-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SjQwvg8ZaEfasBCkgjdw8SOMbMMWzQaZ+dFoG3/2g4YsmBAcjk4s2g9sEK4gXZo3 fiTJ/OYTSRbSUm3NQK+jJw== 0000950129-97-001378.txt : 19970401 0000950129-97-001378.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950129-97-001378 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANCSHARES CORP OF TEXAS CENTRAL INDEX KEY: 0000069834 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 741692337 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13472 FILM NUMBER: 97570015 BUSINESS ADDRESS: STREET 1: P O BOX 1511 CITY: LAREDO STATE: TX ZIP: 78042 BUSINESS PHONE: 2107242424 MAIL ADDRESS: STREET 1: 104 EAST MANN RD CITY: LAREDO STATE: TX ZIP: 78042 10-K 1 NATIONAL BANCSHARES CORP. OF TEXAS - 12/31/96 1 =============================================================================== 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, 1996 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 1-13472 * * * * * * NATIONAL BANCSHARES CORPORATION OF TEXAS (Exact name of small business issuer as specified in its charter) TEXAS 74-1692337 (State of Incorporation) (I.R.S. Employer Identification Number) 104 EAST MANN ROAD, LAREDO, TEXAS 78042 (Address of principal executive offices) Telephone number: (210) 724-2424 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: $ 20,819,731 (Total Interest Income). State the aggregate market value of voting stock held by non-affiliates based upon the closing AMEX sale price on March 6, 1997 : $61,728,226. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after its distribution of securities under a plan confirmed by a court. Yes X No . --- --- State the number of shares outstanding of each of the issuer's classes of common equity, as of March 6, 1997 : 4,658,734 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the Annual Meeting of Shareholders to be held May 16, 1997 (Part III). =============================================================================== 2 TABLE OF CONTENTS
PART I Item 1. Description of Business .......................................................... 3 Item 2. Description of Property .......................................................... 9 Item 3. Legal Proceedings ................................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders .............................. 9 PART II Item 5. Market for Common Equity and Related Shareholder Matters ......................... 10 Item 6. Selected Consolidated Financial Data ............................................. 11 Item 7. Management's Discussion and Analysis ............................................. 13 Item 8. Financial Statements ............................................................. 25 Item 9. Changes and/or Disagreements with Accountants on Accounting and Financial Disclosure ........................................................ 52 PART III Item 10. Directors, Executive Officers, Promoters and Control Persons ..................... 52 Item 11. Executive Compensation ........................................................... 52 Item 12. Security Ownership of Certain Beneficial Owners and Management ................... 53 Item 13. Certain Relationships and Related Transactions ................................... 53 PART IV Item 14. Exhibits and Reports on Form 8-K ................................................. 53
3 PART I ITEM 1. DESCRIPTION OF BUSINESS THE COMPANY National Bancshares Corporation of Texas (the "Company") is a bank holding company incorporated in Texas on June 14, 1971, and registered under the Bank Holding Company Act of 1956, as amended. The Company successfully emerged from reorganization (the "Reorganization") under Chapter 11 of the United States Bankruptcy Code in May 1992. As a result of the Reorganization, the Company came under new management and control and its assets and liabilities were substantially restructured. The Company now conducts its banking operations through NBC Bank-Laredo, N.A. ("NBC-Laredo"), NBC Bank-Eagle Pass, N.A. ("NBC-Eagle Pass"), NBC Bank-Rockdale ("NBC-Rockdale") and The First National Bank in Luling ("FNB-Luling"), (collectively, the "Banks"). NBC-Laredo, NBC-Eagle Pass, NBC-Rockdale and FNB-Luling are wholly-owned subsidiaries of NBT of Delaware, Inc., a Delaware corporation that is a wholly-owned subsidiary of the Company. The Company also operates its data and item processing for the subsidiary banks through NBC Holdings-Texas, Inc., a wholly-owned subsidiary of NBT of Delaware, Inc. At December 31, 1996, the Company (on a consolidated basis) had total assets of $328 million, total investments securities of $161 million, total loans of $113 million, total deposits of $280 million, total stockholders' equity of $43 million and net operating loss carry-forwards for federal income tax purposes of $107 million. For the year ended December 31, 1996, the Company recorded net income of $5.7 million. Subsequent to December 31, 1996, the Company reached a definitive agreement with Wells Fargo Bank (Texas), National Association to purchase three of Wells Fargo's branches. The branches are located in Giddings, Marble Falls and Taylor, Texas. The sale includes the deposit accounts and facilities and equipment of the branches, but does not include any loans with the exception of deposit-secured loans. Through this purchase the Company's subsidiary banks will acquire deposits of approximately $100 million making the Company's consolidated assets in excess of $430 million. The purchase price of the branches will be determined prior to closing. The transaction should be completed by the third quarter of 1997. The Company's executive offices are located at 104 East Mann Road, Laredo, Texas 78042, and its telephone number is (210) 724-2424. THE BANKS Each of the subsidiary banks is a separate entity which operates under the day-to-day management of its own board of directors and officers. The Banks grant agribusiness, commercial, residential and installment loans to customers primarily in Central and South Texas. The Banks also offer a range of commercial banking services, including acceptance of deposits and providing letters of credit. Deposit services include certificates of deposit, individual retirement accounts, checking accounts, interest-bearing checking accounts, savings accounts and money market accounts. In addition, the Banks provide traveler's checks, safe deposit boxes and other customary nondeposit banking services. The Banks provide limited escrow services, and NBC-Rockdale provides trust services. NBC-Eagle Pass, NBC-Laredo and FNB-Luling do not intend to provide trust services in the future. FNB-Luling provides discount brokerage 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. 3 4 The following table sets forth certain financial information with respect to the Banks as of December 31, 1996 (dollars in thousands):
Assets Loans Deposits ------ ----- -------- NBC - Eagle Pass $173,574 $ 45,595 $155,640 NBC - Laredo $ 65,345 $ 35,085 $ 57,298 NBC - Rockdale $ 53,697 $ 17,880 $ 46,196 FNB - Luling $ 27,569 $ 14,698 $ 22,256
LOAN PORTFOLIO 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. Each loan is evaluated based on, among other things, character and leverage capacity of the borrower; capital and investment in a particular property, if applicable; cash flow; collateral; market conditions for the borrower's business or project; and prevailing economic trends and conditions. The Banks lending policies also require an independent appraisal or an evaluation on each parcel of real estate which will be taken as collateral for a loan. The Banks disburse funds under each construction loan in accordance with a disbursement schedule that is part of the construction loan agreement and details the budgeted project cost. Borrowers are required to submit payment requests with cost breakdowns and invoices that are accompanied by, as appropriate, labor releases, original material releases and payee signatures acknowledging pending payment. Payment requests must also be supported by project inspection reports that include, among other things, line item actual cost comparisons to budgeted costs, photographs of the project and a discussion of the project's status. Funds are disbursed only after the request has been reviewed by an officer of the Bank and a determination has been made that the project is proceeding on budget. The majority of all of the Banks real estate loans are small and medium sized real estate loans. COMMERCIAL LOANS. Commercial loans include loans made primarily to small and medium sized businesses and professionals for working capital. Although the Banks typically look to the borrower's cash flow as the principal source of repayment of such loans, many of these are secured by real estate as a secondary source of repayment. Certain of the Banks' commercial loans are secured by buildings for which the Banks have provided the construction financing. 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. DEPOSITS The Banks have generated a substantial portion of its deposits from individuals and small businesses in its immediate market area. 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. COMPETITION The Banks face substantial competition for deposits and loans throughout their market areas. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services offered, convenience of banking facilities and hours of operation. Competition comes primarily from other commercial banks, savings and loans, credit unions, mutual funds and other financial intermediaries. The Company believes the primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services and personalized services. The Banks face competition for deposits and loans throughout their market areas not only from local institutions 4 5 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. Based on June 30, 1996 data, NBC-Laredo holds 2 percent of the total deposits of its community. There are seven local banks in the Laredo area as well as a branch of Bank of America and a branch of Pacific Southwest Bank. The Laredo market is dominated by International Bank of Commerce with approximately 31 percent of total deposits and Laredo National Bank with 44 percent of total deposits. NBC-Eagle Pass is one of two banks located in Eagle Pass, Texas and holds in excess of 63 percent of the community's banking deposits. NBC-Rockdale is the largest bank in Rockdale holding over 48 percent of the total deposits and is the third largest of the four banks located in Milam County, Texas holding approximately 17 percent of the total deposits. FNB-Luling is one of two banks located in Luling, Texas, holding over 32% of the deposits of the city. There is also a branch of Pacific Southwest Bank and American National Bank of Gonzales located in Luling. GROWTH OBJECTIVES The Company intends to grow its business in the State of Texas by adding additional branches and through possible acquisitions. Because the Company has $107 million of net operating loss carryforwards as of December 31, 1996, 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 to acquire additional banks is dependent upon (i) the availability of suitable candidates and (ii) the Company's ability to compete effectively for such additional banks and establishing 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, 1996, the Company employed approximately 169 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 Bank Holding Company Act of 1956, as amended (the "Act"). The Company is required to file with the Federal Reserve Board ("FRB") quarterly and annual reports and such additional information as the FRB may require pursuant to the 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 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 5% 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 5 6 Company is prohibited by the Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% 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. THE BANKS. Banks are extensively regulated under federal and state law. NBC-Laredo, NBC-Eagle Pass and FNB-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 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 of 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, be such an unsafe or unsound practice. CONTROL ISSUES. Investors in the Common Stock are potentially subject to certain change of bank control laws; those contained in the Act, the Federal Deposit Insurance Act (the "FDIA") and applicable Texas laws. In general, persons who wish to acquire a number of shares of Common Stock that, when aggregated with that person's other holdings of Common Stock, if any, would equal or exceed 10 percent of the Company's Common Stock, or who otherwise might be subject to the change of bank control rules, should consult with their legal counsel regarding the applicability of the provisions of any of these laws. INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA"), authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state 6 7 through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out of interstate branching. FDIC INSURANCE. The deposits of the Banks are insured by the Federal Deposit Insurance Corporation ("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. In 1994, the FDIC assessment rate ranged from $.23 per $100 of deposits to $.31 per $100 of deposits. In 1995, the FDIC assessment rate ranged from $.04 per $100 of deposits to $.31 per $100 of deposits. In 1996, the FDIC assessment rate ranged from zero to $.27 per $100 of deposits with a minimum semi-annual assessment of $1,000. Changes in the FDIC's regulations, its range of assessment rates or the Banks' annual assessment rates can materially affect the Company's cost of doing business and, as a result, its results of operations. The Banks assessment rates are currently zero and, therefore, have been significantly reduced from prior years. FDICIA REGULATION. On December 19, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. Among other things, FDICIA requires the federal banking regulators to take "prompt and corrective action" in respect of depository institutions insured by the FDIC that do not meet minimum capital requirements. FDICIA establishes five capital tiers: `"well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." As of December 31, 1996, all of the Company's banks were well capitalized. FDICIA directs that each federal banking agency prescribe standards, by regulation or guidelines, for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings, stock valuation, and such other operational and managerial standards as the agency deems appropriate. The FDIC, in consultation with the other federal banking agencies, has adopted a final rule and guidelines with respect to internal and external audit procedures and internal controls in order to implement those provisions of FDICIA intended to facilitate the early identification of problems in financial management of depository institutions. On July 10, 1995, the federal banking agencies published the final rules implementing three of the safety and soundness standards required by FDICIA, including operational and managerial standards, asset quality and earnings standards, and compensation standards. Management does not believe the impact of such standards on the Company will be material. FDICIA also contains a variety of other provisions that may effect the operations of the Company, including new reporting requirements, revised regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give ninety days notice to customers and regulatory authorities before closing any branch. 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 and 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. 7 8 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, 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 inclusion of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. The federal banking agencies have also adopted a minimum leverage ratio of Tier 1 capital to total assets of 3% for banks that have a uniform composite ("CAMEL") rating of 1. All other institutions and institutions experiencing or anticipating significant growth are expected to maintain capital at least 100 to 200 basis points above the minimum level. Furthermore, higher leverage ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the FDICIA. See "Management's Discussion and Analysis -- Capital Resources." CRA AND FAIR LENDING DEVELOPMENTS. The Banks are subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act ("CRA") activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities. 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 cause the Banks to be unwilling to foreclose upon the 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 8 9 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 located in the NBC-Laredo Bank building located at 104 East Mann Road, Laredo, Texas, occupying premises of approximately 600 square feet. The Company has an indefinite lease with the Bank with monthly lease payments of $1,500 per month. The Company has entered into a forty-two month sublease for 1,429 square feet in Suite 1700 at 100 Wilshire Boulevard, Santa Monica, California, with lease payments of $3,500 per month. The lease expires on December 31, 1999. This property is for office use. The Company has entered into a three year lease for 1,176 square feet in Suite 875 at 111 Soledad, San Antonio, Texas, with lease payments of $882 per month. Beginning October 1, 1997 the lease payments escalate to $980 per month. This property is used for data processing and item processing for the subsidiary banks. The lease expires on September 30, 1998. The Company has entered into an eighteen month lease for 1,086 square feet in Suite 660 at 613 N.W. Loop 410, San Antonio, Texas, with lease payments of $1,312.25 per month. The lease expires on December 31, 1997. This property is used as a loan production office. 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 at this address. NBC-Laredo leases a 1,200 square foot motor bank approximately one-half mile south of its main location at Mall Del Norte, Laredo, Texas. This property is leased until December 31, 1999, with monthly lease payments of $1,700 per month. NBC-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 which was completed in December 1995. 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. FNB-Luling's main banking facility is located at 200 S. Pecan Ave., Luling, Texas. The bank owns and occupies a 5500 square foot one story building at this location. 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 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET PRICE OF COMMON STOCK The Common Stock of the Company has been listed on the American Stock Exchange since April 28, 1995. Prior to that date, the Common Stock of the Company was not listed on any stock exchange nor quoted on the National Association of Securities Dealers Automated Quotation Systems ("NASDAQ"). Historically, there has been a very limited public trading market in the Company's Common Stock. As of December 31, 1996, the Company had approximately 450 shareholders of record. The following table sets forth the high and low sales/bid prices/quotations for the Company's Common Stock during 1996 and 1995. These bid quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions:
SALES/BID PRICES ----------------------------- HIGH LOW ------------ ------------- 1996: 4TH QUARTER $ 12.00 $ 10.88 3RD QUARTER 11.38 10.38 2ND QUARTER 11.63 10.75 1ST QUARTER 11.38 9.63 1995: 4th Quarter $ 11.38 $ 9.63 3rd Quarter 10.75 7.63 2nd Quarter 8.25 6.50 1st Quarter 6.81 5.81
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 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
SEVEN MONTHS YEAR ENDED DECEMBER 31, ENDED ----------------------- ------ STATEMENT OF INCOME DATA: (dollars in thousands) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Interest income ....................................... $ 20,820 $ 18,955 $ 15,985 $ 14,904 $ 8,969 Interest expense ...................................... 8,112 7,359 5,589 5,184 3,411 --------- --------- ---------- ---------- ---------- Net interest income ................................. 12,708 11,596 10,396 9,720 5,558 Provision(Credit) for loan losses ..................... (5) (855) (990) (1,290) (2,540) Non-interest income ................................... 2,789 2,762 2,521 2,478 1,586 Non-interest expense .................................. 9,586 9,149 8,491 8,587 5,347 Income taxes .......................................... 206 159 440 707 20 Extraordinary credit, net of tax ...................... -- 219 -- -- -- --------- --------- ---------- ---------- ---------- Net income .......................................... $ 5,710 $ 6,124 $ 4,976 $ 4,194 $ 4,317 ========= ========= ========== ========== ========== COMMON SHARE DATA:** Net income before extraordinary credit ................ $ 1.21 $ 1.23 $ 1.25 $ 1.09 $ 1.19 Extraordinary credit, net of tax ...................... -- 0.05 -- 1.05 .39 Book value ............................................ 9.21 7.94 6.16 5.30 3.29 Weighted average common and common equivalent shares outstanding ..................... 4,715,010 4,785,132 3,988,185 3,846,651 3,624,452 BALANCE SHEET DATA (AT PERIOD END): (dollars in thousands) Total assets .......................................... $ 327,918 $ 270,092 $ 264,487 $ 231,773 $ 223,847 Investments and federal funds sold .................... 184,021 152,677 155,364 120,287 113,647 Total loans ........................................... 113,258 91,588 90,448 90,814 93,667 Allowance for loan losses ............................. 2,408 1,906 2,495 3,005 4,415 Total deposits ........................................ 279,755 231,937 229,054 202,327 203,262 Other debt ............................................ 3,995 366 4,361 8,336 7,750 Total stockholders' equity ............................ 42,909 35,977 29,386 20,176 15,976 PERFORMANCE DATA: Return on average total assets ........................ 1.97% 2.31% 2.06% 1.85% 3.37% Return on average stockholders' equity ................ 14.73% 18.25% 21.54% 24.32% 56.93% Net interest margin (tax equivalent) .................. 4.80% 4.77% 4.70% 4.67% 4.76% ASSET QUALITY RATIOS: Non-performing loans to total loans ................... 1.77% 1.70% 2.00% 2.93% 5.51% Net loan charge-offs (recoveries) to average loans .... -0.04% -0.29% -0.54% 13% 0.24% Allowance for loan losses to total loans .............. 2.13% 2.08% 2.76% 3.31% 4.71% CAPITAL RATIOS: Average stockholders' equity to average total assets .. 13.35% 12.65% 9.57% 7.59% 5.92% Tier 1 risk-based capital * ........................... 33.58% 35.77% 28.14% 20.82% (A) Total risk-based capital* ............................. 34.84% 37.18% 29.39% 22.09% (A) Leverage ratio* ....................................... 13.67% 13.28% 10.57% 8.79% (A)
(A) Data not available * Calculated in accordance with Federal Reserve guidelines currently in effect. ** Restated to reflect eight-for-one reverse stock split effective on September 12, 1994. 11 12 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA Selected quarterly consolidated financial data is presented in the following tables for the years ended December 31, 1996 and 1995. (Dollars in thousands, except per share data):
1996 QUARTER ENDED (UNAUDITED) ------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ Interest income ............................ $ 4,826 $ 5,002 $ 5,143 $ 5,848 Interest expense ........................... 1,896 1,927 1,995 2,293 ------- ------- ------- ------- Net interest income ........................ 2,930 3,075 3,148 3,555 Provision (credit) for loan losses ......... 20 10 10 (45) Loss on sales of available for sale ........ -- (1) -- (6) Noninterest income ......................... 739 602 727 728 Noninterest expense ........................ 2,235 2,381 2,310 2,661 ------- ------- ------- ------- Income before provision for federal income taxes ...................... 1,414 1,285 1,555 1,661 ------- ------- ------- ------- Federal income taxes ....................... 53 33 37 83 ------- ------- ------- ------- Net income ................................. $ 1,361 $ 1,252 $ 1,518 $ 1,578 ------- ------- ------- ------- Net earnings per share ..................... $ 0.29 $ 0.27 $ 0.32 $ 0.33 ------- ------- ------- -------
1995 QUARTER ENDED (UNAUDITED) ------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ Interest income ............................ $ 4,548 $ 4,680 $ 4,780 $ 4,949 Interest expense ........................... 1,758 1,824 1,897 1,883 ------- ------- ------- ------- Net interest income ........................ 2,790 2,856 2,883 3,066 Provision (credit) for loan losses ......... 30 (240) (300) (345) Gain (loss) on sales of available for sale securities ............. (1) -- 1 (1) Noninterest income ......................... 603 567 849 744 Noninterest expense ........................ 2,197 2,301 2,138 2,513 ------- ------- ------- ------- Income before provision for federal income taxes and extraordinary gain ....... 1,165 1,362 1,895 1,641 Federal income taxes ....................... 32 28 44 53 Extraordinary gain on prepayment of debt ... 219 -- -- -- ------- ------- ------- ------- Net income ................................. $ 1,352 $ 1,334 $ 1,851 $ 1,588 ------- ------- ------- ------- Net earnings per share ..................... $ 0.28 $ 0.28 $ 0.39 $ 0.33 ------- ------- ------- -------
12 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's consolidated balance sheets and statements of income. This discussion should be read in conjunction with the Consolidated Financial Statements, accompanying notes, and selected financial data appearing elsewhere in this Report. RESULTS OF OPERATIONS Net income for 1996 was $5.7 million, a decrease of $414,000 or 6.8% over the $6.1 million recorded in 1995. 1995 included two nonrecurring items, a $223,000 extraordinary gain on the prepayment of debt and an $855,000 credit to the provision for loan losses. Net income for 1995 adjusted for the nonrecurring items would have been $5.0 million. Compared to the adjusted 1995 net income, 1996 reflects an increase of $665,000 or 14%. The increase was due primarily to a 9.6% increase in net interest income in 1996 from 1995. Also in 1996, noninterest expense increased 4.8%, from $9.1 million to $9.6 million, which is primarily due to the depreciation expense related to the new branch in Eagle Pass which was completed in late 1995 and new data processing equipment purchased in the last quarter of 1995 and throughout 1996. On a weighted average share basis, net income for 1996 was $1.21 compared to $1.23 for 1995 before the extraordinary credit. During 1996, the Company's Return on Assets was 1.97% compared to 2.31% and 2.06% for 1995 and 1994, respectively. The Company's Return on Equity for 1996 was 14.73% compared to 18.25% and 21.54% for 1995 and 1994, respectively. The decline in the return on equity ratio is mainly attributable to an increase in the capital of the Company. The Company's strong capital position is reflected in the ratio of average stockholders' equity to average total assets which was 13.35%, 12.65%, and 9.57% for 1996, 1995 and 1994, respectively. Net income for 1995 was $6.1 million compared to $5.0 million in 1994. The $1.1 million increase was primarily attributable to an improvement of $1.2 million in net interest income for 1995. Net income in 1995 and 1994 also benefited from credits to the loan loss provision of $855,000 and $990,000, respectively, due to the continued improvement in loan quality. The following table shows selected key performance ratios over the last three years:
1996 1995 1994 ---- ---- ---- Return on average assets 1.97% 2.31% 2.06% Return on average stockholders' equity* 14.73% 18.25% 21.54% Average stockholders' equity* to average total assets 13.35% 12.65% 9.57%
- ----------- * before adjustment for unrealized gains and losses on available for sale securities. The return on average assets ratio is calculated by dividing net income by average total assets for the year. The return on average stockholders' equity ratio is calculated by dividing net income by average stockholders' equity for the year, excluding the effect of the net unrealized gain or loss on available for sale securities. The average stockholders' equity to average total assets ratio is calculated by dividing average stockholders' equity for the year by average total assets for the year. NET INTEREST INCOME. Net interest income constitutes the principal source of income for the Company and represents the difference between interest income on earning assets and interest expense on interest-bearing liabilities. The largest category of earning assets for 1996 was investment securities with the second largest being loans. Net interest income for 1996 was $12.7 million, an increase of $1.1 million or 9.5% compared to 1995. The net increase reflected a $1.9 million increase in interest income which was offset by a $.8 million increase in interest expense. The interest income increase was due primarily to an increase in the investment security and loan portfolios. Average investment securities and average loans in 1996 increased 12% and 6%, respectively, over 1995. The Company's yield on earning assets increased to 7.84% from 7.80% in 1995. The rate paid on interest bearing liabilities increased 3 basis points from 3.83% in 1995 to 3.86% in 1996. 13 14 The net interest margin is the net return on earning assets which is computed by dividing taxable equivalent net interest income by average total earning assets. The net interest margin for 1996 was 4.80% compared to 4.77% and 4.70% for 1995 and 1994, respectively. This increase in the net interest margin for 1996 and 1995 results from increases in the volume of earning assets. The net interest spread increased one basis point to 3.98% in 1996 from 3.97% in 1995.
-------------------------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------------------------- 1996 1995 1994 --------------------------------- ----------------------------- -------------------------------- INTEREST EARNED/ Interest Average Interest Average Interest Average INCURRED & RATES Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate - -------------------------- --------- --------- ---- -------- ------- ---- -------- --------- ---- EARNING ASSETS: Interest-bearing accounts $ 230 $ 14 6.08% $ 423 $ 26 6.15% $ 246 $ 13 5.28% Federal funds sold ...... 18,997 1,039 5.46% 18,701 1,092 5.84% 15,902 684 4.30% Investment securities: US Treasuries .......... 141,333 8,752 6.19% 127,502 7,569 5.94% 110,699 6,012 5.42% US Government agencies . 4,280 291 6.80% 4,867 320 6.57% 5,282 318 6.00% States & political subdivisions ......... 11 1 9.09% 30 2 6.67% 354 2 0.57% Other .................. 3,371 100 2.96% 281 18 6.41% 322 19 5.82% --------- --------- ---- -------- ------- ---- -------- --------- ---- Total investment securities ............ 148,995 9,144 6.13% 132,680 7,909 5.96% 116,657 6,351 5.43% Loans, net of discounts (A) 96,787 10,634 10.99% 91,357 9,948 10.89% 89,190 8,969 10.03% --------- --------- ---- -------- ------- ---- -------- --------- ---- Total earning assets ..... 265,009 20,831 7.86% 243,161 18,975 7.80% 221,995 16,017 7.20% NON-INTEREST BEARING ASSETS: Cash and due from banks . 12,829 12,048 11,060 Allowance for loan losses (2,117) (2,353) (2,972) Other assets ............ 14,507 12,411 11,327 --------- -------- -------- Total assets ............. $ 290,228 $265,267 $241,410 ========= ======== ======== INTEREST-BEARING LIABILITIES: NOW accounts ............ $ 33,342 953 2.86% $ 32,127 985 3.05% $ 30,603 810 2.65% Savings, money market & CD's ................ 175,711 7,086 4.03% 157,910 6,214 3.94% 144,924 4,246 2.93% Other debt .............. 1,282 73 5.69% 2,022 160 7.91% 6,428 533 8.29% --------- --------- ---- -------- ------- ---- -------- --------- ---- TOTAL INTEREST-BEARING LIABILITIES ............ 210,335 8,112 3.86% 192,059 7,359 3.83% 181,955 5,589 3.07% Non-interest bearing liabilities: Demand deposits ......... 39,489 37,667 35,119 Other liabilities ....... 1,590 1,261 1,240 --------- -------- -------- Total liabilities ........ 251,414 230,987 218,314 --------- -------- -------- Redeemable Preferred Stock .................. 59 715 -- Stockholders' equity ..... 38,755 33,565 23,096 --------- -------- -------- Total liabilities and stockholders' equity ... $ 290,228 $ 265,267 241,410 ========= ========= ======= Taxable-equivalent net interest income .... 12,719 11,616 10,428 Taxable equivalent adjustment ............. 11 20 32 --------- ------- --------- Net interest income ...... $ 12,708 $ 11,596 $10,396 ========= ======= ========= Net interest spread (B) .. 3.98% 3.97% 4.14% ==== ==== ==== Net interest margin (C) .. 4.80% 4.77% 4.70% ==== ==== ====
(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. 14 15 The following table analyzes the increases in taxable-equivalent net interest income stemming from changes in interest rates and from asset and liability volume, including mix, for the years ended December 31, 1996 and 1995. Non- accruing loans have been included in assets for calculating this table, thereby reducing the yield on loans. The changes in interest due to both rate and volume in the table below have been allocated to volume or rate change in proportion to the absolute amounts of change in each. ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
1996 VS. 1995 1995 VS. 1994 -------------------------------------------------------------------------- DUE TO CHANGES IN DUE TO CHANGES IN INCREASE ------------------- INCREASE ------------------- (DECREASE) RATES VOLUME (DECREASE) RATES VOLUME ---------- ----- ------ ---------- ----- ------ (Dollars in thousands) TAXABLE-EQUIVALENT INTEREST INCOME: Interest-bearing accounts .......... $ (12) $ -- $ (12) $ 13 $ 4 $ 9 Federal funds sold ................. (53) (70) 17 408 288 120 Investment securities .............. 1,235 238 997 1,558 683 875 Loans, net of discounts ............ 686 93 593 979 761 218 ------- ----- ------- ------- ------- ------- Total taxable-equivalent interest income ................ 1,856 261 1,595 2,958 1,737 1,221 ------- ----- ------- ------- ------- ------- INTEREST EXPENSE: Interest-bearing deposits .......... 840 112 728 2,143 1,593 550 Other debt ......................... (87) (29) (58) (373) (24) (349) ------- ----- ------- ------- ------- ------- Total interest expense ........... 753 83 670 1,770 1,569 201 ------- ----- ------- ------- ------- ------- TAXABLE-EQUIVALENT NET INTEREST INCOME ................ $ 1,103 $ 178 $ 925 $ 1,188 $ 168 $ 1,020 ======= ===== ======= ======= ======= =======
Taxable-equivalent net interest income for 1996 increased $1.1 million or 9.5% over 1995. Taxable-equivalent net interest income for 1995 increased $1.2 million or 3% over 1994. In 1996 and 1995, interest income increased as the volume of earning assets rose. 15 16 INTEREST RATE SENSITIVITY. Management seeks to maintain consistent growth of net interest income through periods of changing interest rates by avoiding fluctuating net interest margins. Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to repricing characteristics of interest earning assets and liabilities. The following table commonly referred to as a "static gap report," indicates the Company's interest rate sensitivity position at December 31, 1996 and may not be reflective of positions in subsequent periods: 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 --------- ------- -------- ----- -------- ----- EARNING ASSETS: Loans, net of discounts ........ $ 52,281 $ 6,488 $ 20,550 $ 79,319 $ 33,939 $113,258 Investment securities .......... 605 5,068 31,272 36,945 123,897 160,842 Federal funds sold ............. 22,650 -- -- 22,650 -- 22,650 Interest-bearing accounts ...... 529 -- -- 529 -- 529 --------- -------- -------- --------- -------- -------- Total earning assets ........... $ 76,065 $ 11,556 $ 51,822 $ 139,443 $157,836 $297,279 ========= ======== ======== ========= ======== ======== INTEREST-BEARING LIABILITIES: Interest-bearing transaction, savings and money market ....... $ 97,871 $ -- $ -- $ 97,871 $ -- $ 97,871 Certificates and time deposits.. 26,595 35,728 65,486 127,809 7,458 135,267 Long term debt ................. 3,640 2 8 3,650 345 3,995 --------- -------- -------- --------- -------- -------- Total interest-bearing liabilities .................... $ 128,106 $ 35,730 $ 65,494 $ 229,330 $ 7,803 $237,133 ========= ======== ======== ========= ======== ======== INTEREST SENSITIVITY GAP ......... $ (52,041) $(24,174) $(13,672) $ (89,887) ========= ======== ======== ========= CUMULATIVE GAP ................... $ (52,041) $(76,215) $(89,887) $ (89,887) ========= ======== ======== ========= RATIO OF EARNING ASSETS TO INTEREST-BEARING LIABILITIES ... 59.4% 32.3% 79.1% 60.8%
The interest rate sensitivity table reflects a cumulative liability sensitive position during the one year period shown. Generally, this indicates that the liabilities reprice more quickly than the assets in a given period, and that a decline in market rates will benefit net interest income. An increase in market rates would have the opposite effect. 16 17 NON-INTEREST INCOME. The major components of non-interest income are service charges and fees earned on deposit accounts. The following table summarizes changes in non-interest income during the past three years: NON-INTEREST INCOME (Dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1996 1995 1994 ----------------------------------------------------------- % % AMOUNT CHANGE AMOUNT CHANGE AMOUNT ------ ------ ------ ------ ------ Service charges and fees ............................. $ 2,371 8.6% $ 2,184 11.6% $1,957 Net realized gains (losses) on sales of securities ... (6) 535.1% (1) -102.0% 50 Net gains on sales of other real estate owned and other assets ............................... 103 -71.6% 365 53.2% 237 Miscellaneous income ................................. 321 49.7% 214 -22.0% 277 ------- --- ------- ---- ------ Total non-interest income ............................ $ 2,789 1.0% $ 2,762 9.6% $2,521 ======= ===== ======= ===== ======
The $27,000 or 1.0% increase in non-interest income for 1996 from 1995 is due primarily to the 8.6% increase in service charges and fees. The improvement in service charges and fees can be partly attributed to a 10% increase in average deposits in 1996. Included in 1996 is non-recurring income of $97,000 due to net gains and losses on other real estate owned and investment securities which was less than the $364,000 reported in 1995. Therefore, the increase in 1996, disregarding the non-recurring items, would be $294,000 or 12.2% over 1995. Non-interest income for 1995 was $241,000 or 9.6% higher than 1994 primarily due to an 11.6% increase in service charges and fees. NON-INTEREST EXPENSE. Non-interest expense includes all expenses of the Company other than interest expense, loan loss provision and income tax expense. The following table summarizes the changes in non-interest expense for the past three years: NON-INTEREST EXPENSE (Dollars in thousands)
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- % % AMOUNT CHANGE AMOUNT CHANGE AMOUNT ------ ------ ------ ------ ------ Salaries and employee benefits ....... $4,848 9.7% $4,420 3.9% $4,253 Occupancy and equipment expenses ..... 1,544 28.8% 1,198 7.4% 1,115 Data processing fees ................. 418 -35.5% 648 2.9% 630 FDIC insurance ....................... 6 -97.7% 257 -42.8% 449 Insurance ............................ 109 -10.7% 122 -7.6% 132 Office supplies ...................... 375 27.1% 295 18.0% 250 Postage and courier .................. 379 13.8% 333 29.1% 258 Professional fees .................... 689 -17.3% 833 32.0% 631 Goodwill ............................. 35 100.0% -- 0.0% -- Miscellaneous other expenses ......... 1,183 13.4% 1,043 34.9% 773 ------ ----- ------ ----- ------ Total non-interest expense ........... $9,586 4.8% $9,149 7.7% $8,491 ====== ===== ====== ===== ======
17 18 Total non-interest expense for 1996 increased 4.8% over 1995. However, as a percentage of average assets, non-interest expense declined slightly from 3.4% in 1995 to 3.3% in 1996. The increase in non-interest expenses is reflected in occupancy and equipment expenses and salaries and benefit expense. Salaries and benefits rose 9.7% in 1996 due to salary merit increases, incentive compensation increases, the addition of employees to operate the new Eagle Pass branch, the new data center and the acquisition of FNB-Luling in September 1996. The number of full time equivalent employees increased by 21 employees in 1996 from 1995 to a total of 169. The 28.8% increase in occupancy and equipment expenses is due to the depreciation expense on the new branch facility in Eagle Pass, Texas and the addition of new data processing equipment purchased in the latter half of 1995 and throughout 1996. Some of the decline in data processing expense is reflected in the increase in equipment expense due to the Company going "in-house" for data processing. The 97.7% decline in FDIC insurance premiums on deposits occurred as a result of a reduction in the rates previously being charged by the FDIC. Non-interest expense of $9.1 million for the year ended 1995 represented an increase of 7.7% compared with 1994. The 32% increase in professional fees was due to fees incurred in initially complying with the reporting requirements of the Securities and Exchange Commission. INCOME TAXES. The Company recognized income tax expense of $206,000 in 1996 compared to $159,000 in 1995 and $440,000 in 1994. See Note 16 to the Consolidated Financial Statements for details of tax expense. At December 31, 1996, the Company had approximately $107 million in net operating loss carryforwards that will be available to reduce income tax liabilities in future years. If unused, approximately $103 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. INVESTMENT SECURITIES. The following table presents the consolidated investment securities portfolio as of December 31, 1996, 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". INVESTMENT PORTFOLIO MATURITY AND YIELDS (Dollars in thousands)
------------------------------------------------------------------------------------------- December 31, 1996 ------------------------------------------------------------------------------------------- One Year One to Five to Over Ten or Less Five Years Ten Years Years ------------------- -------------------- ------------------- ----------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Total -------- --------- --------- -------- --------- --------- --------- --------- --------- Held to maturity securities: (Amortized Cost) U.S. Treasury securities ....... $17,757 5.85% $ 51,643 6.54% $ 2 2.00% $ -- -- $ 69,402 U.S. Government agency and mortgage backed securities.... -- -- -- -- -- -- 3,184 6.69% 3,184 State and Municipal securities.. -- -- -- -- -- -- -- -- -- Foreign debt securities......... -- -- 13 6.06% 50 7.70% -- -- 63 -------- --------- --------- -------- --------- --------- --------- --------- --------- Total held to maturity........ $17,757 5.85% $ 51,656 6.54% $52 7.48% $3,184 6.69% $ 72,649 ======== ========= ========= ======== ========= ========= ========= ========= ========= Available for sale securities: (Fair Value) U.S. Treasury securities........ $18,599 6.06% $ 62,047 6.05% $-- -- $ -- -- $ 80,646 U.S. Government agency and mortgage backed securities.... 1,291 6.79% 1,202 7.14% -- -- 126 8.51% 2,619 Other securities................ -- -- -- -- -- -- 4,928 3.24% 4,928 -------- --------- --------- -------- --------- --------- --------- --------- --------- Total available for sale...... $19,890 6.10% $ 63,249 6.07% $-- -- $5,054 3.37% $ 88,193 ======== ========= ========= ======== ========= ========= ========= ========= ========= Total investment securities.. $37,647 5.98% $114,905 6.28% $52 7.48% $8,238 4.65% $160,842 ======== ========= ========= ======== ========= ========= ========= ========= =========
The weighted average yield on the investment security portfolio of the Company at December 31, 1996 was 6.13% compared to a weighted average yield of 5.74% at December 31, 1995. 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. 18 19 Note 3 to this report reflects the estimated fair value for various categories of investment securities as of December 31, 1996 and 1995. The following table presents the book value of investment securities at December 31:
DECEMBER 31, --------------------------------- (Dollars in Thousands) 1996 1995 1994 --------- --------- --------- U.S. Treasury securities .................... $ 149,400 $ 125,537 $ 131,170 U.S. Government agencies and corporations ... 4,132 -- 168 Mortgage backed securities .................. 1,638 4,529 5,064 Other securities ............................ 4,247 1,464 565 --------- --------- --------- Total .................................... $ 159,417 $ 131,530 $ 136,967 ========= ========= =========
LOANS. The following table presents the composition of the Company's loan portfolio by type of loan: LOAN PORTFOLIO (Dollars in thousands)
DECEMBER 31, ---------------------------------------------------------------------------------------------------- % OF % OF % OF % OF % OF 1996 TOTAL 1995 TOTAL 1994 TOTAL 1993 TOTAL 1992 TOTAL ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Commercial ................ $23,992 21.2% $13,643 14.9% $15,175 16.8% $13,095 14.4% $14,314 15.3% Real estate construction .. 6,324 5.6% 11,868 13.0% 10,085 11.2% 8,329 9.2% 9,587 10.2% Real estate mortgage ...... 65,556 57.9% 51,664 56.4% 49,406 54.6% 47,347 52.1% 41,881 44.7% Consumer installment net of unearned discount... 17,386 15.3% 14,413 15.7% 15,782 17.4% 22,043 24.3% 27,885 29.8% -------- ----- ------ ----- ------- ----- ------- ----- ------- ----- Total loans ............... $113,258 100.0% $91,588 100.0% $90,448 100.0% $90,814 100.0% $93,667 100.0% ======== ===== ======= ===== ======= ===== ======= ===== ======= =====
The preceding loan composition table shows that in 1996 total loans increased $21.7 million or 23.7% over 1995. Approximately $14.7 million of this increase was due to the loans obtained in connection with the FNB-Luling acquisition. At December 31, 1996, loans were 40.5% of deposits compared to 39.5% at the previous year end. The following table presents commercial and real estate construction loans as of December 31, 1996, based on scheduled principal repayments and the total amounts of loans due after one year classified according to sensitivity to changes in interest rates: MATURITIES AND RATE SENSITIVITY OF LOANS (Dollars in thousands)
OVER ONE YEAR OVER ONE YEAR THROUGH FIVE OR LESS FIVE YEARS YEARS TOTAL ------- ----------- ----- ----- Commercial................................ $19,848 $4,029 $ 115 $23,992 Real estate construction ................. 3,087 2,166 1,071 6,324 ------- ------ ------ ------- Total .................................... $22,935 $6,195 $1,186 $30,316 ======= ====== ====== =======
Of the loans maturing after one year, $2,324,000 have fixed interest rates and $5,057,000 have variable interest rates. 19 20 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for loan losses is established through charges to operations in the form of a provision for loan losses. Loans, or portions thereof, which are considered to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The allowance represents the amount, which in the judgment of each subsidiary Bank's management, will be adequate to absorb possible losses. The adequacy of the allowance is determined by management's continuous evaluation of the loan portfolio and by the employment of third party loan review consultants. Industry concentrations, specific credit risks, past loan loss experience, delinquency ratios, current loan portfolio quality and projected economic conditions in the Bank's market areas are pertinent factors in determining the adequacy of the allowance for possible loan losses. Loans identified as losses by management, external loan review or bank examiners are charged-off. Despite loan growth in 1996, a credit to the provision for loan losses of $5,000 was made to reduce the allowance for loan losses to an appropriate level. Credits to the provision for loan losses were also made in 1995 and 1994 in the amounts of $855,000 and $990,000, respectively. The aggregate total of credits made to the provision for loan losses since the 1992 reorganization amounts to $5,680,000 and was a significant contribution to the improved capitalization of the Company. The improvement in credit quality of the loan portfolio and recoveries of previously charged-off loans that provided unanticipated additions to the allowance for possible loan losses justify the credits made to the allowance. The Company recorded net recoveries of $40,000 for the year ended December 31, 1996 compared to net recoveries of $266,000 for 1995. The following table summarizes, for the periods presented, the activity in the allowance for possible loan losses arising from provisions credited to operations, loans charged off and recoveries of loans previously charged off: ANALYSIS OF ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in thousands)
------ ----------------------------------------------- SEVEN YEAR ENDED DECEMBER 31, MONTHS ----------------------------------------------- ENDED 1996 1995 1994 1993 1992 ---- ---- ---- ---- ------ Average loans outstanding ............................. $ 94,671 $ 91,357 $ 89,190 $ 91,233 $ 96,982 ======== ======== ======== ======== ======== Balance at beginning of year .......................... $ 1,906 $ 2,495 $ 3,005 $ 4,415 $ 7,191 Allowance on acquired loans ........................... 467 -- -- -- -- Charge-Offs: Commercial ............................................ 76 60 16 286 (A) Real estate construction .............................. -- -- 10 12 (A) Real estate mortgage .................................. -- 6 45 2 (A) Consumer installment .................................. 175 264 249 680 935 -------- -------- -------- -------- -------- Total charge-offs ..................................... 251 330 320 980 935 Recoveries: Commercial ............................................ 39 69 73 133 (A) Real estate construction .............................. -- -- 100 56 (A) Real estate mortgage .................................. 70 285 210 159 (A) Consumer installment .................................. 182 242 417 512 699 -------- -------- -------- -------- -------- Total recoveries ...................................... 291 596 800 860 699 -------- -------- -------- -------- -------- Net charge-offs (recoveries) .......................... (40) (266) (480) 120 236 Provision charged (credited) to operating expense ..... (5) (855) (990) (1,290) (2,540) -------- -------- -------- -------- -------- Balance at end of year ................................ $ 2,408 $ 1,906 $ 2,495 $ 3,005 $ 4,415 ======== ======== ======== ======== ======== Net charge-offs (recoveries) as a percentage of average loans outstanding ............................. -0.04% -0.29% -0.54% 0.13% .24% ==== ==== ==== ==== === Allowance for possible loan losses as a percentage of year-end loans, net of unearned discount ........... 2.13% 2.08% 2.76% 3.31% 4.71% ==== ==== ==== ==== ====
(A) Detail not available. Amount included with consumer installment loans. 20 21 The following table reflects the allocation of the allowance for possible loan losses to the various loan categories and the corresponding percentage of total loans that it represents. Management believes that the allowance can be allocated by category only on an approximate basis. ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES (Dollars in thousands)
--------------------------------------------------------------------------------------- DECEMBER 31, --------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------ ------------- ------------- ---------------- ----------------- % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- Commercial .................. $ 131 0.12% $ 306 0.33% $ 195 0.22% $ 243 0.27% $ 377 0.40% Real estate construction .... -- -- -- -- -- -- -- -- 3 0.00% Real estate mortgage......... 614 0.54% 729 0.80% 811 0.90% 729 0.80% 1,098 1.17% Consumer installment......... 185 0.16% 255 0.28% 370 0.41% 658 0.72% 516 0.55% Unallocated ................. 1,478 1.31% 616 0.67% 1,119 1.24% 1,375 1.51% 2,421 2.59% ------ ---- --- ---- ----- ---- ----- ---- ----- ---- Total $2,408 2.13% $1,906 2.08% $2,495 2.76% $3,005 3.31% $ 4,415 4.71% ====== ==== ====== ==== ====== ==== ====== ==== ======= ====
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 consist of non-accrual loans and foreclosed real estate. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is ninety days or more past due. All installment loans past due ninety days or more are placed on non-accrual unless the loan is well secured or in the process of collection. On non-accrual loans, interest income is not recognized until actually collected. At the time the loan is placed on non-accrual status, interest previously accrued but not collected is reversed and charged against current income. Foreclosed real estate consists of property which has been acquired through foreclosure. At the time of foreclosure, the property is recorded at the lower of the estimated fair value less selling expenses or the loan balance with any write down charged to the allowance for loan losses. Any future write downs on the property are charged to operations. The following table discloses non-performing assets and loans 90 days past due and still accruing interest as of December 31: NON-PERFORMING ASSETS (Dollars in thousands)
---------------------------------------------- DECEMBER 31, ---------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-accrual loans ..................................... $1,195 $1,177 $1,070 $1,350 $3,554 Restructured loans ................................... 90 -- -- -- -- Foreclosed real estate ................................ 715 888 735 1,307 1,609 --- --- --- ----- ----- Total non-performing assets ........................... $2,000 $2,065 $1,805 $2,657 $5,163 ====== ====== ====== ====== ====== NON-PERFORMING ASSETS AS A PERCENTAGE OF: Total assets .......................................... 0.61% 0.76% 0.68% 1.15% 2.27% Total loans plus foreclosed real estate ............... 1.75% 2.23% 1.98% 2.88% 5.42% Accruing loans past due 90 days or more ............... $ 182 $ 383 $ 151 $ 154 $ 227
21 22 Interest income that would have been earned in 1996 on non-accrual loans had such loans performed in accordance with the original contracted terms was $187,000. The amounts related to 1995 and 1994 were $115,000 and $117,000, respectively. Independent third party loan reviews of the subsidiary Banks are performed on an annual basis. The loans are also reviewed by banking regulators on an eighteen month basis. On a monthly basis, the Board of Directors' Loan Committee of each Bank reviews new loans, renewals and delinquencies. Management of each Bank monitors on a continuing basis those loans which it feels should be followed closely. The Banks are required by the regulatory authorities to have foreclosed real estate appraised periodically. DEPOSITS. The primary source of funds for the Company is the deposits of the subsidiary Banks. The Company does not accept brokered deposits. The following table presents average balances and the corresponding average rate paid for the deposit categories: AVERAGE DEPOSITS AND AVERAGE RATES PAID (Dollars in thousands)
--------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1996 1995 1994 ------------------ ------------------ ------------------ RATE RATE RATE AMOUNT PAID AMOUNT PAID AMOUNT PAID ------ ---- ------ ---- ------ ---- Noninterest-bearing demand deposits ........... $ 39,489 -- $ 37,667 -- $ 35,119 -- INTEREST-BEARING DEPOSITS: Interest-bearing transaction (NOW) accounts ... 33,342 2.85% 32,127 3.05% 30,603 2.58% Savings and money market accounts ............. 54,928 2.90% 51,992 2.81% 51,488 2.55% Certificates and time deposits under $100,000.. 76,248 4.36% 68,654 4.30% 65,178 3.04% Certificates and time deposits greater than $100,000 ...................................... 44,535 4.86% 37,264 4.85% 28,258 3.44% ------ ---- ------ ---- ------ ---- Total interest-bearing deposits ............... 209,053 $190,037 $175,527 -------- -------- ------- Weighted average rate paid .................... 3.85% 3.79% 2.88% ==== ==== ==== Total average deposits ........................ $248,542 $227,704 $210,646 ======== ======== ========
Total average deposits increased $21 million or 9.2% with the majority of the increase reflected in certificates of deposit greater than $100,000. Included in total deposits is $83,677,000, $77,731,000, and $70,937,000 of Mexican National deposits at December 31, 1996, 1995, and 1994, respectively. The remaining maturity on certificates of deposit greater than $100,000 as of December 31, 1996 is presented below: (Dollars in thousands)
THREE OVER THREE OVER SIX OVER MONTHS THROUGH THROUGH TWELVE OR LESS SIX MONTHS TWELVE MONTHS MONTHS TOTAL ------- ---------- ------------- ------ ----- Certificates of deposit greater than $100,000 $ 21,650 $13,671 $15,160 $2,170 $52,651 ======== ======= ======= ====== =======
22 23 LIQUIDITY Liquidity is the ability to have funds available at all times to meet the commitments of the Company. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and short-term investments in time deposits in banks, federal funds sold and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the Company's trade area. The Banks have not and do not solicit brokered deposits as a funding source. The liquidity of the Company is enhanced by the fact that 77% of total deposits at December 31, 1996 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, 1996, the Company's liquid assets amounted to $129 million or 39% of total gross assets, up from $102 million or 38% at December 31, 1995. Secondary sources of liquidity include the Company's ability to sell loan participations and purchase federal funds. NBC-Eagle Pass has an approved federal funds line at a correspondent bank. Subsequent to December 31, 1996, the Company was advanced $3 million on its line of credit to provide additional funds to pay off the short term notes payable related to the Luling acquisition. See Note 8 in the Notes to the Consolidated Financial Statements for the terms of the notes. CAPITAL RESOURCES Total stockholders' equity increased $6.9 million to $42.9 million at December 31, 1996 from $36.0 million at December 31, 1995. In addition to net income of $5.7 million, stockholders' equity increased $.5 million due to an improvement in the net fair value of securities available for sale, Series B Preferred Stock was converted to Common Stock and $8,000 was received for the exercise of stock options. The ratio of total stockholders' equity to total assets was 13.1% at December 31, 1996 compared with 13.3% at December 31, 1995. The Company and subsidiary Banks are subject to minimum capital ratios mandated by their respective banking industry regulators. The table below illustrates the Company and subsidiary Bank's compliance with the risk-based capital guidelines of the 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, 1996 include unfunded loan commitments and letters of credit. Currently under the regulatory guidelines, the net unrealized gain or loss on securities available for sale is not included in the calculation of risk based capital and the leverage ratio. The leverage ratio is Tier 1 capital divided by average total assets. A leverage ratio of 3.0% 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. The table below illustrates the Company and its subsidiary Bank's compliance with the risk-based capital guidelines as of December 31, 1996:
NBC NBC NBC FNB CONSOLIDATED EAGLE PASS LAREDO ROCKDALE LULING ------------ ---------- ------ -------- ------ (Dollars in thousands) Total average assets (less goodwill) .............. $289,711 $162,407 $61,561 $52,947 $ 25,753 Risk weighted assets (net of goodwill) $117,986 $ 50,009 $38,872 $15,707 $ 16,935 Tier 1 capital .................................... $ 39,614 $ 16,674 $ 7,159 $ 7,051 $ 2,896 Total capital ..................................... $ 41,100 $ 17,305 $ 7,645 $ 7,247 $ 3,108 Leverage ratio .................................... 13.67% 10.27% 11.63% 13.32% 11.25% Risk based capital ratios: Tier 1 ............................................ 33.58% 33.34% 18.42% 44.89% 17.10% Total capital ..................................... 34.84% 34.60% 19.67% 46.14% 18.35%
23 24 The Company and its subsidiary Banks exceed the risk-based capital and leverage requirements set by the regulators as evidenced in the above table. As of December 31, 1996, the Company and its subsidiary Banks met the criteria for classification as a "well-capitalized" institution under the rules of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). ACCOUNTING MATTERS SFAS No. 123 "Accounting for Stock-Based Compensation," issued in October 1995, and effective beginning in 1996, will allow companies to adopt a fair value based method of accounting for employee stock option plans, or to continue on the intrinsic value based method currently prescribed by Accounting Principals Board ("APB") Opinion No. 25. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. Under the intrinsic value based method, compensation cost is the excess, if any, of the quoted market price of the stock at grant date over the amount the employee must pay for the stock. If a company continues to use the intrinsic value based method, it must make certain pro forma disclosures of net income and earnings per share as if the fair value method of accounting for stock options were used as prescribed by SFAS No. 123. The Company has determined that it 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 1996, 1995 and 1994. 24 25 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of National Bancshares Corporation of Texas and Subsidiaries Laredo, Texas We have audited the accompanying consolidated balance sheets of National Bancshares Corporation of Texas and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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 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 consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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, 1996 and 1995, and the results of operations and its cash flows for the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Padgett, Stratemann & Co., L.L.P. Padgett, Stratemann & Co., L.L.P. Certified Public Accountants February 21, 1997 25 26 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS) ASSETS
1996 1995 --------- --------- Cash and Due from Banks Interest Bearing Deposits in Banks $ 17,305 $14,707 Federal Funds Sold 529 193 Securities Available for Sale 22,650 19,845 Securities Held to Maturity 88,193 66,864 Loans - Net of Unearned Discount and Allowance for 72,649 65,775 Loan Losses Bank Premises and Equipment 110,850 89,682 Other Assets 6,978 6,569 8,764 6,457 --------- --------- $ 327,918 $ 270,092 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995 ---- ---- DEPOSITS: Demand - Non-interest Bearing $ 46,617 $ 37,706 NOW, Money Market, and Savings Accounts 97,871 83,490 Time - $100,000 and over 52,651 38,260 Other Time 82,616 72,481 -------- -------- TOTAL DEPOSITS 279,755 231,937 Accrued Interest Payable and Other Liabilities 1,259 1,097 Other Debt 3,995 366 -------- -------- TOTAL LIABILITIES 285,009 233,400 -------- -------- REDEEMABLE PREFERRED STOCK - SERIES B CONVERTIBLE -- 715 -------- -------- STOCKHOLDERS' EQUITY: Common Stock - $.001 par value; 100,000,000 shares authorized; 4,658,734 shares in 1996 and 4,529,855 shares issued and outstanding in 1995 5 4 Surplus 16,341 15,619 Retained Earnings 25,321 19,611 Net Unrealized Appreciation on Securities Available for Sale, net of tax of $182 in 1996 and $366 in 1995 1,242 743 -------- -------- TOTAL STOCKHOLDERS' EQUITY 42,909 35,977 -------- -------- $ 327,918 $ 270,092 ========= =========
Notes to consolidated financial statements form an integral part of these statements. 26 27 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ----------- ----------- ----------- INTEREST INCOME: Interest and Fees on Loans $ 10,623 $ 9,928 $ 8,937 Interest on Investment Securities - Taxable 9,144 7,907 6,349 Interest on Investment Securities - Nontaxable 1 2 2 Interest on Federal Funds Sold 1,038 1,092 684 Interest on Deposits in Banks 14 26 13 ----------- ----------- ----------- TOTAL INTEREST INCOME 20,820 18,955 15,985 INTEREST EXPENSE: Interest on Deposits 8,039 7,199 5,056 Interest on Debt 73 160 533 ----------- ----------- ----------- TOTAL INTEREST EXPENSE 8,112 7,359 5,589 ----------- ----------- ----------- NET INTEREST INCOME 12,708 11,596 10,396 Credit for Possible Loan Losses (5) (855) (990) ----------- ----------- ----------- NET INTEREST INCOME AFTER CREDIT TO PROVISION FOR POSSIBLE LOAN LOSSES 12,713 12,451 11,386 NON-INTEREST INCOME: Service Charges and Fees 2,371 2,184 1,957 Net Realized (Losses) Gains on Sales of Securities (6) (1) 50 Net Gains on Sales of Other Real Estate Owned and Other Assets 103 365 237 Miscellaneous Income 321 214 277 ----------- ----------- ----------- TOTAL NON-INTEREST INCOME 2,789 2,762 2,521 NON-INTEREST EXPENSE: Salaries and Employee Benefits 4,848 4,420 4,253 Occupancy and Equipment Expenses 1,544 1,198 1,115 Other Operating Expenses 3,194 3,531 3,123 ----------- ----------- ----------- TOTAL NON-INTEREST EXPENSE 9,586 9,149 8,491 INCOME BEFORE FEDERAL INCOME TAXES AND EXTRAORDINARY ITEM 5,916 6,064 5,416 Federal Income Tax Expense 206 159 440 ----------- ----------- ----------- INCOME BEFORE EXTRAORDINARY ITEM 5,710 5,905 4,976 Gain Realized on Prepayment of Debt, net of tax of $4 -- 219 -- ----------- ----------- ----------- NET INCOME $ 5,710 $ 6,124 $ 4,976 =========== =========== =========== Income per common and common-equivalent share: Before Extraordinary Item $ 1.21 $ 1.23 $ 1.25 Extraordinary Item -- 0.05 -- ----------- ----------- ----------- Net Income per share $ 1.21 $ 1.28 $ 1.25 =========== =========== =========== Weighted Average Number of Common and Common-Equivalent Shares Outstanding 4,715,010 4,785,132 3,988,185
Notes to consolidated financial statements form an integral part of these statements. 27 28 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
SERIES A CONVERTIBLE PREFERRED STOCK ------------------------------------ NUMBER OF SHARES PAR SURPLUS ----- --- ------- BALANCE AT JANUARY 1, 1994 2,604 $ 26 $ 2,578 Effect of adopting SFAS No. 115 at January 1, 1994 -- -- -- Net income -- -- -- Cancellation of shares due to untendered claims: Common -- -- -- Preferred (402) (4) (398) Conversion of Preferred to Common (9) -- (9) Exercise of Common Stock option -- -- -- Common Stock issued -- -- -- Eight-for-one reverse stock split -- -- -- Net change in unrealized depreciation on securities available for sale, net of tax benefit of $911 -- -- -- ------ ---- ------- BALANCE AT DECEMBER 31, 1994 2,193 22 2,171 Net income -- -- -- Redemption of Preferred Stock (1,270) (13) (1,257) Conversion of Preferred to Common (923) (9) (914) Net change in unrealized appreciation on securities available for sale, net of tax of $797 -- -- -- ------ ---- ------- BALANCE AT DECEMBER 31, 1995 -- -- -- Net income -- -- -- Conversion of Series B Preferred to Common -- -- -- Exercise of Common Stock option -- -- -- Net change in unrealized appreciation on securities available for sale, net of tax of $183 -- -- -- ------ ---- ------- BALANCE AT DECEMBER 31, 1996 -- $-- $ -- ====== ==== =======
Notes to consolidated financial statements form an integral part of these statements. 28 29
NET UNREALIZED APPRECIATION COMMON STOCK (DEPRECIATION) - ---------------------------------------- ON SECURITIES NUMBER OF RETAINED AVAILABLE SHARES PAR SURPLUS EARNINGS FOR SALE TOTAL --------- ---- ------- -------- -------------- -------- 26,512 $ 27 $ 9,034 $ 8,511 $-- $ 20,176 -- -- -- -- 933 933 -- -- -- 4,976 -- 4,976 (211) -- -- -- -- -- -- -- 402 -- -- -- 1 -- 9 -- -- -- 1,894 1 93 -- -- 94 888 1 4,974 -- -- 4,975 (24,670) (25) 25 -- -- -- -- -- -- -- (1,768) (1,768) ----- ---- ------- ------- ------- -------- 4,414 4 14,537 13,487 (835) 29,386 -- -- -- 6,124 -- 6,124 -- -- 159 -- -- (1,111) 116 -- 923 -- -- -- -- -- -- -- 1,578 1,578 ----- ---- ------- ------- ------- -------- 4,530 4 15,619 19,611 743 35,977 -- -- -- 5,710 -- 5,710 128 1 714 -- -- 715 1 -- 8 -- -- 8 -- -- -- -- 499 499 ----- ---- ------- ------- ------- -------- 4,659 $ 5 $16,341 $25,321 $ 1,242 $ 42,909 ===== ==== ======= ======= ======= ========
Notes to consolidated financial statements form an integral part of these statements. 29 30 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,710 $ 6,124 $ 4,976 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 944 613 682 Deferred federal income taxes 61 38 320 Restoration of loan loss provision (5) (855) (990) Net realized loss (gain) on sales of securities 6 1 (50) Gain on sale on other real estate owned and other assets (103) (365) (237) Extraordinary gain on prepayment of debt (gross) -- (223) -- Increase in accrued interest receivable (196) (96) (277) (Increase) decrease in prepaid expenses and other assets (42) 1 943 Increase (decrease) in accrued interest payable and other 39 126 (186) Write-down of other real estate owned 18 72 54 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,432 5,436 5,235 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in federal funds sold 2,320 (445) (7,880) Net decrease (increase) in interest bearing deposits in banks (40) 70 (263) Purchases of securities available for sale (44,009) (16,872) (14,437) Proceeds from maturities of securities available for sale 16,225 9,238 5,312 Proceeds from sales of securities available for sale 10,226 6,356 5,455 Purchases of securities to be held to maturity (23,865) (16,251) (46,393) Proceeds from maturities of securities to be held to maturity 17,811 22,877 20,426 Proceeds from sales of securities to be held to maturity -- -- 1,506 Net (increase) decrease in loans (6,624) (1,260) 1,019 Capital expenditures (730) (2,664) (392) Capital expenditures on other real estate owned -- 1 (131) Proceeds from sale of other real estate owned 431 524 776 Net (payments for) cash acquired from acquisitions (46) -- -- -------- -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (28,301) 1,574 (35,002) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from principal advances on other debt 140 175 198 Principal payments on other debt (150) (4,044) (3,889) Net increase (decrease) in demand deposits, NOW accounts, money market accounts, and savings accounts 10,206 (4,933) 12,837 Net increase in time deposits 14,263 7,816 13,890 Sale of Common Stock -- -- 4,975 Exercise of Common Stock options 8 -- 94 Redemption of Series A Preferred Stock -- (1,111) -- -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 24,467 (2,097) 28,105 -------- -------- -------- Net increase (decrease) in cash and due from banks 2,598 4,913 (1,662) Cash and due from banks at beginning of year 14,707 9,794 11,456 -------- -------- -------- Cash and due from banks at end of year $ 17,305 $ 14,707 $ 9,794 ======== ======== ========
Notes to consolidated financial statements form an integral part of these statements. 30 31 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of National Bancshares Corporation of Texas (the Company) and its wholly-owned subsidiaries conform to generally accepted accounting principles and to general practices within the banking industry. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Following is a summary of the Company's more significant accounting and reporting policies: NATURE OF OPERATIONS The Company is a bank holding company which operates four commercial banks. Two banks are located in Central Texas and the other two banks are located on the Texas-Mexico border. CONSOLIDATION The consolidated financial statements include the accounts of National Bancshares Corporation of Texas and its wholly-owned subsidiary, NBT of Delaware, Inc. (the Delaware Company) and the accounts of the Delaware Company's wholly-owned subsidiaries, NBC Bank Eagle Pass, N.A. (Eagle Pass), NBC Bank Laredo, N.A. (Laredo), NBC Bank Rockdale (Rockdale), The First National Bank in Luling (Luling), and NBC-Holdings, Inc., collectively referred to as the "Banks." Significant intercompany accounts and transactions have been eliminated in consolidation. The Delaware Company was formed during 1995 as a bank holding company. It acquired all of the common stock of the Banks in a stock exchange with the Company in a business combination accounted for similar to a pooling of interests. The transaction does not affect any previously reported consolidated financial statement amounts. INVESTMENTS IN SECURITIES Pursuant to SFAS No. 115, the Company's investments in securities are classified in three categories and accounted for as follows: o TRADING 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. As of December 31, 1996 and 1995, the Company had no securities classified as trading securities. o SECURITIES TO BE HELD TO MATURITY. 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. o SECURITIES AVAILABLE FOR SALE. 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. 31 32 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The transfer of a security between categories of investments is accounted for at fair value. For a debt security transferred into the available for sale category from the held to maturity category, the unrealized holding gain or loss at the date of the transfer is recognized in a separate component of stockholders' equity. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance is maintained at a level adequate 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. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged off are added to the allowance. BANK PREMISES AND EQUIPMENT Land is carried at cost. Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized on straight-line and accelerated methods over the estimated useful lives of the assets. The estimated useful lives range from 3 to 50 years. Amortization of leasehold improvements is computed using the straight-line method over the primary term of the lease. INTEREST INCOME ON LOANS Unearned income on discounted loans is credited to the unearned discount account when the loan is made and is recorded as interest income over the term of the loan based on methods that approximate the 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. PROFIT SHARING PLAN The Company has a defined contribution profit sharing plan covering substantially all employees. Contributions to the plan are determined annually by each Bank's Board of Directors. 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. A valuation reserve is maintained to record the excess of the carrying values over the fair market values of the properties. 32 33 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTANGIBLE ASSETS The excess cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line basis over fifteen years. Intangible assets are included in other assets. All such intangible assets are periodically evaluated as to the recoverability of their carrying value. INCOME TAXES The Company and its subsidiaries file an income tax return on a consolidated basis. Provisions for income taxes are based on taxes payable or refundable for the current year (after exclusion of nontaxable income such as interest on state and municipal securities) and deferred taxes on temporary differences between the amount of taxable income and pretax financial income and between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Deferred tax assets and liabilities are included in the consolidated financial statements at currently 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. 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. EARNINGS PER SHARE OF COMMON STOCK EARNINGS PER SHARE have been computed based on the weighted average number of common and common equivalent shares outstanding during the years ended December 31, 1996, 1995, and 1994. In accordance with Accounting Principles Board (APB) Opinion No. 15, the Series B Convertible Preferred Stock has been considered as common stock equivalents because they have characteristics essentially the same as the common shares. Common Stock Purchase Options have been included in earnings per share as common stock equivalents from the date of their grant. FULLY DILUTED EARNINGS PER SHARE are not presented for 1996, 1995, and 1994 because the dilutive effect is less than three percent. 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. 33 34 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. RECLASSIFICATIONS Certain amounts have been reclassified from prior presentations at December 31, 1995 to conform to classifications at December 31, 1996. There is no effect on previously reported net income or retained earnings. 2. ACQUISITION On September 30, 1996, the Company acquired Luling Bancshares, Inc., including its subsidiary, The First National Bank in Luling, in Luling, Texas. The transaction was accounted for as a purchase. The purchase price has been allocated to the underlying assets and liabilities based on estimated fair value at the date of acquisition. Results of operations are included from the date of acquisition. The Company acquired approximately $26 million in total assets and assumed liabilities of approximately $24 million. The Company paid a premium of approximately $2 million over the book value of the net assets. The Company paid approximately $1.2 million in cash and executed short term notes payable of $3.6 million due January 2, 1997 for the remainder of the purchase price. 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:
DECEMBER 31, 1996 ------------------------------------------------------------------- GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE ------- ------ ---- ------- AVAILABLE FOR SALE SECURITIES: (Dollars in Thousands) U.S. Treasury securities $80,199 $ 645 $198 $80,646 U.S. Government Agency securities 948 20 -- 968 Mortgage-backed securities 1,638 13 -- 1,651 Equity securities 3,780 945 -- 4,725 Federal Reserve Bank stock 203 -- -- 203 ------- ------ ---- ------- Total $86,768 $1,623 $198 $88,193 ======= ====== ==== =======
34 35 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 ------------------------------------------------------ GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ----------- (Dollars in Thousands) HELD TO MATURITY SECURITIES: U.S. Treasury securities $ 69,201 $ 756 $ 58 $ 69,899 U.S. Government Agency securities 3,184 25 -- 3,209 Other securities 264 -- 10 254 ---------- ---------- ---------- ---------- Total $ 72,649 $ 781 $ 68 $ 73,362 ========== ========== ========== ==========
DECEMBER 31, 1995 --------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ----------- (Dollars in Thousands) AVAILABLE FOR SALE SECURITIES: U.S. Treasury securities $63,631 $1,094 $43 $64,682 Mortgage-backed securities 717 24 -- 741 Equity securities 1,213 34 -- 1,247 Federal Reserve Bank stock 194 -- -- 194 ------- ------ --- ------- Total $65,755 $1,152 $43 $66,864 ======= ====== === =======
DECEMBER 31, 1995 -------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE --------- ---------- ---------- ----------- (Dollars in Thousands) HELD TO MATURITY SECURITIES: U.S. Treasury securities $61,906 $1,310 $29 $63,187 Mortgage-backed securities 3,812 22 2 3,832 State and Municipal securities 20 -- -- 20 Other securities 37 3 -- 40 ------- ------ --- ------- Total $65,775 $1,335 $31 $67,079 ======= ====== === =======
During the year ended December 31, 1996, the Company did not transfer any securities between the held to maturity and available for sale categories. In December 1995, the Company transferred securities in the held to maturity category with an amortized cost of approximately $12,348,000 and a net unrealized gain of approximately $201,000 into the available for sale category. These transfers were made during the one-time SFAS No. 115 grace period granted by the Financial Accounting Standards Board. The transfers were made to allow for more flexible management of the investment portfolio. 35 36 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company holds equity securities of an entity that received notice of a tender offer during 1996. The unrealized gain associated with these equity securities was approximately $945,000 at December 31, 1996. The transaction is anticipated to settle during the first half of 1997, pending regulatory approval. The remainder of the unrealized gains and losses on investment securities held at December 31, 1996 and 1995 have been judged to be temporary market fluctutations with no material financial impact on the Company. Investment securities carried at approximately $35,634,000 and $33,406,000 at December 31, 1996 and 1995, 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, 1996 were as follows:
DECEMBER 31, 1996 ------------------------------------------------------------------ HELD TO MATURITY AVAILABLE FOR SALE ----------------------------- ----------------------------- AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE COST FAIR VALUE COST FAIR VALUE --------- ----------- --------- ----------- (Dollars in Thousands) Due in one year or less $17,757 $17,801 $19,015 $19,093 Due in one year to five years 51,656 52,308 62,012 62,394 Due from five to ten years 52 44 -- -- Due after ten years 3,184 3,209 120 127 ------- ------- ------- ------- Total 72,649 73,362 81,147 81,614 ======= ======= ======= ======= Equity securities -- -- 3,780 4,725 Mortgage-backed securities -- -- 1,638 1,651 Federal Reserve Bank stock -- -- 203 203 ------- ------- ------- ------- $72,649 $73,362 $86,768 $88,193 ======= ======= ======= =======
Gross realized gains and gross realized losses on sales of securities available for sale were $13,000 and $19,000, respectively, in 1996, $1,200 and $2,000, respectively, in 1995, and $52,000 and $2,000, respectively, in 1994. 4. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES The components of loans in the consolidated balance sheets were as follows:
DECEMBER 31, 1996 1995 --------- ------- (Dollars in Thousands) Commercial Loans $23,316 $13,001 Real Estate - Construction 6,324 11,868 Real Estate - Commercial 25,766 18,821 Real Estate - Residential 39,790 32,843 Consumer Loans 18,288 15,104 Other Loans 676 642 --------- ------- 114,160 92,279 Unearned Discount (902) (691) --------- ------- 113,258 91,588 Allowance for Possible Loan Losses (2,408) (1,906) --------- ------- $ 110,850 $89,682 ========= =======
36 37 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in the allowance for possible loan losses were as follows:
DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (Dollars in Thousands) Balance at Beginning of Period $ 1,906 $ 2,495 $ 3,005 Restoration of Loan Loss Provision (5) (855) (990) Allowance on Acquired Loans 467 -- -- Loans Charged Off (251) (330) (320) Recoveries 291 596 800 ---------- ---------- ---------- Balance at End of Period $ 2,408 $ 1,906 $ 2,495 ========== ========== ==========
The restoration of loan loss provision of $5,000, $855,000 and $990,000 for the years ended December 31, 1996, 1995 and 1994, respectively, resulted from significant collections of previously charged-off loans, and from improved performance and quality of the loan portfolio resulting in the recovery of any related excess allowance. Effective January 1, 1995, the Banks adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure." Adoption of SFAS No. 114 and SFAS No. 118 was not material to the financial condition or results of operations of the Banks. As of December 31, 1996 and 1995, the Banks have impaired loans of $1,195,000 and $1,177,000, respectively. The allowance for loan losses related to those loans was $97,300 and $169,600 at December 31, 1996 and 1995, respectively. The average recorded investment in impaired loans during the year ended December 31, 1996 and 1995 was $1,186,000 and $1,123,500, respectively. Interest income of approximately $478,000 and $308,000 on impaired loans was recognized for cash payments received during the year ended December 31, 1996 and 1995. The Banks' nonperforming loans at December 31, 1996 consisted of $182,000 in accruing loans over 90 days past due and $1,195,000 in nonaccrual loans. The reduction in interest income associated with nonaccrual loans during the year ended December 31, 1996, 1995 and 1994 was approximately $187,000, $115,000 and $117,000, respectively. 5. BANK PREMISES AND EQUIPMENT The components of bank premises and equipment included in the consolidated balance sheets were as follows:
DECEMBER 31, 1996 1995 ---------- ---------- (Dollars in Thousands) Land $ 1,157 $ 1,012 Buildings and Leasehold Improvements 5,894 5,512 Equipment and Furniture 4,540 4,080 ---------- ---------- 11,591 10,604 Less: Accumulated Depreciation 4,613 4,035 ---------- ---------- $6,978 $6,569 ========== ==========
Depreciation expense totaled $705,000, $427,000 and $339,000 for the years ended December 31, 1996, 1995, and 1994, respectively. 37 38 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER ASSETS Other assets include the following:
DECEMBER 31, 1996 1995 ---------- ---------- (Dollars in Thousands) Accrued Interest Receivable $ 2,951 $ 2,512 Deferred Tax Asset 2,645 2,725 Other Real Estate Owned 715 888 Goodwill 2,052 -- Other 401 332 ---------- ---------- Total $ 8,764 $ 6,457 ========== ==========
Other real estate owned is as follows:
DECEMBER 31, 1996 1995 ---------- ---------- (Dollars in Thousands) Original recorded amount $ 715 $ 4,779 Allowance for losses -- (3,891) ---------- ---------- $ 715 $ 888 ========== ==========
Changes in the allowance for losses on other real estate owned are as follows:
DECEMBER 31, 1996 1995 ---------- ---------- (Dollars in Thousands) Balance at Beginning of Year $ 3,891 $ 3,841 Provision for Losses on Other Real Estate Owned -- 50 Disposition of Property (3,891) -- ---------- ---------- Balance at End of Year $ -- $ 3,891 ========== ==========
7. DEPOSITS Included in total deposits are $83,677,000 and $77,731,000 of Mexican National deposits at December 31, 1996 and 1995, respectively. The aggregate amount of short-term jumbo certificates of deposit (CDs), each with a minimum denomination of $100,000, was approximately $50,481,000 and $37,745,000 at December 31, 1996 and 1995, respectively. At December 31, 1996, the scheduled maturities of CDs are as follows (Dollars in thousands): Year ending December 31, 1997 $ 127,325 1998 6,357 1999 1,337 2000 229 2001 and thereafter 19 --------- $ 135,267 =========
38 39 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. OTHER DEBT As a result of the Luling acquisition (see Note 2), the Company has entered into short term note payables with three individuals in the aggregate amount of $3,638,746. The notes bear interest rates of 5%. The maturity dates of the notes are January 2, 1997. Subsequent to December 31, 1996, these notes were paid in full on their due date with funds received from the Company's line of credit. In May 1994, Laredo borrowed $200,000 from the Federal Home Loan Bank of Dallas. This advance bears an interest rate of 7.49% and has a maturity date of June 1999. Principal and interest payments are due monthly in the approximate amount of $1,600 with the remaining balance due at maturity. The outstanding balance at December 31, 1996 and 1995 was approximately $188,000 and $193,000, respectively. In July 1995, $175,000 was advanced to Laredo from the Federal Home Loan Bank of Dallas. This note bears an interest rate of 6.393% and has a maturity date of August 2015. Principal and interest payments are due monthly in the approximate amount of $1,300 with the remaining balance due at maturity. The outstanding balance at December 31, 1996 and 1995 was approximately $169,000 and $173,500, respectively. Both of these loans are secured by a certain block of fixed rate mortgage loans carried by Laredo. On September 30, 1996, the Company executed a $16 million line of credit with Texas Independent Bank in Dallas. The line bears a variable interest rate at New York prime (8.25% at December 31, 1996). Interest is due quarterly with principal due at maturity. The line matures on September 30, 1997. The line of credit is collateralized by the common stock of NBT of Delaware, Inc. and the stock of the subsidiary banks. Subsequent to December 31, 1996, the Company advanced $3 million on the line to pay off the short term notes payable related to the Luling Bancshares acquisition. Aggregate maturities at December 31, 1996 are as follows: Year ending December 31, 1997 $3,649,000 1998 11,300 1999 182,000 2000 6,000 2001 and thereafter 147,446 ---------- $3,995,746 ==========
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 18 as financial instruments with off- balance sheet risk. The Company and its wholly-owned subsidiaries are defendants in legal actions arising from normal business activities. Management believes that those actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's financial position, results of operations, cash flows, or liquidity. The Company has a forty-two month sub-lease agreement for general corporate office space. The commencement date of the sub-lease was July 1, 1996. The Company also leases property which is used as a data processing center. The commencement date of this lease was October 1, 1995. The Company has also entered into an eighteen month lease for a loan production office. The commencement date of the lease was July 1, 1996. The Company also has an indefinite lease with Laredo with monthly lease payments of $1,500. Gross rental expense for the year ended December 31, 1996, 1995, and 1994 was $76,040, $121,897, and $0, respectively. 39 40 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum lease payments at December 31, 1996 are as follows: Year ending December 31, 1997 $ 86,625 1998 68,820 1999 60,000 2000 18,000 --------- $ 233,445 =========
10. REDEEMABLE PREFERRED STOCK During 1994, the Company issued a series of 715,000 shares of preferred stock, designated as Series B Convertible Preferred Stock, with a par value of $.01 per share and a redemption price of $1 per share. This stock was issued pursuant to a Stock Swap Agreement effective December 31, 1994, whereby the holder of two subordinated promissory notes issued by the Company exchanged the notes for 715,000 shares of the Company's Series B Convertible Preferred Stock. The 715,000 shares were converted to Common Stock at a conversion ratio of one share of Common Stock for 5.59998 shares of Series B Convertible Preferred Stock during 1996. 11. CONVERTIBLE PREFERRED STOCK The Company is authorized to issue 20,000,000 shares of preferred stock with a par value of $.01 per share. During 1992, the Company issued a series of 2,604,153 shares of preferred stock, designated as Series A Convertible Preferred Stock. On March 31, 1994, 401,595 shares represented by senior debentures not surrendered to the Company by the holders for conversion into Series A Convertible Preferred Stock reverted to the Company as granted by a motion by the United States Bankruptcy Court of Western District of Texas, San Antonio Division. During 1995 and 1994, 922,976 and 9,243 shares, respectively, of Series A Convertible Preferred Stock were converted to Common Stock. In late 1994, the Company made available to the Series A Preferred shareholders a tender offer to sell their shares at $.70 per share. As a result of this tender offer, 537,305 shares were tendered for cash. In November 1995, the Company notified all remaining Series A Preferred shareholders that the remaining shares would be redeemed by the Company on December 1, 1995 at $1 per share. As a result, 733,034 shares were redeemed and no Series A Preferred Stock was outstanding at December 31, 1995. 40 41 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. BOOK VALUE PER SHARE Book value per share has been calculated as follows:
Series B Convertible Preferred Common Stock Stock --------------- --------------- DECEMBER 31, 1996: Par $ -- $ 4,659 Ascribed Surplus -- 16,340,541 Retained Earnings -- 25,320,787 Net Unrealized Appreciation on Securities Available for Sale -- 1,243,018 --------------- --------------- -- 42,909,005 Number of Shares Outstanding / -- / 4,658,734 --------------- --------------- $ -- $ 9.21 =============== =============== DECEMBER 31, 1995: Par $ 7,150 $ 4,530 Ascribed Surplus 707,850 15,618,854 Retained Earnings -- 19,610,867 Net Unrealized Appreciation on Securities Available for Sale -- 743,174 --------------- --------------- 715,000 35,977,425 Number of Shares Outstanding / 715,000 / 4,529,855 --------------- --------------- $ 1.00 $ 7.94 =============== ===============
Each share of Series B Convertible Preferred Stock was convertible, at the option of the holder, into Common Stock. The conversion ratio was one share of Common Stock for 5.59998 shares of Series B Convertible Preferred Stock. Had the holders exercised that right at December 31, 1995, there would have been 4,657,534 Common Shares outstanding with a book value of $7.88 per share. 13. EMPLOYEE BENEFITS The Company has a defined contribution profit sharing 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. Profit sharing expense for the years ended December 31, 1996, 1995 and 1994 totaled $49,515, $63,778 and $71,172, respectively. 14. MANAGEMENT AND DIRECTOR STOCK OPTION PLAN Effective March 31, 1994, the Company adopted the 1994 Nonqualified Stock Option Plan (the 1994 Plan). Options representing 80,000 shares available under the 1992 Plan were transferred to the 1994 Plan. In addition, 8,334 shares representing unexercised options under the 1992 Plan of an officer who resigned, were added to the 1994 Plan. The maximum number of shares for which the options could be granted and sold under the 1994 Plan was 88,334 shares of Common Stock. The 1994 Plan shall be administered by the Board of Directors of the Company, or an administrator designated by the Board of Directors. The Board of Directors or the administrator is authorized to determine the terms and conditions of all options granted. The Board of Directors or the applicable administrator may adopt such rules and regulations for carrying out the 1994 Plan as it may deem best. 41 42 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Each option under the 1994 Plan shall terminate and be unexercisable upon the date specified by the applicable administrator, however, this date shall not exceed ten years from the grant date of the options. In 1994, options representing 29,000 shares included in the 1994 Plan were granted to certain officers and employees of the Company at an option price of $5.68 per share. The grant date of these options is March 31, 1994, with a vesting period of 20% per year for five years. In 1996, 1,200 of these options were exercised. None of these granted options were exercised in 1995 or 1994. At December 31, 1994, there were 59,334 shares as to which options could be granted in the future under the 1994 Plan. Effective March 1, 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan), which includes the "Outside Director's Stock Option Agreement" and the "Nonqualified Stock Option Agreement." The maximum number of shares for which options could be granted or sold under the 1995 Plan was 214,000 shares of Common Stock. This number is limited by the 29,000 options which were granted under the 1994 Plan. Shares of Common Stock subject to options which for any reason expire or terminate unexercised, and shares which are reacquired by the Company after issuance under the 1995 Plan, may again be available for grant or purchase under the 1995 Plan. The number of shares of Common Stock available for issuance under the 1995 Plan are subject to adjustment in the event of certain corporate transactions, including stock dividends, mergers, recapitalizations, or similar events. In 1996, options representing 1,800 shares included in the 1995 plan were reacquired by the Company. On March 1, 1996, options representing 14,000 shares were granted to the outside directors of the Company at an option price of $11.25 per share. On September 30, 1996, options representing 5,700 shares were granted to certain officers of the Company at an option price of $11.00 per share. In 1995, options representing 103,000 shares included in the 1995 Plan were granted to certain directors and officers of the Company at an option price of $6.25 per share. The grant date of these options is March 1, 1995. Under the "Outside Director's Stock Option Agreement," the outside director shall have a right to exercise the option at any time after the date of grant or the date the Company's shareholders approve the 1995 Plan, whichever is later, but the option may not be exercised, in whole or in part, after the seventh anniversary of the date of grant. Under the "Nonqualified Stock Option Agreement," options are exercisable in one-third increments commencing one year after the grant date. The option, however, may not be exercised, in whole or in part, after five years from the date of grant. None of these granted options were exercised in 1996 or 1995. At December 31, 1996, there were 64,100 shares as to which options could be granted in the future under the 1995 Plan. Following is a summary of changes in the number of shares of Common Stock represented by options granted:
Number of Shares ------- Options outstanding as of December 31, 1994 29,000 Options granted under the 1995 Plan (exercisable at $6.25 per share) 103,000 ------- Options outstanding as of December 31, 1995 132,000 ------- Options granted under the 1995 Plan (exercisable at $11.25 and $11.00) 19,700 Options exercised in 1996 (1,200) Options reacquired (1,800) ------- Options outstanding as of December 31, 1996 148,700 =======
42 43 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1996, 1995 and 1994. 15. OTHER OPERATING EXPENSES Other operating expenses include the following:
DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ (Dollars in Thousands) Data processing expenses $ 418 $ 648 $ 630 FDIC insurance 6 257 449 Insurance 109 122 132 Office supplies 375 295 250 Postage and courier 379 333 258 Professional fees 689 833 631 Goodwill amortization 35 -- -- Miscellaneous 1,183 1,043 773 ------ ------ ------ Total $3,194 $3,531 $3,123 ====== ====== ======
16. FEDERAL INCOME TAX The provision for federal income tax consisted of the following:
YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------ ------ ------ (Dollars in Thousands) Currently Paid or Payable $ 145 $ 121 $ 120 Deferred Expense 61 38 320 ------ ------ ------ $ 206 $ 159 $ 440 ====== ====== ======
The provision for federal income tax is less than that computed by applying the federal statutory rate of 34% as indicated in the following analysis:
YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (Dollars in Thousands) Tax Based on Statutory Rate $ 2,011 $ 2,062 $ 1,841 Effect of Tax-exempt Income (33) (28) (27) Interest and Other Nondeductible Expenses 7 98 163 Decrease in Deferred Tax Asset Valuation Allowance (1,949) (2,082) (1,554) Alternative Minimum Tax 132 125 120 Goodwill 12 -- -- Other - Net 26 (16) (103) ------- ------- ------- $ 206 $ 159 $ 440 ======= ======= =======
43 44 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the deferred income tax asset included in other assets were as follows:
YEARS ENDED DECEMBER 31, ------------------------ 1996 1995 -------- -------- (Dollars in Thousands) Deferred Tax Assets Related to: Net Operating Loss Carryforward $ 36,478 $ 38,299 Other Real Estate Owned 71 73 Allowance for Loan Losses 1 24 Securities Valuation Reserve 72 97 Non-accrual Loan Interest 69 -- Other 76 37 -------- -------- 36,767 38,530 Less Valuation Allowance 33,403 35,352 -------- -------- Total Deferred Tax Assets 3,364 3,178 -------- -------- Deferred Tax Liabilities Related to: Allowance for Loan Losses (122) -- Depreciation (121) (47) Bond Accretion (83) (40) Other (211) -- Net Unrealized Appreciation on Securities Available for Sale (182) (366) -------- -------- Total Deferred Tax Liabilities (719) (453) -------- -------- Net Deferred Tax Asset $ 2,645 $ 2,725 ======== ========
For federal income tax purposes, the Company had approximately $107 million in net operating loss carrryforwards as of December 31, 1996 which will be available to reduce income tax liabilities in future years. If unused, approximately $103 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, 1996 and 1995, the deferred tax asset valuation allowance was reduced by $1,949,000 and $2,082,000, 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 $2,645,000 at December 31, 1996. 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. 44 45 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. 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, 1996 and 1995 was $3,702,000 and $4,847,000. During the year ended December 31, 1996 and 1995, new loans to such related parties amounted to $1,580,000 and $660,000 and repayments amounted to $2,725,000 and $742,000. 18. 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. 45 46 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The estimated fair values of the Company's financial instruments were as follows:
DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------ ------------------------ (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial Assets: Cash and Due from Banks $ 17,305 $ 17,305 $ 14,707 $ 14,707 Interest Bearing Deposits in Banks 529 529 193 193 Federal Funds Sold 22,650 22,650 19,845 19,845 Securities Available for Sale 88,193 88,193 66,864 66,864 Securities Held to Maturity 72,649 73,362 65,775 67,079 Loans - net 110,850 111,114 89,682 88,877 Accrued Interest Receivable 2,951 2,951 2,512 2,512 Financial Liabilities: Demand Deposits 46,617 46,617 37,706 37,706 NOW, Money Market, and Savings Accounts 97,871 97,871 83,490 83,490 Time Deposits 135,267 136,032 110,741 111,065 Accrued Interest Payable 865 865 682 682 Other Debt 3,995 3,995 366 366
The fair value of off-balance sheet assets and liabilities is not considered significant. A summary of the notional amounts of the Bank's financial instruments with off-balance sheet risk at December 31, 1996 is as follows:
Notional Amount --------------- Commitments to Extend Credit $7,888,000 Standby Letters of Credit 711,000
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. 46 47 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow information is as follows:
YEARS ENDED DECEMBER 31, 1996 1995 1994 ---------------------------- (Dollars in Thousands) Cash paid: Interest $7,988 $7,267 $4,875 Income taxes 126 166 61 Non-cash items: Loans originated to facilitate the sale of foreclosed assets 130 416 323 Loan foreclosures 66 385 104
19. 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 South 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. 20. 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 I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Company and its subsidiary banks meet all capital adequacy requirements to which it is subject. As of December 31, 1996, 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 I risk-based, and Tier I 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 48 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.
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE AS OF DECEMBER 31, 1996: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- --------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- Total Capital to Risk Weighted Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $41,100 34.84% $ 9,439 8.00% $11,799 10.00% Greater Greater than or than or equal to equal to Eagle Pass 17,305 34.60 4,001 8.00 5,000 10.00 Greater Greater than or than or equal to equal to Laredo 7,645 19.67 3,110 8.00 3,887 10.00 Greater Greater than or than or equal to equal to Rockdale 7,247 46.14 1,257 8.00 1,571 10.00 Greater Greater than or than or equal to equal to Luling 3,108 18.35 1,355 8.00 1,693 10.00 Tier 1 Capital to Risk Weighted Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $39,614 33.58% $ 4,719 4.00% $ 7,079 6.00% Greater Greater than or than or equal to equal to Eagle Pass 16,674 33.34 2,000 4.00 3,001 6.00 Greater Greater than or than or equal to equal to Laredo 7,159 18.42 1,555 4.00 2,332 6.00 Greater Greater than or than or equal to equal to Rockdale 7,051 44.89 628 4.00 942 6.00 Greater Greater than or than or equal to equal to Luling 2,896 17.10 677 4.00 1,016 6.00 Tier 1 Capital to Average Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $39,614 13.67% $11,588 4.00% $14,486 5.00% Greater Greater than or than or equal to equal to Eagle Pass 16,674 10.27 6,496 4.00 8,120 5.00 Greater Greater than or than or equal to equal to Laredo 7,159 11.63 2,462 4.00 3,078 5.00 Greater Greater than or than or equal to equal to Rockdale 7,051 13.32 2,118 4.00 2,647 5.00 Greater Greater than or than or equal to equal to Luling 2,896 11.25 1,030 4.00 1,288 5.00
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE AS OF DECEMBER 31, 1995: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ----------------------- --------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- ----- -------- ----- Total Capital to Risk Weighted Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $36,617 37.18% $ 7,879 8.00% $ 9,849 10.00% Greater Greater than or than or equal to equal to Eagle Pass 16,272 35.10 3,709 8.00 4,636 10.00 Greater Greater than or than or equal to equal to Laredo 7,404 21.32 2,780 8.00 3,475 10.00 Greater Greater than or than or equal to equal to Rockdale 6,917 41.47 1,334 8.00 1,668 10.00 Tier 1 Capital to Risk Weighted Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $35,234 35.77% $ 3,940 4.00% $ 5,909 6.00% Greater Greater than or than or equal to equal to Eagle Pass 15,687 33.83 1,855 4.00 2,782 6.00 Greater Greater than or than or equal to equal to Laredo 6,969 20.06 1,390 4.00 2,085 6.00 Greater Greater than or than or equal to equal to Rockdale 6,706 40.21 667 4.00 1,001 6.00 Tier 1 Capital to Average Assets: Greater Greater than or than or equal to equal to CONSOLIDATED $35,234 13.28% $10,611 4.00% $13,263 5.00% Greater Greater than or than or equal to equal to Eagle Pass 15,687 10.51 6,089 4.00 7,611 5.00 Greater Greater than or than or equal to equal to Laredo 6,969 11.93 2,336 4.00 2,920 5.00 Greater Greater than or than or equal to equal to Rockdale 6,706 12.88 2,083 4.00 2,603 5.00
48 49 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Condensed balance sheet information of National Bancshares Corporation of Texas (The Parent Company) at December 31, 1996 and 1995, and the related statements of income and cash flows for the years then ended are as follows: NATIONAL BANCSHARES CORPORATION OF TEXAS (PARENT COMPANY ONLY) BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS)
ASSETS 1996 1995 ------- ------- Cash $ 1,467 $ 808 Interest Bearing Deposits in Banks 32 315 Securities Available for Sale -- 1,062 Investment in Subsidiaries 41,390 30,072 Fixed Assets - net 36 574 Other Real Estate Owned -- 249 Federal Tax Benefits Due 599 632 Deferred Tax Asset 3,074 2,947 Other Assets 136 120 ------- ------- $46,734 $36,779 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable $ 104 $ 50 Notes Payable - net 3,639 -- Accrued Interest Payable and Other Liabilities 82 37 ------- ------- Total Liabilities 3,825 87 ------- ------- Redeemable Preferred Stock - Series B Convertible -- 715 ------- ------- Common Stock 5 4 Surplus - Common Stock 16,341 15,619 Retained Earnings 25,321 19,611 Net Unrealized Appreciation on Securities Available for Sale, net of Tax of $182 in 1996 and $366 in 1995 1,242 743 ------- ------- Total Stockholders' Equity 42,909 35,977 ------- ------- $46,734 $36,779 ======= =======
49 50 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATIONAL BANCSHARES CORPORATION OF TEXAS (PARENT COMPANY ONLY) STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ---------- ---------- ---------- Income: Dividends from Subsidiaries $ 2,697 $ -- $ 3,372 Undistributed Earnings of Subsidiaries 1,543 4,613 975 Other Income 352 90 8 Net Realized Gains on Sales of Securities 11 1 -- Gain on Sale of Other Real Estate Owned 17 -- 41 Interest on Deposits in Banks 14 18 9 Interest and Dividends on Investment Securities 47 154 46 ---------- ---------- ---------- 4,681 4,876 4,451 ---------- ---------- ---------- Expenses: Salaries and Employee Benefits 404 349 294 Occupancy and Equipment Expenses 217 131 57 Interest Expense 47 141 525 Other Operating Expenses 298 547 367 ---------- ---------- ---------- 966 1,168 1,243 ---------- ---------- ---------- Income Before Federal Income Tax and Extraordinary Item 3,715 3,708 3,208 Federal Income Tax Benefit 1,995 2,197 1,768 ---------- ---------- ---------- Income Before Extraordinary Item 5,710 5,905 4,976 ---------- ---------- ---------- Extraordinary Item - Gain on Extinguishment of Debt, net of income tax of $4 -- 219 -- ---------- ---------- ---------- Net Income $ 5,710 $ 6,124 $ 4,976 ========== ========== ========== Earnings Per Share: Income Before Extraordinary Item $ 1.21 $ 1.23 $ 1.25 Extraordinary Item -- 0.05 -- ---------- ---------- ---------- Net Income $ 1.21 $ 1.28 $ 1.25 ========== ========== ========== Weighted Average Number of Common Shares and Common Equivalent Shares Outstanding 4,715,010 4,785,132 3,988,185 ========== ========== ==========
50 51 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NATIONAL BANCSHARES CORPORATION OF TEXAS (PARENT COMPANY ONLY) STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
1996 1995 1994 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 5,710 $ 6,124 $ 4,976 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries (4,240) (4,613) (4,347) Dividends received 2,697 -- 3,372 Depreciation and amortization 109 (33) 346 Net realized gains on securities available for sale (11) (1) -- Direct write-downs of other real estate owned -- 50 -- Gain on sale of other real estate owned and other assets (17) -- (41) Extraordinary gain on prepayment of debt (gross) -- (223) -- (Increase) decrease in accrued interest receivable and other (307) (390) 388 Increase (decrease) in accrued interest payable and other 99 (107) (15) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,040 807 4,679 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease (increase) in interest bearing accounts 283 (36) (279) Purchases of securities available for sale (3,657) (6,425) -- Proceeds from sales of securities available for sale 1,042 2,377 -- Proceeds from maturities of securities available for sale 74 3,334 -- Purchases of securities to be held to maturity -- -- (6,566) Proceeds from maturities of securities to be held to maturity -- 5,566 1,000 Capital expenditures (188) (608) (1) Proceeds from sale of other real estate owned 266 -- 498 Net payments for investment in subsidiary (1,209) -- -- ------- ------- ------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (3,389) 4,208 (5,348) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of Common Stock -- -- 4,975 Proceeds from advances on short term debt 140 -- -- Principal payments on other debt (140) (4,037) (3,890) Exercise of Common Stock options 8 -- 94 Redemption of Series A Preferred Stock -- (1,111) -- ------- ------- ------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 8 (5,148) 1,179 ------- ------- ------- Net increase (decrease) in cash and due from banks 659 (133) 510 Cash and due from banks at beginning of year 808 941 431 ------- ------- ------- Cash and due from banks at end of year $ 1,467 $ 808 $ 941 ======= ======= =======
51 52 ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item with respect to directors of the Company as well as executive officers who are also directors of the Company is incorporated by reference from the Company's definitive proxy statement for its 1996 Annual Meeting of Shareholders to be held May 16, 1997. 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. FRANK D. BARROW, age 52, has been Chairman of the Board and President of NBC-Rockdale since 1986. WILLIAM D. HALES, age 50, has been President of FNB-Luling since March 1988. The Company also employs six 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: N. VICTOR FELAN, age 39, has been Senior Vice President of NBC-Eagle Pass since April 1996. Mr. Felan oversees the San Antonio loan production office. Formerly, Mr. Felan was Vice President of First Commercial Bank, Sequin, Texas from January 1994 until April 1996. In addition, Mr. Felan was Senior Vice President of International Bank of Commerce, Laredo, Texas from 1986 to 1994. MARIO J. GONZALEZ, age 33, has been Executive Vice President of NBC-Laredo since April 1993. Formerly, Mr. Gonzalez was a National Bank Examiner with the OCC, from October 1986 until April 1993. R. SAMUEL JUVE, age 44, has been an Executive Vice President of NBC-Eagle Pass, since April 1993. Mr. Juve was formerly Senior Vice President of NBC-Eagle Pass from February 1990 until March 1993. DWAYNE J. KOLLY, age 44, has been Senior Vice President and Cashier for NBC-Laredo since October 1993. Formerly, Mr. Kolly was Vice President and Cashier of First National Bank, Uvalde, Texas, from 1986 to 1993. ANNE R. RENFROE, age 32, 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. Ms. Renfroe is a certified public accountant. GEORGE W. SCHUH, age 50, 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. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Company's definitive proxy statement for its 1997 Annual Meeting of Shareholders to be held May 16, 1997. 52 53 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 1997 Annual Meeting of Shareholders to be held May 16, 1997. 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 1997 Annual Meeting of Shareholders to be held May 16, 1997. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K a.EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 2.1 Third Amended Joint Plan of Reorganization, as approved by U.S. Bankruptcy Court, effective May 26, 1992 ........................................................................................ * 3.1 Restated Articles of Incorporation and Statement of Relative Rights and Preferences of Preferred Stock, filed December 29, 1994 ................................................................... ** 3.2 Bylaws of the Company.......................................................................................... * 10.1 Employment Agreement between the Company and Jay H. Lustig, dated October 1, 1992 ...................................................................... * 10.2 Employment Agreement between the Company and Marvin E. Melson dated July 26, 1994 ...................................................................... ** 10.3 1994 Non-Qualified Stock Option Plan, adopted March 30, 1994 ........................................................................................ * 10.4 Exhibit number not used........................................................................................ 10.5 Exhibit number not used........................................................................................ 10.6 Office lease for 111 Soledad, San Antonio, Texas............................................................... 10.7 Office Lease for 613 N.W. Loop 410, San Antonio,Texas.......................................................... 10.8 Sublease for 100 Wilshire Boulevard, Santa Monica, California.................................................. 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................................... ***
53 54 10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan........................................ *** 11.1 Computation of Earnings Per Share.............................................................................. 21.1 Subsidiaries of the Company.................................................................................... 27.1 Financial Data Schedule ....................................................................................... 99.1 First Amended Disclosure Statement with Respect to the Second Amended Joint Plan of Reorganization .................................................................................. **
* Previously filed on November 14, 1994, with the Company's Form 10-SB. ** Previously filed on March 2, 1995, with the Company's Amendment No1 to Form 10-SB. *** Previously filed on June 19, 1995, with the Company's Form SB-2, File no. 33-93638. B.REPORTS ON FORM 8-K No reports on Form 8-K were filed with the Securities and Exchange Commission during the last quarter of the period covered by this Report. 54 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, National Bancshares Corporation of Texas has duly caused this report to be signed on its behalf by the undersigned, this 25th day of March, 1997, 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.
SIGNATURE TITLE DATE /s/ Jay H. Lustig Chairman of the Board March 25, 1997 - ----------------- Jay H. Lustig /s/ Marvin E. Melson Director, President March 25, 1997 - -------------------- Chief Executive Officer Marvin E. Melson /s/ H. Gary Blankenship Director March 25, 1997 - ------------------------ H. Gary Blankenship /s/ John W. Lettunich Director March 25, 1997 - --------------------- John W. Lettunich /s/ Charles T. Meeks Director March 25, 1997 - -------------------- Charles T. Meeks
55 56 EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT ------ ----------------------- 2.1 Third Amended Joint Plan of Reorganization, as approved by U.S. Bankruptcy Court, effective May 26, 1992 ........................................................................................ * 3.1 Restated Articles of Incorporation and Statement of Relative Rights and Preferences of Preferred Stock, filed December 29, 1994 ................................................................... ** 3.2 Bylaws of the Company.......................................................................................... * 10.1 Employment Agreement between the Company and Jay H. Lustig, dated October 1, 1992 ...................................................................... * 10.2 Employment Agreement between the Company and Marvin E. Melson dated July 26, 1994 ...................................................................... ** 10.3 1994 Non-Qualified Stock Option Plan, adopted March 30, 1994 ........................................................................................ * 10.4 Exhibit number not used........................................................................................ 10.5 Exhibit number not used........................................................................................ 10.6 Office lease for 111 Soledad, San Antonio, Texas............................................................... 10.7 Office Lease for 613 N.W. Loop 410, San Antonio,Texas.......................................................... 10.8 Sublease for 100 Wilshire Boulevard, Santa Monica, California.................................................. 10.9 Form of Stock Subscription Agreement for 1994 Private Placement................................................ *** 10.10 1995 Stock Option Plan......................................................................................... *** 10.11 Form of Outside Director's Stock Option Agreement for 1995 Stock Option Plan................................... *** 10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan........................................ *** 11.1 Computation of Earnings Per Share.............................................................................. 21.1 Subsidiaries of the Company.................................................................................... 27.1 Financial Data Schedule ....................................................................................... 99.1 First Amended Disclosure Statement with Respect to the Second Amended Joint Plan of Reorganization .................................................................................. **
* Previously filed on November 14, 1994, with the Company's Form 10-SB. ** Previously filed on March 2, 1995, with the Company's Amendment No1 to Form 10-SB. *** Previously filed on June 19, 1995, with the Company's Form SB-2, File no. 33-93638. EX-10.6 2 OFFICE LEASE FOR 111 SOLEDAD, SAN ANTONIO, TX 1 Exhibit 10.6 LEASE AGREEMENT NATIONAL BANCSHARES CORPORATION OF TEXAS As Tenant and COMMERCE PLAZA INVESTORS, L.P. As Landlord July 25, 1995 2 BASIC LEASE INFORMATION Tenant: National Bancshares Corporation of Texas, a Texas Corporation Notification Address: P. O. Box 1511 Laredo, Texas 78042 Attention: Marvin E. Melson Facsimile Number: (210) 717-2734 Landlord: Commerce Plaza Investors, L.P. a Delaware Limited Partnership Notification Address: 3030 LBJ Freeway, Suite 1500 Dallas, Texas 75234 Attention: Leasing Director Facsimile Number: (214) 888-8029 Building: Commerce Plaza office building, located at 111 Soledad, San Antonio, Texas Premises: Suite No. 875, containing 1,176 square feet of Net Rentable Area in the Building, as shown on the floor plan attached to this Lease as Exhibit A. Term: The period beginning on the Commencement Date and ending at 6:00 p.m. on the last day of the twenty-fourth (24th) full calendar month after the Commencement Date. Thus, unless the Commencement Date falls on the first day of a calendar month, the Term will also include the initial partial calendar month immediately following the Commencement Date.
Monthly Base Rent: Months(1) Rate(2) Amount(3) Installment ------- ---- ---------- ------- 1 to 24 $9.00 $10,584.00 $882.00 --- -- ---- --------- ------ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ __ to __ $____ $_________ $______ ------------- (1)Full calendar months after the Commencement Date. For any initial partial calendar month, the monthly
3 installment of Base Rent will be the same as in the first full calendar month after the Commencement Date. (2)Per square foot of Net Rentable Area per annum. (3)Expressed on an annualized basis even though the applicable period may be longer or shorter than twelve months. Security Deposit: $882.00 Base Year: Calendar year 1995 Operating Costs Base Rate: The rate of Operating Costs per square foot of Net Rentable Area in the Building for the Base Year. Tax Costs Base Rate: The rate of Tax Costs per square foot of Net Rentable Area in the Building for the Base Year. Utilities Costs Base Rate: The rate of Utilities Costs per square foot of Net Rentable Area in the Building for the Base Year. Tenant Improvements: Any leasehold improvements installed in the Premises as of the date of this Lease, together with (and as altered by) the Work Letter Improvements, if any. Broker: D. B. Harrell Commercial Real Estate Services Guarantor: None
The Basic Lease Information is part of the Lease. Each term in the left column is used throughout the Lease as a defined term with the meaning stated in the Basic Lease Information. 4 LEASE AGREEMENT 1. PREMISES AND TERM 1.1 DEMISE OF PREMISES. Landlord demises to Tenant the Premises located in the Building, which is situated on the land described in Exhibit B (together with the Building and other improvements now or hereafter located thereon, the "Property"), and covenants that subject to the terms and conditions of this Lease, Tenant will quietly have, hold, and enjoy the Premises so long as Tenant pays Rent as required by this Lease and otherwise performs and complies with this Lease. Tenant accepts the Premises from Landlord in an "as is" condition (save only for the Work Letter Improvements, if any) without warranty of any kind except as may be expressly stated to the contrary in this Lease, and agrees to surrender the Premises to Landlord in the condition required by this Lease on the expiration of the Term or earlier termination of this Lease. So long as Tenant occupies the Premises, Tenant will have the nonexclusive right to use the lobbies, walks, parking facilities, drives, and other areas of the Property made available by Landlord from time to time for the common use of occupants of the Building. 1.2 TERM. The Term will commence on the date (the "Commencement Date") that is the earlier of (a) the Substantial Completion Date (as defined in the Work Letter attached as Rider 1), or (b) the date on which Tenant first begins to occupy the Premises; and unless terminated earlier pursuant to this Lease, the Term will expire at the time specified in the Basic Lease Information. On receipt from Landlord, Tenant must execute a declaration in the form of Exhibit C to confirm the date upon which the Commencement Date occurred. Pending resolution of any objections Tenant may have to the date reflected as the Commencement Date in the declaration, Rent must paid based on that date; and on resolution of Tenant's objections, an appropriate reduction or increase (without interest or penalty) be made in the next Monthly Rent Installment due. 1.3 AREA CALCULATIONS. All calculations of Usable Area and Net Rentable Area under this Lease will be made in accordance with the following definitions: (a) "Usable Area" means: (i) in the case of a full-floor space to be occupied by a single tenant, the entire area of the floor measured from the inside surface of the outer pane of glass and extensions of the plane thereof in non-glass areas to the inside surface of the opposite outer pane of glass and extensions of the plane thereof in non- glass areas, including all On-Floor Common Area and excluding only Service Area and General Common Area; and (ii) in the case of space on a floor to be occupied by more than one (1) tenant, the area enclosed by the inside surface of the outer pane of glass and extensions of the plane thereof in non-glass areas and by demising walls (measured from the midpoint of demising walls), excluding only Service Area, On-Floor Common Area, and General Common Area. No deduction will be made for 5 columns or projections necessary to the Building. (b) "Net Rentable Area" means: (i) in the case of a full-floor space to be occupied by a single tenant, the Usable Area of the floor plus an allocation of General Common Area; and (ii) in the case of space on a floor to be occupied by more than one (1) tenant, the Usable Area of the space plus an allocation of both General Common Area and On-Floor Common Area. (c) "Service Area" means an area within vertical penetrations such as (and measured from the midpoint of the walls enclosing) Building stairs, elevator shafts, fire towers, flues, vents, stacks, vertical pipe shafts, and vertical ducts, but excluding structural columns and areas for the specific use of any tenant (such as special stairs or elevators). (d) "On-Floor Common Area" means the total area on a floor of a Building located within (and measured from the midpoint of the walls enclosing or inside surface of the outer pane of glass enclosing) public corridors, elevator foyers, rest rooms, mechanical rooms, janitor closets, telephone, electrical and equipment rooms, and other similar facilities for the use of all tenants on that floor. The total On-Floor Common Area of a floor to be occupied by more than one (1) tenant will be allocated to the Net Rentable Area of a particular space on that floor in proportion to the Usable Area of that space relative to the total Usable Area on that floor. (e) "General Common Area" means the total area of the Building within (and measured from the midpoint of the walls enclosing or from the inside surface of the outer pane of glass enclosing, or extensions of the plane thereof in non-glass areas) the Building's elevator machine rooms, main mechanical rooms, loading dock facilities, telephone switch rooms, main electrical rooms, public lobbies, engineering, security, postal and cleaning areas, and other areas not leased or held for lease within the Building, but which are necessary or desirable for the proper utilization of the Building generally or to Provide services to the Building generally. The total General Common Area of the Building will be allocated to the Net Rentable Area of a particular space in proportion to the Usable Area of that space relative to the total Usable Area of the Building. 1.4 ADJUSTMENT OF NET RENTABLE AREA. The Net Rentable Area of the Premises will not be adjusted as a result of variations resulting from initial construction of any Work Letter Improvements. If the Net Rentable Area of the Premises or Building changes for any reason, any Rent calculations based on Net Rentable Area will be adjusted accordingly effective as of Tenant's receipt of written notice from Landlord of the adjustment and the reason therefor. Tenant may object to errors in the adjustment by Landlord only if Tenant notifies Landlord in writing within thirty (30) days 2 6 thereafter of the specific errors made by Landlord. Pending resolution of any such objections by Tenant, Rent must be paid as adjusted by Landlord based on the change in Net Rentable Area; and on resolution of Tenant's objections, an appropriate reduction or increase (without interest or penalty) will be made in the next Monthly Rent Installment due. 1.5 RELOCATION OF THE PREMISES. Upon written notice to Tenant, Landlord may substitute for the Premises other space in the Building of substantially the same Net Rentable Area as the Premises with leasehold improvements that, as nearly as practical, are substantially the same as the Tenant Improvements initially installed in the Premises. Within sixty (60) days after Landlord's written request, Tenant must execute an amendment to this Lease whereby all references to the Premises in this Lease are changed to refer to the space substituted for the Premises, Base Rent is adjusted to reflect any resulting change in Net Rentable Area, and all other provisions of this Lease remain unchanged. Landlord will reimburse Tenant for all reasonable and documented costs incurred to third parties as a direct and necessary result of Tenant's relocation to the space substituted for the Premises, including expenses for moving property, reconnecting equipment, and reprinting stationery. Landlord agrees to relocate Tenant's furnishings and equipment during nonbusiness hours and over the course of a weekend. 1.6 ALTERATIONS OF THE PROPERTY. Landlord may (without unreasonable interference with Tenant's use of the Premises) make alterations, additions, or improvements to the Building and other parts of the Property from time to time, enter upon the Premises as necessary therefor, and close or restrict access to portions of the Building or other portions of the Property for any reason. Landlord may change the name or address of the Building. 2. RENT 2.1 PAYMENT OF RENT. On or before the first day of each calendar month throughout the Term, Tenant must pay Landlord in advance without demand or notice the "Monthly Rent Installment" consisting of the total of (a) the monthly installment of Base Rent specified in the Basic Lease Information for the applicable calendar month, (b) one-twelfth (1/12th) of the Base Rent Adjustment as estimated by Landlord for the applicable calendar year, and (c) any Monthly Parking Charge. On Tenant's execution of this Lease, Tenant must pay Landlord one (1) month's Base Rent in the amount of the monthly installment of Base Rent in effect for the first calendar month of the Term to be applied to the First full Monthly Rent Installment. If the Commencement Date falls on other than the first day of a calendar month, then on the Commencement Date Tenant must pay Landlord a prorated portion of one (1) month's Monthly Rent Installment based on the number of days elapsed during the Term in that month. All sums of money payable by Tenant to Landlord 3 7 pursuant to this Lease constitute rent, and all such sums, together with the Monthly Rent Installments, are referred to generically in this Lease as "Rent." Except as expressly stated to the contrary in this Lease, all Rent is payable to Landlord without abatement, set-off, or counterclaim at Landlord's Notification Address (or at any other address that Landlord may designate in writing from time to time). 2.2 BASE RENT ADJUSTMENT. The "Base Rent Adjustment" for each calendar year will equal the product of (a) the Net Rentable Area of the Premises, times (b) a rate per annum per square foot of Net Rentable Area equal to the sum of (i) the excess, if any, of the rate of Operating Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Operating Costs Base Rate, (ii) the excess, if any, of the rate of Tax Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Tax Costs Base Rate, and (iii) the excess, if any, of the rate of Utilities Costs per square foot of Net Rentable Area in the Building for the applicable calendar year over the Utilities Costs Base Rate. Effective on any change in the Net Rentable Area of the Premises or the Building in accordance with this Lease, the calculation of the Base Rent Adjustment will change accordingly. The Base Rent Adjustment will never lower Base Rent below the amount specified in the Basic Lease Information. Prior to January 1 of each calendar year after the Base Year (or as soon thereafter as reasonably practical), Landlord will provide an estimate of the Base Rent Adjustment for the forthcoming calendar year, and the Monthly Rent Installments due thereafter will be adjusted to reflect the Base Rent Adjustment so estimated by Landlord. By June 1 of each calendar year, or as soon thereafter as reasonably practical, Landlord will furnish to Tenant a statement (the "Annual Statement") showing in reasonable detail the calculation of the Base Rent Adjustment for the immediately preceding calendar year and comparing the actual Base Rent Adjustment to the estimated Base Rent Adjustment actually paid by Tenant. If the estimated Base Rent Adjustment paid is less than the actual Base Rent Adjustment reflected on the Annual Statement, Tenant must pay Landlord the amount of the deficit in a lump sum no later than thirty (30) days after receipt of the Annual Statement. If the estimated Base Rent Adjustment paid is greater than the actual Base Rent Adjustment reflected on the Annual Statement, Landlord will allow Tenant equal monthly credits against the Monthly Rent Installments due for the remainder of the then current calendar year in an aggregate amount equal to the surplus, or if Landlord so chooses, Landlord will pay Tenant the amount of the surplus in a lump sum within thirty (30) days after delivery of the Annual Statement. In calculating any surplus or deficit owed for any calendar year in which the Term expires, the Base Rent Adjustment will be prorated in proportion to the number of days elapsed during the Term in that calendar year. 4 8 2.3 OPERATING COSTS. "Operating Costs" means all expenses and costs of any kind incurred by Landlord in connection with the ownership, operation, management, maintenance, or repair of the Property other than Tax Costs, Utilities Costs, and Excluded Costs. Operating Costs include, without limitation, all of the following: (a) Wages, salaries, fees, and all related expenses (including without limitation, taxes, insurance, and benefits) of all personnel engaged in the operation, management, maintenance, or repair of the Property. (b) Costs of supplies, tools, equipment, and other materials, including replacement parts and equipment, whether purchased, leased, used, or consumed in the operation, maintenance, or repair of the Property. (c) Costs of maintenance or service agreements for the Property, including, without limitation, access control service, window cleaning, traffic control, janitorial service, landscape maintenance, and elevator maintenance. (d) Costs of operation, maintenance, or repair of interior and exterior common or public areas of the Property, including, without limitation, sidewalks, driveways, parking areas, and landscaping. (e) Legal or accounting costs for the Property, including, without limitation, a reasonable allocation of off- site costs and costs of annual audits of Operating Costs, Tax Costs, and Utilities Costs by certified public accountants, if performed. (f) Costs of insurance carried by Landlord relating to the Property, including, without limitation, fire and casualty insurance (with extended, all-risk, or other coverages), rental loss or business interruption insurance, comprehensive or commercial general liability insurance, and other commercially reasonable insurance carried by Landlord, plus the cost of all deductible payments made by Landlord. (g) Assessments, fees, or similar charges for the Property's share of the cost of operating and maintaining common areas and facilities of any office or business park in which the Property is located. (h) Costs of complying with Laws applicable to the operation, management, maintenance, or repair of the Property, including, without limitation, costs for licenses, permits, and inspection fees. (i) Amortization in accordance with generally accepted accounting principles of capital expenditures and reasonable financing charges for items that are primarily for the purpose of 5 9 reducing or avoiding increases in Operating Costs in Landlord's good faith estimate, (ii) promoting safety, or (iii) complying with Laws imposed after the initial construction of the Building. In addition to the foregoing, Landlord may include in Operating Costs unamortized capital expenditures that in the aggregate are less than two percent (2%) of the estimated amount of the total of Operating Costs, Tax Costs, and Utilities Costs for the applicable calendar year. (j) Management fees and costs of a Property management office in the Building or an allocation of the costs of an off-site central office maintained for management of the Property. 2.4 TAX COSTS. "Tax Costs" means all of the following that are not Excluded Costs and that are imposed by Law on the Property or on Landlord in connection with the ownership or operation of the Property: (a) general and special ad valorem and other taxes, assessments, and charges; (b) any future capital levy, rent, or other tax, assessment, or charge imposed in place of or in addition to the ad valorem and other taxes, assessments, or other governmental charges presently in effect; and (c) consulting, accounting, legal fees, and other costs resulting from any challenge of ad valorem or other taxes, assessments, or other governmental charges. If the Property is not separately assessed, Landlord will allocate Tax Costs to the Property on a reasonable basis. 2.5 UTILITIES COSTS. "Utilities Costs" means all of the following that are not Excluded Costs and that are incurred by Landlord in connection with the ownership or operation of the Property: (a) costs and expenses for consumption or use of public or private utility services for the Property, including, without limitation, water, steam, sewer, waste disposal, gas, telecommunications, and electricity; and (b) amortization in accordance with generally accepted accounting principles of capital expenditures and reasonable financing charges for items that are primarily for the purpose of (i) reducing or avoiding increases in Utilities Costs in Landlord's good faith estimate, or (ii) complying with Laws imposed after the initial construction of the Building. 2.6 EXCLUDED COSTS. "Excluded Costs" means all of the following: (a) Except as expressly included in the definitions of Operating Costs and Utilities Costs, capital expenditures as determined in accordance with generally accepted accounting principles, depreciation and amortization, and interest and other finance charges. (b) Costs for the initial construction of the Property or for improvements to leased premises. 6 10 (c) Costs for the sale or financing of the Property, including brokerage commissions, attorneys' and accountants' fees, closing costs, title insurance premiums, and other similar costs. (d) Leasing commissions, attorneys' fees, and other expenses in connection with negotiations for leases or disputes with particular tenants. (e) Repair or replacement costs paid with proceeds of insurance or condemnation. (f) Costs for which Landlord is reimbursed by any tenant or other party, including, without limitation, costs for furnishing any utilities or services in addition to or in excess of those included in Building Standard Services. (g) Taxes attributable to the personal property or trade fixtures of any tenant. (h) Utilities or other costs that are payable directly to a third party by any tenant. (i) Taxes on net income, death taxes, franchise taxes, and taxes in connection with any change of ownership of the Property. (j) Penalties for late payment of taxes, utility bills, or other amounts owed by Landlord except to the extent Landlord was in good faith contesting payment. 2.7 ACCOUNTING PRINCIPLES. Operating Costs, Tax Costs, and Utilities Costs will be computed on an accrual basis in accordance with generally accepted accounting principles consistently applied. Tax Costs will accrue in the calendar year levied or assessed except for Tax Costs attributable to special taxes and assessments that are payable in installments, which will accrue only to the extent of the installment payable each calendar year. Operating Costs, Tax Costs, and Utilities Costs will be calculated on an annualized basis for a full calendar year. In calculating Operating Costs, Tax Costs, and Utilities Costs, costs that vary with occupancy (such as janitorial service and utilities) will be appropriately adjusted to reflect the amount that such variable costs would have been with occupancy at the greater of ninety-five percent (95%) of the Net Rentable Area of the Building or the actual occupancy of the Building throughout the applicable calendar year. All rates per square foot of Net Rentable Area in the Building involved in determining the Base Rent Adjustment will be calculated based on the greater of ninety-five percent (95%) of the Net Rentable Area of the Building or the actual occupancy of the Building throughout the applicable calendar year. 7 11 2.8 LATE PAYMENT OF RENT. Past-due Rent will bear interest from the date due until paid at the rate per annum that is the lesser of (a) five percent (5%) in excess of the "prime rate" or "base rate" of Bank One, Texas, National Association (or its successor) from time to time (or if such rate is discontinued, the rate charged by that bank to its most creditworthy commercial borrowers), or (b) the maximum interest rate allowed by Law. Any Rent or other sum required to be paid to Landlord on written demand will be due and payable on Tenant's receipt of a bill, invoice, or other written demand for payment from Landlord. If any Monthly Rent Installment is more than five (5) days past due, or if any other payment of Rent or any other sum is more than ten (10) days past due, Tenant must pay Landlord on written demand a late charge that is the greater of $250.00 or five percent (5 %) of the amount of the Monthly Rent Installment or other Rent past due. Late charges are intended to compensate Landlord for additional administrative expenses associated with late payment. Any payment of past-due Rent will be applied first to any late charges owed, then to any interest accrued, and finally to the balance of Rent owed. 2.9 SECURITY DEPOSIT. Tenant must pay the Security Deposit to Landlord on Tenant's execution of this Lease. Tenant will not receive any interest on the Security Deposit. Landlord may commingle the Security Deposit with other funds of Landlord. If a Tenant Default occurs, Landlord may (in addition to any other remedies) apply the Security Deposit in whole or in part to pay any Rent, damages, or other sums owed by Tenant. On written demand by Landlord following such application, Tenant must pay Landlord a sufficient sum to restore the Security Deposit to the full amount specified in the Basic Lease Information. The Security Deposit is not an advance payment of Rent or a measure of Landlord's damages for a Tenant Default. Upon full payment and performance of this Lease by Tenant (including, without limitation, final payment of any deficiency in the Base Rent Adjustment owed by Tenant as reflected in the final Annual Statement), Landlord will refund to Tenant any balance of the Security Deposit remaining after deducting any Rent, damages, or other sums owed by Tenant. 3. SERVICES FURNISHED BY LANDLORD 3.1 BUILDING STANDARD SERVICES. So long as Tenant occupies the Premises and no Tenant Default has occurred, Landlord will furnish the following "Building Standard Services": (a) Central heating, ventilating, and air conditioning ("HVAC") in the Premises in season between the hours (the "Building Hours") of 7:00 a.m. to 7:00 p.m., Monday through Friday, and 8:00 a.m. to 4:00 p.m., Saturday, exclusive of holidays observed by national banks in the city where the Property is located. 8 12 (b) Electricity for routine lighting and the operation of general office machines such as typewriters, dictating equipment, adding machines, personal computers, copying machines, and the like that are designed to operate at or below the rated voltage and current loads of outlets, circuits, and other electrical equipment initially installed in the Premises as part of the Tenant Improvements and that do not consume either singly or in the aggregate, an amount of electrical power per square foot of Usable Area materially in excess of the amount of electrical power per square foot of Usable Area normally consumed in ordinary general office occupancy of the Building. (c) Building standard janitorial service in the Premises Monday through Friday, exclusive of holidays observed by national banks in the city in which the Property is located. (d) Replacement as needed of Building standard fluorescent light bulbs in the Premises. (e) Initial issuance to Tenant of two (2) keys for each corridor door to the Premises, and if Landlord provides electronic access control to tenants of the Building generally, initial issuance to Tenant's employees in the Premises of access cards for use in Building standard electronic access card readers (not to exceed one (1) access card per 333 square feet of Net Rentable Area in the Premises). (f) Initial installation in Building standard graphics of Tenant's name and suite number on the main exterior door of the Premises, and if Landlord provides a tenant directory in the main Building lobby, one (1) initial listing of Tenant's name on the tenant directory. (g) Nonexclusive use of rest rooms with hot and cold water at locations provided for the use of the Building's tenants generally. (h) Nonexclusive use of passenger elevator service to the floor of the Premises, with at least one (1) cab in service twenty-four (24) hours per day. (i) Routine maintenance, replacement, and repair of the structural components of the Building, of the mechanical, electrical, and plumbing systems and equipment serving the Building generally, and of the interior and exterior common areas of the Building, including the Building's ground floor lobby, exterior lighting, landscaping, and irrigation on the Property, and parking, driveway, and walkway areas on the Property. (j) Operation of equipment and/or employment of personnel for the purpose of attempting to control access to the ground floor lobby of the Building during other than Building Hours. 9 13 3.2 ADDITIONAL SERVICES. If Landlord chooses to do so, Landlord may make additional services available to tenants of the Building. Unless the additional services are furnished to office tenants of the Building generally, Landlord will establish a Building standard charge to be billed to the particular tenants that request or utilize the additional services. The following additional services will be available for a Building standard charge if requested by Tenant: (a) If requested far enough in advance in accordance with standard procedures established for the Building, HVAC service during other than Building Hours. The Building standard charge may include a minimum area and a minimum number of hours of HVAC operation. (b) Replacement of electronic access cards. (c) If Landlord provides a tenant directory in the main Building lobby, and to the extent space is available, additional or changed listings on the tenant directory. 3.3 EXCESS OR SPECIAL SERVICE REQUIREMENTS. Landlord and Tenant agree that: (a) If any equipment in the Premises generates excessive heat or requires a range of ambient temperature and humidity outside of that afforded by the operation of the Building's standard HVAC equipment at thermostat settings that Landlord considers standard for,the Building, Landlord may require Tenant to cease using such equipment within ten (10) days after written notice from Landlord. If Tenant fails to do so, Landlord may elect to install supplemental HVAC and metering equipment, in which case Tenant must pay the following costs to Landlord from time to time on written demand: (i) the cost of the supplemental equipment and its design and installation plus a Building standard charge to compensate Landlord for the additional administrative burden; (ii) the cost of maintenance, replacement, and repair of the supplemental equipment plus a Building standard charge to compensate Landlord for the additional administrative burden; and (iii) costs of electrical power consumed and chilled water as metered or otherwise reasonably determined by Landlord, plus actual costs of accounting and billing therefor. This paragraph will apply to the supplemental HVAC unit installed above the ceiling in the Leased Premises. (b) No equipment may be used that requires or uses electricity in excess of the rated voltage and current loads of the outlets, circuits,and other electrical equipment initially installed in the Premises as part of the Tenant Improvements, and Landlord may enter the Premises and disconnect such equipment immediately without prior notice to Tenant. If any type or quantity of equipment in the Premises consumes electrical power in an amount per square foot of Usable Area that is materially in 10 14 excess of the amount of electrical power per square foot of Usable Area normally consumed in ordinary general office occupancy of the Building, Landlord may require Tenant to cease using such equipment within ten (10) days after written notice from Landlord. If Tenant fails to do so, Landlord may elect to install supplemental metering equipment, in which case Tenant must pay the following costs to Landlord from time to time on written demand: (i) the cost of the supplemental equipment and its design and installation plus a Building standard charge to compensate Landlord for the additional administrative burden; (ii) the cost of maintenance, replacement, and repair of the supplemental equipment plus a Building standard charge to compensate Landlord for the additional administrative burden; and (iii) metered costs of electrical power consumed in excess of that included in Utilities Costs, plus actual costs of accounting and billing therefor. (c) If improvements in the Premises or any of the fixtures, furnishings, equipment, or other personal property in the Premises requires janitorial services in excess of that reasonably considered standard for the Building by Landlord, if additional janitorial service is required to clean and store cooking, eating, and drinking utensils and equipment in the Premises, or if additional janitorial service is required to properly dispose of food, drink, or other wastes and debris in the Premises, Landlord may refuse to provide such services (in which case Tenant must provide such services at its cost in a manner reasonably satisfactory to Landlord), or Landlord may elect to provide such services (in which case Tenant must pay Landlord from time to time on written demand the additional cost of such services plus a Building standard charge to compensate Landlord for the additional administrative burden). (d) If the Premises or any other part of the Property is damaged by any act or omission of Tenant or its employees, agents, or contractors, Landlord will make needed repairs or replacements, but Tenant must pay Landlord on written demand the cost of the repairs and replacements in excess of insurance proceeds actually received by Landlord, if any, plus a Building standard charge to compensate Landlord for the additional administrative burden. Landlord will have no obligation to begin such repair or replacement work until Landlord receives all insurance proceeds and any funds due from Tenant. (e) All sums payable by Tenant pursuant to this Section are in addition to the Base Rent Adjustment, which will be payable without reduction in accordance with other applicable provisions of this Lease. 4. USE AND OCCUPANCY BY TENANT 4.1 USE. The Premises may be used and occupied only for general office purposes and for no other purpose whatsoever. Landlord 11 15 expressly prohibits the Tenant from using the Leased Premises for any deposit taking operation. Tenant may not engage in or cause, must ensure that none of its employees, agents, or contractors engages in or causes, and must use good faith, reasonable efforts to ensure that none of its customers or other visitors engages in or causes any of the following in the Premises or elsewhere on the Property: (a) any action or the placement of any object that is visible from the exterior of the Building or from lobby or other common areas of the Property and that adversely affects the appearance of the Property; (b) any emission of harmful or offensive odors or fumes or any loud or disturbing noises; (c) any excessive load on floors or other structural elements of the Building or on the mechanical, electrical, and plumbing systems of the Building; (d) any fire or other hazard that might adversely affect the availability or cost of insurance carried by Landlord or other tenants; (e) any use, generation, storage, treatment, transportation, or disposal of any Hazardous Material (except for generally available office equipment and supplies that contain small quantities or low concentrations of Hazardous Material so long as they are properly used and stored within the Premises, properly disposed of by Tenant at a location other than the Property, and do not by Law require any license or permit); (f) any waste, nuisance, or other unreasonable interference with or disturbance of Landlord's business or the occupancy of any other tenant of the Property; (g) any criminal or other disreputable conduct that might adversely affect the reputation of Landlord or the Property; (h) any noncompliance with rules, procedures, or instructions of Landlord or its employees, agents, or contractors relating to protection of life or personal safety or to security or access control; or (i) any noncompliance with the Building Rules attached as Exhibit D (or amendments or additions to such rules hereafter promulgated by Landlord). "Hazardous Material" means any toxic or hazardous waste, material, or substance or any other substance that is prohibited, limited, or regulated as a health or environmental hazard or pollutant under any Law, or that even if not so regulated, could or does pose a hazard to the environment or to the health and safety of the occupants of the Building or others. 4.2 COMPLIANCE WITH LAWS. Tenant at its cost must comply with, must cause its employees, agents, and contractors to comply with, and must use good faith, reasonable efforts to cause its customers and other visitors to comply with all applicable codes, statutes, ordinances, regulations, and other legal requirements of any government or governmental agency (collectively, "Laws") relating to the use, condition, or occupancy of the Premises (including, without limitation, all Laws applicable to Tenant's business and operations in the Premises). Without limiting the foregoing, Tenant at its cost must comply with all requirements of the Americans With Disabilities Act and implementing regulations applicable to the use, condition, or occupancy of the Premises other than requirements relating solely to the physical structure 12 16 of (a) the Work Letter Improvements, if any, as initially installed in the Premises by Landlord, (b) the roof, foundation, and exterior walls of the Building, and (c) the common areas of the Property. 4.3 MAINTENANCE OF THE PREMISES. Tenant must promptly report to Landlord any damage to the Premises. Except to the extent included in Building Standard Services, maintenance, replacement, and repair of all improvements and other components of the Premises must be carried out by Tenant at its cost in a good and workmanlike manner, using contractors approved by Landlord in writing, and in a manner sufficient to keep the Premises and the improvements therein in as good a condition as on the Commencement Date, reasonable wear and tear excepted. 4.4 SIGNS AND ADVERTISING. Except for the entry letters and numerals initially installed by Landlord as part of the Building Standard Services or as specifically provided to the contrary in a Rider to this Lease (if any), no signs or other graphics relating to Tenant or its business that are visible from the exterior of the Building or from lobby or other common areas of the Property may be installed anywhere on the Property. If Landlord elects to permit any such signs or graphics, the size, location, and appearance thereof must be satisfactory to Landlord in its discretion. Tenant may not use the name of Landlord or of the Building or Property for any purpose other than to identify the location of the Premises in Tenant's address. 4.5 ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. Tenant may make no alterations, additions, or improvements to the Premises or the Property without the prior written consent of Landlord (which may be withheld in Landlord's discretion). If Landlord consents, all alterations, additions, or improvements must be completed without cost to Landlord, and Tenant must pay Landlord on written demand the amount of all costs incurred by Landlord for architects and engineers, permits, or other purposes related to the alterations, additions, or improvements, plus a Building standard charge to compensate Landlord for the additional administrative burden. Tenant must comply with all reasonable requirements of Landlord relating to plans and specifications, compliance with building codes and other Laws, employment and bonding of contractors, insurance, compatibility with the Building's mechanical, electrical, and plumbing systems, aesthetic considerations, and other matters as determined by Landlord. All alterations, additions, or improvements, including, without limitation, all partitions, walls, railings, carpeting, floor and wall coverings, and other fixtures (excluding Tenant's trade fixtures) will become the property of Landlord when made, and will remain upon the Premises, provided, however, the foregoing will not apply to the supplemental HVAC unit installed above the ceiling in the Leased Premises, which may be removed by Tenant at Tenant's sole cost using a contractor approved by Landlord at Landlord's sole discretion, at the expiration of the Term or earlier termination of 13 17 this Lease. Without limiting the foregoing, each of the following requires Landlord's prior written consent: (a) installation of food, soft drink or other vending machines; (b) removal or replacement of window coverings on exterior windows initially installed in the Premises as part of the Tenant Improvements, or the installation of additional window coverings, drapes, or other window treatments; and (c) rekeying or other changes in the locks or other access control devices on the exterior or interior doors of the Premises, or duplication of any keys or electronic access cards furnished by Landlord. 4.6 PERSONAL PROPERTY AND TRADE FIXTURES. Tenant may not remove any of the following from the Premises: (a) HVAC systems, fixtures, or equipment, other than the supplemental HVAC unit; (b) lighting fixtures or equipment; (c) carpeting and other attached floor coverings, or raised flooring; (d) plumbing fixtures and equipment; (e) paneling or millwork; (f) built-in shelving or cabinets; (g) drapes, blinds, or other window treatments; and (h) equipment or appliances purchased or installed by Landlord as part of the Work Letter Improvements. Except as provided in the preceding sentence, any personal property or trade fixtures installed in the Premises at Tenant's expense will remain Tenant's personal property, and must be removed from the Property by Tenant on the expiration of the Term or earlier termination of this Lease without damage to the Premises or other parts of the Property. On the expiration of the Term or earlier termination of this Lease, Tenant must also deliver to Landlord all keys, electronic access cards, and safe or vault combinations with respect to the Premises, and leave the Premises in a clean condition free of waste, refuse, or debris. If Tenant fails to do so, Landlord may retain, store, or dispose of any trade fixtures or other personal property left in the Premises however Landlord chooses without liability of any kind to Tenant, repair any damage to the Premises or other parts of the Property caused by the removal thereof, change or rekey locks and other access control devices as necessary throughout the Building to maintain security, and clean the Premises and properly dispose of all such waste, refuse, or debris; and Tenant must pay to Landlord on written demand all costs and expenses incurred by Landlord in connection with the foregoing, plus a Building standard charge to compensate Landlord for the additional administrative burden. 4.7 TAXES PAYABLE BY TENANT. Tenant must pay any documentary stamp tax, transfer tax, sales or use tax, excise tax, or any other tax, assessment, or charge (other than any income, franchise, or similar tax imposed directly on Landlord or Landlord's net income from the Property) required to be paid on account of (a) the execution of this Lease, (b) the use or occupancy of the Premises by Tenant, (c) the sale or use of goods or services furnished by Landlord directly to Tenant or at Tenant's request, (d) the Rent or other payments due hereunder, or (e) the value of trade fixtures, furnishings, equipment, or other personal property located on the 14 18 Premises and owned by or in the custody of Tenant. All such taxes, assessments, and charges must be paid promptly as they become due prior to delinquency. Tenant will provide Landlord with copies of paid receipts for such taxes, assessments, or charges promptly after payment. Tenant must also pay on written demand from Landlord any increase in ad valorem taxes or assessments on the Property as a result of alterations, additions, or improvements made after the Commencement Date (as separately assessed or as reasonably valued and allocated by Landlord). 4.8 PROTECTION AGAINST LIENS. No mechanics', materialmen's, or other type of lien or claim may be filed against Landlord or the Property by, against, through, or under Tenant or its contractors. If any such lien or claim is filed, Tenant must either cause the lien or claim to be discharged within ten (10) days after filing, or if all required approvals from the holders of Mortgages on the Property are obtained and Tenant furnishes adequate security to prevent any foreclosure proceedings against the Property, Tenant may in good faith contest such lien or claim; otherwise, Landlord may, in addition to any other right or remedy available to it, elect to discharge the lien or claim by paying the amount alleged to be due or by giving appropriate security. If Landlord discharges or secures the lien or claim, then Tenant must reimburse Landlord on written demand for all sums paid and all costs (including reasonable attorneys' fees and costs of litigation) incurred by Landlord plus a Building standard charge to compensate Landlord for the additional administrative burden. All of Tenant's contracts, purchase orders, or similar documents relating to any labor or materials to be furnished for the Premises must state that Tenant is solely responsible for payment and that no lien may attach to the Property to secure any payment due. 4.9 ACCESS BY LANDLORD. Landlord and its agents and representatives may enter the Premises without notice in an emergency. At reasonable hours and after reasonable notice and accompanied by an employee, agent or representative of the Tenant, Landlord and its agents and representatives may enter the Premises to conduct inspections, make repairs, alterations or additions, and to show the Premises to prospective tenants, subtenants, mortgagees, and purchasers. 5. TRANSFERS 5.1 TRANSFERS BY TENANT. Landlord and Tenant agree that: (a) Without the prior written consent of Landlord in each instance (which may be withheld in Landlord's discretion), Tenant may not do any of the following (a "Tenant Transfer"): (i) assign this Lease or any estate or interest therein, whether absolutely or collaterally as security for any obligation; (ii) sublease any part of the Premises; (iii) permit any assignment of this Lease or any 15 19 estate or interest therein by operation of Law, whether absolutely or collaterally as security for any obligation; (iv) grant any license, concession, or other right of occupancy for any part of the Premises; (v) permit the use of any part of the Premises by any person other than Tenant and its agents and employees; (vi) assign or otherwise transfer ownership of a majority of the assets of Tenant; or (vii) merge or be consolidated into any other entity. In soliciting any Tenant Transfer, Tenant must endeavor to obtain fair market value consideration. No Tenant Transfer to any then current tenant or occupant of the Building will ever be permitted. Any attempted Tenant Transfer without Landlord's prior written consent will be void. (b) If Tenant requests Landlord's consent to a Tenant Transfer, Landlord may either (i) approve or disapprove the Tenant Transfer, or (ii) terminate this Lease with respect to the part of the Premises affected by the proposed Tenant Transfer. In connection with each Tenant Transfer request by Tenant, Tenant must obtain and furnish to Landlord all documents, financial reports, and other information Landlord reasonably requires in order to evaluate the proposed transferee. Landlord will advise Tenant of Landlord's decision about the requested Tenant Transfer within thirty (30) days after receipt of Tenant's written Tenant Transfer request and all requested supporting materials. As a condition to giving its consent to a Tenant Transfer, Landlord may require that any instrument to effectuate the Tenant Transfer be in a form satisfactory to Landlord, that the transferee assume the Lease, and that alterations to the Premises needed to comply with Law be carried out without cost to Landlord in accordance with the provisions of this Lease relating to alterations of the Premises. If Landlord refuses to consent to a requested Tenant Transfer, this Lease and the obligations and liabilities of Tenant under this Lease will nonetheless remain in full force and effect. The consent of Landlord to one Tenant Transfer is never to be construed as waiving the requirement for Landlord's consent to other Tenant Transfers, nor will any consent by Landlord or any Tenant Transfer discharge or release Tenant from any obligations or liabilities to Landlord under this Lease. (c) Tenant must pay Landlord all cash or other proceeds of any Tenant Transfer in excess of the Rent payable under this Lease, and Tenant hereby assigns to Landlord all rights it may have or ever acquire to the excess proceeds, which will be due and payable to Landlord on receipt by Tenant and will be accompanied by an accounting of the sums owed, certified by Tenant. No transferee of less than the entire Premises for the full Term as the result of a Tenant Transfer will ever be entitled to exercise any renewal, extension, expansion, termination, or other option provided in this Lease (or in any Rider) or to the return of the Security Deposit. If a Tenant Default occurs after any Tenant Transfer, Landlord may, at its option, collect Rent directly from the transferee, and Tenant hereby authorizes any such transferee to pay Rent directly 16 20 to Landlord at all times after receipt of written notice from Landlord. No direct collection of Rent by Landlord from any transferee following a Tenant Transfer will constitute a novation or otherwise release Tenant from its obligations and liabilities under this Lease. 5.2 TRANSFERS BY LANDLORD. Landlord has the unrestricted right to sell, assign, mortgage, encumber, or otherwise dispose of all or any part of the Property or any interest therein. Upon sale or other disposition of the Property, Landlord will be released from obligations and liabilities thereafter accruing under this Lease, and Tenant will attorn to Landlord's successor and look solely to such successor for performance of the Lease thereafter. 5.3 SUBORDINATION. This Lease is automatically subordinate to all present and future mortgages, deeds of trust, deeds to secure debt, other security instruments, or ground or land leases encumbering all or any part of the Property ("Mortgages") and to all renewals, modifications, consolidations, replacements, and extensions of any Mortgage. No other document is necessary to subordinate this Lease to any Mortgage, but if Landlord so requests, Tenant will promptly execute an appropriate document to confirm such subordination. Upon request of any party succeeding to the interest of Landlord as a result of enforcement of any Mortgage, Tenant will automatically become the tenant of such successor in interest without change in the terms of this Lease except that such successor in interest will not be (a) subject to any credits, offsets, defenses, or claims which Tenant may have against any prior landlord, (b) bound by any payment of Rent for more than one (1) month in advance (except prepayments in the nature of security for the performance by Tenant of its obligations under this Lease that are actually received by such successor in interest), (c) bound by any amendment or modification of this Lease made without the written consent of the holder of the Mortgage (if such consent is required by the Mortgage), (d) liable for any act, omission, or default of any prior landlord, or (e) required to make any capital improvements to the Property or the Premises that Landlord may have failed to complete. Notwithstanding the foregoing, the holder of any Mortgage may elect at any time to subordinate its Mortgage to this Lease by filing a document to such effect in the appropriate public real property records and giving Tenant notice of such election. 5.4 ESTOPPEL CERTIFICATE. Within ten (10) days after written request from Landlord, Tenant must (a) execute an estoppel certificate on a form provided by Landlord certifying the status of such matters with respect to the Lease as Landlord may request, and (b) furnish Landlord the most recent available audited financial statement (or if Tenant does not normally have audited Financial statements prepared, the most recent unaudited financial statement) of Tenant and of any guarantor of this Lease. If Tenant fails to deliver a requested estoppel certificate within the required 10-day 17 21 period, Tenant will be deemed to have agreed to the statements contained in the form provided by Landlord. 6. RISK MANAGEMENT 6.1 CASUALTY INSURANCE. Landlord must maintain fire and casualty insurance with at least extended coverage on the Building and other improvements included in the Property (excluding trade fixtures and personal property owned by Tenant or in Tenant's custody or control) in amounts desired by Landlord issued by an insurance company authorized to insure properties in the state where the Property is located. Tenant will have no interest in the proceeds of Landlord's insurance. If any improvements in the Premises have a value substantially disproportionate to those found generally in the Building, or if Tenant's use or occupancy poses any increased risk of loss (without implying any consent to such use or occupancy), any resulting increase in Landlord's premiums for such insurance must be paid by Tenant to Landlord on written demand. Tenant at its own cost must maintain fire and casualty insurance with at least extended coverage for the replacement cost of all trade fixtures and personal property located on the Property and owned by Tenant or in Tenant's custody or control, with business interruption coverage for a period of at least six (6) months, issued by an insurance company authorized to insure properties in the state where the Property is located. Tenant must furnish Landlord certificates of insurance evidencing the required fire and casualty insurance coverage prior to the Commencement Date and thereafter prior to each policy renewal date. 6.2 WAIVER OF SUBROGATION AND CLAIMS. Landlord waives all claims, causes of action, or other rights of recovery against Tenant and its employees, agents, and contractors for any loss or damage to the Building and other improvements included in the Property by reason of fire or other insurable risk or loss (whether or not actually insured), regardless of cause or origin (including negligence), and agrees that no insurer will have any right of subrogation to Landlord. Tenant waives all claims, causes of action, or other rights of recovery against Landlord and its employees, agents, and contractors for any loss or damage to any trade fixtures and personal property located on the Property and owned by Tenant or in Tenant's custody or control by reason of fire or other insurable risk of loss (whether or not actually insured), regardless of cause or origin (including negligence), and agrees that no insurer will have any right of subrogation to Tenant. Each of Tenant and Landlord will advise its fire and casualty insurers of the foregoing waiver and ensure that such waiver is a part of each policy of fire and casualty insurance that it carries. 6.3 CASUALTY DAMAGE. If any part of the Premises is damaged by fire or other casualty, Tenant will give prompt notice to Landlord. Landlord may, at its option, terminate this Lease by so notifying 18 22 Tenant in writing within sixty (60) days after the date of a fire or other casualty if (a) the casualty renders any substantial part of the Premises untenantable and the repair time to restore the Premises to a tenantable condition (as reasonably estimated by Landlord) will extend beyond the date that is one hundred eighty (180) days after the date of the casualty, (b) the casualty renders any substantial part of the Premises untenantable and at the time, less than two (2) years remain until the expiration of the Term, (c) any part of the Property is damaged to the extent that in Landlord's judgment, restoration is not practical (whether or not the Premises have been damaged by the casualty), or (d) the holder of any Mortgage requires application of any insurance proceeds to reduce the Mortgage debt. If the damage by fire or other casualty renders any substantial part of the Premises untenantable and if the repair time to restore the Premises to a tenantable condition (as reasonably estimated by Landlord) will extend beyond the date that is one hundred eighty (180) days after the date of the casualty, Tenant may elect to terminate this Lease by so notifying Landlord in writing within thirty (30) days after Tenant receives Landlord's written estimate of the time required for restoration. If the Lease is not so terminated by Landlord or Tenant, Landlord will promptly begin and diligently pursue the work of restoring the Premises (including the Tenant Improvements initially installed in the Premises) to substantially their former condition as soon as reasonably possible. Landlord will not, however, be required to restore any alterations, additions, or improvements other than the initial Tenant Improvements or to spend any amount in excess of the insurance proceeds actually received by Landlord as a result of the casualty. Landlord will allow Tenant all equitable abatement of Rent during the time and to the extent the Premises are untenantable as the result of fire or other casualty, but such abatement will not extend the Term. 6.4 CONDEMNATION. If all or substantially all of the Property is condemned or is sold in lieu of condemnation, then this Lease will terminate on the date the condemning authority takes possession of the Property. If less than all of the Property is so condemned or sold (whether or not the Premises are affected) and in Landlord's judgment, the Property cannot be restored to an economically viable condition, or if the holder of any Mortgage requires application of condemnation proceeds to the reduction of the Mortgage debt, Landlord may terminate this Lease by written notice to Tenant effective on the date the condemning authority takes possession of the affected part of the Property. If the condemnation or sale in lieu thereof will render any substantial part of the Premises untenantable, Tenant may terminate this Lease by written notice to Landlord effective on the date the condemning authority takes possession of the affected part of the Premises. If this Lease is not so terminated by Landlord or Tenant, Landlord will, to the extent feasible, restore the Premises (including the Tenant Improvements initially installed in the Premises) to substantially their former condition. Landlord will not, however, be required to 19 23 restore any alterations, additions or improvements other than the initial Tenant Improvements or to spend any amount in excess of the condemnation proceeds actually received by Landlord. Landlord will allow Tenant an equitable abatement of Rent during the time and to the extent the Premises are untenantable as the result of any condemnation or sale in lieu thereof, but such abatement will not extend the Term. All condemnation awards and proceeds belong exclusively to Landlord, and Tenant will not be entitled to, and expressly waives and assigns to Landlord, all claims for any compensation for condemnation; provided, however, if Tenant is permitted by applicable law to maintain a separate action that will not reduce condemnation awards or proceeds to Landlord, Tenant amy pursue such separate action, but only for loss of business, moving expenses, and Tenant's trade fixtures. 6.5 LIABILITY INSURANCE. Each of Landlord and Tenant must maintain separate policies of commercial general liability insurance issued by an insurance company authorized to transact business in the state where Property is located. The combined single limit of liability insurance coverage must be at least $2,000,000, or such greater amount as Landlord may reasonably require from time to time (so long as Landlord maintains at least the same limit of coverage). Coverage in excess of $1,000,000 may be provided through a policy of umbrella liability insurance. Tenant's liability insurance policy must name Landlord as an additional insured and contain an undertaking by the insurer not to cancel or change coverage materially without first giving thirty (30) days' written notice to Landlord. Tenant must furnish Landlord certificates of insurance evidencing the required commercial general liability insurance coverage prior to the Commencement Date and thereafter prior to each policy renewal date. 6.6 INDEMNIFICATION. Landlord and Tenant agree that: (a) Tenant will indemnify, defend, and hold Landlord and its officers, employees, agents, directors, shareholders, and partners harmless against any loss, liability, damage, fine or other governmental penalty, cost, or expense (including reasonable attorneys' fees and costs of litigation), or any claim therefor, resulting from: (i) noncompliance with or violation of any Law applicable to Tenant or its use and occupancy of the Premises; (ii) the use, generation, storage, treatment, or transportation, or the disposal or other release into the environment, of any Hazardous Material by Tenant or its employees, agents, or contractors or as a result of Tenant's use and occupancy of the Premises; (iii) injury to persons or loss or damage to property to the extent caused by any negligent or wrongful act or omission of Tenant or its employees, agents, and contractors, but only to the extent the loss or damage would not be covered by property and casualty insurance of the type and amount required to be carried by Landlord pursuant to this Lease (whether or not actually so carried). 20 24 (b) Landlord will indemnify, defend, and hold Tenant and its officers, employees, agents, directors, shareholders, and partners harmless against any loss, liability, damage, fine or other governmental penalty, cost, or expense (including reasonable attorneys' fees and costs of litigation), or any claim therefor, resulting from: (i) Landlord's noncompliance with or violation of any Law applicable to Landlord, but only to the extent such noncompliance or violation is not based on the use or occupancy of the Premises by Tenant or on any other act or omission of Tenant or its employees, agents, or contractors; (ii) the use, generation, storage, treatment, or transportation, or the disposal or other release into the environment, of any Hazardous Material by Landlord or its employees, agents, or contractors; (iii) injury to persons or loss or damage to property to the extent caused by any negligent or wrongful act or omission of Landlord or its employees, agents, and contractors, but only to the extent the loss or damage would not be covered by property and casualty insurance of the type and amount required to be carried by Tenant pursuant to this Lease (whether or not actually so carried). 6.7 LIMITATIONS ON LIABILITY. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant agree that: (a) None of the following will constitute a breach of the covenant of quiet enjoyment, an actual or constructive eviction of Tenant, or a Landlord Default: (i) the unavailability, curtailment, interruption, fluctuation, inadequacy, or other defect in any of the services furnished or to be furnished by Landlord pursuant to Article III of this Lease as a result of any failure or malfunction of, or damage to any lines, equipment, or other facilities on the Property or elsewhere, any act or omission of any utility company, the requirements of any Law, the unavailability of materials or supplies, or any other circumstance outside of Landlord's reasonable control so long as Landlord in good faith attempts to remedy such circumstances as quickly as reasonably possible; (ii) any design or other defect in the physical structure of the Building, in the mechanical, electrical, and plumbing systems of the Property, or in the Tenant Improvements or any other improvements on the Property so long as Landlord in good faith attempts to remedy the defect as quickly as reasonably possible; or (iii) any repairs, replacements, maintenance, alterations, additions, or improvements to any part of the Property so long as such activities are conducted without unreasonable interference with Tenant's use of the Premises. (b) Landlord will not be liable (whether in the event of a Landlord Default or in any other circumstance whatsoever), and Tenant hereby waives and releases all claims, causes of action, or other rights of recovery it may ever have against Landlord for: (i) any negligent or other acts or omissions by other tenants or occupants of the Property or their employees, agents, contractors, customers, or visitors; (ii) loss or damage to property or personal 21 25 injury or death resulting from any negligent or other act or omission of Landlord or its employees, agents, or contractors relating to the security of the Property; (iii) any loss of business or profits of Tenant or other consequential damages; or (iv) exemplary, punitive, or other special damages of any kind. (c) None of Landlord's officers, employees, agents, directors, shareholders, or partners will ever have any liability to Tenant under or in connection with this Lease, and Tenant hereby waives and releases all claims, causes of action, or other rights of recovery it may ever have against such parties under or in connection with this Lease. (d) Tenant agrees to look solely to Landlord's interest in the Property for the recovery of any damages or other sums of money that Landlord may ever owe Tenant under or in connection with this Lease, and Landlord will never be personally liable for payment of any such damages or other sums of money, or any judgment therefor. 6.8 ALLOCATION OF RISKS. TENANT ACKNOWLEDGES THAT IT HAS BEEN ADVISED TO HAVE THE PROVISIONS OF THIS LEASE REVIEWED BY AN ATTORNEY OF ITS OWN CHOOSING AND THAT IT HAS DONE SO OR KNOWINGLY ELECTED NOT TO DO SO. EACH OF THE WAIVERS, RELEASES, AND OTHER LIMITATIONS ON LIABILITY OR CLAIMS PROVIDED IN THIS ARTICLE OR ELSEWHERE IN THIS LEASE (INCLUDING, WITHOUT LIMITATION, LIABILITY OR CLAIMS BASED ON NEGLIGENCE OR OTHER FAULT) HAS BEEN KNOWINGLY AND INTENTIONALLY MADE AND AGREED TO BY TENANT. THIS SECTION IS INTENDED TO SATISFY ANY REQUIREMENT OF LAW THAT A WAIVER, RELEASE, OR OTHER LIMITATION OF CLAIMS OR LIABILITY BASED ON NEGLIGENCE OR OTHER FAULT BE CONSPICUOUSLY DISCLOSED. 7. DEFAULT AND REMEDIES 7.1 TENANT DEFAULT. The occurrence of any of the following will be a "Tenant Default": (a) Tenant fails to pay Monthly Rent Installment within five (5) days after the date payment is due, or Tenant fails to pay any other Rent or other sum owing from Tenant to landlord under this Lease within ten (10) days after the date of Tenant's receipt of a bill, invoice, or other written demand for payment. (b) Tenant fails to perform or comply with any provision of this Lease not requiring the payment of Rent or other sums of money, and such failure continues for more than fifteen (15) days after written notice from Landlord of such failure; provided, however, if any such failure by Tenant cannot be corrected within such 15-day period solely as a result of nonfinancial circumstances outside of Tenant's control, and if Tenant has commenced substantial corrective actions within such 15-day period and is diligently pursuing such corrective actions, such 15-day period will be extended for such additional time as is reasonably 22 26 necessary to allow completion of actions to correct Tenant's failure. (c) Tenant fails to take occupance of the Premises within fifteen (15) days after the Commencement Date, or tenant thereafter ceases to do business in or abandons any substantial part of the Premises, whether or note Rent continues to be paid. (d) If Tenant or any guarantor of this Lease is other than a natural person, the corporate, partnership, or other entity constituting Tenant or such guarantor is dissolved, liquidated, or otherwise ceases to exist in good standing under applicable Law. (e) Tenant's leasehold estate is taken on execution or other process of Law in any action against Tenant. (f) Tenant or any guarantor of this Lease files a petition under any chapter of the United States Bankruptcy Code, as amended, or under any similar Law of any state, or a petition is filed against Tenant or any such guarantor under the United States Bankruptcy Code, as amended, or under any similar Law of any state and is not dismissed with prejudice within twenty (20) days of filing, or a receiver or trustee is appointed for Tenant's leasehold estate or for any substantial part of the assets of Tenant or any such guarantor and such appointment is not dismissed with prejudice within sixty (60) days, or Tenant or any such guarantor makes a general assignment for the benefit of creditors. (g) Any guarantor of this Lease fails or refuses to perform or comply with such guarantor's guaranty of this Lease. 7.2 LANDLORD'S REMEDIES. If a Tenant Default has occurred, Landlord may (in addition to any other rights or remedies available by Law) then or at any time thereafter to do any one or more of the following at Landlord's option: (a) Landlord, with or without terminating this Lease, may take any reasonable action to remedy any failure of Tenant to comply with or perform this Lease, and may enter the Premises as necessary to do so. Tenant must reimburse Landlord on written demand for all costs so incurred plus a Building standard charge to compensate Landlord for the additional administrative burden. (b) Landlord may terminate this Lease by express written notice of termination to Tenant, enter and repossess the Premises by forcible entry or detainer suit or as otherwise permitted by Law without additional demand or notice of any kind to Tenant, and remove all persons or property therefrom using such lawful force as may be necessary (and Tenant hereby waives any claim for loss or damage by reason of such reentry, repossession, or removal), in which case Landlord will be entitled to recover from Tenant (i) the cost of repossessing the Premises (including without limitation, 23 27 reasonable attorneys' fees and costs of litigation), (ii) the anticipated cost of any repairs, alterations, additions, and improvements to the Premises, leasing inducements, and brokerage commissions for reletting the Premises, (ii) all unpaid Rent owed at the time of termination, (iv) the present value of the balance of the Rent for the remainder of the Term less the present fair market rental value of the Premises for the same period (taking into account all relevant factors, including market rent concessions and the time necessary to relet the Premises and using a discount rate per annum equal to the interest rate on U.S. Treasury obligations with a maturity comparable to the length of the remainder of the Term), and (v) interest and any other sum of money or damages owing by Tenant to Landlord. On termination of this Lease, Landlord may elect to evict all subtenants and others in possession, or on attornment of any subtenant to Landlord, to recognize such sublease as a direct lease between the subtenant and Landlord. (c) Landlord may terminate Tenant's right of possession (but not this Lease), enter and repossess the Premises by forcible entry or detainer suit or as otherwise permitted by Law without demand or notice of any kind to Tenant and without terminating this Lease, and remove all persons or property therefrom using such lawful force as may be necessary (and Tenant hereby waives any claim for loss or damage by reason of such reentry, repossession, or removal), in which case Landlord may (but will not be obligated to) relet the Premises for the account of Tenant for such rent and upon such terms as are satisfactory to Landlord, and without preference to any other space in the Building. The rent actually received from such reletting of the Premises, if any, will be applied to (i) the cost of repossessing the Premises (including without limitation, reasonable attorneys' fees and costs of litigation), (ii) the cost of any repairs, alterations, additions, and improvements to the Premises, leasing inducements, and brokerage commissions paid by Landlord for reletting the Premises (which Landlord is hereby authorized to make), (iii) accrued unpaid Rent, and (iv) interest and any other sum of money or damages owing by Tenant to Landlord. If at any time or from time to time the rent actually received from such reletting of the Premises, if any, is not sufficient to pay all such sums then accrued, the deficiency will be due and payable from Tenant to Landlord on written demand. Landlord may file suit to recover any such deficiency at any time or from time to time without being obliged to wait until expiration of the Term, and no recovery of any sum due Landlord will be a defense to recovery of any amount not previously reduced to judgment. No reletting of the Premises will be construed as an election on the part of Landlord to terminate this Lease, which termination will occur, if at all, only by express written notice of termination to Tenant. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any previous Tenant Default. 24 28 (d) in entering the Premises pursuant to this Section, Landlord may use a duplicate or master key or lock combination or other lawful means, and may thereafter change the locks to the Premises to preclude further access by Tenant or others; and Tenant waives any requirement of Law to the contrary. Thereafter, Landlord will not be obliged to permit Tenant or others to enter the Premises; provided, however, during Landlord's normal business hours and at the convenience of Landlord, and upon the written request of Tenant accompanied by such written waivers and releases as Landlord may require, Landlord will escort Tenant or its authorized personnel to the Premises to retrieve any personal belongings or other property of Tenant not subject to any lien or security interest in favor of Landlord. (e) Even if this Lease is not terminated, Landlord may terminate all rights of Tenant, if any, to receive any allowance, reimbursement payment, or other concession under any provision of this Lease (or any Rider) and all renewal, extension, expansion, cancellation, termination, or other options of Tenant, if any, under any provision of this Lease (or any Rider). 7.3 HOLDING OVER. If Tenant remains in possession after the expiration of the Term or earlier termination of this Lease with the express written consent of Landlord, Tenant will be a month-to-month tenant; otherwise, Tenant will be a tenant at will. In either case, Tenant must pay a Monthly Rent Installment each month throughout the holdover period equal to the greater of (a) twice the Monthly Rent Installment that Tenant was obligated to pay immediately preceding the start of the holdover period, or (b) the prevailing market rent for the Premises as reasonably determined by Landlord. No holding over by Tenant will extend the Term. If Tenant remains in possession as a tenant at will, Tenant will indemnify, defend, and hold Landlord harmless against any loss, liability, damage, cost, or expense (including attorneys' fees and costs of litigation), or any claim therefor, resulting from any inability or delay in delivering possession to any party to whom Landlord may have agreed to lease any part of the Premises. 7.4 LIEN FOR RENT. In addition to any lien at Law, Tenant grants Landlord a lien and security interest on all property of Tenant now or hereafter located in the Premises (including proceeds thereof) to secure payment of the Rent and full performance of this Lease by Tenant. Landlord has all rights for the enforcement of such lien and security interest as are available under applicable Law, including, without limitation, rights under the Uniform Commercial Code of the state where the Property is located and the right after a Tenant Default to sell the property so encumbered at a public or private sale, with or without having such property at the sale, after giving Tenant reasonable notice of the time of any public sale or of the time after which any private sale is to be made, at which sale Landlord may purchase unless otherwise prohibited by Law. Unless otherwise required by Law, and without excluding any 25 29 other manner of giving Tenant reasonable notice, any requirement of reasonable notice will be met if notice is given in the manner prescribed in this Lease at least five (5) days before the time of sale. The proceeds of any sale will be applied first to pay Landlord's costs and expenses of accomplishing the sale (including reasonable attorneys' fees and costs of litigation) and then to any other sums owing and unpaid to Landlord under this Lease. Tenant agrees to execute as debtor such financing statements as Landlord may reasonably request in order to perfect its security interest. Landlord, at its election at any time, may File a copy of this Lease (or a copy of the first page, this Section, and the signature page of this Lease) as a financing statement. 7.5 LANDLORD'S DEFAULT. It will be a "Landlord Default" only if Landlord fails to perform or comply with any provision of this Lease and the failure continues for fifteen (15) days after written notice from Tenant to Landlord (with a copy to the holder of any Mortgage if Tenant has been notified in writing of the identity and address of such holder); provided, however, if any such failure by Landlord cannot be corrected within such 15-day period solely as a result of nonfinancial circumstances outside of the control of Landlord, and if substantial corrective actions have commenced within such 15-day period and are being diligently pursued, such fifteen-day period will be extended for such additional time as is reasonably necessary to allow completion of actions to correct Landlord's failure. Except as otherwise provided in this Lease, if a Landlord Default occurs, Tenant will be entitled to all rights and remedies available by Law. 7.6 ATTORNEYS' FEES. In the event of litigation relating to a Tenant Default or a Landlord Default, the defaulting party must pay all reasonable attorneys' fees and expenses incurred by the nondefaulting party in enforcing its rights under this Lease. In addition, if Tenant requests the consent of Landlord to any matter or requests Landlord to take any other action requiring legal services, Tenant must pay all reasonable attorneys' fees and expenses so incurred by Landlord. 7.7 NON-WAIVER. The failure of a party to insist upon the strict performance of any provision of this Lease or to exercise any remedy for default will not be construed as a waiver. The waiver of any noncompliance with this Lease will not keep subsequent similar noncompliance from being a default. No waiver will be effective unless expressed in writing signed by the waiving party, and no course of dealing will constitute a waiver or otherwise modify the provisions of this Lease. No waiver will affect any condition other than the one specified in the waiver and then only for the time and in the manner stated. Landlord's receipt of any Rent or other sums with knowledge of noncompliance with this Lease by Tenant will not be considered a waiver of the noncompliance. No payment by Tenant of a lesser amount than the full amount then due will be considered to be other than on account of the earliest 26 30 amount due. No endorsement or statement on any check or any letter accompanying any check or payment will be considered an accord and satisfaction, and Landlord may accept any check or payment without prejudice to Landlord's right to recover the balance owing and to pursue any other available remedies. No acceptance by Landlord of keys or possession of the Premises will constitute a surrender or waive any Tenant Default or other liability or obligation of Tenant under this Lease. 7.8 REMEDIES CUMULATIVE. Except as otherwise expressly stated in this Lease, all rights and remedies in this Lease are in addition to such other rights as may be available by Law. The exercise of one right or remedy will not constitute an election to waive or forego any other right or remedy. 8. OTHER PROVISIONS 8.1 NOTICES. Any notice in connection with this Lease may be given by (a) depositing written notice in the United States mail, postpaid and certified and addressed to the party at its Notification Address with return receipt requested, (b) delivering written notice by commercial messenger or overnight private delivery service to the party at its Notification Address, or (c) facsimile transmission of written notice to the party at its Notification Address. Unless actually received earlier, written notice deposited in the mail in the manner described above will be effective on the third business day after it is so deposited, even if not received. Written notice given by commercial messenger, overnight private delivery, or facsimile transmission in the manner described above will be effective as of the time of receipt at the Notification Address as evidenced by any confirmation of delivery provided by the messenger or delivery service or by facsimile confirmation of transmission. Each party may change its Notification Address by not less then least ten (10) days' prior written notice to the other party. 8.2 BUILDING STANDARD CHARGES. The Building standard charge for any service or other action is fifteen percent (15%) of the total costs and expenses paid to others for necessary materials, equipment, and services (including legal, architectural, engineering, and other consulting services), or at Landlord's option, a reasonable fee or other charge uniformly established for the Building to compensate Landlord for the additional work and administrative burden. 8.3 BROKERS. Each of Landlord and Tenant represents and warrants to the other that it has not entered into any agreement with, or otherwise had any dealings with any broker or agent other than Broker as the result of which any commission, fee, or other compensation of any kind will be payable by the other party in connection with this Lease. Each party will indemnify, defend, and 27 31 hold the other party harmless against any loss, liability, damage, cost, or expense (including reasonable attorneys' fees and costs of litigation), or any claim therefor resulting from the untruth or inaccuracy of the foregoing warranty and representation made by such party. Any fee of commission owing to Broker will be paid only in accordance with the terms of a separate written agreement directly between Landlord and Broker. 8.4 AUTHORITY. Tenant warrants that as of the date of execution of this Lease by Tenant, all consents or approvals (including approvals of any board of directors or partners) required for Tenant's execution, delivery, and performance of this Lease have been obtained, that Tenant has the right and authority to enter into and perform this Lease, and that this Lease is valid and binds Tenant. Landlord warrants that as of the date of execution of this Lease by Landlord, all consents or approvals (including approvals of any board of directors or partners) required for Landlord's execution, delivery, and performance of this Lease have been obtained, that Landlord has the right and authority to enter into and perform this Lease, and that this Lease is valid and binds Landlord. 8.5 RECORDING AND CONFIDENTIALITY. Tenant agrees not to record this Lease or any memorandum or affidavit thereof. Tenant may not disclose the terms of this Lease to any third party except (a) legal counsel to Tenant, (b) any assignee of Tenant's interest in this Lease or sublessee of Tenant, (c) as required by Law or by subpoena or other similar legal process, or (d) for financial reporting purposes. 8.6 INTERPRETIVE PROVISIONS. Landlord and Tenant agree that: (a) This document, which consists of the Basic Lease Information, this Lease Agreement, and its attached Exhibits and Riders (which are identified below the signatures of the parties), embodies the entire contract between the parties, and supersedes all prior agreements and understandings between the parties related to the Premises, including all lease proposals, letters of intent, and similar documents. All representations, warranties, or agreements of an inducement nature, if any, are merged with, and stated in this document. This Lease is being executed in multiple counterparts, each of which is an original for all purposes. (b) This Lease may be amended or otherwise modified only by a written instrument executed by both Landlord and Tenant. No consent or approval by Landlord will be effective unless given in writing signed by Landlord or its duly authorized representative. Any consent or approval by Landlord will extend only to the matter specifically stated in writing. (c) The captions appearing in this Lease are included solely for convenience and will never be given any effect in construing 28 32 this Lease. The presumption that this Lease should be more strictly construed against Landlord as the drafting party does not apply. (d) If any provision of this Lease is invalid or unenforceable, the remainder of this Lease will not be affected. Each separate provision of this Lease will remain valid and enforceable to the fullest extent permitted by Law. (e) This Lease binds not only Landlord and Tenant, but also their respective heirs, personal representatives, successors, and assigns (to the extent assignment is permitted by this Lease). (f) This Lease is governed by the Laws of the state where the Property is located. (g) All references to "days" in this Lease are to calendar days. All references to "business days" in this Lease are to days that national banks are open for business in the city where the Property is located. All references to the "date of this Lease" are to the date appearing on the cover page of this Lease, which is approximately the date on which Tenant executed this Lease. Time is of the essence. (h) Any liability or obligation of Landlord or Tenant under this Lease accrued, arising, or based on any act, omission, or other circumstance during the Term will survive the expiration of the Term or earlier termination of this Lease, including without limitation, obligations and liabilities (i) relating to the final adjustment of any estimated installments of the Base Rent Adjustment to the actual Base Rent Adjustment owed, (ii) relating to the condition of the Premises, and (iii) arising under agreements in this Lease to indemnify, defend, or hold harmless. (i) The relationship created by this Lease is that of landlord and tenant. Landlord and Tenant are not partners or joint venturers, and neither has any agency powers on behalf of the other. Tenant is not a beneficiary of any other contract or agreement relating to the Property to which Landlord may be a party, and Tenant has no right to enforce any such other contract or agreement on behalf of itself, Landlord, or any other party. 8.7 EXECUTION AND EFFECTIVENESS. If the name of any Guarantor is reflected in the Basic Lease Information, Landlord's obligations are conditioned upon the receipt by Landlord of the Guaranty of Lease in the form attached as Exhibit E duly executed by such Guarantor, failing which this Lease will be null and void. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or an option for lease. This Lease will be effective only when fully executed and delivered by both Tenant and Landlord. 29 33 IN WITNESS WHEREOF, the parties have executed this Lease. LANDLORD: TENANT: COMMERCE PLAZA INVESTORS, L.P. NATIONAL BANCSHARES By: Commerce Plaza CORPORATION OF TEXAS Operating Corporation, its General Partner By: /s/ James L. Mertz, Jr. By: /s/ Anne R. Renfroe ------------------------- ----------------------- Name: James L. Mertz, Jr. Name: Anne R. Renfroe Title: Senior Vice President Title: Chief Financial Officer Exhibits: A Floor Plan of Premises B Description of Land C Form of Commencement Date Certificate D Building Rules Riders: 1 Work Letter 2 Renewal Option 30 34 RIDER 1 WORK LETTER Tenant agrees that the Leased Premises as herein described, are suitable for Tenant's intended use and acceptable for occupancy in its present condition. If Tenant requires any construction within the Premises, Tenant must submit drawings and specifications for Landlord's approval. If Landlord approves the construction, Landlord will oversee all construction following Landlord's receipt of a construction order executed by Tenant. As a condition to Landlord's approval, Tenant must pay Landlord in advance the full amount of all construction, architectural, and other costs attributable to the construction. 35 RIDER 2 RENEWAL OPTIONS Tenant has Three (3) options to extend the Term. Each option that is exercised will extend the Term for twelve (12) consecutive months following immediately after the date on which the Term would otherwise have expired. Each option must be exercised, if at all, by Tenant's giving written notice to Landlord at least three hundred sixty-five (365) days before the end of the then current Term, failing which, all options under this Rider will lapse. If the Term is so extended, all provisions of the Lease will remain unchanged except as follows: (a) The number of remaining options to extend the Term under this Rider will be reduced by one (1) for each option exercised. (b) The Work Letter will not apply, and Landlord will have no obligation to renovate, remodel, or to make any alterations, additions, or improvements to the Premises. (c) Base Rent will be adjusted to $10.00 per square foot for the first (1st) Option, $10.50 per square foot for the second (2nd) Option and $11.00 per square foot for the third (3rd) Option. (d) The Security Deposit will be increased to equal one (1) month's Base Rent as adjusted for the applicable extended Term, and the amount of the increase will be due and payable at the time the applicable option to extend is exercised. (e) The Monthly Parking Charge will be adjusted to equal the greater of (i) the Monthly Parking Charge in effect under this Lease immediately prior to the applicable extension of the Term, or (ii) the Monthly Parking Charge quoted by Landlord for leases of comparable space in the Building beginning when the applicable extension of the Term begins. 36 FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT to Lease Agreement (the "First Amendment") is entered into as of September 17th, 1996 between Patriot Commerce Investors, L.P., a Delaware Limited Partnership ("Landlord"), and National Bancshares Corporation of Texas, a Texas Corporation ("Tenant"). RECITALS: A. Tenant is leasing Premises identified as Suite 875 and containing 1,176 square feet of Net Rentable Area in the Building known as Riverview Towers, 111 Soledad, San Antonio, Texas 78205, under the terms of the Lease Agreement dated July 25, 1995 (the "Lease"). B. Landlord and Tenant desire to renew this Lease under the terms of the renewal option (Rider 2) in the Lease. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are acknowledged, Landlord and Tenant amend the Lease as follows: 1. Landlord and Tenant agree that the Lease Term is hereby extended to end September 30, 1998. 2. Landlord and Tenant agree that as of October 1, 1997 (the "Effective Date") the Base Rental (exclusive of Base Rent Adjustment) shall be as follows:
Rate per Square Foot of NRA Per Annual Monthly Months Annum Amount Installments I - 12 $10.00 $11,760.00 $980.00
3. Landlord and Tenant agree that the Premises, as described in the Lease, are suitable for Tenant's intended use and occupancy in their present condition, with no improvements required of Landlord. 4. Landlord and Tenant agree that the Security Deposit of $882.00 shall be increased by $98.00. Tenant must pay the increase in Security Deposit to Landlord on Tenant's execution of this Amendment. 5. The number of Renewal Options remaining under the Lease is reduced to (2). 6. Landlord and Tenant acknowledge that Landlord's name was incorrectly reflected in the Lease as "Commerce Plaza Investors, L.P." when in fact the correct name of Landlord is Patriot Commerce Investors, L.P. 1 37 7. Landlord and Tenant acknowledge that the Building name has changed from "Commerce Plaza" to "Riverview Towers." 8. All covenants, conditions and obligations contained in the Lease Agreement shall remain in full force and effect except as modified by this First Amendment. IN WITNESS WHEREOF, Landlord and Tenant have executed this First Amendment as of the date. LANDLORD: TENANT: PATRIOT COMMERCE INVESTORS, L.P. NATIONAL BANCSHARES through its General Partner, CORPORATION Patriot Commerce Operating Corporation By: /s/ James L. Mertz, Jr. By: /s/ Anne R. Renfroe -------------------------- --------------------- Name: James L. Mertz, Jr. Name: Anne R. Renfroe Title: Senior Vice President Title: Chief Financial Officer 2 EX-10.7 3 OFFICE LEASE FOR 613 NW LOOP 410, SAN ANTONIO, TX 1 EXHIBIT 10.7 LEASE AGREEMENT STATE OF TEXAS COUNTY OF BEXAR THIS LEASE AGREEMENT made and entered into on this day, the 10th day of June, 1996 between SPECTRUM BUILDING of TEXAS, L.L.P. (hereinafter called "Lessor") whose address for purposes hereof is 613 N. W. Loop 410, Suite 660, San Antonio, Texas 78216 and National Bancshares Corporation (hereinafter called "Lessee"). Lessee's address for purposes hereof until commencement of the term of this Lease being 613 N. W. Loop 410, San Antonio, Texas 78216 and that thereafter being that of the "Building" (hereinafter defined). WITNESSETH ARTICLE I. LEASED PREMISES 1. Subject to and upon the terms, provisions and conditions hereinafter set forth, and each in consideration of the duties, covenants and obligations of the other hereunder, Lessor does hereby lease, demise and let to Lessee and Lessee does hereby lease from Lessor those certain premises (hereinafter sometimes called the "Leased Premises") in the building known as the SPECTRUM (herein called the "Building" and its legal description is attached hereto and marked as Exhibit "A") located in San Antonio, Texas, such premises being more particularly described as follows: Approximately One Thousand Eighty Six Feet of Net Rentable Area (1,086 NRA) located on the sixth (6th) floor of the Spectrum Building as reflected on the floor plan of such premises attached hereto and made a part hereof as Exhibit B. 2. The term "Net Rentable Area" (NRA) as used herein, shall refer to (i) in the case of a single tenancy floor, all floor area measured from the inside surface of the outer glass or exterior wall of the Building to the inside surface of the opposite exterior wall, excluding only the areas within the outside walls used for elevator mechanical rooms, building stairs, fire towers, elevator shafts, flues, vents, stacks, vertical pipe shafts and vertical 2 ducts, but including such areas which are for the specific use of the particular tenant such as special stairs or elevators, plus an allocation of the square footage of the Building's elevator and main mechanical rooms, ground level lobbies and basement service area, and (ii) in the case of a partial floor, all floor within the inside surface of the outer glass or exterior wall enclosing the portion of the Leased Premises on such floor and measured to the mid-point of the walls separating areas leased by or held for lease to other tenants or from areas devoted to corridors, elevator foyers, rest rooms, mechanical rooms, janitor closets, vending areas and other similar facilities for the use of all Tenants on the particular floor (hereinafter sometimes called "Common Areas"), but including a proportionate part of the Common Areas located on such floor based upon the ratio which the tenant's NRA on such floor bears to the aggregate NRA on such floor plus an allocation of the square footage of the Building's elevator and main mechanical rooms, columns or projections necessary to the Building. All parking facilities located within the Building are excluded from NRA. The NRA in the Leased Premises has been calculated on the basis of the foregoing definition and is hereby stipulated for all purposes hereto to be approximately 1,086 square feet, whether the same should be more or less as a result of minor variations resulting from actual construction and completion of the Leased Premises for occupancy so long as such work is in accordance with the terms and provisions hereof. ARTICLE II. TERM 1. (a) Subject to and upon the terms and conditions set forth herein, or in any exhibit or addendum hereto, this lease shall continue in force for a term of eighteen (18) months, beginning on the 1st day of July, 1996, and ending on the 31st day of December, 1997. (b) In the event the Leased Premises should not be ready for occupancy by said commencement date for any reason, Lessor shall not be liable or responsible for any claims, damages or liabilities in connection therewith or by reason thereof. This Lease Agreement shall be effective only from the time that the Leased Premises are ready for occupancy by Lessee which date shall be the date of commencement of the term of the Lease. Should the term of this lease commence on a date other than that specified in Paragraph (1)a above, of Article II, Lessor and Lessee will, at the request of either, execute a declaration specifying the beginning date of the term of this Lease Agreement. In such event, rental under this Lease shall not commence until said revised commencement date, and the stated term in this Lease shall thereupon commence and the 2 3 expiration date shall be extended so as to give effect to the full stated term. USE 2. The Leased Premises are to be used and occupied by Lessee solely for the purpose of general office space. BASE RENTAL 3. Lessee hereby agrees to pay annual rental (herein called "Base Rental") in the sum of $15,747.00 per year. Lessee shall pay, as additional rent, all other sums of money as shall become due and payable by Lessee to Lessor under this Lease. The Lessor shall have the same remedies of default for the payment of additional rent as are available to Lessor in the case of a default in the payment of Base Rental. Such Base Rental, together with any adjustments of rent provided for herein then in effect, shall be due and payable in twelve (12) equal installments on the first day of each calendar month during the initial term or any extensions or renewals thereof, and Lessee hereby agrees to so pay such rent to Lessor at such address as may be designated by Lessor monthly in advance without demand. If the term of this Lease as heretofore established commences on other than the first day of a month or terminates on other than the last day of a month, then the installment of Base Rental of such month or months shall be prorated and the installment or installments so prorated shall be paid in advance. All past due installments of rent shall bear interest at 10% per annum until paid. SECURITY DEPOSIT 4. Upon execution of this Lease, Lessee shall deposit with Lessor and Lessor will keep on deposit at all times during the term of this Lease, the sum of One Thousand Three Hundred Twelve & 25/100 Dollars ($1,312.25) (the "Security Deposit"), as security for the payment by Lessee of all rent and other amounts herein agreed to be paid and for the faithful performance of all the terms, conditions, and covenants of this Lease. If, at any time during the term of this Lease, Lessee shall be in default in the performance of any provision of this Lease, Lessor shall have the right to use said deposit, or so much thereof as necessary, in payment of any rent or other amount of default in reimbursement of any expense incurred by Lessor, and in payment of any damages incurred by Lessor by reason of Lessee's default. In such event, Lessee shall, on 3 4 written demand of Lessor, pay to Lessor a sufficient amount in cash to restore the deposit. To the extent the deposit has not been utilized, for such purposes, it shall be refunded to Lessee within sixty (60) days after the termination of the Lease or surrender and acceptance of the Premises, whichever occurs last. Lessor shall have the right to commingle the deposit with other funds of Lessor and no interest shall be paid thereon to Lessee (except as required by law). Lessor shall deliver the funds deposited by Lessee to the purchaser of Lessor's interest in the Premises in the event such interest be sold and, thereupon, Lessor shall be discharged from further liability with respect to the deposit. If claims of Lessor exceed the deposit, Lessee shall remain liable for the balance of such claims. BASE RENTAL ADJUSTMENT 5. The Base Rental Adjustment shall be calculated in accordance with the following: (a) Lessee's Base Rental includes a component applicable to Basic Costs (hereinafter defined) equal to the 1996 cost per square foot of NRA of the Leased Premises. (b) Prior to the commencement of each calendar year of Lessee's occupancy, Lessor shall provide an estimate of Basic Costs for said calendar year. Lessee shall pay a Base Rental for said calendar year adjusted upward or downwards, as appropriate, by the amount of difference between the prior calendar year's estimated Basic Costs and the coming year's estimated Basic Costs. (c) Within 150 days or as soon thereafter as possible of the conclusion of each calendar year of the lease term, Lessor shall furnish to Lessee a statement of Lessor's Basic Costs for said lease year. A lump sum payment will be made from Lessor to Lessee or from Lessee to Lessor, as appropriate, within 30 days of the delivery of such statement equal to the difference in actual Basic Costs and estimated Basic Costs for which payments have been included in the adjusted Base Rental set forth above for the just completed year. The effect of this reconciliation payment is that Lessee will pay during the lease term its share of Basic Costs increases over the original 1996 cost per square foot and no more. (d) All increases in Basic Costs shall be paid by Lessee in the proportion which Lessee's Net Rentable Area 4 5 bears to 100% of the total Net Rentable Area in the Building or to the total Net Rentable Area leased in the Building (if such total leased is greater than 100% of the total Building NRA). Nothing contained in this Paragraph 4 shall be construed at any time so to reduce the monthly installments of Base Rental payable hereunder below the amount set forth in Article II, Paragraph 3, of this lease. BASIC COSTS 6. "Basic Costs" as said term is used herein shall consist of all operating expenses of the Building, which shall be computed on the accrual basis and shall include all expenditures by Lessor to maintain and operate all facilities of the Building in operation from the beginning of the lease term and such additional facilities in subsequent years as may be determined by Lessor to be necessary. All operating expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied. The term "operating expenses" as used herein shall mean all expenses, costs and disbursements (but not replacement of capital investment items nor specific costs especially billed to and paid by specific tenants) of every kind and nature which Lessor shall pay or become obligated to pay because of or in connection with the ownership and operation of the Building, including but not limited to the following: (a) Wages, salaries and all related expenses and benefits, of all employees engaged in operation and maintenance, or security, of the Building and personnel who may provide traffic control relating to ingress and egress to and from the parking facilities which are part of the Building to the surrounding public streets. All taxes, insurance and benefits relating to employees providing these services shall be included. (b) Cost of all supplies and materials and equipment rented or used in operation and maintenance of the Building. (c) Cost of all utilities for the Building, including the cost of water and power, heating, lighting, air conditioning and ventilating for the Building (including charges to the Building for any such services for the Building provided from a central plant which also serves other parts of the Building). (d) Management costs and the cost of all maintenance and service agreements for the Building and the equipment 5 6 therein, including, but not limited to, alarm service, window cleaning, security service, traffic control, janitorial service and elevator maintenance. (e) Cost of all insurance relating to the Building, including, but not limited to, the cost of fire, rental abatement, casualty and liability insurance applicable to the Building and Lessor's personal property used in connection therewith. (f) All taxes and assessments and governmental charges whether federal, state, county or municipal, and whether they be by taxing districts or authorities presently taxing the Building or by others subsequently created or otherwise, and any other taxes and assessments attributable to the Building or its operation and an allocation to the Building of the taxes for the service roads which serve the Building. It is agreed that Lessee will be responsible for ad valorem taxes on its personal property and on the value of leasehold improvements to the extent that same exceed standard building allowances. (g) Cost of repairs and general maintenance of the Building (excluding repairs and general maintenance paid by proceeds of insurance or by Lessee or other third parties, and alterations attributable solely to tenants of the Building other than Lessee). (h) Amortization of the cost of installation of capital investment items which are primarily for the purpose of reducing operating costs or which may be required by governmental authority. All such costs shall be amortized over the reasonable life of the capital investment items by including in Basic Costs annually the applicable amortization amount, with the reasonable life and amortization schedule being determined in accordance with generally accepted accounting principles and in no event to extend beyond the reasonable life of the Building. (i) Lessor's central accounting costs applicable to the Building. (j) Any allocation of expenditures for service or operation of the Building attributable to the Building, determined in accordance with generally accepted accounting principles. (k) Cost of an office in the Building maintained for management of the Building 6 7 Notwithstanding any other provision herein to the contrary, it is agreed that in the event the Building is not fully occupied during any year of the lease term, an adjustment shall be made in computing the Basic Costs for such year so that the Basic Costs shall be computed for such year as though the Building had been fully occupied during such year. Lessee at its expense shall have the right at any reasonable time within twelve months after the end of a year in which additional rent is due, to retain an independent certified public accountant to audit Lessor's books and records relating to this Lease for any year or years for which additional rental payments become due; or at Lessor's sole discretion, Lessor will provide such audit prepared by a certified public accountant. ARTICLE III. Lessor covenants and agrees with Lessee: SERVICES TO BE FURNISHED BY LESSOR 1. To use its best efforts to cause public utilities to furnish the electricity, gas and water utilized in operating any and all facilities serving the leased premises. 2. To provide (as part of the Basic Costs of the Building) access to the Building during weekends and after normal working hours during the week via access cards and proximity access card readers. Lessor shall not be liable to Lessee for losses due to theft or burglary, or for damages done by unauthorized persons on the premises. Normal building hours are 7:00 a.m.-6:00 p.m. Monday-Friday, and 8:00 a.m.- 12:00 p.m. Saturdays. 3. To furnish (as part of the Basic Costs of the Project) Lessee while occupying the premises: (a) Hot and cold water at those points of supply provided for general use of other tenants in the Building; central heat and air considered by Lessor to be standard, but such service at times during weekdays other than normal business hours for the Building, on Saturday afternoons, Sundays and holidays to be furnished only upon request of Lessee, who shall bear the entire cost thereof; routine maintenance and electric lighting service for all public areas and special service areas of the Building in the manner and to the extent deemed by Lessor to be standard. 7 8 (b) Janitor service on a five (5) day week basis at no extra charge; provided, however, if Lessee's floor coverings or other improvements are other than building standard, Lessee will pay the additional cleaning cost attributable thereto as additional rent. Lessee will pay said additional rent upon presentation of a statement therefor by Lessor, and Lessee's failure to pay shall constitute default hereunder. (c) Electrical facilities to furnish sufficient power for typewriters, voice writers, calculating machines, personal computers, copiers and other machines of similar low electrical consumption (total consumption not to exceed one watt per square foot of Net Rentable Area per month); but not including electricity required for duplicating and electronic data processing equipment, special lighting in excess of building standard, and any other item of electrical equipment which (singly) consumes more than 0.5 kilowatts at rated capacity or requires a voltage other than 120 volts single phase and provided that if the installation of said electrical equipment requires additional air conditioning capacity above that provided by the building standard system, then the additional air conditioning installation including any submetering devices necessary and operating costs will be the obligation of Lessee. (d) All building standard fluorescent bulb replacement in all areas and all incandescent bulb replacement in public areas, toilet and rest room areas and stairwells. Failure by Lessor to any extent to furnish these defined services, or any cessation thereof, resulting from causes beyond the reasonable control of Lessor shall not render Lessor liable in any respect for damages to either person or property, nor be construed as an eviction of Lessee, nor work an abatement of rent, nor relieve Lessee from fulfillment of any covenant or agreement hereof. Should any of the equipment or machinery serving the Building break down, or for any cause cease to function properly, Lessee shall have no claim for rebate of rent or damages on account of an interruption of service occasioned thereby or resulting therefrom. KEYS and LOCKS 4. To furnish Lessee two (2) keys for each corridor door entering the Leased Premises. Additional keys will be furnished at a charge by Lessor on an order signed by 8 9 Lessee's authorized representative. All such keys shall remain the property of Lessor. No additional locks shall be allowed on any door of the Leased Premises without Lessor's permission, and Lessee shall not make, or permit to be made any duplicate keys, except those furnished by Lessor. Upon termination of this Lease, Lessee shall surrender to Lessor all keys of the Leased Premises, and give to Lessor the explanation of the combination of all locks for safe, safe cabinets and vault doors, if any, in the Leased Premises. WINDOW COVERINGS 5. To provide horizontal mini-blind window coverings. Lessee agrees that any window coverings in addition to those provided are at Lessee's cost and are subject to Lessor's written approval. IMPROVEMENTS to be MADE by LESSOR 6. To provide and install all letters or numerals on doors into the Leased Premises. All such letters and numerals shall be in Building standard graphics, and no others shall be used or permitted on the Leased Premises. Lessor also agrees to provide and install, a listing on the Building directory board. 7. Lessor is to Lease the Leased Premises to the Lessee on an "as is" basis. PEACEFUL ENJOYMENT 8. That Lessee shall, and may peacefully have, hold and enjoy the Leased Premises, subject to the other terms hereof, provided that Lessee pays the rental and other sums herein recited to be paid by Lessee and performs all of Lessee's covenants and agreements herein contained. It is understood and agreed that this covenant and any and all other covenants of Lessor contained in this Lease shall be binding upon Lessor and its successors only with respect to breaches occurring during its and their respective ownership of the Lessor's interest hereunder. 9 10 LIMITATION of LESSOR'S PERSONAL LIABILITY 9. Lessee specifically agrees to look solely to Lessor's interest in the Building for the recovery of any judgment from Lessor, it being agreed that Lessor shall never be personally liable for any such judgment. The provisions contained in the foregoing sentence are not intended to, and shall not limit any right that Lessee might otherwise have to obtain injunctive relief against Lessor or Lessor's successors in interest, or any other action not involving the personal liability of Lessor to respond in monetary damages from assets other than Lessor's interest in the Building or any suit or action in connection with enforcement or collection of amounts which may become owing or payable under or on account of insurance maintained by Lessor. PARKING 10. Lessee shall at all times during the term of this lease have parking rights for at least 3 vehicles in the Parking Garage located adjacent to the Building. No specific spaces in the parking Garage are to be assigned to Lessee but Lessor will issue Lessee the aforesaid number of parking stickers each of which will authorize parking in the Parking Garage of a vehicle on which the sticker is displayed, or Lessor will provide a reasonable alternative means of identifying and controlling vehicles authorized to be parked in the Parking Garage. Lessor may designate the area within which each such vehicle may be parked, and Lessor may change such designations from time to time. Lessor may make, modify and enforce rules and regulations relating to the parking of automobiles in the Parking Garage, and Lessee will abide by such rules and regulations. Lessor also reserves the right to increase the size of the Parking Garage. As the Basic Parking Charge, Lessee covenants and agrees to pay Lessor during the term of this Lease, as additional rental hereunder, the sum of $ -0- per month for each of the parking stickers to be issued by Lessor as herein provided, such sum to be payable monthly in advance on the first day of each and every calendar month during the lease term, and calendar month in the event the lease term commences on a date other than the first day of a calendar month. 10 11 ARTICLE IV. Lessee covenants and agrees with Lessor: PAYMENTS by LESSEE 1. To pay all rent and sums provided to be paid to Lessor in the times and in the manner herein provided. REPAIRS by LESSOR 2. Unless otherwise stipulated herein, Lessor shall not be required to make any improvements or repairs of any kind or character on the Leased Premises during the term of this Lease, except such repairs as may be required for normal maintenance operations. The obligation of Lessor to maintain and repair the Leased Premises shall be limited to building standard items. Special leasehold improvements will, at Lessee's written request, be maintained by Lessor at Lessee's cost, plus an additional charge to cover overhead. REPAIRS by LESSEE 3. At its own cost and expense, to repair or replace any damage or injury done to the Building, or any part thereof, caused by Lessee or Lessee's agents, employees, invitees or visitors; provided however, if Lessee fails to make such repairs or replacements promptly, Lessor may, at its option, make such repairs or replacements, and Lessee shall repay the cost thereof to the Lessor on demand, subject to Article V, paragraph 15. CARE of the LEASED PREMISES 4. Not to commit or allow any waste or damage to be committed on any portion of the Leased Premises, and at the termination of this Lease, by lapse of time or otherwise, to deliver up said Leased Premises to Lessor in as good condition as at date of possession by Lessee, ordinary wear and tear excepted, and upon such termination of this Lease, Lessor shall have the right to re-enter and resume possession of the Leased premises. 11 12 ASSIGNMENT of SUBLEASE 5. In the event Lessee should desire to assign this Agreement or sublet the Leased Premises or any part thereof, Lessee shall give Lessor written notice of such desire at least sixty (60) days in advance of the date on which Lessee desires to make such assignment or sublease. Lessor shall then have a period of thirty (30) days following receipt of such notice within which to notify Lessee in writing that Lessor elects either (1) to terminate this Agreement as to the space so affected as of the date so specified by Lessee in which event Lessee will be relieved of all further obligation hereunder as to such space, or (2) permit Lessee to assign or sublet such space, subject, however, to subsequent written approval of the proposed assignee or sublessee by Lessor; if however, the rental rate agreed upon between Lessee and Sublessee is greater than the rental rate that Lessee must pay Lessor, then such excess rental shall be deemed additional rent owed by Lessee to Lessor and shall be paid by Lessee to Lessor in the same manner that Lessee pays the base rent as outlined in Section II, paragraph 3, or (3) to refuse to consent (with cause only) to Lessee's assignment or subleasing such space and to continue this Lease in full force and effect as to the entire Leased Premises. If Lessor should fail to notify Lessee in writing of such election within said thirty (30) day period, Lessor shall be deemed to have elected option (2) above. If Lessor elects to exercise option (2) above, Lessee agrees to provide at its expense, direct access from such sublet space to a public corridor of the Building. No assignment or subletting by Lessee shall relieve Lessee of any obligation under this Lease. Any attempted assignment or sublease by Lessee in violation of the terms and covenants of this paragraph shall be void. ALTERATIONS, ADDITIONS, IMPROVEMENTS 6. Not to permit the Leased Premises to be used for any purpose other than that stated in the use clause hereof, or make or allow to be made any alterations or physical additions in or to the Leased Premises, without first obtaining the written consent of Lessor. Any and all such alterations, physical additions, or improvements, when made to the Leased Premises by Lessee, shall at once become the property of Lessor and shall be surrendered to Lessor upon the termination of this Lease by lapse of time or otherwise; provided, however, this clause shall not apply to movable equipment or furniture owned by Lessee. Lessee 12 13 agrees specifically that no food, soft drink or other vending machine will be installed within the Leased Premises. LEGAL USE and VIOLATIONS of INSURANCE COVERAGE 7. Not to occupy or use any portion of the Leased Premises to be occupied or used for any business or purpose which is unlawful, disreputable or deemed to be extra-hazardous on account of fire, or permit anything to be done which would in any way increase the rate of fire insurance coverage on said Building and/or its contents. LAWS and REGULATIONS; RULES of BUILDING 8. To comply with all laws, ordinances, orders, rules and regulations (state, federal, municipal and other agencies or bodies having any jurisdiction thereof) relating to the use, condition or occupancy of the Leased Premises. Lessee will comply with the rules of the Building adopted by Lessor from time to time for the safety, care and cleanliness of the Leased Premises and for preservation of good order therein, all of which will be sent by Lessor to Lessee in writing and shall be thereafter carried out and observed by Lessee. ENTRY for REPAIRS and INSPECTION 9. To permit Lessor or its agents or representatives to enter into and upon any part of the Leased Premises at all reasonable hours to inspect same, clean or make repairs, alterations or additions thereto, as Lessor may deem necessary or desirable, and Lessee shall not be entitled to any abatement or reduction of rent by reason thereof. NUISANCE 10. To conduct its business and control its agents, employees, invitees and visitors in such manner as not to create any nuisance, or interfere with, annoy or disturb any other Lessee or Lessor in his operation of the Building. 13 14 SUBORDINATION to MORTGAGE 11. This Lease is subject and subordinate to any first lien mortgage or deed of trust which may now or hereafter encumber the Building of which the Leased Premises form a part and to all renewals, modifications, consolidations, replacements and extensions thereof. This clause shall be self-operative and no further instrument of subordination need be required by any mortgagee. In confirmation of such subordination, however, Lessee shall at Lessor's request execute promptly any appropriate certificate or instrument that Lessor may request. Lessee hereby constitutes and appoints Lessor the Lessee's attorney-in-fact to execute any such certificate or instrument for and on behalf of Lessee. In the event of the enforcement by the trustee or the beneficiary under any such mortgage or deed of trust, Lessee will, upon request of any person or party succeeding to the interest of Lessor as a result of such enforcement, automatically become the Lessee of such successor in interest without change in the terms or other provisions of such lease; provided, however, that such successor in interest shall not be bound by (i) any payment of rent or additional rent for more than one month in advance except pre-payments in the nature of security for the performance by Lessee of its obligations under this Lease, or (ii) any amendment or modification of this Lease made without the written consent of such trustee or such beneficiary or such successor in interest. Upon request by such successor in interest, Lessee shall execute and deliver an instrument or instruments confirming the attornment herein provided for. ESTOPPEL CERTIFICATE or THIRD PARTY AGREEMENT 12. At Lessor's request Lessee will execute either an Estoppel Certificate addressed to Lessor's mortgagee or a three-party agreement among Lessor, Lessee and said mortgagee certifying as to such facts (if true) and agreeing to such notice provisions and other matters as such mortgagee may reasonably require in connection with Lessor's financing. NAME CHANGES 13. That Lessor shall have the right to change the name of the Building or the design of construction thereof whenever Lessor, in its sole discretion deems it appropriate without 14 15 any liability to Lessee and without any consent of Lessee being necessary. ARTICLE V. Lessor and Lessee mutually covenant and agree as follows: CONDEMNATION and LOSS or DAMAGE 1. If the Leased Premises shall be taken or condemned for the public purpose to such an extent as to render the Leased Premises untenantable this Lease shall, at the option of either party, forthwith cease and terminate. All proceeds from any taking or condemnation of the Leased Premises shall belong to and be paid to Lessor. DAMAGES FROM CERTAIN CAUSES 2. Lessor shall not be liable or responsible to Lessee for any loss or damage to any property or person occasioned by theft, fire, act of God, public enemy, injunction, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority, or for any damage or inconvenience which may arise through repair or alteration of any part of the Building, or failure to make any such repairs. LESSOR'S RIGHT to RELET 3. In the event of default by Lessee in any of the terms or covenants of this Lease or in the event the Leased Premises are abandoned by Lessee, Lessor shall have the right, but not the obligation, to relet same for the remainder of the term provided for herein; and if the rent received through such reletting does not at least equal the rent provided for herein, Lessee shall pay and satisfy any deficiency between the amount of the rent so provided for, and that received through reletting and in addition thereto, shall pay all reasonable expenses incurred in connection with any such reletting, including but not limited to the cost of renovating, altering and decorating for a new occupant. Nothing herein shall be construed as in any way denying Lessor the right in the event of abandonment of said premises or other breach of this agreement by Lessee, to treat the same as an entire breach and at Lessor's option to immediately sue for the entire 15 16 breach of this agreement and any and all damages which Lessor suffers thereby. HOLDING OVER 4. In the event of holding over by Lessee after expiration or termination of the Lease without the written consent of Lessor, Lessee shall pay as liquidated damages double rent for the entire holdover period. No holding over by Lessee after the term of this Lease shall operate to extend the Lease; in the event of any unauthorized holding over, Lessee shall indemnify Lessor against all claims for damages by any other Lessee to whom Lessor may have leased all or any part of the premises covered hereby effective upon the termination of this Lease. Any holding over with the consent of Lessor in writing shall thereafter constitute this Lease a lease from month to month. FIRE CLAUSE 5. In the event of a fire in the Leased Premises, Lessee shall immediately give notice thereof to Lessor. If the Leased Premises, though no fault or neglect of Lessee, its agents, employees, invitees or visitors, shall be partially destroyed by fire or other casualty so as to render the Leased Premises untenantable, the rental herein shall abate thereafter until such time as the Leased Premises are made tenantable as determined by Lessor. In the event of the total destruction of the Leased Premises without fault or neglect of Lessee, its agent, employees, invitees or visitors, or if from such cause the same shall be so damaged that Lessor shall decide not to rebuild, then all rent owed up to the time of such destruction or termination shall be paid by Lessee and henceforth this Lease shall cease and come to an end. ATTORNEY'S FEES 6. In the event Lessee makes default in the performance of any of the terms, covenants, agreements or conditions contained in this Lease and Lessor places the enforcement of this Lease, or any part thereof, or the collection of any rent due, or to become due hereunder, or recovery of the possession of the Leased Premises in the hands of an attorney, or files suit upon the same, Lessee agrees to pay Lessor's attorney's fees. 16 17 ALTERATION 7. This agreement may not be altered, changed or amended, except by an instrument in writing, signed by both parties hereto. ASSIGNMENT by LESSOR 8. Lessor shall have the right to transfer and assign, in whole or in part, all its rights and obligations hereunder and in the Building and property referred to herein, and in such event and upon its transferee's assuming Lessor's obligations hereunder (any such transferee to have the benefit of, and be subject to, the provisions of Paragraph 8 and 9 of Article III hereof) no further liability or obligation shall thereafter accrue against Lessor hereunder. DEFAULT by LESSEE 9. If default shall be made in the payment of any sum to be paid by Lessee under this Lease, and default shall continue for ten (10) days, or default shall be made in the performance of any of the other covenants or conditions which Lessee is required to observe and to perform, and such default shall continue for twenty (20) days, or if the interest of Lessee under this Lease shall be levied on under execution or other legal process, or if any petition shall be filed by or against Lessee to declare Lessee bankrupt or to delay, reduce or modify Lessee's debts or obligations, or if any petition shall be filed or other action taken to reorganize or modify Lessee's capital structure if Lessee be a corporation or other entity, or if Lessee be declared insolvent according to law, or if any assignment of Lessee's property shall be made for the benefit of creditors, or if a receiver or trustee is appointed for Lessee or its property, or if Lessee shall abandon the Leased Premises during the term of this Lease or any renewals or extensions thereof, then Lessor may treat the occurrence of any one or more of the foregoing events as a breach of this Lease (provided that no such levy, execution, legal process or petition filed against Lessee shall constitute breach of this Lease if Lessee shall vigorously contest the same by appropriate proceedings and shall remove or vacate the same within thirty (30) days from the date of its creation, service or filing) and thereupon, at Lessor's option, may have any one or more of the following described remedies in addition to all other rights and remedies provided at law or in equity. 17 18 (a) Lessor may terminate this Lease and forthwith repossess the Leased Premises and be entitled to recover forthwith as damages a sum of money equal to the total of (i) the cost of recovering the Leased Premises, (ii) the unpaid rent earned at the time of termination, plus interest thereon at the maximum lawful rate per annum from the due date, (iii) the balance of the rent for the remainder of the term less the fair market value of the Leased Premises for said period, and (iv) any other sum of money and damages owed by Lessee to Lessor. (b) Lessor may terminate Lessee's right of possession (but not the Lease) and may repossess the Leased Premises by forcible entry or detainer suit or otherwise, without demand or notice of any kind to Lessee and without terminating this Lease, in which event Lessor may, but shall be under no obligation to do so, relet the same for the account of Lessee for such rent and upon such terms as shall be satisfactory to Lessor. For the purpose of such reletting Lessor is authorized to decorate or to make any repairs, changes, alterations or additions in or to Leased Premises that may be necessary or convenient, and (i) if Lessor shall fail or refuse to relet the Leased Premises, or (ii) if the same are relet and a sufficient sum shall not be realized from such reletting after paying the unpaid basic and additional rent due hereunder earned but unpaid at the time of reletting plus ten percent per annum thereon, the cost of recovering possession, and all of the costs and expenses of such decorations, repairs, alterations and additions and the expense of such reletting and of the collection of the rent accruing therefrom to satisfy the rent provided for in this lease to be paid, then Lessee shall pay to Lessor as damages a sum equal to the amount of the rental reserved in this Lease for such period or periods, or if the Leased Premises have been relet, the Lessee shall satisfy and pay any such deficiency upon demand therefor from time to time and Lessee agrees that Lessor may file suit to recover any sums falling due under the terms of this Article V, Paragraph 9(b) from time to time; and that no delivery to or recovery of any portion due Lessor hereunder shall be any defense in any action to recover any amount not theretofore reduced to judgment in favor of Lessor, nor shall such reletting be construed as an election on the part of Lessor to terminate this Lease unless a written notice of such intention be given by Lessor to Lessee. Notwithstanding any such reletting without termination, Lessor may at any time thereafter elect to terminate this Lease, for such previous breach. NON-WAVIER 10. Failure of Lessor to declare any default immediately upon occurrence thereof, or delay in taking action in 18 19 connection therewith, shall not waive such default, but Lessor shall have the right to declare any such default at any time and take such action as might be lawful or authorized hereunder, either in law or in equity. CASUALTY INSURANCE 11. Lessor shall maintain fire and extended coverage insurance on the portion of the Building constructed by Lessor, including additions and improvements by Lessee which are required to be made by Lessee by this Lease and which have become or are to become the property of Lessor upon vacation of the Leased Premises by Lessee. Said insurance shall be maintained with an insurance company authorized to do business in Texas, in amounts and with deductibles desired by Lessor and at the expense of Lessor and payments for losses thereunder shall be made solely to Lessor. Lessee shall maintain at its expense fire and extended coverage insurance on all of its personal property, including removable trade fixtures located in the Leased Premises and on all additions and improvements made by Lessee and not required to be insured by Lessor above. If the annual premiums to be paid by Lessor shall exceed the standard rates because Lessee's operations, contents of the Leased Premises, or improvements with respect to the Leased Premises beyond building standard, result in extra-hazardous exposure, Lessee shall promptly pay the excess amount of the premium upon request by Lessor. Lessee agrees that it shall keep its furniture, fixtures, merchandise, equipment and all items Lessee is obligated to maintain and repair under this Lease but not items or Building nonstandard items required to be insured by Lessor insured against loss or damage by fire or other casualty covered by an "all risk", multi-peril, or "special form" policy, including fire and extended coverage, to the extent of full replacement cost of such items. It is understood and agreed that Lessee assumes all risk of damage to its own property arising from any cause whatsoever, including without limitation, loss by theft or otherwise. LIABILITY INSURANCE 12. Lessor and Lessee, each at their respective expense, shall maintain a policy or policies of comprehensive general liability insurance with the premiums thereon fully paid in advance issued by and binding upon some solvent insurance company, such insurance to afford minimum protection of not less than One Million Dollars ($1,000,000.00) in respect to any one occurrence, and of not less than Five Hundred Thousand Dollars ($500,000.00) for property damage in any one occurrence. The policy or 19 20 policies of insurance to be maintained by Lessee shall name the Lessor as an additional insured and shall contain an endorsement that such policies cannot be amended or modified as to Lessor without fifteen (15) days prior written notice. Lessee shall deliver duplicate original policies or certificates of insurance in form satisfactory to Lessor not less than twenty (20) days prior to the expiration of old policies. HOLD HARMLESS 13. Lessee shall not be liable to Lessor, or to Lessor's agents, servants, employees, customers or invitees for any damage to person or property caused by any act, omission or neglect of Lessor, its servants or employees, and Lessor agrees to hold Lessee harmless from all claims for such damage. Lessor shall not be liable to Lessee, or to Lessee's agents, servants, employees, customers or invitees for any damage to person or property caused by an act, omission or neglect of Lessee, its agents, servants or employees, and Lessee agrees to indemnify and hold Lessor harmless from all liability and claims for any such damage. WAIVER of SUBROGATION RIGHTS 14. Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each hereby waives any and all rights of recovery, claim, action or cause of action, against the other, its agents, officers, or employees, for any loss or damage that may occur to the premises hereby demised, or any part, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause which could be insured against under the terms of standard fire and extended coverage insurance policies referred to in Article V, Paragraph 2 hereof, regardless of cause or origin, including negligence of the other party hereto, its agents, officers or employees, and covenants that no insurer shall hold any right of subrogation against such other party. This waiver of subrogation provision shall be effective to the full extent, but only to the extent, that the same does not impair the effectiveness of insurance policies of Lessor and Lessee. SUBSTITUTION 15. At any time after the execution of this Lease Agreement, Lessor may substitute for the Leased Premises other premises in the Building (the "New Premises") in 20 21 which event the New Premises shall be deemed to be the Leased Premises for all purposes hereunder provided: (a) The New Premises shall be similar in area and in appropriateness for Lessee's purposes; and (b) Any such substitution is effected for the purpose of accommodating a Lessee that will occupy all or a substantial portion for the floor on which the Leased Premises are located; and (c) If Lessee is occupying the Leased Premises or has borne costs for work which will have to be redone as a result of the relocation at the time for any substitution, Lessor shall pay the expense of moving Tenant, its property and equipment from the Leased Premises and of completing the New Premises with improvements at least equal to those located in the Leased Premises. (d) Lessor must give Lessee thirty (30) days prior written notice of its intent to substitute the Leased Premises. NOTICE 16. All notices, demands, consents and approvals which may be or are required to be given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when deposited in the United States mail, certified or registered, postage prepaid, and addressed to the party to be notified at the address for such party specified in this Lease Agreement, or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days notice to the notifying party. Lessee hereby appoints as an agent to receive the service of all dispossessory or distraint proceedings and notices thereunder the person in charge of or occupying the Leased Premises at the time, and, if no person shall be in charge of or occupying the same, then such service may be made by attaching the same on the main entrance of the Leased Premises. NO JOINT VENTURE 17. This Lease shall not be deemed or construed to create or establish any relationship (other than that of Landlord and Tenant) or partnership or joint venture or similar relationship or agreement between Lessor and Lessee hereunder. 21 22 This Lease shall be binding upon and inure to the benefit of the successors and assigns of the Lessor, and shall be binding upon and inure to the benefit of Lessee, its successors, and, to the extent assignment may be approved by Lessor hereunder, Lessee's assigns. The pronouns of any gender shall include the other genders, and either the singular or the plural shall include the other. All rights and remedies of Lessor under this Lease shall be cumulative and none shall exclude any other rights or remedies allowed by law; and this lease is declared to be a Texas contract, and all of the terms thereof shall be construed according to the laws of the State of Texas. IN TESTIMONY WHEREOF, the parties hereto have executed this Lease as of the date aforesaid. LESSOR Spectrum Building of Texas, L.L.P By: /s/ Richard H. LePere --------------------------- Richard H. LePere Its: Legal Agent LESSEE National Bancshares Corporation By: /s/ Anne Renfroe ------------------------- Its: Chief Financial Officer 22 EX-10.8 4 SUBLEASE FOR 100 WILSHIRE BLVD, SANTA MONICA, CA 1 EXHIBIT 10.8 SUBLEASE AGREEMENT This Sublease Agreement (Sublease) is made and entered into as of the 1st day of July, 1996, between Equibond, Inc., a California corporation (hereinafter called "Sublessor"), and National Bancshares Corporation of Texas, a Texas corporation (hereinafter called "Sublessee"): ARTICLE 1. PRIME LEASE 1.1 Sublease Subject to Prime Lease. This Sublease is subject and subordinate to that certain office lease ("Lease") dated June 8, 1994, and executed by and between 100 Wilshire Associates (hereinafter called the "Prime Lessor"), as landlord and Sublessee, as tenant. Said Lease was assigned to Sublessor by Sublessee, and consented to by Prime Lessor, by and through an Assignment, Assumption and Consent, effective July 1, 1996 ("Assignment"). The Lease, as assigned by the Assignment, is hereinafter called the "Prime Lease". A copy of the Lease and the Assignment are attached hereto as Exhibit "A" and made a part hereof for all purposes as if fully set forth herein. 1.2 Compliance with Prime Lease. With the exception of the obligation to pay Base Rental pursuant to Section 8 of the Prime Lease and to pay Operating Expenses pursuant to Section 9 thereof, Sublessee hereby covenants and agrees to comply with and perform all obligations of Sublessor under the Prime Lease which relates to, or are properly allocated to, the Leased Premises, including, without limitation, all repair obligations, all insurance obligations, all obligations to pay utility charges and taxes, and all indemnification obligations of Sublessor thereunder, and any liability accruing from Sublessee's failure to pay same when due thereunder. Sublessee agrees that whenever the consent of Prime Lessor is required under the terms of the Prime Lease with respect to any action, Sublessee shall obtain the consent of Sublessor and of Prime Lessor prior to taking such action. Sublessee hereby covenants and agrees to promptly deliver to Sublessor copies of any and all notices or other correspondence received by Sublessee from Prime Lessor that might affect Sublessor in any manner and further agrees, notwithstanding Section 9.3 to the contrary, to so deliver same in the manner most appropriate to insure that Sublessor will be able to respond to any of such notices or other correspondence from the Prime Lessor within any time periods set forth in the Prime Lease. 1.3 Services. Sublessee hereby acknowledges and agrees that the only services, amenities and rights to which Sublessee is entitled under this Sublease are those to which Sublessor is entitled under the Prime Lease (subject to all the provisions, restrictions and conditions imposed of the Prime Lease). Sublessor 2 to provide any such services, amenities and rights nor shall any such failure be construed as a breach hereof by Sublessor or an eviction of Sublessee or entitle Sublessee to an abatement of any of the rentals under this Sublease, except and only to the extent that Sublessor receives an abatement under the Prime Lease with respect thereto. 1.4 Exercise of Rights and Remedies Under Prime Lease. Sublessee shall not have the right to exercise any of Sublessor's options or elections permitted or authorized under the Prime Lease, or to institute any action or proceeding against Prime Lessor for the enforcement of the Prime Lease. If Prime Lessor shall default in the performance of any of its obligations under the Prime Lease, Sublessor shall, upon the written request of Sublessee and at Sublessee's sole cost and expense, use its diligent good faith efforts to enforce the Prime Lease and obtain Prime Lessor's compliance with its obligations thereunder. ARTICLE 2. DEMISE AND DESCRIPTION 2.1 Demise of Leased Premises. Subject to and upon the terms and conditions set forth herein, Sublessor hereby subleases to Sublessee, and Sublessee hereby subleases from Sublessor for the term herein set forth, all of Sublessor's right, title and interest in and to the use and occupancy of the premises leased by Sublessor under the Prime Lease, same being approximately 1,429 square feet of rentable area located on floor 17 in the building known as the 100 Wilshire Building, as shown outlined on Exhibit "A", to the Prime Lease (herein called the "Leased Premises"). 2.2 Condition of the Leased Premises. Tenant acknowledges and agrees that it has inspected the Leased Premises and agrees to accept same in its present condition, "AS IS" and "WITH ALL FAULTS." 2.3 DISCLAIMER OF WARRANTIES. SUBLESSEE ACKNOWLEDGES THAT NEITHER SUBLESSOR NOR PRIME LESSOR HAS MADE OR WILL MAKE ANY WARRANTIES TO SUBLESSEE WITH RESPECT TO THE QUALITY OF CONSTRUCTION OF ANY LEASEHOLD IMPROVEMENTS OR TENANT FINISH WITHIN THE LEASED PREMISES OR AS TO THE CONDITION OF THE LEASED PREMISES, EITHER EXPRESS OR IMPLIED, AND THAT SUBLESSOR AND PRIME SUBLESSOR EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE LEASED PREMISES ARE OR WILL BE SUITABLE FOR SUBLESSEE'S INTENDED COMMERCIAL PURPOSES. EXCEPT AS EXPRESSLY PROVIDED IN SECTION 1.4 HEREOF, SUBLESSEE'S OBLIGATION TO PAY RENTALS UNDER THIS SUBLEASE IS NOT DEPENDENT UPON THE CONDITION OF THE LEASED PREMISES OR THE BUILDING (NOW OR IN THE FUTURE) OR THE PERFORMANCE BY PRIME LESSOR OF ITS OBLIGATIONS UNDER THE PRIME LEASE, AND SUBLESSEE SHALL CONTINUE TO PAY THE RENTALS HEREUNDER WITHOUT ABATEMENT, SETOFF OR DEDUCTION NOTWITHSTANDING ANY BREACH BY SUBLESSOR OF ITS DUTIES OR 2 3 OBLIGATIONS HEREUNDER OR BY PRIME LESSOR OF ITS DUTIES OR OBLIGATIONS UNDER THE PRIME LEASE, WHETHER EXPRESS OR IMPLIED. ARTICLE 3. TERM; SURRENDER OF POSSESSION 3.1 Term. Unless the Prime Lease is terminated sooner pursuant to the terms thereof, the term of this Sublease ("Term") shall be for the period commencing on July 1, 1996 and ending on December 31, 1999. 3.2 Surrender of Leased Premises. At the termination of this Sublease, by lapse of time or otherwise, Sublessee shall deliver up the Leased Premises to Sublessor in as good condition as existed on the date of possession by Sublessee, ordinary wear and tear and casualty damage excepted. Upon such termination of this Sublease, Sublessor shall have the right to re-enter and resume possession of the Leased Premises. 3.3 Holding Over. In the event of holding over by Sublessee after expiration or termination of this Sublease without the prior written consent of Sublessor, Sublessee shall pay as liquidated damages the greater of (i) double the amount of all base rental and additional rental which was payable by Sublessee immediately prior to such expiration or termination, and (ii) the then current market rental for the Leased Premises, pro rated on a daily basis for the entire holdover period. ARTICLE 4. RENT 4.1 Base Rental. Sublessee hereby agrees to pay an annual base rental of Twenty-Nine and 40/100 Dollars ($29.40) per square foot of net rentable area within the Leased Premises. Sublessee shall pay such base rental to Sublessor monthly without demand, for each and every month during the Term, in installments of Three Thousand Five Hundred and No/100 Dollars ($3,500.00). 4.2 Additional Rental. Sublessee shall also pay to Sublessor monthly as additional rental the pro rata amount, if any, of the operating expenses charged to Sublessor pursuant to Section 9 of the Prime Lease for any month during the Term which are properly allocated to the Leased Premises. In addition, Sublessee's rent shall be reduced to the extent the Sublessor's rent is reduced or abated under the terms of the Primary Lease, on a pro rata basis using the square footage used by the Sublessee compared to the total square footage under the Prime Lease. 4.3 Payment of Rentals. Each monthly installment of base rental and additional rental due to Sublessor under this Sublease shall be payable by Sublessee on the first day of each calendar month at Sublessor's address herein set forth or at such other 3 4 place as Sublessor shall designate in writing from time to time. If less than all of any calendar month or year occurs during the Term, rents for such partial month or year shall be prorated based on the actual number of days during such month or year occurring within the Term. ARTICLE 5. QUIET ENJOYMENT 5.1 Covenant of Quiet Enjoyment. Provided Sublessee has performed all of the terms, covenants, agreements and conditions of this Sublease, including the payment of rental and all other sums due hereunder, Sublessee shall peaceably and quietly hold and enjoy the Leased Premises against Sublessor and all persons claiming by, through or under Sublessor, for the term herein described, subject to the provisions and conditions of this Sublease and of the Prime Lease. 5.2 Limitation. It is understood and agreed that the provision of Section 5.1 and any and all other covenants of Sublessor contained in this Sublease shall be binding upon Sublessor and its successors only with respect to breaches occurring during its and their respective ownership of the Sublessor's interest hereunder. This Sublease is subject to and subordinate to all matters of public record in Los Angeles, California. ARTICLE 6. ASSIGNMENT AND SUBLETTING 6.1 Restriction. Sublessee shall not, without the prior written consent of Sublessor, which may not be unreasonably withheld, assign, transfer, mortgage, pledge, hypothecate or encumber this Sublease or any interest herein or sublet the Leased Premises or any part thereof, or permit the use of the Leased Premises by any party other than Sublessee. Any such assignment or subletting without such consent by Sublessor shall be void. Any such consent by Sublessor to any such assignment or subletting shall not release Sublessee from any of Sublessee's obligations hereunder or be deemed to be a consent to any subsequent assignment, subletting, occupation or use by another person. 6.2 Consent Subject to Prime Lessor Approval. Sublessor's consent to any proposed assignment or subletting may be given subject to the further consent of Prime Lessor. ARTICLE 7. INDEMNIFICATION AND EXCULPATION 7.1 Indemnity. Sublessee shall indemnify Sublessor for and hold Sublessor harmless from and against all costs, expenses (including reasonable attorneys' fees), fines, suits, claims, 4 5 demands, liabilities and actions resulting from any breach, violation or nonperformance of any covenant or condition hereof or from the use or occupancy of the Leased Premises by Sublessee or Sublessee's employees, agents, contractors, licensees and invitees, including any such costs, expenses, fines, suits, claims, demands, liabilities and actions which are attributable in whole or in part to the negligence of Sublessor, its employees, agents, contractors, licensees or invitees. 7.2 Exculpation. Sublessor shall not be liable to Sublessee or Sublessee's employees, agents, contractors, licensees or invitees for any damage to person or property resulting from any act or omission of any visitor to the Leased Premises except as Sublessor's own negligence may contribute thereto. ARTICLE 8. DEFAULTS AND REMEDIES 8.1 Default by Sublessee; Remedies of Sublessor. In case of any breach hereof by Sublessee, in addition to all other rights of Sublessor hereunder or available to Sublessor at law or equity, Sublessor shall have all the rights against Sublessee as would be available to the Prime Lessor against Sublessor under the Prime Lease if such breach were by Sublessor thereunder. If Sublessee defaults in the performance of any of the terms and provisions hereof and Sublessor places the enforcement of this Sublease in the hands of an attorney, Sublessee agrees to reimburse Sublessor for all reasonable expenses incurred by Sublessor as a result thereof including, but not limited to, reasonable attorneys' fees. ARTICLE 9. MISCELLANEOUS 9.1 Amendment. No amendment, modification or alteration of the terms hereof shall be binding unless the same shall be in writing, dated subsequent to the date hereof and duly executed by the parties hereto. 9.2 Headings; Interpretation. Descriptive headings are for convenience only and shall not control or affect the meaning or construction of any provision of this Sublease. Whenever the context of this Sublease requires, words used in the singular shall be construed to include the plural and vice versa and pronouns of whatsoever gender shall be deemed to include and designate the masculine, feminine or neuter gender. 9.3 Notices. Subject to Article 1.2 hereof, all notices, consents, requests, instructions, approvals and other communications provided for herein and all legal process in regard hereto shall be validly given, made or served, if in writing and delivered personally or sent by United States certified or registered mail, postage prepaid, return receipt requested, if to: 5 6 Sublessor: Equibond, Inc. 100 Wilshire Boulevard, Suite 1700 Santa Monica, California 90401 Attention: Jay H. Lustig Sublessee: National Bancshares Corporation of Texas P.O. Box 1511 Laredo, Texas 78042 Attention: Mr. Marvin E. Melson or to such other addresses as any party hereto may, from time to time, designate in writing delivered in a like manner. 9.4 Successors and Assigns. This Sublease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns in accordance with the terms of this Sublease. 9.5 Time of the Essence. Time is of the essence in the performance by Sublessee of its obligations hereunder. 9.6 Remedies Cumulative; Applicable Law. All rights and remedies of Sublessor under this Sublease shall be cumulative and none shall exclude any other rights or remedies allowed by law; and this Sublease is declared to be a Texas contract, and all of the terms thereof shall be construed according to the laws of the State of Texas. 9.7 Entire Agreement. The terms and provisions of all schedules and exhibits described herein and attached hereto are hereby made a part hereof for all purposes. This Sublease constitutes the entire agreement of the parties with respect to the subject matter hereof, and all prior correspondence, memoranda, agreements or understandings (written or oral) with respect hereto are merged into and superseded by this Sublease. 9.8 Authority. Sublessee warrants, represents and covenants that (a) it is a duly organized and existing legal entity under the laws of the state in which it is organized, and in good standing in the State of Texas, (b) it has full right and authority to execute, deliver and perform this Sublease, (c) the person executing this Sublease on behalf of Sublessee was authorized to do so, and (d) upon request of Sublessor, Sublessee will deliver to Sublessor satisfactory evidence of the due authorization, execution and delivery of this Sublease by Sublessee. 9.9 Severability. If any term or provision of this Sublease, or the application thereof to any person or circumstance, shall to 6 7 any extent be invalid or unenforceable, the remainder of this Sublease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Sublease shall be valid and shall be enforceable to the extent permitted by law. 9.10 No Recording. This Sublease (including any exhibits hereto) shall not be recorded without the prior written consent of Sublessor. 9.11 Parking. Sublessee shall be entitled to utilize the parking privileges provided to Sublessor pursuant to Section 5 of the Prime Lease, for which Sublessee shall reimburse Sublessor monthly, together with the payment of rentals pursuant to Section 4.3 above, the amount which sublessor is billed therefor pursuant to the Prime Lease. 9.12 Prime Lessor's Consent Required. Sublessee acknowledges that, pursuant to the provisions of the Prime Lease, Sublessor is required to obtain Prime Lessor's written consent to this Sublease, and accordingly, that the obligations of Sublessor hereunder are expressly subject to Sublessor obtaining such consent. 9.13 Common Areas. Sublessee shall have the non-exclusive right, in common with others, to use the common areas in and adjacent to the Leased Premises pursuant to Section 2 of the Prime Lease. 9.14 Cancellation of Agreement. The agreement entered into as of March 1, 1995, between National Bancshares Corporation of Texas and Equibond, Inc. is hereby cancelled as of the date of this Sublease Agreement. 9.15 Security Rent Deposit. Sublessor acknowledges that a six-month security rent deposit ("Deposit") in the amount of Twenty-One Thousand and No/100 Dollars ($21,000.00) has been paid by Sublessee to Sublessor and shall be placed by Sublessor in an interest-bearing account as security for the payment of rent by Sublessee. Said Deposit, plus all interest accrued, shall be promptly returned to Sublessee upon the expiration of this Sublease provided Sublessee has paid all rent due hereunder. 7 8 IN WITNESS WHEREOF, the undersigned Sublessor and Sublessee have executed this Sublease effective as of the date and year first written above. SUBLESSOR: EQUIBOND, INC. By: /s/ Jay H. Lustig Name: Jay H. Lustig Title: President SUBLESSEE: NATIONAL BANCSHARES CORPORATION OF TEXAS By: /s/ Marvin E. Melson Name: Marvin E. Melson Title: President CONSENTED AND AGREED this ____ day of ____________, 1996: PRIME LESSOR 100 WILSHIRE ASSOCIATES By:_______________________________ Name:_____________________________ Title:____________________________ 8 EX-11.1 5 COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In thousands, except per share amounts)
DECEMBER 31, ---------------------------------------- 1996 1995 1994 -------- -------- -------- NET INCOME PER COMMON SHAREHOLDER: Income before extraordinary credit $ 5,710 $ 5,905 $ 4,976 Extraordinary credit, net of tax -- 219 -- -------- -------- -------- Primary earnings applicable to common shareholders $ 5,710 $ 6,124 $ 4,976 ======== ======== ======== COMMON SHARES USED IN PRIMARY PER SHARE CALCULATION: Weighted average number of common shares outstanding 4,640 4,443 3,590 Addition from assumed exercise of stock options 57 40 108 Addition from assumed exercise of Series A Convertible Preferred Stock -- 174 290 Addition from assumed conversion of Series B Convertible Preferred Stock 18 128 -- -------- -------- -------- Weighted average number of common and common-equivalent shares outstanding 4,715 4,785 3,988 ======== ======== ======== PRIMARY EARNINGS PER COMMON SHARE: Income before extraordinary credit $ 1.21 $ 1.23 $ 1.25 Extraordinary credit -- .05 -- -------- -------- -------- Earnings per share $ 1.21 $ 1.28 $ 1.25 ======== ======== ========
Note: Fully diluted earnings per share are not presented as dilution is less than 3%. EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF NATIONAL BANCSHARES CORPORATION OF TEXAS NBT of Delaware, Inc., incorporated in Delaware Subsidiaries of NBT of Delaware, Inc.: NBC Bank, N.A. (Eagle Pass), incorporated in Texas NBC Bank - Laredo, N.A., incorporated in Texas NBC Bank - Rockdale, incorporated in Texas The First National Bank in Luling, incorporated in Texas NBC Holdings - Texas, Inc., incorporated in Texas 57 EX-27.1 7 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1996 DEC-31-1996 17,305 529 22,650 0 88,193 72,649 73,362 113,258 2,408 327,918 279,755 3,639 1,259 356 0 0 5 42,904 327,918 10,623 9,145 1,052 20,820 8,039 73 12,708 (5) (6) 9,586 5,916 5,916 0 0 5,710 1.21 1.21 7.86 1,195 182 90 4,947 1,476 251 291 2,408 2,408 0 1,478
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