 1998 and 1997 were $185,000 and
$151,000, respectively.
Independent third party loan reviews of the Banks are performed on an
annual basis. The loans are also reviewed by banking regulators on an eighteen
month basis. On a monthly basis, the Board of Directors' of each Bank reviews
new loans, renewals and delinquencies. Management of each Bank monitors, on a
continuing basis, loans which it feels should be followed closely. The Banks
are required by the regulatory authorities to have foreclosed real estate
appraised periodically.
DEPOSITS. The primary source of funds for the Company is the deposits
of the Banks. The Company does not accept brokered deposits. The following
table presents average balances and the corresponding average rate paid for
the deposit categories:
<TABLE>
<CAPTION>
AVERAGE DEPOSITS AND AVERAGE RATES PAID
(Dollars in thousands)
-------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
RATE RATE RATE
AMOUNT PAID AMOUNT PAID AMOUNT PAID
------------ -------- ------------ -------- ------------- --------
Noninterest-bearing demand deposits $ 72,752 -- $ 63,402 -- $ 54,723 --
INTEREST-BEARING DEPOSITS:
Interest-bearing transaction (NOW) accounts 69,974 2.52% 61,656 2.57% 48,723 2.77%
Savings and money market accounts 103,745 3.05% 91,054 3.16% 70,559 3.14%
Certificates and time deposits under $100,000 136,451 4.34% 132,623 4.74% 103,982 4.67%
Certificates and time deposits greater than $100,000 87,037 4.77% 75,381 5.07% 59,993 5.01%
------------ -------- ------------ -------- ------------- --------
Total interest-bearing deposits 397,207 360,714 283,257
------------ ------------ -------------
Weighted average rate paid 3.78% 4.04% 4.03%
======= ======== ========
Total deposits $ 469,959 $ 424,116 $ 337,980
============ ============ =============
</TABLE>
Total average deposits increased $45.8 million or 10.8% due to
internal growth. Mexico is part of the natural trade territory of the Banks.
Thus, dollar-denominated deposits from Mexican sources have traditionally been
a significant source of deposits. Included in total deposits are $110,690,000,
$103,768,000, and $94,477,000 of Mexican National deposits at December 31,
1999, 1998, and 1997, respectively (in United States dollars only).
22
<PAGE>
The remaining maturity on certificates of deposit greater than
$100,000 as of December 31, 1999 is presented below: (Dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
THREE OVER THREE OVER SIX OVER
MONTHS THROUGH THROUGH TWELVE
OR LESS SIX MONTHS TWELVE MONTHS MONTHS TOTAL
------------------ ----------------- ------------------------------------ ------------------
Certificates of deposit of
$100,000 and greater $ 40,182 $ 19,655 $ 31,938 $ 2,864 $ 94,639
================== ================= ================ ================== ==================
</TABLE>
LIQUIDITY
Liquidity is the ability to have funds available at all times to meet
the commitments of the Company. Asset liquidity is provided by cash and assets
which are readily marketable or pledgeable or which will mature in the near
future. Liquid assets include cash and short-term investments in time deposits
in banks, federal funds sold, trading account securities and securities
available for sale. Liquidity is also provided by access to core funding
sources, primarily core depositors in the Company's trade area. The Banks have
not and do not solicit brokered deposits as a funding source. The liquidity of
the Company is enhanced by the fact that 74% of total deposits at December 31,
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 December 31, 1999, the Company's liquid assets amounted to $266
million or 48% of total gross assets, up from $199 million or 39% at December
31, 1998. One reason for the large increase was due to extra cash reserve on
hand in anticipation of Year 2000 issues. The Company will resume its normal
liquidity standards during the first quarter of 2000. Secondary sources of
liquidity include the Company's ability to sell loan participations and
purchase federal funds. In addition, NBC-Eagle Pass has an approved federal
funds line at a correspondent bank and NBC-Laredo has an approved line of
credit with the Federal Home Loan Bank.
CAPITAL RESOURCES
Total stockholders' equity decreased $1.6 million to $50.6 million
at December 31, 1999 from $52.2 million at December 31, 1998. In addition to
net income of $2.7 million, stockholders' equity increased, $2.2 million due
to the reduction in the deferred tax asset valuation allowance and decreased
$5.1 million due to a decline in the net fair value of securities available
for sale. Stockholders' equity was reduced by the 94,325 shares of common
stock repurchased at a cost of $1.4 million, or an average of $15.43 per
share, as part of stock repurchase plan approved by the Board of Directors in
1997 and 1998. The Board had authorized the repurchase of 900,000 shares. As
of December 31, 1999, the Company has repurchased 558,000 shares. The ratio of
total stockholders' equity to total assets was 9.2% at December 31, 1999
compared with 10.2% at December 31, 1998. The decline in the unrealized gain
or loss on available for sale securities was the reason for the decrease.
The Company and the Banks are subject to minimum capital ratios
mandated by their respective banking industry regulators. The table in Note 18
in the Consolidated Financial Statements illustrates the Company's and the
Banks' compliance with the risk-based capital guidelines of the FRB and the
OCC. These guidelines are designed to measure Tier 1 and total capital while
taking into consideration the risk inherent in both on and off-balance sheet
items. Off-balance sheet items at December 31, 1999 include unfunded loan
commitments and letters of credit. Pursuant to the current regulatory
guidelines, the net unrealized gain or loss on securities available for sale
is not included in the calculation of risk-based capital and the leverage
ratio. The leverage ratio is Tier 1 capital divided by quarterly average total
assets. A leverage ratio of 3.0% is the minimum requirement for only the most
highly rated banking organizations and all other institutions are required to
maintain a leverage ratio of 3 to 5 percent.
Tier 1 capital for the Company includes common stockholders' equity
less goodwill. Total capital includes Tier 1 capital and a portion of the
allowance for loan losses. The ratios are calculated by dividing the
qualifying capital by the risk-weighted assets. The minimum ratio for
qualifying total capital is 8.0% of which 4.0% must be Tier 1 capital. For the
Company's capital ratios at December 31, 1999 and 1998, see Note 18 in the
Consolidated Financial Statements.
23
<PAGE>
ACCOUNTING MATTERS
SFAS No. 128 "Earnings Per Share", issued in February 1997, and
effective December 31, 1997, establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing earnings per share previously found in APB Opinion No.
15, EARNINGS PER SHARE, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to Opinion No.15.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income." The statement provides that all
items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. Comprehensive income
includes net income as well as certain items that are reported directly within
a separate component of stockholders' equity and bypass net income. The
provisions of SFAS No. 130 are effective for fiscal years beginning after
December 15, 1997. The adoption of this statement did not have a material
impact on financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operation segments in annual
financial statements and requires that those enterprises report selected
information about operation segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS No.
131 is effective for financial statements for periods beginning after December
15, 1997. The adoption of this statement did not have an impact on financial
position or results of operation.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which is required to be adopted in years beginning after June 15,
2000. The Company adopted the new Statement effective June 1999. The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant
effect on the Company's earnings or financial position.
FORWARD-LOOKING INFORMATION
This Form 10-K contains certain "forward-looking" statements as such
term is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," " believe," "estimate," "expect" and "intend" and words or
phrases of similar import, as they relate to the Company or its subsidiaries
or Company management, are intended to identify forward-looking statements.
Such statements reflect the current risks, uncertainties and assumptions
related to certain factors including, without limitation, competitive factors,
general economic conditions, customer relations, relationships with vendors,
the interest rate environment, governmental regulation and supervision,
seasonality, technological change, changes in industry practices, one-time
events and other factors described herein and in other filings made by the
Company with the Securities and Exchange Commission. Based upon changing
conditions, should any one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, or intended. The Company does not intend to
update these forward-looking statements.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth in the section
entitled "Market Risk Disclosure - Interest Rate Sensitivity" included under
Item 7 of this document and is incorporated herein by reference.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
National Bancshares Corporation of Texas:
We have audited the accompanying consolidated balance sheet of National
Bancshares Corporation of Texas and subsidiaries as of December 31, 1999, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Bancshares Corporation of Texas and subsidiaries as of December 31, 1999, and
the results of their operations and their cash flows for the year then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
San Antonio, Texas
March 20, 2000
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
National Bancshares Corporation of Texas and Subsidiaries
San Antonio, Texas
We have audited the accompanying consolidated balance sheet of National
Bancshares Corporation of Texas and Subsidiaries as of December 31, 1998, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years ended December 31, 1998 and 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Bancshares Corporation of Texas and Subsidiaries as of December 31, 1998, and
the results of operations and its cash flows for the years ended December 31,
1998 and 1997, in conformity with generally accepted accounting principles.
/s/ Padgett, Stratemann & Co., L.L.P.
Padgett, Stratemann & Co., L.L.P.
Certified Public Accountants
March 18, 1999
27
<PAGE>
<TABLE>
<CAPTION>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31, DECEMBER 31,
1999 1998
-------------------- -------------------
<S> <C> <C>
Cash and due from banks $ 30,394 $ 16,473
Interest-bearing accounts 2,299 2,343
Federal funds sold 11,949 37,195
Investment securities available for sale 221,268 142,558
Investment securities held to maturity 66 89,923
Loans, net of discounts 247,406 192,219
Allowance for possible loan losses (2,841) (2,670)
Bank premises and equipment, net 19,784 17,793
Goodwill 8,427 8,804
Other assets 11,032 7,440
-------------------- -------------------
Total Assets $ 549,784 $ 512,078
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand deposits - non-interest bearing $ 70,629 $ 67,160
Interest-bearing transaction accounts (NOW) 82,717 65,847
Savings and money market accounts 110,433 95,622
Certificates and time deposits under $100,000 131,322 136,996
Certificates and time deposits $100,000 and over 94,639 82,031
-------------------- -------------------
Total Deposits 489,740 447,656
-------------------- -------------------
Accrued interest payable and other liabilities 2,394 2,073
Other borrowings 2,317 8,459
Long term notes payable 4,700 1,684
-------------------- -------------------
Total Liabilities 499,151 459,872
Stockholders' Equity:
Common Stock, $.001 par value, 100,000,000 shares authorized, 4,669,834
issued and 4,111,834 outstanding at December 31, 1999 and
4,661,234 issued and 4,197,559 outstanding at December 31, 1998 5 5
Additional paid-in capital 30,909 28,629
Retained earnings 31,421 28,683
Accumulated other comprehensive income (loss) (1,751) 3,395
Treasury Stock, at cost (558,000 shares in 1999, 463,675 in 1998) (9,951) (8,506)
-------------------- -------------------
Total Stockholders' Equity 50,633 52,206
-------------------- -------------------
Total Liabilities and Stockholders' Equity $ 549,784 $ 512,078
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
<TABLE>
<CAPTION>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 20,143 $ 16,632 $ 13,029
Interest on investment securities 14,163 14,845 12,667
Interest on federal funds sold 1,247 1,504 1,513
Interest on deposits in banks 113 82 125
---------------- --------------- --------------
TOTAL INTEREST INCOME 35,666 33,063 27,334
INTEREST EXPENSE:
Interest on deposits 14,999 14,568 11,419
Interest on debt 708 347 303
---------------- --------------- --------------
TOTAL INTEREST EXPENSE 15,707 14,915 11,722
NET INTEREST INCOME 19,959 18,148 15,612
Less: Provision for possible loan losses 625 232 80
---------------- --------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR
POSSIBLE LOAN LOSSES 19,334 17,916 15,532
NON-INTEREST INCOME:
Service charges and fees 3,627 3,240 2,796
Net trading account profit - 782 103
Net realized gains (losses) on securities (1,640) 1,103 1,133
Net gains on sales of other real estate and assets 35 9 62
Other income 592 567 293
---------------- --------------- --------------
TOTAL NON-INTEREST INCOME 2,614 5,701 4,387
NON-INTEREST EXPENSE:
Salaries and employee benefits 9,192 7,947 6,239
Occupancy and equipment expenses 3,273 2,566 1,917
Goodwill amortization 376 376 191
Other expenses 4,745 4,384 3,897
---------------- --------------- --------------
TOTAL NON-INTEREST EXPENSE 17,586 15,273 12,244
INCOME BEFORE FEDERAL INCOME TAXES 4,362 8,344 7,675
Federal income tax expense 1,624 3,056 2,811
---------------- --------------- --------------
NET INCOME $ 2,738 $ 5,288 $ 4,864
================ =============== ==============
BASIC EARNINGS PER SHARE $ 0.66 $ 1.17 $ 1.04
================ =============== ==============
DILUTED EARNINGS PER SHARE $ 0.64 $ 1.14 $ 1.02
================ =============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
-------------------------------- COMPREHENSIVE
NUMBER OF PAID IN RETAINED TREASURY INCOME (LOSS),
SHARES PAR CAPITAL EARNINGS STOCK NET OF TAX TOTAL
-------- -------- -------- -------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 4,659 $ 5 $ 23,131 $ 18,531 -- $ 1,242 $ 42,909
Net Income -- -- -- 4,864 -- -- 4,864
Unrealized gain on securities,
net of tax and reclassification
adjustment -- -- -- -- -- 714 714
--------
Total comprehensive income 5,578
--------
Reduction of deferred tax valuation -- -- 2,611 -- -- -- 2,611
-------- -------- -------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 4,659 5 25,742 23,395 -- 1,956 $ 51,098
Net Income -- -- -- 5,288 -- -- 5,288
Unrealized gain on securities,
net of tax and reclassification
adjustment -- -- -- -- -- 1,439 1,439
--------
Total comprehensive income 6,727
--------
Reduction of deferred tax valuation -- -- 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 -- -- -- 2,738 -- -- 2,738
Unrealized loss on securities,
net of tax and reclassification
adjustment -- -- -- -- -- (5,146) (5,146)
--------
Total comprehensive loss (2,408)
--------
Reduction of deferred tax valuation -- -- 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
======== ======== ======== ======== ======== ======== ========
Disclosure of reclassification amount:
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)
========
1998 unrealized gain on securities arising during period $ 711
Reclassification adjustment for gains included in income, net of tax of $375 728
--------
Net unrealized gain on securities, net of tax $ 1,439
========
1997 unrealized loss on securities arising during period $ (34)
Reclassification adjustment for gains included in income, net of tax of $385 748
--------
Net unrealized gain on securities, net of tax $ 714
========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,738 $ 5,288 $ 4,864
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 2,264 1,798 1,159
Tax benefit realized from utilization of deferred tax assets 2,227 2,888 2,657
Provision for possible loan losses 625 232 80
Net realized (gain) loss on securities available for sale 1,640 (1,103) (1,133)
Net decrease (increase) in trading account - 4,908 (3,433)
Write-down of other real estate owned 63 - -
Gain on sale of other real estate owned and other assets (35) (9) (62)
(Increase) decrease in accrued interest receivable and other assets (1,228) 46 (1,944)
Increase in accrued interest payable and other liabilities 320 70 764
--------- --------- ---------
Net cash provided by operating activities 8,614 14,118 2,952
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease (increase) in federal funds sold 25,246 (7,255) (7,290)
Net decrease (increase) in interest-bearing accounts 44 (2,125) 312
Net increase in loans (55,640) (56,876) (23,179)
Purchases of securities available for sale (52,228) (27,939) (98,351)
Proceeds from sales of securities available for sale 26,549 15,240 33,739
Proceeds from maturities of securities available for sale 22,832 11,619 15,679
Purchases of securities held to maturity - (7,035) (52,179)
Proceeds from maturities of securities held to maturity 4,234 23,649 17,710
Proceeds from sales of securities held to maturity - - 539
Capital expenditures (3,556) (6,480) (6,551)
Proceeds from sale of other real estate owned 258 32 600
Net payments for cash acquired from acquisitions - - (7,319)
--------- --------- ---------
Net cash used in investing activities (32,261) (57,170) (126,290)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
savings and money-market accounts 35,150 10,678 73,463
Net increase in certificates of deposit and time deposits 6,935 22,563 61,197
Proceeds from advances on other borrowings and long term debt 2,413 10,641 12,319
Principal payments on other borrowings and long term debt (5,538) (3,143) (13,668)
Purchase of treasury stock (1,445) (8,506) -
Proceeds from exercise of common stock options 53 14 -
--------- --------- ---------
Net cash provided by financing activities 37,568 32,247 133,311
Net increase (decrease) in cash and due from banks 13,921 (10,805) 9,973
Cash and due from banks at beginning of year 16,473 27,278 17,305
--------- --------- ---------
Cash and due from banks at end of year $ 30,394 $ 16,473 $ 27,278
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 15,545 $14,776 $ 11,206
Federal income taxes paid 212 71 128
Non-cash items:
Loans originated to facilitate the sale of foreclosed assets 150 22 155
Loan foreclosures - 947 94
</TABLE>
31
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of National Bancshares Corporation of
Texas (the Company) and its wholly-owned subsidiaries conform to generally
accepted accounting principles and to general practices within the banking
industry. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Following is a summary of
the Company's more significant accounting and reporting policies:
NATURE OF OPERATIONS
The Company is a bank holding company which operates four commercial banks
and seven branches located in Central Texas and South Texas on the
Texas-Mexico border.
CONSOLIDATION
The consolidated financial statements include the accounts of 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); and (iv) NBC Holdings - Texas, Inc. (San Antonio,
Texas). NBC Bank - Central, N.A. (Luling, Texas) is a majority-owned
subsidiary of NBT of Delaware, Inc.
NBC Financial, Inc. was approved by all appropriate regulatory authorities
as a fully-disclosed introducing broker/dealer, and began operations in
September 1999. All securities transactions for NBC Financial, Inc. are
being cleared through Pershing, a division of Donaldson, Lufkin & Jenrette
Securities Corporation. NBC Financial, Inc. provides general securities
services for customers of our banks and the general public, and will
operate pursuant to a leasing arrangement in several of the banks or
branches.
INVESTMENTS IN SECURITIES
Securities held principally for resale in the near term are classified as
trading securities and recorded at their fair values. Unrealized gains and
losses on trading securities are included in other income. Bonds, notes,
and debentures for which the Company has the positive intent and ability to
hold to maturity are reported at cost adjusted for amortization of premiums
and accretion of discounts, which are recognized in interest income using
the interest method over the period to maturity. Securities available for
sale consist of bonds, notes, and debentures not classified as trading
securities nor as securities to be held to maturity. These securities are
recorded at their fair values. Unrealized holding gains and losses, net of
tax, on securities for sale are reported as a net amount in a separate
component of stockholders' equity.
Declines in the fair market value of individual held to maturity and
available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method with the exception of
the investment portfolio maintained at NBT of Delaware, Inc. in which the
average cost method is used to compute gains and losses on sales. The
transfer of a security between categories of investments is accounted for
at fair value.
32
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance is maintained at a level considered adequate by management to
absorb probable losses. Management determines the adequacy of the allowance
based upon reviews of individual loans, recent loss experience, current
economic conditions, the risk characteristics of the various categories of
loans, and other pertinent factors. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the Banks allowances for possible loan losses. Loans deemed
uncollectible are charged to the allowance. The allowance is increased by
provisions charged to operating expense and recoveries on loans previously
charged off.
Impaired loans are measured based on (1) the present value of expected
future cash flows discounted at the loan's effective interest rate; (2) the
loan's observable market price; or (3) the fair value of the collateral if
the loan is collateral dependent.
BANK PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is recognized on
straight-line method over the estimated useful lives of the assets. The
estimated useful lives range from 3 to 50 years. Amortization of leasehold
improvements is computed using the straight-line method over the primary
term of the lease.
INTEREST INCOME ON LOANS
Unearned income on discounted loans is credited to the unearned discount
account when the loan is made and is recorded as interest income over the
term of the loan to approximate the effective interest method.
Interest on other loans is accrued and credited to income based on the
principal amount outstanding. Generally, the accrual of interest on
impaired loans is discontinued when principal or interest payments become
90 days past due, and/or in the opinion of management, there is an
indication that the borrower may be unable to meet payments as they become
due. Upon such discontinuance, all unpaid accrued interest is reversed and
charged to current year operations. Interest income is subsequently
recognized only to the extent cash payments are received.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and certain direct origination costs are deferred and
recognized as an adjustment of the yield over the contractual term of the
related loan.
OTHER REAL ESTATE OWNED
Real estate acquired by foreclosure is carried in other assets at the lower
of the recorded investment in the property or the fair value of the
property less estimated selling costs. Prior to foreclosure, the value of
the underlying loan is written down to the fair value of the real estate to
be acquired by a charge to the allowance for loan losses, if necessary. Any
subsequent write-downs are charged against operating expenses. Operating
expenses of such properties, net of related income, are included in other
expenses.
INTANGIBLE ASSETS
The excess cost over fair value of net assets of businesses acquired
(goodwill) is amortized on a straight-line basis over twenty-five years.
All such intangible assets are periodically evaluated as to the
recoverability of their carrying value.
33
<PAGE>
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company and its subsidiaries file an income tax return on a
consolidated basis. Provisions for income taxes are based on taxes payable
or refundable for the current year (after exclusion of nontaxable income
such as interest on state and municipal securities) and deferred taxes on
temporary differences between the amount of taxable income and pretax
financial income and between the tax bases of assets and liabilities and
their reported amounts in the consolidated financial statements. Deferred
tax assets and liabilities are included in the consolidated financial
statements at currently enacted income tax rates applicable to the period
in which the deferred tax assets and liabilities are expected to be
realized or settled as prescribed in SFAS No. 109, "Accounting for Income
Taxes." As changes in tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provisions for income taxes.
Deferred income taxes are provided for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. In accordance with AICPA Statement of Position (SOP) No. 90-7,
income tax benefits recognized from preconfirmation net operating loss
carryforwards were used first to reduce reorganization value in excess of
amounts allocable to identifiable assets and thereafter to increase
additional paid-in capital (See Note 14).
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in
the consolidated balance sheet caption "cash and due from banks."
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the subsidiary Banks have entered into
off-balance-sheet financial instruments consisting of commitments to extend
credit and standby letters of credit. Such financial instruments are
recorded in the consolidated financial statements when they are funded or
related fees are incurred or received.
The Company or its subsidiaries are not a party to any off-balance-sheet
derivative financial instruments such as interest rate futures or swap
contracts.
NET INCOME PER SHARE OF COMMON STOCK
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the entity.
COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that an
enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position.
Adoption of this statement did not have a material impact on the Company's
financial position, results of operations or liquidity.
34
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS No. 131). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operation segments in annual
financial statements and requires that those enterprises report selected
information about operation segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. The adoption of this statement did not have an impact on
financial position or results of operations. Management of the Company
believes that it does not have separate reportable operating segments under
the provisions of SFAS No. 131.
RECLASSIFICATIONS
Certain amounts have been reclassified from prior presentations at December
31, 1998 and 1997 to conform to classifications at December 31, 1999. There
is no effect on previously reported net income or retained earnings.
2. ACQUISITIONS
The Company's acquisitions have been accounted for under the purchase
method of accounting. On July 18, 1997, the Company acquired three branches
of Wells Fargo Bank in Giddings, Marble Falls and Taylor, Texas. The
Company acquired approximately $103.4 million in deposits and $2.6 million
in the owned branch facilities branch furniture, fixtures and certain
equipment. The Company paid a purchase price of approximately $9.9 million
for the acquisitions. The acquired branches operations have been included
in the statement of operations since the date of the acquisition.
3. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of investment
securities of the Company and their approximate fair values at December 31
were as follows: (Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, 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>
35
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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 $ 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>
During the year ended December 31, 1999, the Company transferred securities
with a fair value of $85,578,000 from the held to maturity category into
the available for sale category. An unrealized gain of $2,185,036 was
recorded upon the transfer in 1999. During the year ended December 31,
1998, the Company transferred securities with a fair value of $1,475,425
from the available for sale category into the trading category. A gain of
$430,325 was realized upon the transfer in 1998. During the year ended
December 31, 1997, the Company did not transfer any securities between the
held to maturity and available for sale categories.
The unrealized gains and losses on investment securities held at December
31, 1999 and 1998 have been judged to be temporary market fluctuations with
no material financial impact on the Company. Unrealized net holding gains
on trading securities of $103,000 were included in earnings in 1997. There
were no unrealized net holding gains or losses on trading securities in
either 1998 and 1999.
Investment securities carried at approximately $92,225,000 and $55,824,000
at December 31, 1999 and 1998, respectively, were pledged to secure public
funds.
The scheduled maturities of securities to be held to maturity and
securities available for sale at December 31, 1999 were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 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 $ 18,472 $ 18,506 $ - $ -
Due in one year to five years 130,456 129,841 66 61
Due from five to ten years 62,468 61,572 - -
Due after ten years 1,858 1,859 - -
---------- ----------- ----------- -------------
Total $ 213,254 $ 211,778 $ 66 $ 61
Equity Securities 5,074 3,981 - -
Mortgage backed securities 5,253 5,169 - -
Federal Reserve Bank Stock 340 340 - -
---------- ----------- ----------- -------------
Total $ 223,921 $ 221,268 $ 66 $ 61
========== =========== =========== =============
</TABLE>
36
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross realized gains and gross realized losses on sales of securities
available for sale were $529,893 and $2,170,099, respectively, in 1999,
$1,128,294 and $25,148, respectively, in 1998, and $1,412,000 and $279,000,
respectively, in 1997.
4. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The components of loans in the consolidated balance sheets were as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Commercial Loans $ 39,962 $ 30,242
Real Estate - Construction 21,959 12,125
Real Estate - Commercial 76,180 56,420
Real Estate - Residential 76,112 63,234
Agriculture Loans 4,836 3,712
Consumer Loans 27,833 26,277
Other Loans 1,405 1,435
-------------- -------------
248,287 193,445
Unearned Discount (881) (1,226)
-------------- -------------
247,406 192,219
Allowance for Possible Loan Losses (2,841) (2,670)
-------------- -------------
$ 244,565 $ 189,549
============= =============
</TABLE>
Changes in the allowance for possible loan losses were as follows (Dollars
in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,670 $ 2,458 $ 2,408
Provisions for possible loan losses 625 232 80
Losses charged to the allowance (597) (290) (272)
Recoveries credited to the allowance 143 270 242
----------- ---------- ----------
Balance at end of year $ 2,841 $ 2,670 $ 2,458
============ ========== ==========
</TABLE>
Impaired loans are those loans where it is probable that all amounts due
according to contractual terms of the loan agreement will not be collected.
The Company has identified these loans through its normal loan review
procedures. Impaired loans include (1) all non-accrual loans, (2) loans
which are 90 days or more past due, unless they are well secured (i.e. the
collateral value is sufficient to cover principal and accrued interest) and
are in the process of collection, and (3) other loans which management
believes are impaired. Substantially all of the Company's impaired loans
are measured at the fair value of the collateral. In limited cases the
Company may use other methods to determine the level of impairment of a
loan if such loan is not collateral dependent.
As of December 31, 1999, 1998, and 1997, the Banks have impaired loans of
$2,334,000, $899,000, and $1,314,000, respectively. The allowance for loan
losses related to those loans was $274,000, $75,000, and $117,000 at
December 31, 1999, 1998, and 1997, respectively. The average recorded
investment in impaired loans during the year ended December 31, 1999, 1998,
and 1997 was $1,670,000, $1,546,000, and $1,254,000, respectively. Interest
income of approximately $67,000, $50,000, and $287,000 on impaired loans
was recognized for cash payments received during the year ended December
31, 1999, 1998, and 1997, respectively. Management of the Company
recognizes the risks associated with these impaired loans. However,
management's decision to place loans in this category does not necessarily
mean that the Company expects losses to occur.
37
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Banks' nonperforming loans at December 31, 1999 consisted of $239,000
in accruing loans over 90 days past due and $2,095,000 in nonaccrual loans.
The reduction in interest income associated with nonaccrual loans during
the year ended December 31, 1999, 1998, and 1997 was approximately $89,000,
$185,000, and $151,000, respectively.
5. BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment included in the consolidated
balance sheets were as follows (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Land $ 4,345 $ 4,345
Buildings and Leasehold Improvements 14,523 12,881
Equipment and Furniture 8,720 7,296
------------- ------------
Total Cost 27,588 24,522
Less: Accumulated Depreciation 7,804 6,729
------------- ------------
Net Book Value $ 19,784 $ 17,793
============= ============
</TABLE>
Depreciation expense totaled $1,565,000, $1,197,000, and $919,000 for the
years ended December 31, 1999, 1998, and 1997, respectively. Capitalized
interest on three branch construction projects totaled $87,230 for the year
ended December 31, 1998.
6. OTHER ASSETS
Other assets include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
------------- ------------
<S> <C> <C>
Accrued Interest Receivable $ 5,073 $ 4,750
Net Deferred Tax Asset 4,362 900
Other Real Estate Owned 906 1,195
Other 691 595
------------- ------------
Total $ 11,032 $ 7,440
============= ============
</TABLE>
7. DEPOSITS
Included in total deposits are $110,690,000 and $103,768,000 of Mexican
National deposits at December 31, 1999 and 1998, respectively.
The aggregate amount of short-term jumbo certificates of deposit (CDs),
each with a minimum denomination of $100,000, was approximately $91,775,000
and $79,722,000 at December 31, 1999 and 1998, respectively.
38
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999, the scheduled maturities of CDs are as follows
(Dollars in thousands):
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 213,870
2001 10,463
2002 1,095
2003 347
2004 and thereafter 186
---------------
$ 225,961
===============
</TABLE>
8. OTHER BORROWINGS AND LONG-TERM NOTES PAYABLE
On December 31, 1999, a subsidiary bank holding company maintained a
margin account which is secured by investment securities. The interest
rate is variable (6.00% at December 31, 1999).The balance at December 31,
1999 was $2,317,000.
In July 1995, $175,000 was advanced to Laredo from the Federal Home Loan
Bank of Dallas. This note bears an interest rate of 6.393% and has a
maturity date of August 2015. Principal and interest payments are due
monthly in the approximate amount of $1,300 with the remaining balance due
at maturity. The outstanding balance at December 31, 1999 and 1998 was
approximately $153,000 and $159,000, respectively. In September 1998,
Laredo borrowed $100,000 from the Federal Home Loan Bank of Dallas. This
advance bears an interest rate of 5.15% and has a maturity date of October
2018. Principal and interest payments are due monthly in the approximate
amount of $668. The outstanding balance at December 31, 1999 and 1998 was
approximately $96,300 and $99,500, respectively. In December 1998, Laredo
borrowed $1,250,000 from the Federal Home Loan Bank of Dallas. This
advance bears an interest rate of 5.13% and has a maturity date of
January 2004. Principal and interest payments are due monthly in the
approximate amount of $24,000. The outstanding balance at December 31,
1999 and 1998 was approximately $1,025,000 and $1,250,000, respectively.
In January 1999, Laredo borrowed $1,000,000 from the Federal Home Loan
Bank of Dallas. This advance bears an interest rate of 5.216% and has a
maturity date of February 2004. Principal and interest payments are due
monthly in the approximate amount of $19,000. The outstanding balance at
December 31, 1999 was approximately $835,600.
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 Wall Street Journal prime (8.50% at December 31, 1999). Principal
payments of $161,825 plus interest are due quarterly beginning January 2,
2000 with the balance of 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 outstanding balance at December 31, 1999 was
$2,555,000. The Company also executed a one year $1 million revolving line
of credit dated October 29, 1999 with The Independent BankersBank. The
line bears interest at Wall Street Journal prime with any outstanding
interest to be paid quarterly. The outstanding balance at December 31,
1999 was $0. The Company is required to meet certain debt convenants, of
which full compliance was met at December 31, 1999.
Aggregate maturities at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
2000 $ 3,397,350
2001 1,102,884
2002 1,740,483
2003 505,228
2004 and thereafter 271,741
----------------
$ 7,017,686
================
</TABLE>
39
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's consolidated financial statements do not reflect various
commitments and contingent liabilities which arise in the normal course of
business and which involve elements of credit risk, interest rate risk,
and liquidity risk. These commitments and contingent liabilities are
described in Note 16 as financial instruments with off-balance sheet risk.
The Company and its wholly-owned subsidiaries are defendants in legal
actions arising from normal business activities. Management believes that
those actions are without merit or that the ultimate liability, if any,
resulting from them will not materially affect the Company's financial
position, results of operations, cash flows, or liquidity.
The Company had a forty-two month sub-lease agreement for general
corporate office space. The commencement date of the sub-lease was July
1, 1996. The sub-lease was renewed for a one year term on December 31,
1999. The Company leased property which was used as a data processing
center. The commencement date of this lease was October 1, 1995. This
lease expired on March 31, 1999. Gross rental expense for the year ended
December 31, 1999, 1998, and 1997 was $57,491, $134,738, and $108,458,
respectively.
At December 31, 1999 the Company's future minimum lease payments under
operating leases were $42,000 for the year ending December 31, 2000.
10. EARNINGS PER SHARE
The following provides a reconciliation of basic and diluted earnings per
share (Dollars in thousands, except shares and per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net income before extraordinary credit $ 2,738 $ 5,288 $ 4,864
Weighted average shares outstanding:
Basic 4,154,529 4,503,427 4,658,734
Diluted 4,249,197 4,625,323 4,749,200
Earnings per share - Basic $ 0.66 $ 1.17 $ 1.04
---------------- ---------------- ----------------
Effect of diluted securities:
Stock options (0.02) (0.03) (0.02)
---------------- ---------------- ----------------
Earnings per share - Diluted $ 0.64 $ 1.14 $ 1.02
================ ================ ================
</TABLE>
11. EMPLOYEE BENEFITS
The Company has a defined contribution plan for the benefit of
substantially all employees. The plan includes a 401(k) retirement plan
feature. Employees are allowed to make contributions to the plan. Each
subsidiary Bank's contribution to the plan is determined annually by that
Bank's Board of Directors. Plan expense for the years ended December 31,
1999, 1998 and 1997 totaled $189,391, $140,767, and $104,873,
respectively.
40
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. MANAGEMENT AND DIRECTOR STOCK OPTION PLAN
The Company has various stock option plans under which the Company's
officers, directors and key employees may be granted options to purchase
the Company's common stock at 100% of the market price on the day the
option is granted.
The Plans are administered by the Board of Directors of the Company. The
Board of Directors is authorized to determine the terms and conditions of
all options granted.
Each option under the plans shall terminate and be unexercisable upon
the date specified by the applicable administrator, however, this date
shall not exceed ten years from the grant date of the options.
Under the "Nonqualified Stock Option Agreement," options are exercisable
in one-fifth increments commencing one year after the grant date and
subject to any longer or shorter periods the Administrator may impose.
Following is a summary of transactions for the years presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1999 1998 1997
--------------------------- ------------------------- -------------------------
SHARES WEIGHTED SHARES WEIGHTED SHARES WEIGHTED
AVG AVG AVG
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <S> <S>
Outstanding, beginning of year 265,700 $ 9.70 198,700 $ 8.42 148,700 $ 6.80
Granted 117,700 15.29 70,350 13.23 50,000 13.25
Exercised (8,600) 6.14 (2,500) 5.68 - -
Forfeited (625) 15.25 (850) 13.25 - -
------------- ------------ ----------- ------------- ----------- -------------
Outstanding, end of year 374,175 $ 11.53 265,700 $ 9.70 198,700 $ 8.42
============= ============ =========== ============= =========== =============
Exercisable at end of year 205,520 $ 9.21 169,280 $ 8.17 147,040 $ 7.33
Weighted average fair value of
Options granted during the year $ 14.875 $ 13.23 $ 13.25
</TABLE>
The options outstanding at December 31, 1999, have exercise prices between
$5.68 and $15.5625 with a weighted average exercise price of $11.53 and a
weighted average remaining contractual life of 3.98 years. At December 31,
1999, there remained 57,525 shares reserved for future grants of options
under the Plans.
The Company accounts for this plan under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," under which no
compensation cost has been recognized for options granted. Had compensation
cost for the plan been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
the Company's net income and earnings per share would have been reduced by
insignificant amounts on a pro forma basis for the years ended December 31,
1999 and 1998. The fair value of the options granted in 1999 and 1998 were
estimated as of the date of grant using an accepted options pricing model
with the following weighted-average assumptions: risk-free interest rate of
6.475% and 4.654%, respectively; expected dividend yield of 0% and 0%,
respectively; expected volatility of 14.7% and 25%, respectively; and
expected life of 6 years.
Effective January 1, 1996, the Company adopted the disclosure provisions
of SFAS No. 123, "Accounting for Stock-Based Compensation," however, the
Company will continue to account for stock-based compensation using APB
Opinion No. 25 for both stock option plans and, accordingly, no
compensation cost will be recognized for stock options in the
consolidated financial statements. In determining compensation cost based
on the fair value method at the date of grant for stock options under
SFAS No. 123, the Company's net income and net income per share would
have been reduced by less than 1% for 1999, 1998, and 1997.
41
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OTHER OPERATING EXPENSES
13. Other operating expenses include the following (Dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Data processing expenses $ 319 $ 267 $ 247
FDIC insurance 51 49 34
Insurance 133 107 101
Office supplies 685 603 572
Postage and courier 526 498 601
Professional fees 837 905 784
Miscellaneous 2,194 1,955 1,558
---------------- ---------------- ----------------
Total $ 4,745 $ 4,384 $ 3,897
================ ================ ================
</TABLE>
14. FEDERAL INCOME TAX
The provision for federal income tax consisted of the following (Dollars
in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Currently Paid or Payable $ 132 $ 168 $ 154
Deferred Expense 1,492 2,888 2,657
--------------- --------------- ---------------
Total $ 1,624 $ 3,056 $ 2,811
=============== =============== ===============
</TABLE>
The provision for federal income tax is less than that computed by
applying the federal statutory rate of 34% to income before income taxes
as indicated in the following analysis (Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Tax Based on Statutory Rate $ 1,483 $ 2,837 $ 2,610
Effect of Tax-exempt Income (16) (15) (26)
Interest and other Nondeductible Expenses 7 9 8
Alternative Minimum Tax 132 167 156
Goodwill 28 28 24
Other - Net (10) 30 39
--------------- --------------- ---------------
$ 1,624 $ 3,056 $ 2,811
=============== =============== ===============
</TABLE>
42
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of the deferred income tax assets and liabilities consist of
the following (Dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets Related to:
Net Operating Loss Carryforward $ 30,417 $ 32,521
Other Real Estate Owned 67 72
Securities Valuation Reserve 64 55
Non-accrual Loan Interest 235 140
Securities Writedown 744 -
Other 90 40
Net Unrealized Depreciation on Securities Available for Sale 902 -
----------- -----------
32,519 32,828
Less: Valuation Allowance 27,285 29,512
----------- -----------
Total Deferred Tax Assets 5,234 3,316
----------- -----------
Deferred Tax Liabilities Related to:
Allowance for Loan Losses (17) (31)
Depreciation (89) (146)
Bond Accretion (749) (395)
Goodwill (17) (94)
Net Unrealized Appreciation on Securities Available for Sale - (1,750)
----------- -----------
Total Deferred Tax Liabilities (872) (2,416)
----------- -----------
Net Deferred Tax Asset $ 4,362 $ 900
=========== ===========
</TABLE>
For federal income tax purposes, the Company had approximately $89 million
in net operating loss carryforwards as of December 31, 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 $85 million of such
carryforwards will expire in 2005, with the remaining approximately $4
million expiring in 2006.
Pursuant to SFAS No. 109, the Company had available certain deductible
temporary differences and net operating loss carryforwards for use in
future tax reporting periods, which created deferred tax assets. SFAS No.
109, requires that deferred tax assets be reduced by a valuation allowance
if, based on the weight of the available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. During the year ended December 31, 1999 and 1998, the deferred
tax asset valuation allowance was reduced by $2,227,000 and $2,873,000,
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
$4,362,000 at December 31, 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 prescribed
by income tax law. Although realization of the net deferred tax asset is
not assured because of these uncertainties, management believes it is more
likely than not that all of the recorded deferred tax asset will be
realized.
In accordance with AICPA SOP No. 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", income tax benefits recognized
from preconfirmation net operating loss carryforwards and other tax assets
are used first to reduce the reorganization value in excess of amounts
allocable to identifiable assets and then to increase additional paid-in
capital.
43
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. RELATED PARTY TRANSACTIONS
The Banks have entered into transactions with their directors, executive
officers, and their affiliates. Such transactions were made in the ordinary
course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present
other unfavorable features. The aggregate amount of loans to such related
parties at December 31, 1999 and 1998 was $6,774,000 and $5,906,000,
respectively. During the year ended December 31, 1999 and 1998, new loans
to such related parties amounted to $2,653,000 and $2,884,000,
respectively, and repayments amounted to $2,670,000 and $1,181,000,
respectively. No outside directors of the Company have any outstanding
loans.
During 1998 and 1997, the Company utilized a stock brokerage firm, which is
100% owned by the Company's Chairman, to execute certain transactions on
its behalf. The Company uses an unrelated company to act as custodian and
clearing firm for its investment assets. Net commissions earned by the
traders at the brokerage firm, excluding the Company Chairman, related to
investment transactions by the Company in 1999 and 1998 totaled $7,128 and
$35,918 on purchase and sale transactions of $4,173,014 and $78,810,916,
respectively.
16. FINANCIAL INSTRUMENTS
The Banks are party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of their
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the consolidated financial statements. The contract or
notional amounts of those instruments reflect the extent of the Banks'
involvement in particular classes of financial instruments.
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual notional
amount of those instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for on-balance
sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Banks evaluate
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Banks upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral held varies but may include accounts receivable; inventory;
property, plant, and equipment; and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
44
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the notional amounts of the Bank's financial instruments with
off-balance sheet risk at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
NOTIONAL AMOUNT
---------------
<S> <C>
Commitments to extend credit $ 19,881,000
Commitments to extend credit - Credit Cards 421,000
Financial standby letters of credit 906,000
Performance standby letters of credit 603,000
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the consolidated balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases,
could not be realized in immediate settlement of the instrument. SFAS No.
107 excludes certain financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating the fair value of its financial instruments:
CARRYING AMOUNTS APPROXIMATE FAIR VALUES for cash and due from banks;
interest bearing deposits in banks; federal funds sold; securities
available for sale; variable rate loans; accrued interest receivable and
payable; demand deposits; NOW, money market, and savings accounts; and
variable rate time deposits.
QUOTED MARKET PRICES, where available, or if not available, based on
quoted market prices of comparable instruments for securities to be held to
maturity.
DISCOUNTED CASH FLOWS using interest rates currently being offered on
instruments with similar terms and with similar credit quality, including
fixed rate loans; fixed rate time deposits; and other debt.
QUOTED FEES CURRENTLY BEING CHARGED for off-balance-sheet instruments,
including letters of credit and loan commitments.
45
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- --------------------------
(DOLLARS IN THOUSANDS)
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Due from Banks $ 30,394 $ 30,394 $ 16,473 $ 16,473
Interest Bearing Deposits in Banks 2,299 2,299 2,343 2,343
Federal Funds sold 11,949 11,949 37,195 37,195
Securities Available for Sale 221,268 221,268 142,558 142,558
Securities Held to Maturity 66 61 89,923 94,399
Loans - net 244,565 249,357 189,549 191,160
Accrued Interest Receivable 5,073 5,073 4,750 4,750
Financial Liabilities:
Demand Deposits 70,629 70,629 67,160 67,160
NOW, Money market, and
Savings Accounts 193,150 193,150 161,469 161,469
Time Deposits 225,961 268,420 219,027 260,056
Accrued Interest Payable 1,591 1,591 1,429 1,429
Other Debt 7,017 7,017 10,143 10,143
</TABLE>
The fair value of off-balance sheet assets and liabilities is not
considered significant.
LIMITATIONS:
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Other significant assets and
liabilities that are not considered financial assets or liabilities include
the deferred tax asset, bank premises and equipment, other real estate
owned, and other assets. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
17. CONCENTRATIONS OF CREDIT
Substantially all of the Banks' loans, commitments, and standby letters of
credit have been granted to customers in the Banks' market areas which
include South and Central Texas. Substantially all of these customers are
depositors of the Banks. Investments in state and municipal securities also
involve governmental entities within the Banks' market areas. The
concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution
of loans outstanding. Standby letters of credit are granted primarily to
commercial borrowers.
46
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. REGULATORY MATTERS
The amount of dividends that may be declared by the Banks without prior
approval of the various regulatory agencies is limited by statutory and
regulatory rules.
The Company and its subsidiary Banks are required to maintain minimum
ratios of Tier 1 capital to total average assets and minimum ratios of Tier
1 and total capital to risk weighted assets, as defined by the banking
regulators.
The Company and its subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Company and its subsidiary banks must
meet specific capital guidelines that involve quantitative measures of the
Company and its subsidiary banks assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The Company and its subsidiary banks capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its subsidiary banks to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of
Tier 1 capital (as defined) to average assets (as defined). Management
believes, as of December 31, 1999, that the Company and its subsidiary
banks meet all capital adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Banking
regulators categorized the Company and its subsidiary banks as "well
capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized" the Company and its subsidiary
banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institutions' categories.
47
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company and its subsidiary banks actual capital amounts and ratios
are also presented in the table (Dollars in thousands).
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
AS OF DECEMBER 31, 1999: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- -------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk Weighted Assets:
CONSOLIDATED $ 46,076 17.47% $ 21,094 >= 8.00% $ 26,368 >= 10.00%
Eagle Pass 20,299 13.99% 11,607 >= 8.00 14,509 >= 10.00
Laredo 9,077 15.50% 4,684 >= 8.00 5,856 >= 10.00
Rockdale 7,532 21.86% 2,756 >= 8.00 3,445 >= 10.00
Luling 4,356 22.26% 1,566 >= 8.00 1,957 >= 10.00
Tier 1 Capital to Risk Weighted Assets:
CONSOLIDATED $ 43,235 16.40% $ 10,547 >= 4.00% $ 15,821 >= 6.00%
Eagle Pass 19,104 13.17% 5,804 >= 4.00 8,705 >= 6.00
Laredo 8,377 14.31% 2,342 >= 4.00 3,513 >= 6.00
Rockdale 7,102 20.61% 1,378 >= 4.00 2,067 >= 6.00
Luling 4,108 20.99% 783 >= 4.00 1,174 >= 6.00
Tier 1 Capital to Average Assets:
CONSOLIDATED $ 43,235 7.86% $ 21,990 >= 4.00% $ 27,488 >= 5.00%
Eagle Pass 19,104 6.49% 11,777 >= 4.00 14,721 >= 5.00
Laredo 8,377 8.14% 4,119 >= 4.00 5,148 >= 5.00
Rockdale 7,102 6.45% 4,408 >= 4.00 5,510 >= 5.00
Luling 4,108 13.61% 1,207 >= 4.00 1,509 >= 5.00
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
AS OF DECEMBER 31, 1998: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------- -------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------------ ------------ ------------- ------------ ---------------
Total Capital to Risk Weighted Assets:
CONSOLIDATED $ 41,033 19.62% $ 16,730 >= 8.00% $ 20,912 >= 10.00%
Eagle Pass 18,656 16.36% 9,120 >= 8.00 11,400 >= 10.00
Laredo 8,638 16.78% 4,119 >= 8.00 5,149 >= 10.00
Rockdale 7,112 24.36% 2,336 >= 8.00 2,920 >= 10.00
Luling 3,933 21.31% 1,477 >= 8.00 1,846 >= 10.00
Tier 1 Capital to Risk Weighted Assets:
CONSOLIDATED $ 38,418 18.37% $ 8,365 >= 4.00% $ 12,547 >= 6.00%
Eagle Pass 17,231 15.11% 4,560 >= 4.00 6,840 >= 6.00
Laredo 8,040 15.61% 2,060 >= 4.00 3,089 >= 6.00
Rockdale 6,747 23.11% 1,168 >= 4.00 1,752 >= 6.00
Luling 3,699 20.04% 738 >= 4.00 1,108 >= 6.00
Tier 1 Capital to Average Assets:
CONSOLIDATED $ 38,418 8.12% $ 19,707 >= 4.00% $ 24,633 >= 5.00%
Eagle Pass 17,231 6.49% 10,622 >= 4.00 13,277 >= 5.00
Laredo 8,040 9.95% 3,233 >= 4.00 4,041 >= 6.00
Rockdale 6,747 6.12% 4,408 >= 4.00 5,510 >= 5.00
Luling 3,699 13.03% 1,135 >= 4.00 1,419 >= 5.00
</TABLE>
48
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Condensed balance sheet information of National Bancshares Corporation of
Texas (The Parent Company) at December 31, 1999 and 1998, and the related
statements of income and cash flows for the years ended December 31, 1999,
1998 and 1997 are as follows (Dollars in thousands):
<TABLE>
<CAPTION>
BALANCE SHEETS:
DECEMBER 31,
------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
ASSETS:
Cash $ 194 $ 360
Investment in subsidiaries 50,093 54,389
Fixed assets - net 78 166
Federal tax benefits due 923 827
Deferred tax asset 3,185 3,117
Other assets 171 199
------------------ -----------------
Total Assets $ 54,644 $ 59,058
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable $ 2,555 $ 6,187
Accrued interest payable and other liabilities 186 240
------------------ -----------------
Total Liabilities 2,741 6,427
------------------ -----------------
Common stock 5 5
Surplus - common stock 30,909 28,629
Retained earnings 31,421 28,683
Accumulated other comprehensive income (loss) (1,751) 3,395
Treasury stock, at cost (475,682 shares in 1999, 438,675 shares in 1998) (8,681) (8,081)
------------------ -----------------
Total Stockholders' Equity 51,903 52,631
------------------ -----------------
$ 54,644 $ 59,058
================== =================
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1999 1998 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
INCOME:
Dividends from subsidiaries $ 3,936 $ 2,300 $ 1,535
Undistributed earnings of subsidiaries 8 3,924 4,245
Other income 128 412 40
--------------- ---------------- ----------------
4,072 6,636 5,820
--------------- ---------------- ----------------
EXPENSES:
Salaries and employee benefits 773 690 498
Occupancy and equipment expenses 227 141 91
Interest expense 383 202 275
Professional fees 200 238 212
Other operating expenses 173 249 113
--------------- ---------------- ----------------
1,756 1,520 1,189
--------------- ---------------- ----------------
INCOME BEFORE FEDERAL INCOME TAX BENEFIT 2,316 5,116 4,631
Federal income tax benefit 422 172 233
--------------- ---------------- ----------------
NET INCOME $ 2,738 $ 5,288 $ 4,864
=============== ================ ================
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NATIONAL BANCSHARES CORPORATION OF TEXAS
(PARENT COMPANY ONLY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,738 $ 5,288 $ 4,864
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in earnings of subsidiaries (3,944) (6,224) (5,780)
Dividends received 3,936 2,300 1,535
Depreciation and amortization 27 28 16
Tax benefit realized from utilization of deferred tax assets 2,227 2,873 2,611
Provision for deferred income taxes (67) (122) 79
(Increase) decrease in accrued interest receivable and other
assets (68) (235) (76)
Increase (decrease) in accrued interest payable and other
liabilities (54) 153 (255)
--------------- -------------- ---------------
Net cash provided by operating activities 4,795 4,061 2,994
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in interest bearing accounts - - 32
Capital expenditures (406) (136) (38)
Capital contribution to subsidiaries (377) - (2,500)
--------------- -------------- ---------------
Net cash used in investing activities (783) (136) (2,506)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from advances on debt - 6,386 5,500
Principal payments on other debt (3,631) (2,500) (6,839)
Exercise of common stock options 53 14 -
Purchase of treasury stock (600) (8,081) -
--------------- -------------- ---------------
Net cash used in by financing activities (4,178) (4,181) (1,339)
Net decrease in cash and due from banks (166) (256) (851)
Cash and due from banks at beginning of year 360 616 1,467
--------------- -------------- ---------------
Cash and due from banks at end of year $ 194 $ 360 $ 616
=============== ============== ===============
</TABLE>
50
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On April 22, 1999 the Company dismissed Padgett, Stratemann & Co.,
L.L.P. as its independent accountants as previously reported in the Company's
Current Report on For 8-K for that date. The dismissal was approved by the
Audit Committee and the Company's Board of Directors. The reports of Padgett,
Stratemann & Co., L.L.P. on the financial statements for the two most recent
fiscal years did not contain an adverse opinion, disclaimer of opinion,
qualification or modification as to uncertainty, audit scope or accounting
principles. Furthermore, during the two most recent fiscal years and through
April 22, 1999, there were no disagreements with Padgett, Stratemann & Co.,
L.L.P. on any matter of accounting principles or practices, which
disagreements, if not resolved to the satisfaction of Padgett, Stratemann &
Co., L.L.P., that would have caused that firm to make reference to the
subject matter of such disagreements in its reports on the financial
statements for such years. However, the Company restated its financial
statements for 1996, 1997, and 1998 because of an error in the application of
an accounting principle related to the reporting of income taxes. Padgett,
Stratemann & Co. L.L.P., has concurred in the conclusion that there was an
error in the prior financial statements regarding this issue.
On April 22, 1999, the Company appointed KPMG, L.L.P. as its
independent accountants. During the two most recent fiscal years and through
April 22, 1999, the Company had not consulted with KPMG, L.L.P. regarding the
application of accounting principles to a specific transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's financial statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item with respect to directors of the
Company as well as executive officers who are also directors of the Company is
incorporated by reference from the Company's definitive proxy statement for
its 2000 Annual Meeting of Shareholders to be held May 19,2000.
Information required by this Item with respect to executive officers
of the Company who are not also directors of the Company is set forth below.
ANNE R. RENFROE, age 35, has been the Chief Financial Officer of the Company
since May 1995. Formerly, Ms. Renfroe was Vice-President and Controller of
Texas Independent Bank, Dallas, Texas from December 1992 to January 1995. In
addition, from August 1989 to December 1992 Ms. Renfroe was an audit
supervisor with Fisk Robinson, P.C., Dallas, Texas. From 1986 to 1989, Ms.
Renfroe was Assistant Controller for NorthPark National Bank in Dallas, Texas.
Ms. Renfroe is a certified public accountant.
MORRIS D. WEISS, age 40, has been Senior Vice President and General Counsel
for the Company since April 1997 with responsibilities for overseeing and
managing the legal affairs of the Company. Prior to joining the Company, Mr.
Weiss was a partner with the law firm of Weil, Gotshal & Manges, LLP from
January 1994 until April 1997 in the Business Finance and Restructuring
Department, and had been an associate at such firm since October 1985. In
addition, Mr. Weiss has been General Counsel of Equibond, Inc., a stock
brokerage firm, and Senior Vice President and General Counsel of NBI, Inc.,
since April 1997.
The Company also employs eight significant employees who are not
directors or executive officers of the Company but who make or are expected to
make significant contributions to the business of the Company. The following
sets forth biographical information of the persons:
FRANK D. BARROW, age 55, has been Chairman of the Board and President of
NBC-Rockdale since 1986.
MARIO J. GONZALEZ, age 36, has been President and Chief Executive Officer of
NBC-Laredo since March 1998. Formerly, Mr. Gonzalez was Executive Vice
President of NBC-Laredo from April 1993 to March 1998. In addition, Mr.
Gonzalez was a National Bank Examiner with the OCC, from October 1986 until
April 1993.
WILLIAM D. HALES, age 53, has been President of NBC-Luling since March 1988.
51
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
R. SAMUEL JUVE, age 47, has been President of NBC-Eagle Pass since January 1997.
Formerly, Mr. Juve was Executive Vice President of NBC-Eagle Pass, since April
1993 and Senior Vice President of NBC-Eagle Pass from February 1990 until March
1993.
52
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DWAYNE J. KOLLY, age 47, has been Executive Vice President, Chief Operations
Officer and Information Services Coordinator of NBC-Laredo since March 1998.
Formerly, Mr. Kolly was Senior Vice President Information Services Coordinator
and Cashier for NBC-Laredo from October 1993 to March 1998. In addition, Mr.
Kolly was Vice President and Cashier of First National Bank, Uvalde, Texas, from
1986 to 1993.
THOMAS MCMORRIS, age 59, has been Executive Vice President of NBC-Eagle Pass and
President of NBC-San Antonio since February 1998. Formerly, Mr. McMorris was
Senior Vice President/Community Investment Group of NationsBank of Texas, San
Antonio from 1990 to 1998.
GEORGE W. SCHUH, age 53, has been Executive Vice President, Cashier and
Secretary of NBC-Eagle Pass since March 1994. Formerly, Mr. Schuh was Senior
Vice President, Cashier and Secretary of NBC-Eagle Pass from June 1992 to March
1994. In addition, from August 1991 to June 1992, Mr. Schuh was Senior Vice
President & Cashier for The Bank of the West, Austin, Texas.
HECTOR VASQUEZ, JR., age 46, has been Senior Vice President and Information
Services Manager of NBC Holdings - Texas, Inc. since February 1997. Formerly Mr.
Vasquez was Senior Vice President and Management Information Services Director
for Citizens Bank of Corpus Christi, Texas from July 1973 to February 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
to be held May 19,2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
to be held May 19,2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated by reference from the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
to be held May 19,2000.
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Third Amended Joint Plan of Reorganization, as approved by
U.S. Bankruptcy Court, effective May 26, 1992 . . . . . . . .. . . . . . . *
3.1 Restated Articles of Incorporation and Statement of Relative
Rights and Preferences of Preferred Stock, filed December 29,
1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . **
3.2 Bylaws of the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.1 Employment Agreement between the Company and Jay H. Lustig,
dated October 1, 1992. . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.2 Employment Agreement between the Company
and Marvin E. Melson dated July 26, 1994 . . . . . . . . . . . . . . . . . **
53
<PAGE>
NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10.3 1994 Non-Qualified Stock Option Plan, adopted March 30, 1994 . . . . . . . *
10.8 Sublease for 100 Wilshire Boulevard. . . . . . . . . . . . . . . . . . . . ***
10.9 Form of Stock Subscription Agreement for 1994 Private Placement. . . . . . ***
10.10 1995 Stock Option Plan . . . . . . . . . . . . . . . . . . . . . . . . . . ***
10.11 Form of Outside Director's Stock Option Agreement for 1995
Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock
Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***
11.1 Computation of Earnings Per Share. . . . . . . . . . . . . . . . . . . . .
16 Letter re change in certifying accountant. . . . . . . . . . . . . . . . . ****
21.1 Subsidiaries of the Company. . . . . . . . . . . . . . . . . . . . . . . .
23.1a Consent of KPMG, LLP, Independent Auditors . . . . . . . . . . . . . . . .
23.1b Consent of Padgett, Stratemann & Co., LLP, former independent auditors . .
27 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . . . . .
99.1 First Amended Disclosure Statement with Respect to the Second
Amended Joint Plan of Reorganization . . . . . . . . . . . . . . . . . . . **
</TABLE>
* Previously filed on November 14, 1994, with the Company's Form 10-SB.
** Previously filed on March 2, 1995, with the Company's Amendment No. 1
to Form 10-SB.
*** Previously filed on June 19, 1995, with the Company's Form SB-2, File
no. 33-93638.
**** Previously filed on April 22, 1999, with the Company's Form 8-K.
b. REPORTS ON FORM 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, National Bancshares Corporation of Texas has duly caused
this report to be signed on its behalf by the undersigned, this 24th day of
March, 2000, thereunto duly authorized.
NATIONAL BANCSHARES CORPORATION OF TEXAS
By: /s/ Anne R. Renfroe
-------------------------------------
Anne R. Renfroe
Chief Financial Officer and
Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Jay H. Lustig Chairman of the Board March 24, 2000
- ---------------------------------
Jay H. Lustig
/s/ Marvin E. Melson Director, President March 24, 2000
- --------------------------------- Chief Executive Officer
Marvin E. Melson
/s/ H. Gary Blankenship Director March 24, 2000
- ---------------------------------
H. Gary Blankenship
/s/ John W. Lettunich Director March 24, 2000
- ---------------------------------
John W. Lettunich
/s/ Charles T. Meeks Director March 24, 2000
- ---------------------------------
Charles T. Meeks
</TABLE>
55
<PAGE>
Exhibit 11.1
NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------------------
Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income $ 2,738 $ 5,288 $ 4,864
BASIC EPS
Income available
to common shareholders $ 2,738 4,155 $ 0.66 $ 5,288 4,503 $ 1.17 $ 4,864 4,659 $ 1.04
====== ====== ======
EFFECT OF DILUTIVE
SECURITIES
Stock options 95 122 90
------- ----- ------- ----- ------- -----
DILUTED EPS
Income available to common
shareholders + assumed
conversions $ 2,738 4,250 $ 0.64 $ 5,288 4,625 $ 1.14 $ 4,864 4,749 $ 1.02
======= ===== ====== ======= ===== ====== ======= ===== ======
</TABLE>
<PAGE>
Exhibit 21.1
NATIONAL BANCSHARES CORPORATION OF TEXAS
SCHEDULE OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME STATE OF INCORPORATION
<S> <C>
NBT of Delaware, Inc. Delaware
NBC Bank, N.A. Texas
NBC Bank Texas
NBC Bank--Laredo, N.A. Texas
NBC Bank--Central, N.A. Texas
NBC Holdings--Texas, Inc. Texas
NBT Securities Holdings, Inc. Delaware
NBC Financial, Inc. Texas
</TABLE>
<PAGE>
Exhibit 23.1a
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors
National Bancshares Corporation of Texas:
We consent to incorporation by reference in Registration Statement No. 333-94213
on Form S-8 of National Bancshares Corporation of Texas of our report dated
March 20, 2000 relating to the consolidated balance sheet of National Bancshares
Corporation of Texas and subsidiaries as of December 31, 1999, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the year then ended, which report appears in the December 31, 1999
annual report on Form 10-K of National Bancshares Corporation of Texas.
/s/ KPMG, L.L.P.
San Antonio, Texas
March 27, 2000
<PAGE>
Exhibit 23.1b
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
No. 333-94213 dated January 7, 2000 pertaining to the National Bancshares
Corporation of Texas 1994 Nonqualified Stock Option Plan and the National
Bancshares Corporation of Texas 1995 Stock Plan of our report dated March 18,
1999 with respect to the 1998 and 1997 consolidated financial statements of
National Bancshares Corporation of Texas included in its Annual Report
(Form 10-K) for the year ended December 31, 1999, file with the Securities
and Exchange Commission.
/s/ Padgett, Stratemann & Co., L.L.P.
San Antonio, Texas
March 27, 2000
57
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,394
<INT-BEARING-DEPOSITS> 2,299
<FED-FUNDS-SOLD> 11,949
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 221,268
<INVESTMENTS-CARRYING> 66
<INVESTMENTS-MARKET> 61
<LOANS> 247,406
<ALLOWANCE> 2,841
<TOTAL-ASSETS> 549,784
<DEPOSITS> 489,740
<SHORT-TERM> 2,317
<LIABILITIES-OTHER> 2,394
<LONG-TERM> 4,700
0
0
<COMMON> 5
<OTHER-SE> 50,633
<TOTAL-LIABILITIES-AND-EQUITY> 549,784
<INTEREST-LOAN> 20,143
<INTEREST-INVEST> 14,163
<INTEREST-OTHER> 1,360
<INTEREST-TOTAL> 35,666
<INTEREST-DEPOSIT> 14,999
<INTEREST-EXPENSE> 708
<INTEREST-INCOME-NET> 19,959
<LOAN-LOSSES> 625
<SECURITIES-GAINS> (1,640)
<EXPENSE-OTHER> 17,586
<INCOME-PRETAX> 4,362
<INCOME-PRE-EXTRAORDINARY> 4,362
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,738
<EPS-BASIC> 0.66
<EPS-DILUTED> 0.64
<YIELD-ACTUAL> 7.55
<LOANS-NON> 2,095
<LOANS-PAST> 239
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,606
<ALLOWANCE-OPEN> 2,670
<CHARGE-OFFS> 597
<RECOVERIES> 143
<ALLOWANCE-CLOSE> 2,841
<ALLOWANCE-DOMESTIC> 2,841
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,844
</TABLE>
