-----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, RqO4c43aoBNwX3E9C0bop+USYgr3lSHwLRKXxlTKg+Xjm77ak+KLgCDeWXL7AFi4 XZa7WQT0WoNppOrSgyzoTg== 0000950129-99-001718.txt : 19990426 0000950129-99-001718.hdr.sgml : 19990426 ACCESSION NUMBER: 0000950129-99-001718 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990423 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/A SEC ACT: SEC FILE NUMBER: 001-13472 FILM NUMBER: 99600153 BUSINESS ADDRESS: STREET 1: 104 E MANN RD STREET 2: STE 875 CITY: LAREDO STATE: TX ZIP: 78042 BUSINESS PHONE: 2107242424 MAIL ADDRESS: STREET 1: 104 EAST MANN RD STREET 2: SUITE 875 CITY: LAREDO STATE: TX ZIP: 78042 10-K/A 1 NATIONAL BANCSHARES CORPORATION OF TEXAS 1 =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 [ ] 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) 12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811 (Address of principal executive offices) Telephone number: (210) 403-4200 Securities registered under Section 12(b) of the Exchange Act: COMMON STOCK, $.001 PAR VALUE Securities registered under Section 12(g) of the Exchange Act: None Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. Issuer's revenues for its most recent fiscal year: $ 33,062,715 (Total Interest Income). State the aggregate market value of voting stock held by non-affiliates based upon the closing AMEX sale price on March 19, 1999 : $63,540,025. State the number of shares outstanding of each of the issuer's classes of common equity, as of March 19, 1999 : 4,166,559 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement for the Annual Meeting of Shareholders to be held May 21, 1999 (Part III). =============================================================================== 2 TABLE OF CONTENTS PART I Item 1. Description of Business.......................................................... 3 Item 2. Description of Property.......................................................... 8 Item 3. Legal Proceedings................................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders.............................. 9 PART II Item 5. Market for Common Equity and Related Shareholder Matters......................... 10 Item 6. Selected Consolidated Financial Data............................................. 11 Item 7. Management's Discussion and Analysis............................................. 13 Item 8. Financial Statements............................................................. 27 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............................................................ 53 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 "BHC Act"). 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., Laredo, Texas, ("NBC-Laredo"), NBC Bank, N.A., Eagle Pass, Texas ("NBC-Eagle Pass"), NBC Bank, Rockdale, Texas ("NBC-Rockdale") and NBC Bank Central, N.A., Luling, Texas ("NBC-Luling"), (collectively, the "Banks"). NBC-Laredo, NBC-Eagle Pass, NBC-Rockdale and NBC-Luling are wholly-owned subsidiaries of NBT of Delaware, Inc., a Delaware corporation that is a wholly-owned subsidiary of the Company. The Company operates its data and item processing for the Banks through NBC Holdings-Texas, Inc., a wholly-owned subsidiary of NBT of Delaware, Inc. At December 31, 1998, the Company (on a consolidated basis) had total assets of $512.1 million, total investments securities of $232.5 million, total loans of $192.2 million, total deposits of $447.7 million, total stockholders' equity of $52.2 million and net operating loss carry-forwards for federal income tax purposes of $95 million. For the year ended December 31, 1998, the Company recorded net income of $5.3 million. During 1997, the Company acquired three branches of Wells Fargo Bank in the Texas cities of Giddings, Taylor and Marble Falls. The Company acquired approximately $103.4 million in deposits and $2.6 million in the owned branch facilities, branch furniture, fixtures and certain equipment. In 1996, the Company acquired Luling Bancshares, Inc., including its subsidiary, The First National Bank in Luling, in Luling, Texas. The Company acquired approximately $26 million in total assets and assumed liabilities of approximately $24 million. The Company's executive offices are located at 12400 Hwy 281 North, San Antonio, Texas 78216-2811, and its telephone number is (210) 403-4200. THE BANKS Each of the Banks is a separate entity which operates under the day-to-day management of its own board of directors and officers. The Banks grant agribusiness, commercial, residential and installment loans to customers primarily in Central and South Texas. The Banks also offer a range of commercial banking services, including acceptance of deposits 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. NBC-Luling is the only subsidiary that provides discount brokerage services at this time. NBC-Eagle Pass operates three branches, one located in San Antonio, Texas, one located in Marble Falls, Texas and one in Eagle Pass, Texas. NBC-Rockdale operates two branches, located in Giddings and Taylor, Texas. NBC-Laredo operates one branch location in South Laredo which opened in March 1998. NBC-Luling operates one branch located in San Marcos, Texas which opened during the first quarter of 1998. 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, 1998 (Dollars in thousands):
ASSETS LOANS DEPOSITS --------- --------- --------- NBC - Eagle Pass $ 275,630 $ 97,943 $ 250,649 NBC - Rockdale $ 114,873 $ 27,404 $ 100,426 NBC - Laredo $ 82,650 $ 50,445 $ 71,669 NBC - Luling $ 31,332 $ 16,427 $ 25,432
SERVICES OFFERED BY NBC SUBSIDIARY BANKS COMMERCIAL BANKING The Banks provide the following types of loans for corporations and other business clients: REAL ESTATE LOANS. The Banks have historically engaged in real estate lending through construction and term mortgage loans, all of which are secured by deeds of trust on underlying real estate. The majority of 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. Buildings for which the Banks have provided the construction financing secure certain of the Banks' commercial loans. INSTALLMENT LOANS. Installment loans consist primarily of automobile loans, loans made to finance small equipment acquisitions, small loans for personal and household needs and home improvement loans. These loans are made primarily as an accommodation to existing customers and are not a substantial part of the Banks lending strategy. The Banks also provide deposit products to its commercial customers, as well as night deposit and wire transfer services. CONSUMER SERVICES The Banks have generated a substantial portion of its deposits from individuals and small businesses in its immediate market areas. Other consumer bank services include automated teller machines, installment and real estate loans, home equity loans, drive-in services, safe deposit boxes, Internet banking, image bank statements and credit card services. The Banks offer competitive interest rates on money market accounts, savings accounts and certificates of deposit. NBC-Eagle Pass and NBC-Laredo enjoy long-term deposit relationships with many Mexican Nationals (in United States dollars only). The Banks intend to add insurance and brokerage services in 1999. 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 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, 4 5 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, 1998 data, NBC-Laredo holds 2% of the total deposits of its community. There are six local banks in the Laredo area as well as a branch of Norwest Bank. The Laredo market is dominated by International Bank of Commerce with approximately 33% of the community's total deposits and Laredo National Bank with 42% of deposits. NBC-Eagle Pass is one of four banks located in Eagle Pass, Texas and holds in excess of 62% of the community's banking deposits. NBC-Rockdale is the largest bank in Rockdale holding over 45% of the total deposits in the city and is the third largest of the five banks located in Milam County, Texas holding approximately 19% of the county's deposits. NBC-Luling is one of three banks located in Luling, Texas, holding over 37% of the deposits of the city. GROWTH OBJECTIVES The Company intends to grow its business in the State of Texas by adding additional branches and through possible bank or branch acquisitions. Because the Company has $95 million of net operating loss carryforwards as of December 31, 1998, which will not begin to expire until 2005, the Company believes it is well positioned to grow its business by acquiring additional banks. The Company's ability and willingness to acquire additional banks is dependent upon the (i) availability of suitable candidates, (ii) price, and (iii) strategic fit for such additional banks and/or branches. Acquiring additional banks or adding additional branches is also subject to certain federal and state regulatory approvals. See "Supervision and Regulation -- The Company" and "Supervision and Regulation -- Interstate Banking and Branching." There can be no assurance, however, that the Company will obtain the required regulatory approvals or that the Company will be able to successfully add additional branches or acquire additional banks. EMPLOYEES At December 31, 1998, the Company employed approximately 249 full-time equivalent employees. Management believes that its relations with its employees are satisfactory. Employees of the Company enjoy a variety of employee benefit programs, including a 401(k) plan, paid vacations and comprehensive medical, life and accident insurance plans. SUPERVISION AND REGULATION THE COMPANY. The Company, as a registered bank holding company, is subject to regulation under the BHC Act. The Company is required to file with the Federal Reserve Board ("FRB") quarterly and annually and also reports such additional information as the FRB may require pursuant to the BHC Act. The Company is subject to examination by the FRB. The FRB may require the Company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities. Under the BHC Act and regulations adopted by the FRB, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. Further, the Company is required by the FRB to maintain certain levels of capital. See "Supervision and Regulation--Capital Adequacy Guidelines." The Company is required to obtain prior approval of the FRB for the acquisition of more than five percent of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the FRB is also required for the merger or consolidation of the Company and another bank holding company. The Company is prohibited by the BHC Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than five percent of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the FRB, engage in any, or acquire shares of companies engaged in, activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The FRB is also empowered to differentiate between activities commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern and is generally prohibited from approving an application by a bank holding company to acquire voting shares of any commercial bank in another state unless such acquisition is specifically authorized by the laws of such other state. 5 6 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 NBC-Luling, as national banks, are subject to primary supervision, periodic examination and regulation by the Office of the Comptroller of the Currency (the "OCC"). NBC-Rockdale, a Texas state chartered bank, is subject to examination and regulation by the Texas State Banking Department. The deposits of the Banks are insured by the Federal Deposit Insurance Corporation ("FDIC"), which currently insures deposits of each member bank to a maximum of $100,000 per depositor. For this protection, the Banks, as is the case with all insured banks, pay a semi-annual statutory assessment and are subject to the rules and regulations of the FDIC. See "Supervision and Regulation - FDIC Insurance." The regulations promulgated by these federal agencies govern most aspects of the Banks business, including, without limitation, capital to assets ratios, reserves against deposits, maximum lending limitations, investments, mergers and acquisitions, borrowings, dividends and locations of branch offices. The Banks are also subject to applicable provisions of Texas law, insofar as they do not conflict with or are not preempted by federal law. Supervision, legal action and examination of the Banks by the regulatory agencies are generally intended to protect depositors, and are not intended for the protection of shareholders. The OCC also has the authority to prohibit national banks from engaging in what, in the OCC's opinion, constitutes an unsafe or unsound practice in conducting its business. It is possible, depending upon the financial condition of the bank in question and other factors, that the OCC could assert that the payment of dividends or other payments might, under some circumstances, constitute an unsafe or unsound practice. CONTROL ISSUES. Investors in the Common Stock of the Company are potentially subject to certain change of bank control laws; those contained in the BHC Act, the Federal Deposit Insurance Act (the "FDIA") and applicable Texas laws. In general, persons who wish to acquire a number of shares of Common Stock that, when aggregated with that person's other holdings of common stock, if any, would equal or exceed 10 percent of the Company's Common Stock, or who otherwise might be subject to the change of bank control rules, should consult with their legal counsel regarding the applicability of the provisions of any of these laws. INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Branching Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions of banks and bank holding companies without geographic limitation beginning one year after enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge with a bank in another state as long as neither of the states has opted out of interstate branching between the date of enactment of IBBEA and May 31, 1997. IBBEA further provides that states may enact laws permitting interstate bank merger transactions prior to June 1, 1997. A bank may establish a de novo branch in a state in which the bank does not maintain a branch if the state expressly permits de novo branching. Once a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where any bank involved in the merger transaction could have established or acquired branches under applicable federal or state law. A bank that has established a branch in a state through de novo branching may establish and acquire additional branches in such state in the same manner and to the same extent as a bank having a branch in such state as a result of an interstate merger. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the opting out state, whether through an acquisition or de novo. On August 28, 1995, Texas enacted legislation opting out of interstate branching. FDIC INSURANCE. The deposits of the Banks are insured by the FDIC. For this protection, the Banks are subject to the rules and regulations of the FDIC. The Banks also pay FDIC insurance premiums based on each Bank's annual assessment rate assigned to it by the FDIC. The assessment rate is based on the institution's capitalization risk category and "supervisory subgroup." An institution's capitalization risk category is based on the FDIC's determination of whether the institution is well capitalized, adequately capitalized or less than adequately capitalized. An institution's supervisory subgroup is based on the FDIC's assessment of the financial condition of the institution and the probability that FDIC intervention or other corrective action will be required. See page 17 under "non-interest expense" for the amount of FDIC premiums paid by the Banks. 6 7 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 FDIA 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, 1998, all of the Banks were classified as "well capitalized". FDICIA directs that each federal banking agency prescribe standards, by regulation or guidelines, for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, asset quality, earnings, stock valuation, and such other operational and managerial standards as the agency deems appropriate. The FDIC, in consultation with the other federal banking agencies, has adopted a final rule and guidelines with respect to internal and external audit procedures and internal controls in order to implement those provisions of FDICIA intended to facilitate the early identification of problems in financial management of depository institutions. 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. FDICIA also contains a variety of other provisions that may effect the operations of the Company, including reporting requirements, regulatory standards for real estate lending, "truth in savings" provisions, and the requirement that a depository institution give ninety (90) days notice to customers and regulatory authorities before closing any branch. The Federal regulatory agencies have issued standards establishing loan-to-value limitations on real estate lending. CAPITAL ADEQUACY GUIDELINES. The federal banking agencies have issued guidelines for risk-based capital requirements. The guidelines are intended to establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, and takes off-balance sheet items into account in assessing capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Under these guidelines, assets and credit equivalent amounts of off-balance sheet items, such as letters of credit and outstanding loan commitments, are assigned to one of several risk categories, which range from 0% for risk-free assets, such as cash and certain U.S. government securities, to 100% for relatively high-risk assets, such as loans, investments in fixed assets, premises and other real estate owned. The aggregated dollar amount of each category is then multiplied by the risk-weight associated with that category. The resulting weighted values from each of the risk categories are then added together to determine the total risk-weighted assets. The guidelines require a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital. A banking organization's qualifying total capital consists of two components: Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1 capital consists primarily of common stock, related surplus, retained earnings, and qualifying preferred stock. Intangibles, such as goodwill, as well as the unrealized gain or loss on available for sale securities, are generally deducted from Tier 1 capital. At least 50% of the banking organization's total regulatory capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the allowance for possible loan and lease losses in an amount up to 1.25% of risk-weighted assets; (ii) preferred stock not qualifying as Tier 1 capital plus related surplus; and, (iii) mandatory convertible debt. The inclusions of the foregoing elements of Tier 2 capital are subject to certain requirements and limitations of the federal banking agencies. The federal banking agencies have also adopted a minimum leverage ratio of Tier 1 capital to total assets of 3% for banks that have a uniform composite ("CAMEL") rating of 1. All other institutions and institutions experiencing or anticipating significant growth are expected to maintain capital at least 100 to 200 basis points above the minimum level. Furthermore, higher leverage ratios are required to be considered well capitalized or adequately capitalized under the prompt corrective action provisions of the FDICIA. See "Management's Discussion and Analysis- Capital Resources." 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. 7 8 ENVIRONMENTAL LAWS. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. The cost of such removal or remediation of such substances can be substantial. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such substances. As a result, the presence of such substances on any of the real property collateral securing any of the Banks' loans may render such collateral less valuable or worthless or may result in the Banks being unwilling to foreclose upon such collateral. In addition, the Banks may incur substantial environmental liabilities and costs from owning any collateral previously foreclosed upon that is later determined to contain such substances. The Banks attempt to reduce this risk by making inquiry with respect to environmental matters in connection with the extension of credit; however, there can be no assurance that environmental liabilities do not or will not exist with respect to the Banks' collateral. EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION Banking is a business that depends on rate differentials. In general, the difference between the interest rate paid by the Banks on their deposits and other borrowings and the interest rate received by the Banks on loans extended to their customers and securities held in the Banks portfolio comprise the major portion of the Banks earnings. These rates are highly sensitive to many factors that are beyond the control of the Banks. Accordingly, the earnings and growth of the Banks are subject to the influence of local, domestic and foreign economic conditions, including recession, unemployment and inflation. The commercial banking business is not only affected by general economic conditions but is also influenced by the monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the FRB. The FRB implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in United States Government securities, by adjusting the required level of reserves for financial intermediaries subject to its reserve requirements and by varying the discount rate applicable to borrowings by depository institutions. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits and also affect the interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted. From time to time, legislation is enacted which has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial intermediaries. Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial intermediaries are frequently made in Congress, in the Texas legislature and before various bank regulatory and other professional agencies. The likelihood of any major changes and the impact such changes might have on the Company and/or the Banks are impossible to predict. Certain of the potentially significant changes which have been enacted and proposals which have been made recently are discussed above. ITEM 2. DESCRIPTION OF PROPERTY The Company's headquarters are currently located in the NBC-San Antonio building located at 12400 Hwy 281 North, San Antonio, Texas, occupying premises of approximately 4,900 square feet. The Company has a lease with an indefinite term with the Bank with monthly lease payments of $10,256 per month. The Company has entered into a forty-two month sublease for 1,429 square feet in Suite 1700 at 100 Wilshire Boulevard, Santa Monica, California, with lease payments of $3,500 per month. The lease expires on December 31, 1999. This property is for office use. The Company had entered into a lease for 1,703 square feet in Suite 875 at 111 Soledad, San Antonio, Texas, with lease payments of $1,397 per month. This property was used for data processing and item processing for the Banks. The lease expired on March 31, 1999. NBC-Laredo's main banking facility is located at 104 East Mann Road, Laredo, Texas. The Bank owns and occupies a 12,000 square foot, two story building situated on approximately two acres. NBC-Laredo leases a 1,200 square foot motor bank approximately one-half mile south of its main location at Mall Del Norte, Laredo, Texas. This property is leased until December 31, 1999, with monthly lease payments of $1,700 per month. NBC-Laredo also owns and occupies a 2,761 square foot branch located at 2302 Blaine Street, Laredo, Texas which was opened in March 1998. 8 9 NBC-Eagle Pass' main banking facility is located at 439 Main Street, Eagle Pass, Texas, which is within five blocks of the international bridge into Piedras Negras, Coahuila, Mexico. The Bank owns and occupies a two-story, 22,434 square foot building situated on one city block at this address. NBC-Eagle Pass also owns and occupies a 4,000 square foot branch bank, NBC-East, located approximately one mile east of the main bank at 2538 E. Main Street. NBC-Eagle Pass also owns and occupies a two-story 19,761 square foot branch located at 700 Hwy 281, Marble Falls, Texas. NBC-Eagle Pass also owns and occupies a 30,000 square foot branch in San Antonio, Texas located at Arion Parkway and Hwy 281 North. The branch was opened in March 1999. NBC-Rockdale's main banking facility is located at 401 E. Cameron Street, Rockdale, Texas. The Bank owns and occupies a 22,000 square foot two story building at this location. NBC-Rockdale also owns and occupies a 1,700 square foot motor bank located at 1401 W. Cameron Street, Rockdale, Texas. NBC-Rockdale also owns and occupies a 14,524 square foot branch located at 104 W. Austin, Giddings, Texas and a 15,136 square foot branch located at 316 N. Main Street, Taylor Texas. NBC-Luling's main banking facility is located at 200 S. Pecan Ave., Luling, Texas. The bank owns and occupies a 5,500 square foot one story building at this location. In March, 1998, NBC-Luling opened a 2,925 square foot branch which it owns and occupies at 1081 Wonder World Drive, San Marcos, Texas. ITEM 3. LEGAL PROCEEDINGS The Company and the Banks from time to time are involved in legal actions arising from normal business activities. Management believes that those actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. 9 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 under the symbol "NBT." Prior to that date, the Common Stock of the Company was not listed on any stock exchange nor quoted on the National Association of Securities Dealers Automated Quotation Systems ("NASDAQ"). As of December 31, 1998, the Company had approximately 891 shareholders of record. The following table sets forth the high and low sales/bid prices/quotations for the Company's Common Stock during 1998 and 1997. 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 ------ ------ 1998: 4TH QUARTER $17.37 $15.25 3RD QUARTER 21.25 16.75 2ND QUARTER 21.44 20.50 1ST QUARTER 22.94 17.88 1997: 4th Quarter $22.00 $17.75 3rd Quarter 20.75 13.56 2nd Quarter 13.75 13.06 1st Quarter 14.00 11.25
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 - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- STATEMENT OF INCOME DATA: (dollars in thousands) 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- Interest income .............................. $ 33,063 $ 27,334 $ 20,820 $ 18,955 $ 15,985 Interest expense ............................. 14,915 11,722 8,112 7,359 5,589 ----------- ----------- ----------- ----------- ----------- Net interest income ........................ 18,148 15,612 12,708 11,596 10,396 Provision (credit) for loan losses ........... 232 80 (5) (855) (990) Non-interest income .......................... 5,701 4,387 2,789 2,762 2,521 Non-interest expense ......................... 15,273 12,244 9,586 9,149 8,491 Income taxes ** .............................. 3,056 2,811 2,155 2,241 1,994 Extraordinary credit, net of tax ............. -- -- -- 219 -- ----------- ----------- ----------- ----------- ----------- Net income ** .............................. $ 5,288 $ 4,864 $ 3,761 $ 4,042 $ 3,422 =========== =========== =========== =========== =========== COMMON SHARE DATA: Net income before extraordinary credit ** .... $ 1.17 $ 1.04 $ 0.81 $ 0.91 $ 0.95 Extraordinary credit, net of tax ............. -- -- -- 0.05 -- Book value ................................... $ 12.44 $ 10.97 $ 9.21 $ 7.94 $ 6.16 Weighted average shares outstanding .......... 4,503,427 4,658,734 4,639,955 4,443,436 3,589,524 BALANCE SHEET DATA (AT PERIOD END): (dollars in thousands) Total assets ................................. $ 512,078 $ 470,160 $ 327,918 $ 270,092 $ 264,487 Investments and federal funds sold ........... 272,019 279,991 184,021 152,677 155,364 Total loans .................................. 192,219 136,313 113,258 91,588 90,448 Allowance for loan losses .................... 2,670 2,458 2,408 1,906 2,495 Total deposits ............................... 447,656 414,415 279,755 231,937 229,054 Other debt ................................... 10,143 2,646 3,995 366 4,361 Total stockholders' equity ................... 52,206 51,098 42,909 35,977 29,386 PERFORMANCE DATA: Return on average total assets ** ............ 1.09% 1.25% 1.30% 1.52% 1.42% Return on average stockholders' equity ** .... 10.24% 10.59% 9.71% 12.04% 14.82% Net interest margin (tax equivalent) ......... 4.24% 4.42% 4.80% 4.77% 4.70% ASSET QUALITY RATIOS: Non-performing loans to total loans .......... 1.08% 1.16% 1.69% 1.70% 2.00% Net loan charge-offs (recoveries) to average loans .............................. 0.01% 0.02% -0.04% -0.29% -0.54% Allowance for loan losses to total loans ..... 1.39% 1.80% 2.13% 2.08% 2.76% CAPITAL RATIOS: Stockholders' equity to average total assets ..................................... 10.77% 11.78% 13.35% 12.65% 9.57% Tier 1 risk-based capital * .................. 18.37% 27.77% 33.58% 35.77% 28.14% Total risk-based capital * ................... 19.62% 29.02% 34.84% 37.18% 29.39% Leverage ratio * ............................. 8.12% 9.13% 13.67% 13.28% 10.57%
* Calculated in accordance with Federal Reserve guidelines currently in effect ** Restated to reflect prior period adjustment, see Note 2 of the Consolidated Financial Statements 11 12 SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA Selected quarterly consolidated financial data is presented in the following tables for the years ended December 31, 1998 and 1997. Restated to reflect prior period adjustments, see Note 2 of the Consolidated Financial Statements (Dollars in thousands, except per share data):
------------------------------------------------------ 1998 QUARTER ENDED (UNAUDITED) ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ------------ Interest income ........................ $ 7,916 $ 8,159 $ 8,410 $ 8,578 Interest expense ....................... 3,614 3,685 3,745 3,871 -------- -------- ------------ ------------ Net interest income .................. 4,302 4,474 4,665 4,707 Provision for loan loss ................ 20 48 82 82 Gain(loss) on sales of securities ...... 526 107 325 145 Net trading profit (loss) .............. 1,313 (524) (224) 217 Non-interest income .................... 867 904 1,043 1,002 Non-interest expense ................... 3,667 3,792 3,831 3,983 -------- -------- ------------ ------------ Income before federal income taxes ... 3,321 1,121 1,896 2,006 Federal income taxes ................... 1,215 410 695 736 -------- -------- ------------ ------------ Net income ........................... $ 2,106 $ 711 $ 1,201 $ 1,270 -------- -------- ------------ ------------ Basic earnings per share ............. $ 0.45 $ 0.15 $ 0.28 $ 0.29 -------- -------- ------------ ------------
------------------------------------------------------ 1997 QUARTER ENDED (UNAUDITED) ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ------------ Interest income ........................ $ 5,774 $ 6,038 $ 7,589 $ 7,932 Interest expense ....................... 2,372 2,453 3,279 3,618 -------- -------- ------------ ------------ Net interest income .................. 3,402 3,585 4,310 4,314 Provision for loan loss ................ 25 -- 10 45 Gain(loss) on sales of securities ...... 1,091 1 96 (55) Non-interest income .................... 763 698 852 941 Non-interest expense ................... 2,553 2,701 3,467 3,522 -------- -------- ------------ ------------ Income before federal income taxes ... 2,678 1,583 1,781 1,633 Federal income taxes ................... 864 604 681 662 -------- -------- ------------ ------------ Net income ........................... $ 1,814 $ 979 $ 1,100 $ 971 -------- -------- ------------ ------------ Basic earnings per share ............. $ 0.39 $ 0.21 $ 0.23 $ 0.21 -------- -------- ------------ ------------
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 1998 was $5.3 million, an increase of $424,000 or 8.7% over the $4.9 million recorded in 1997 which was $1.1 million or 29.3% over earnings of $3.8 million in 1996. Net income per diluted common share in 1998 was $1.14 compared with $1.02 in 1997 and $0.80 in 1996, an increase of 11.8% and 27.5%, respectively. The Company's return on equity for 1998 was 10.24% compared to 10.59% and 9.71% for 1997 and 1996, respectively. The decline in 1998 is primarily attributable to the purchase of $8.5 million of treasury stock in 1998. The Company's return on assets for 1998 was 1.09% compared to 1.25% and 1.30% for 1997 and 1996, respectively. The decline of this ratio is primarily attributable to the $95 million and $99 million increases in average assets for 1998 and 1997, respectively. 1998 and 1997 earnings included a net $1.2 million and $.8 million gain, respectively, on the sale of securities. Excluding these gains, net operating earnings for 1998 were $4.1 million or $0.87 per diluted common share and $4.1 million or $0.85 per diluted common share for 1997. Total assets of $512 million at December 31, 1998 grew $42 million or 9% over total assets of $470 million at December 31, 1997. Total loans at December 31, 1998 were $192 million, 41% over the previous year end total of $136 million. The growth in the loan portfolio was attained through internal growth. Deposits reflect less dramatic growth, increasing 8% over the same period to $448 million. The following table shows selected key performance ratios over the last three years **:
1998 1997 1996 ------ ------ ------ Return on average assets 1.09% 1.25% 1.30% Return on average stockholders' equity* 10.24% 10.59% 9.71% Average stockholders' equity* to average total assets 10.77% 11.78% 13.35%
* After adjustment to exclude unrealized gains and losses on available for sale securities. ** Restated to reflect the prior period adjustment, see Note 2 in the Consolidated Financial Statements 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. PRIOR PERIOD ADJUSTMENT. The Company's financial statements as of December 31, 1998, 1997 and 1996, have been restated to correct an error in the application of the accounting method used for income tax accounting. The Company has various net deferred tax assets made up primarily of the expected future tax benefit of net operating loss carryforwards and reserves not yet deductible for tax purposes. A valuation allowance was provided against these net deferred tax assets upon the Company's emergence from bankruptcy in May 1992 when "fresh-start" reporting was adopted. The benefits received from subsequent reductions in the deferred tax asset valuation allowance were recorded as reductions of current year income tax expense, which was inconsistent with Financial Accounting Standard No. 109 and Statement of Position No. 90-7. The benefits from the reductions have been restated as an increase in additional paid-in capital as directed by the accounting pronouncements listed above. The restatement does have the effect of reducing reported net income while increasing additional paid-in capital in an amount equal to the decrease in retained earnings. It has no effect upon the cash on hand, book value, cash flow, the amount of the tax loss carryforward, or the amount of taxes due or owing. 13 14 The effect of the restatement is as follows:
-------------------------------------------------------------------------------------- FOR THE YEARS ENDING DECEMBER 31, -------------------------------------------------------------------------------------- 1998 1997 1996 -------------------------- -------------------------- -------------------------- AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED -------------- -------- -------------- -------- -------------- -------- Balance Sheet: Additional Paid-In Capital ......... $ 16,355 $ 28,629 $ 16,341 $ 25,742 $ 16,341 $ 23,131 Retained Earnings .................. 40,957 28,683 32,796 23,395 25,321 18,531 Total Stockholders' Equity ......... 52,206 52,206 51,098 51,098 42,909 42,909 Income Statement: Income Before Federal Income Taxes .......... $ 8,344 $ 8,344 $ 7,675 $ 7,675 $ 5,916 $ 5,916 Federal Income Tax Expense ......... 183 3,056 200 2,811 206 2,155 -------------- -------- -------------- -------- -------------- -------- Net Income ......................... $ 8,161 $ 5,288 $ 7,475 $ 4,864 $ 5,710 $ 3,761 ============== ======== ============== ======== ============== ======== Basic Earnings Per Share ........... $ 1.81 $ 1.17 $ 1.60 $ 1.04 $ 1.23 $ 0.81 Diluted Earnings Per Share ......... $ 1.76 $ 1.14 $ 1.57 $ 1.02 $ 1.22 $ 0.80
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 1998 and 1997 was investment securities with the second largest being loans. Net interest income for 1998 was $18.1 million, an increase of $2.5 million or 16.0% compared to $15.6 million in 1997. The net increase reflected a $5.7 million increase in interest income that was offset by a $3.2 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 1998 increased 18.5% and 33.7%, respectively, over 1997. The Company's yield on earning assets decreased to 7.72% in 1998 from 7.74% in 1997. The rate paid on interest bearing liabilities decreased one basis point from 4.09% in 1997 to 4.08% in 1998. The net interest margin is the net effective yield on earning assets, calculated as net interest income on a taxable-equivalent basis expressed as a percentage of average total earning assets. The net interest margin for 1998 was 4.24% compared to 4.42% and 4.80% for 1997 and 1996, respectively. The decrease in the net interest margin for 1998 is reflective of higher volumes of earning assets. The net interest spread decreased one basis point to 3.64% in 1998 from 3.65% in 1997. 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, 1998 and 1997. 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 (Dollars in thousands)
------------------------------------ ---------------------------------- 1998 VS. 1997 1997 VS. 1996 ------------------------------------ ---------------------------------- DUE TO CHANGE IN DUE TO CHANGE IN INCREASE --------------------- INCREASE -------------------- (DECREASE) RATE VOLUME (DECREASE) RATE VOLUME ---------- ------- --------- ---------- ------- -------- Taxable-equivalent interest income: Interest-bearing accounts ......... $ (43) $ 18 $ (61) $ 111 $ (35) $ 146 Federal funds sold ................ (9) 112 (121) 474 (60) 534 Investment securities ............. 2,177 (166) 2,343 3,523 457 3,066 Loans, net of unearned discount ... 3,600 (795) 4,395 2,412 (388) 2,800 ---------- ------- -------- ---------- ------- -------- Total taxable-equivalent interest income ............ 5,725 (831) 6,556 6,520 (26) 6,546 ---------- ------- -------- ---------- ------- -------- Interest expense: Interest-bearing accounts ......... 3,149 21 3,128 3,380 598 2,782 Other debt ........................ 43 (62) 105 230 99 131 ---------- ------- -------- ---------- ------- -------- Total interest expense ......... 3,192 (41) 3,233 3,610 697 2,913 ---------- ------- -------- ---------- ------- -------- Taxable-equivalent net interest income ............... $ 2,533 $ (790) $ 3,323 $ 2,910 $ (723) $ 3,633 ========== ======= ======== ========== ======= ========
Taxable-equivalent net interest income for 1998 increased $2.5 million or 16.29% over 1997. Taxable-equivalent net interest income for 1997 increased $2.9 million or 22.9% over 1996. In 1998 and 1997, interest income and interest expense increased as the volume of earning assets and interest bearing deposits rose. 15 16
---------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1998 1997 1996 ------------------------------ ----------------------------- ---------------------------- INTEREST EARNED/ INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE INCURRED AND RATES AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ (DOLLARS IN THOUSANDS) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE - ------------------------------- -------- -------- ------- -------- -------- ------- -------- -------- ------- EARNING ASSETS: Interest-bearing accounts $ 1,360 $ 82 6.03% $ 2,642 $ 125 4.74% $ 230 $ 14 6.08% Federal funds sold 26,538 1,504 5.67% 28,846 1,513 5.25% 18,997 1,039 5.46% Investment securities (F): US Treasuries 231,356 14,527 6.28% 191,301 12,186 6.37% 141,333 8,752 6.19% US Government agencies 4,406 279 6.33% 5,143 347 6.75% 4,280 291 6.80% States & political subdivisions -- -- 0.00% -- -- 0.00% 11 1 9.09% Other 639 39 6.10% 3,056 134 4.39% 3,371 100 2.96% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total investment 236,401 14,845 6.28% 199,500 12,667 6.35% 148,995 9,144 6.13% securities Loans, net of discounts (A) 163,911 16,646 10.16% 122,604 13,046 10.64% 96,787 10,634 10.99% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total earning assets 428,210 33,077 7.72% 353,592 27,351 7.74% 265,009 20,831 7.86% NON-INTEREST BEARING ASSETS: Cash and due from banks 18,204 16,433 12,829 Allowance for possible loan (2,561) (2,458) (2,117) losses Other assets 40,944 22,148 14,507 -------- -------- -------- $484,797 $389,715 $290,228 ======== ======== ======== INTEREST-BEARING LIABILITIES: Interest-bearing transaction accounts $ 61,656 $ 1,584 2.57% $ 48,723 $ 1,347 2.77% $ 33,342 $ 953 2.86% Savings, money market and certificates of deposit 299,058 12,984 4.34% 234,533 10,072 4.29% 175,711 7,086 4.03% Other debt 4,857 347 7.14% 3,606 303 8.40% 1,282 73 5.69% -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities 365,571 14,915 4.08% 286,862 11,722 4.09% 210,335 8,112 3.86% ------- ------- ------- NON-INTEREST BEARING LIABILITIES: Demand deposits 63,402 54,723 39,489 Other liabilities 4,157 2,214 1,590 -------- -------- -------- Total liabilities 433,130 343,799 251,414 Redeemable Preferred Stock -- -- 59 STOCKHOLDERS' EQUITY (F) 51,667 45,916 38,755 -------- -------- -------- Total liabilities and stockholders' equity $484,797 $389,715 $290,228 ======== ======== ======== Taxable equivalent net interest income 18,162 15,629 12,719 Less: taxable equivalent adjustment 14 17 11 ------- ------- ------- Net interest income $18,148 $15,612 $12,708 ======= ======= ======= Net interest spread (B) 3.64% 3.65% 3.98% ====== ====== ====== Net interest margin (C) 4.24% 4.42% 4.80% ====== ====== ====== SELECTED OPERATING RATIOS: Return on assets (D) 1.09% 1.25% 1.30% ====== ====== ====== Return on equity (E) 10.24% 10.59% 9.71% ====== ====== ======
(A) Non-accrual loans are included in the average balances used in calculating this table. (B) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (C) The net interest margin is the taxable-equivalent net interest income divided by average earning assets. (D) The return on assets ratio was computed by dividing net income by average total assets. (E) The return on equity ratio was computed by dividing net income by average total stockholders' equity. (F) The average balance has been adjusted to exclude the effect of the unrealized gain or loss on securities available for sale. 16 17 INTEREST RATE SENSITIVITY. The Company continuously monitors and manages the balance between interest rate-sensitive assets and liabilities. Management seeks to maintain consistent growth of net interest income through periods of changing interest rates by avoiding fluctuating net interest margins and to maintain consistent growth of net interest income through periods of changing interest rates. Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to repricing characteristics of assets and liabilities. The following table commonly referred to as a "static gap report," indicates the Company's interest rate sensitivity position at December 31, 1998 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 ------------ --------- --------- --------- --------- -------- Loans, net of discounts $ 63,340 $ 10,994 $ 22,301 $ 96,635 $ 95,584 $192,219 Investment securities 998 4,503 26,726 32,227 200,254 232,481 Federal funds sold 37,195 -- -- 37,195 -- 37,195 Interest-bearing accounts 284 100 1,253 1,637 706 2,343 ------------ --------- --------- --------- -------- -------- Total earning assets $ 101,817 $ 15,597 $ 50,280 $ 167,694 $296,544 $464,238 ============ ========= ========= ========= ======== ======== Interest-bearing liabilities: Interest-bearing transaction, savings and money market $ 161,469 -- -- $ 161,469 -- $161,469 Certificates and time deposits 42,243 50,281 113,829 206,353 12,674 219,027 Debt 8,459 41 371 8,871 1,272 10,143 ------------ --------- --------- --------- -------- -------- Total interest-bearing liabilities $ 212,171 $ 50,322 $ 114,200 $ 376,693 $ 13,946 $390,639 ============ ========= ========= ========= ======== ======== Interest sensitivity gap $ (110,354) $ (34,725) $ (63,920) $(208,999) ============ ========= ========= ========= Cumulative gap $ (110,354) $(145,079) $(208,999) $(208,999) ============ ========= ========= ========= Ratio of earning assets to interest-bearing liabilities 48.0% 31.0% 44.0% 44.5%
The interest rate sensitivity table reflects that the Company is liability sensitive, on a cumulative basis, 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. 17 18 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, ------------------------------------------------------------ 1998 1997 1996 --------------------- --------------------- -------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT -------- --------- -------- --------- -------- Service charges and fees $ 3,240 15.9% $ 2,796 17.9% $ 2,371 Net realized gains (losses) on sales of securities 1,103 (2.6)% 1,133 18,990.4% (6) Net trading profits 782 659.2% 103 100.0% -- Net gains on sales of other real estate owned 9 (85.5)% 62 (39.8)% 103 Miscellaneous income 567 93.5% 293 (8.8)% 321 -------- -------- -------- -------- -------- Total non-interest income $ 5,701 30.0% $ 4,387 57.3% $ 2,789 ======== ======== ======== ======== ========
The $1,314,000 or 30% increase in non-interest income for 1998 from 1997 is due primarily to the $679,000 increase in net trading profits and the $444,000 increase in service charges and fees. The improvement in service charges and fees can be partly attributed to a 21% increase in average transaction deposit accounts in 1998. Included in 1998 is non-recurring income of $1,894,000 due to net gains on other real estate owned and investment securities which was higher than the $1,195,000 reported in 1997. Therefore, the increase in 1998, disregarding the non-recurring items, would be $615,000 or 19.3% higher than 1997. 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, ------------------------------------------------------------ 1998 1997 1996 --------------------- --------------------- -------- AMOUNT % CHANGE AMOUNT % CHANGE AMOUNT -------- --------- -------- --------- -------- Salaries and employee benefits $ 7,947 27.4% $ 6,239 28.7% $ 4,848 Occupancy and equipment expenses 2,566 33.9% 1,917 24.2% 1,544 FDIC insurance 49 44.1% 34 459.2% 6 Insurance 107 5.9% 101 (7.3)% 109 Office supplies 603 5.4% 572 52.4% 375 Postage and courier 498 (17.1)% 601 58.6% 379 Professional fees 905 15.4% 784 13.7% 689 Goodwill amortization 376 96.9% 191 448.6% 35 Miscellaneous other expenses 2,222 23.1% 1,805 12.7% 1,601 -------- --------- -------- --------- -------- Total non-interest expense $ 15,273 24.7% $ 12,244 27.7% $ 9,586 -------- --------- -------- --------- --------
Non-interest expense of $15.3 million for the year ended 1998 represented an increase of 24.7% compared with 1997. However, as a percentage of average assets, non-interest expense remained stable at 3.15% in 1998 compared to 1997. The increase in non-interest expense is reflected in occupancy and equipment expenses and salaries and benefit expense. The 27.4% increase in salaries and benefits for 1998 is due to the (i) addition of employees from the acquisitions of the three Wells Fargo branches of which only five months was included in 1997, (ii) two new branches that were opened in 1998, and (iii) full-time equivalent employees increased by 39 people from 210 in 1997 to 249 at December 31, 1998. The $649,000 or 33.9% increase in occupancy and equipment expenses is due to the depreciation expense related to the three buildings acquired in the Wells Fargo branch acquisitions, the two new branches opened in 1998 in San Marcos and South Laredo, and installation of computer networks at the new locations. Goodwill expense increased $185,000 or 96.9% due to the Wells Fargo acquisition in July 1997. 18 19 INCOME TAXES. The Company recognized income tax expense of $3.1 million in 1998 compared to $2.8 million in 1997. See Note 15 to the Consolidated Financial Statements for details of tax expense. At December 31, 1998, the Company had approximately $95 million in net operating loss carryforwards that will be available to reduce income tax liabilities in future years. If unused, approximately $91 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. The preconfirmation net operating loss carryforwards arose from the Company's emergence from bankruptcy in May 1992. INVESTMENT SECURITIES. Total investment securities averaged $236.4 million in 1998, an 18% increase over the 1997 average of $199.5 million. The following table presents the consolidated investment securities portfolio as of December 31, 1998, by stated maturity with the weighted average interest yield for each range of maturities. Federal Reserve Bank stock and other equity securities are included in the classification "over ten years" in the available for sale category. INVESTMENT PORTFOLIO MATURITY AND YIELDS (Dollars in thousands)
DECEMBER 31, 1998 ----------------------------------------------------------------------------------------------- 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 $14,028 7.02% $ 53,934 6.16% $19,923 6.25% $ -- -- $ 87,885 U.S. Government agency and mortgage-backed securities -- -- -- -- -- -- 1,973 6.27% 1,973 Foreign debt securities -- -- 15 6.06% 50 7.70% -- -- 65 ------- ------- -------- ------- ------- ------- ------- ------- -------- Total held to maturity $14,028 7.02% $ 53,949 6.16% $19,973 6.25% $ 1,973 6.27% $ 89,923 ======= ======= ======== ======= ======= ======= ======= ======= ======== AVAILABLE FOR SALE SECURITIES: (Fair Value) U.S. Treasury securities $13,628 6.69% $ 74,505 6.19% $45,986 6.30% $ -- -- $134,119 U.S. Government agency and mortgage-backed securities -- -- 1,931 5.93% -- -- 70 8.69% 2,001 Other securities -- -- -- -- -- -- 6,438 1.65% 6,438 ------- ------- -------- ------- ------- ------- ------- ------- -------- Total available for sale $13,628 6.69% $ 76,436 6.18% $45,986 6.30% $ 6,508 1.73% $142,558 ======= ======= ======== ======= ======= ======= ======= ======= ======== Total investment securities $27,656 6.86% $130,385 6.17% $65,959 6.28% $ 8,481 2.78% $232,481 ======= ======= ======== ======= ======= ======= ======= ======= ========
The weighted average yield on the investment security portfolio of the Company at December 31, 1998 was 6.16% compared to a weighted average yield of 6.27% at December 31, 1997. See Note 1 of the Notes to the Consolidated Financial Statements for a discussion regarding the investment classifications held to maturity and available for sale. Note 4 of the Notes to the Consolidated Financial Statements reflects the estimated fair value for various categories of investment securities as of December 31, 1998 and 1997. 19 20 The following table summarizes the book value of the investment portfolio at December 31, for the past three years: BOOK VALUE OF INVESTMENT PORTFOLIO (Dollars in thousands)
DECEMBER 31, -------------------------------- 1998 1997 1996 -------- -------- -------- U.S. Treasury securities ........... $214,966 $237,477 $149,400 U.S. Government agencies ........... 1,503 2,990 4,132 Mortgage-backed securities ......... 2,447 1,229 1,638 Other securities ................... 8,419 1,741 4,247 -------- -------- -------- $227,335 $243,437 $159,417 ======== ======== ========
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 1998 TOTAL 1997 TOTAL 1996 TOTAL 1995 TOTAL 1994 TOTAL -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Commercial ............... $ 35,389 18.4% $ 22,911 16.8% $ 23,992 21.2% $ 13,643 14.9% $ 15,175 16.8% Real estate construction ........... 12,125 6.3% 10,338 7.6% 6,324 5.6% 11,868 13.0% 10,085 11.2% Real estate mortgage ..... 119,654 62.3% 81,752 60.0% 65,556 57.9% 51,664 56.4% 49,406 54.6% Consumer installment, net of unearned discount ............... 25,051 13.0% 21,312 15.6% 17,386 15.3% 14,413 15.7% 15,782 17.4% -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans ........... $192,219 100.0% $136,313 100.0% $113,258 100.0% $ 91,588 100.0% $ 90,448 100.0% ======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The preceding loan composition table shows that in 1998 total loans increased $55.9 million or 41.0% over 1997. At December 31, 1998, loans were 42.9% of deposits compared to 32.9% at the previous year-end. The following table presents commercial and real estate construction loans as of December 31, 1998, 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 ....................... $ 21,043 $12,203 $2,143 $35,389 Real estate construction ......... 7,312 3,671 1,142 12,125 -------- ------- ------ ------- Total ....................... $ 28,355 $15,874 $3,285 $47,514 ======== ======= ====== =======
Of the loans maturing after one year, $7,854,000 have fixed interest rates and $11,305,000 have variable interest rates. 20 21 ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses is established through charges to operations in the form of a provision for loan losses. Loans, or portions thereof, which are considered to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The allowance represents the amount, which in the judgment of each Bank's management, will be adequate to absorb possible losses. The adequacy of the allowance is determined by management's continuous evaluation of the loan portfolio and by the employment of third party loan review consultants. Industry concentrations, specific credit risks, past loan loss experience, delinquency ratios, current loan portfolio quality and projected economic conditions in the Bank's market areas are pertinent factors in determining the adequacy of the allowance for possible loan losses. Loans identified as losses by management, external loan review or bank examiners are charged-off. The Company recorded a $232,000 provision for possible loan losses during 1998, compared to $80,000 recorded during 1997. The provision is reflective of the growth in the loan portfolio. Despite loan growth in 1996, a credit to the provision for loan losses of $5,000 was made to reduce the allowance for loan losses to an appropriate level. Credits to the provision for loan losses were also made in 1995 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 charge-offs of $20,000 for the year ended December 31, 1998 compared to net charge-offs of $30,000 for 1997. 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)
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Average loans outstanding $163,911 $122,604 $ 96,787 $ 91,357 $ 89,190 ======== ======== ======== ======== ======== ANALYSIS OF ALLOWANCE FOR LOAN LOSSES: Balance at beginning of year $ 2,458 $ 2,408 $ 1,906 $ 2,495 $ 3,005 Allowance on acquired loans -- -- 467 -- -- Charge-Offs: Commercial 93 50 76 60 16 Real estate construction -- -- -- -- 10 Real estate mortgage 29 -- -- 6 45 Consumer installment 168 222 175 264 249 -------- -------- -------- -------- -------- Total charge-offs 290 272 251 330 320 -------- -------- -------- -------- -------- Recoveries: Commercial 22 53 39 69 73 Real estate construction -- -- -- -- 100 Real estate mortgage 64 38 70 285 210 Consumer installment 184 151 182 242 417 -------- -------- -------- -------- -------- Total recoveries 270 242 291 596 800 -------- -------- -------- -------- -------- Net charge-offs (recoveries) 20 30 (40) (266) (480) Provision charged (credited) to operating expense 232 80 (5) (855) (990) -------- -------- -------- -------- -------- Balance at end of year $ 2,670 $ 2,458 $ 2,408 $ 1,906 $ 2,495 ======== ======== ======== ======== ======== Net charge-offs (recoveries) as a percentage of average loans outstanding during the year 0.01% 0.02% -0.04% -0.29% -0.54% ======== ======== ======== ======== ======== Allowance for loan losses as a percentage of year end loans, net of unearned discount 1.39% 1.80% 2.13% 2.08% 2.76% ======== ======== ======== ======== ========
21 22 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)
YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------------- ----------------- ----------------- ---------------- --------------- % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ------ ------ ------ ------ ------ ------ ----- ------ ---- Commercial $ 102 0.05% $ 99 0.07% $ 131 0.12% $ 306 0.33% $ 195 0.22% Real estate construction -- 0.00% -- 0.00% -- 0.00% -- 0.00% -- 0.00% Real estate mortgage 767 0.40% 760 0.56% 614 0.54% 729 0.80% 811 0.90% Consumer installment 209 0.11% 192 0.14% 185 0.16% 255 0.28% 370 0.41% Unallocated 1,592 0.83% 1,407 1.03% 1,478 1.31% 616 0.67% 1,119 1.24% ------ ------ ------ ------ ------ ------ ------ ----- ------ ---- Total $2,670 1.39% $2,458 1.80% $2,408 2.13% $1,906 2.08% $2,495 2.76% ====== ====== ====== ====== ====== ====== ====== ===== ====== ====
Allocation of a portion of the allowance does not preclude its availability to absorb losses in other categories. The allocation is determined by providing specific reserves against each criticized loan plus an unallocated portion against the remaining portfolio based on experience factors. NON-PERFORMING ASSETS. Non-performing assets increased 32.1% to $2,094,000 at December 31, 1998, compared with $1,585,000 at December 31, 1997, $1,910,000 at December 31, 1996, $2,065,000 at December 31, 1995 and $1,805,000 at December 31, 1994. Non-performing assets as a percentage of total assets increased to .41% at December 31, 1998 up from .34% one year ago. This increase in non-performing assets is due to real estate assets being foreclosed on at a certain Bank. Non-performing assets consist of non-accrual loans, restructured loans and foreclosed real estate. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. All installment loans past due 90 days or more are classified as non-accrual unless the loan is well secured or in the process of collection. On non-accrual loans, interest income is not recognized until actually collected. At the time the loan is placed on non-accrual status, interest previously accrued but not collected is reversed and charged against current income. Restructured loans are loans on which the interest and/or the principal has been reduced due to deterioration in the borrower's financial condition. Even though these loans are performing, they are included in non-performing assets because of the loss of revenue related to the reduction in interest and/or principal. Foreclosed real estate consists of property which has been acquired through foreclosure. At the time of foreclosure, the property is recorded at the lower of the estimated fair value less selling expenses or the loan balance with any write-down charged to the allowance for possible loan losses. Any future write-downs, expenses related to the property, and any gain or loss resulting from the sale of the property are charged to operations. 22 23 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, -------------------------------------------------- 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ Non-accrual loans $ 899 $1,314 $1,195 $1,177 $1,070 Foreclosed real estate 1,195 271 715 888 735 ------ ------ ------ ------ ------ Total non-performing assets $2,094 $1,585 $1,910 $2,065 $1,805 ====== ====== ====== ====== ====== Non-performing assets as a percentage of: Total assets 0.41% 0.34% 0.58% 0.76% 0.68% Total loans plus foreclosed real estate 1.08% 1.16% 1.68% 2.23% 1.98% Accruing loans past due 90 days or more $ 311 $ 40 $ 182 $ 383 $ 151
Interest income that would have been earned in 1998 on non-accrual loans had such loans performed in accordance with the original contracted terms was $185,000. The amounts related to 1997 and 1996 were $151,000 and $187,000, respectively. Independent third party loan reviews of the Banks are performed on an annual basis. The loans are also reviewed by banking regulators on an eighteen month basis. On a monthly basis, the Board of Directors' of each Bank reviews new loans, renewals and delinquencies. Management of each Bank monitors, on a continuing basis, loans which it feels should be followed closely. The Banks are required by the regulatory authorities to have foreclosed real estate appraised periodically. DEPOSITS. The primary source of funds for the Company is the deposits of the Banks. The Company does not accept brokered deposits. The following table presents average balances and the corresponding average rate paid for the deposit categories: AVERAGE DEPOSITS AND AVERAGE RATES PAID (Dollars in thousands)
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- RATE RATE RATE AMOUNT PAID AMOUNT PAID AMOUNT PAID -------- -------- -------- -------- -------- -------- Noninterest-bearing demand deposits $ 63,402 -- $ 54,723 -- $ 39,489 -- INTEREST-BEARING DEPOSITS: Interest-bearing transaction (NOW) accounts 61,656 2.57% 48,723 2.77% 33,342 2.85% Savings and money market accounts 91,054 3.16% 70,559 3.14% 54,928 2.90% Certificates and time deposits under $100,000 132,623 4.74% 103,982 4.67% 76,248 4.36% Certificates and time deposits $100,000 and greater 75,381 5.07% 59,993 5.01% 44,535 4.86% -------- -------- -------- -------- -------- -------- Total interest-bearing deposits 360,714 283,257 209,053 -------- -------- -------- Weighted average rate paid 4.04% 4.03% 3.85% ======= ======== ======== Total average deposits $424,116 $337,980 $248,542 ======== ======== ========
Total average deposits increased $86 million or 25.5% due to internal growth. Mexico is part of the natural trade territory of the Banks. Thus, dollar-denominated deposits from Mexican sources have traditionally been a significant source of deposits. Included in total deposits are $103,768,000, $94,477,000, and $83,677,000 of Mexican National deposits at December 31, 1998, 1997, and 1996, respectively (in United States dollars only). 23 24 The remaining maturity on certificates of deposit greater than $100,000 as of December 31, 1998 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 of $100,000 and greater $34,267 $21,872 $23,583 $ 2,309 $82,031 ======= ======= ======= ======= =======
LIQUIDITY Liquidity is the ability to have funds available at all times to meet the commitments of the Company. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and short-term investments in time deposits in banks, federal funds sold, trading account securities and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the Company's trade area. The Banks have not and do not solicit brokered deposits as a funding source. The liquidity of the Company is enhanced by the fact that 77.9% of total deposits at December 31, 1998 were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. Net cash provided by operating activities at December 31, 1998, includes a $4.9 million decrease in investment securities held in a trading account. See Note 1 of the Consolidated Financial Statements for the accounting treatment of a trading account. At December 31, 1998, the Company's liquid assets amounted to $199 million or 39% of total gross assets, down from $201 million or 43% at December 31, 1997. Secondary sources of liquidity include the Company's ability to sell loan participations and purchase federal funds. In addition, NBC-Eagle Pass has an approved federal funds line at a correspondent bank and NBC-Laredo has an approved line of credit with the Federal Home Loan Bank. CAPITAL RESOURCES Total stockholders' equity increased $1.1 million to $52.2 million at December 31, 1998 from $51.1 million at December 31, 1997. In addition to net income of $5.3 million, stockholders' equity increased $2.9 million due to the reduction in the deferred tax asset valuation allowance and $1.4 million due to an improvement in the net fair value of securities available for sale. Stockholders' equity was reduced by the 463,675 shares of common stock repurchased at a cost of $8.5 million, or an average of $18.35 per share, as part of a stock repurchase plan approved by the Board of Directors in 1997. The Board had authorized the repurchase of 500,000 shares. As of March 23, 1999, the Company has repurchased 494,674 shares. The ratio of total stockholders' equity to total assets was 10.2% at December 31, 1998 compared with 10.9% at December 31, 1997. The Company and the Banks are subject to minimum capital ratios mandated by their respective banking industry regulators. The table in Note 19 in the Consolidated Financial Statements illustrates the Company's and the Banks' compliance with the risk-based capital guidelines of the FRB and the OCC. These guidelines are designed to measure Tier 1 and total capital while taking into consideration the risk inherent in both on and off-balance sheet items. Off-balance sheet items at December 31, 1998 include unfunded loan commitments and letters of credit. Pursuant to the current regulatory guidelines, the net unrealized gain or loss on securities available for sale is not included in the calculation of risk-based capital and the leverage ratio. The leverage ratio is Tier 1 capital divided by quarterly average total assets. A leverage ratio of 3.0% is the minimum requirement for only the most highly rated banking organizations and all other institutions are required to maintain a leverage ratio of 3 to 5 percent. Tier 1 capital for the Company includes common stockholders' equity less goodwill. Total capital includes Tier 1 capital and a portion of the allowance for loan losses. The ratios are calculated by dividing the qualifying capital by the risk-weighted assets. The minimum ratio for qualifying total capital is 8.0% of which 4.0% must be Tier 1 capital. For the Company's capital ratios at December 31, 1998 and 1997, see Note 19 in the Consolidated Financial Statements. ACCOUNTING MATTERS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." The statement provides that all items that are required to be recognized under accounting standards as 24 25 comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity and bypass net income. The provisions of SFAS No. 130 are effective for fiscal years beginning after December 15, 1997. The adoption of this statement did not have a material impact on financial position or results of operations. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operation segments in annual financial statements and requires that those enterprises report selected information about operation segments in interim financial reports issued to shareholders. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The adoption of this statement did not have an impact on financial position or results of operation. SFAS No. 128 "Earnings Per Share", issued in February 1997, and effective December 31, 1997, establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion No.15. In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", which is required to be adopted in years beginning after June 15, 1999. The Company expects to adopt the new Statement effective January 1, 2000. The Statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. Because of the Company's minimal use of derivatives, management does not anticipate that the adoption of the new Statement will have a significant effect on the Company's earnings or financial position. YEAR 2000 The Year 2000 (Y2K) issue centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers will recognize "00" as the year 1900 rather that the year 2000. The Company has formed a Y2K project team comprising technological, data processing, and operations personnel from each of the Banks' management. The project team has developed and is currently executing a planned review and risk assessment of all technology items used in the Company's operations, including core data processing systems, as well as material relationships with suppliers, correspondents, and customer groups. The identification of critical items and relations, and the renovation or replacement of items which are non-compliant with current guidelines were complete in 1998 in accordance with regulatory agency guidelines. Y2K compliance will be effected through data processing hardware and software upgrades and purchases of new equipment with an estimated aggregate cost of approximately $573,000. Approximately $80,000 was expensed for the year ended December 31, 1998 for the Y2K project. The three core systems, or mission critical systems, were implemented and tested for Y2K compliance in December 1998. These three systems include the deposit and loan systems, any ancillary or interface programs and the imaging software. The ATM software and the NT Server software will both be upgraded and tested by the end of the second quarter of 1999. 25 26 The Company has initiated formal communications with all of its significant suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Y2K issue. The Company presently believes that with modifications to existing software and conversions to new software, the Y2K issue will be mitigated without causing a material adverse impact on the operations of the Company. However, if such modifications and conversions are not made, or are not completed timely, the Y2K issue could have an impact on the operations of the Company. At this time, management does not believe that the impact and any resulting costs will be material. FORWARD-LOOKING INFORMATION This Form 10-K contains certain "forward-looking" statements as such term is defined in The Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management. When used in this report, the words "anticipate," " believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, relationships with vendors, the interest rate environment, governmental regulation and supervision, seasonality, technological change, changes in industry practices, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, or intended. The Company does not intend to update these forward-looking statements. 26 27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders National Bancshares Corporation of Texas and Subsidiaries San Antonio, Texas We have audited the accompanying consolidated balance sheets of National Bancshares Corporation of Texas and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 1998, 1997, and 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Bancshares Corporation of Texas and Subsidiaries as of December 31, 1998 and 1997, and the results of operations and its cash flows for the years ended December 31, 1998, 1997, and 1996, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, such statements have been restated to correct the method of accounting for income taxes pursuant to the principles of fresh-start accounting contained in Statement of Position 90-7 of the American Institute of Certified Public Accountants. /s/ Padgett, Stratemann & Co., L.L.P. Padgett, Stratemann & Co., L.L.P. Certified Public Accountants March 18, 1999, except for Note 2, As to which the date is April 19, 1999 27 28 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS) (Restated, See Note 2)
ASSETS 1998 1997 --------- --------- Cash and due from banks $ 16,473 $ 27,278 Interest-bearing accounts 2,343 216 Federal funds sold 37,195 29,940 Trading securities -- 3,433 Investment securities available for sale 142,558 139,771 Investment securities held to maturity 89,923 106,631 Loans, net of discounts 192,219 136,313 Allowance for possible loan losses (2,670) (2,458) Bank premises and equipment, net 17,793 12,538 Goodwill 8,804 9,180 Other assets 7,440 7,318 --------- --------- Total Assets $ 512,078 $ 470,160 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand deposits - non-interest bearing $ 67,160 $ 66,346 Interest-bearing transaction accounts (NOW) 65,847 62,633 Savings and money market accounts 95,622 88,972 Certificates and time deposits under $100,000 136,996 131,787 Certificates and time deposits $100,000 and over 82,031 64,677 --------- --------- Total Deposits 447,656 414,415 --------- --------- Accrued interest payable and other liabilities 2,073 2,001 Other borrowings 8,459 -- Long term notes payable 1,684 2,646 --------- --------- Total Liabilities 459,872 419,062 Stockholders' Equity: Common Stock, $.001 par value, 100,000,000 shares authorized, 4,661,234 issued and 4,197,559 outstanding at December 31, 1998 and 4,658,734 issued and outstanding at December 31, 1997 5 5 Additional paid-in capital 28,629 25,742 Retained earnings 28,683 23,395 Accumulated other comprehensive income 3,395 1,956 Treasury Stock, at cost (463,675 shares in 1998) (8,506) -- --------- --------- Total Stockholders' Equity 52,206 51,098 --------- --------- Total Liabilities and Stockholders' Equity $ 512,078 $ 470,160 ========= =========
Notes to consolidated financial statements form an integral part of these statements. 28 29 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED INCOME STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (Restated, See Note 2)
1998 1997 1996 -------- -------- -------- INTEREST INCOME: Interest and Fees on Loans $ 16,632 $ 13,029 $ 10,623 Interest on Investment Securities - Taxable 14,845 12,667 9,144 Interest on Investment Securities - Nontaxable -- -- 1 Interest on Federal Funds Sold 1,504 1,513 1,038 Interest on Deposits in Banks 82 125 14 -------- -------- -------- TOTAL INTEREST INCOME 33,063 27,334 20,820 INTEREST EXPENSE: Interest on Deposits 14,568 11,419 8,039 Interest on Debt 347 303 73 -------- -------- -------- TOTAL INTEREST EXPENSE 14,915 11,722 8,112 NET INTEREST INCOME 18,148 15,612 12,708 Less: Provision for (Recovery of)Possible Loan Losses 232 80 (5) -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR (RECOVERY OF) POSSIBLE LOAN LOSSES 17,916 15,532 12,713 NON-INTEREST INCOME: Service Charges and Fees 3,240 2,796 2,371 Net Trading Account Profit (Loss) 782 103 -- Net Realized Gains (Losses) on Sales of Securities 1,103 1,133 (6) Net Gains on Sales of Other Real Estate and Assets 9 62 103 Miscellaneous Income 567 293 321 -------- -------- -------- TOTAL NON-INTEREST INCOME 5,701 4,387 2,789 NON-INTEREST EXPENSE: Salaries and Employee Benefits 7,947 6,239 4,848 Occupancy and Equipment Expenses 2,566 1,917 1,544 Goodwill Amortization 376 191 35 Other Expenses 4,384 3,897 3,159 -------- -------- -------- TOTAL NON-INTEREST EXPENSE 15,273 12,244 9,586 INCOME BEFORE FEDERAL INCOME TAXES 8,344 7,675 5,916 Federal Income Tax Expense 3,056 2,811 2,155 -------- -------- -------- NET INCOME $ 5,288 $ 4,864 $ 3,761 ======== ======== ======== BASIC EARNINGS PER SHARE $ 1.17 $ 1.04 $ 0.81 ======== ======== ======== DILUTED EARNINGS PER SHARE $ 1.14 $ 1.02 $ 0.80 ======== ======== ========
Notes to consolidated financial statements form an integral part of these statements. 29 30 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (DOLLARS AND NUMBER OF SHARES IN THOUSANDS)
ACCUMULATED COMMON STOCK OTHER ------------------------------ COMPREHENSIVE NUMBER OF PAID IN RETAINED TREASURY INCOME, SHARES PAR CAPITAL EARNINGS STOCK NET OF TAX TOTAL ---------- ------ -------- --------- ------- ----------- -------- BALANCE DECEMBER 31, 1995, AS PREVIOUSLY 4,530 $ 4 $ 15,619 $ 19,611 $ -- $ 743 $ 35,977 REPORTED Prior period adjustment (see Note 2) -- -- 4,841 (4,841) -- -- -- ------ ------ -------- --------- ------- ------- -------- BALANCE AT DECEMBER 31, 1995, AS RESTATED 4,530 4 20,460 14,770 -- 743 35,977 Net Income -- -- -- 3,761 -- -- 3,761 Unrealized gain on securities AFS, net of tax and reclassification adjustment -- -- -- -- -- 499 499 -------- Total Comprehensive Income 4,260 -------- Reduction of deferred tax valuation allowance -- -- 1,949 -- -- -- 1,949 Conversion of Series B Preferred to Common 128 1 714 -- -- -- 715 Exercise of Common Stock options 1 -- 8 -- -- -- 8 ------ ------ -------- --------- ------- ------- -------- BALANCE AT DECEMBER 31, 1996 4,659 5 23,131 18,531 -- 1,242 42,909 Net Income -- -- -- 4,864 -- -- 4,864 Unrealized gain on securities AFS, net of tax and reclassification adjustment -- -- -- -- -- 714 714 -------- Total Comprehensive Income 5,578 -------- Reduction of deferred tax valuation allowance -- -- 2,611 -- -- -- 2,611 ------ ------ -------- --------- ------- ------- -------- BALANCE AT DECEMBER 31, 1997 4,659 5 25,742 23,395 -- 1,956 51,098 Net Income -- -- -- 5,288 -- -- 5,288 Unrealized gain on securities AFS, net of tax and reclassification adjustment -- -- -- -- -- 1,439 1,439 -------- Total Comprehensive Income 6,727 -------- Reduction of deferred tax valuation allowance -- -- 2,873 -- -- -- 2,873 Exercise of Common Stock Options 2 -- 14 -- -- -- 14 Treasury stock purchased (464) -- -- -- (8,506) -- (8,506) ------ ------ -------- --------- ------- ------- -------- BALANCE AT DECEMBER 31, 1998 4,197 $ 5 $ 28,629 $ 28,683 $(8,506) $ 3,395 $ 52,206 ====== ====== ======== ========= ======= ======= ======== Disclosure of reclassification amount: Unrealized gain on securities AFS arising during period $ 711 Reclassification adjustment for gains included in income, net of tax of $375 728 -------- Net unrealized gain on securities AFS, net of tax $ 1,439 ========
Notes to consolidated financial statements form an integral part of these statements. 30 31 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS) (Restated, See Note 2)
1998 1997 1996 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,288 $ 4,864 $ 3,761 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,798 1,159 944 Tax benefit realized from utilization of deferred tax assets 2,888 2,657 2,010 Provision to (recovery of) allowance for possible loan losses 232 80 (5) Net realized (gains) losses on securities available for sale (1,103) (1,133) 6 Net decrease (increase) in trading account 4,908 (3,433) -- Gain on sale of other real estate owned and other assets (9) (62) (103) Increase in accrued interest receivable and other assets 46 (1,944) (238) Increase in accrued interest payable and other liabilities 70 764 39 Write-down of other real estate owned -- -- 18 --------- --------- --------- Net cash provided by operating activities 14,118 2,952 6,432 CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) decrease in federal funds sold (7,255) (7,290) 2,320 Net (increase) decrease in interest-bearing accounts (2,125) 312 (40) Net increase in loans (56,876) (23,179) (6,624) Purchases of securities available for sale (27,939) (98,351) (44,009) Proceeds from sales of securities available for sale 15,240 33,739 10,226 Proceeds from maturities of securities available for sale 11,619 15,679 16,225 Purchases of securities held to maturity (7,035) (52,179) (23,865) Proceeds from maturities of securities held to maturity 23,649 17,710 17,811 Proceeds from sales of securities held to maturity -- 539 -- Capital expenditures (6,480) (6,551) (730) Proceeds from sale of other real estate owned 32 600 431 Net payments for cash acquired from acquisitions -- (7,319) (46) --------- --------- --------- Net cash used in investing activities (57,170) (126,290) (28,301) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand deposits, NOW accounts, savings and money-market accounts 10,678 73,463 10,206 Net increase in certificates of deposit and time deposits 22,563 61,197 14,263 Proceeds from advances on other borrowings and long term debt 10,641 12,319 140 Principal payments on other borrowings and long term debt (3,143) (13,668) (150) Purchase of treasury stock (8,506) -- -- Proceeds from exercise of common stock options 14 -- 8 --------- --------- --------- Net cash provided by financing activities 32,247 133,311 24,467 Net (decrease) increase in cash and due from banks (10,805) 9,973 2,598 Cash and due from banks at beginning of year 27,278 17,305 14,707 ========= ========= ========= Cash and due from banks at end of year $ 16,473 $ 27,278 $ 17,305 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid: Interest $ 14,776 $ 11,206 $ 7,988 Income taxes 71 128 126 Non-cash items: Loans originated to facilitate the sale of foreclosed assets 22 155 130 Loan foreclosures 947 94 66
Notes to consolidated financial statements form an integral part of these statements. 31 32 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 and seven branches located in Central Texas and South Texas 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, N.A. (Eagle Pass), NBC Bank Laredo, N.A. (Laredo), NBC Bank (Rockdale), NBC Bank-Central, N.A. (Luling), and NBC-Holdings-Texas, Inc., collectively referred to as the "Banks." Significant intercompany accounts and transactions have been eliminated in consolidation. INVESTMENTS IN SECURITIES Securities held principally for resale in the near term are classified as trading securities and recorded at their fair values. Unrealized gains and losses on trading securities are included in other income. Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost adjusted for amortization of premiums and accretion of discounts, which are recognized in interest income using the interest method over the period to maturity. Securities available for sale consist of bonds, notes, and debentures not classified as trading securities nor as securities to be held to maturity. These securities are recorded at their fair values. Unrealized holding gains and losses, net of tax, on securities for sale are reported as a net amount in a separate component of stockholders' equity. Declines in the fair market value of individual held to maturity and available for sale securities below their cost that are other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Gains and losses on the sale of securities available for sale are determined using the specific-identification method with the exception of the investment portfolio maintained at NBT of Delaware, Inc. in which the average cost method is used to compute gains and losses on sales. The transfer of a security between categories of investments is accounted for at fair value. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance is maintained at a level considered adequate by management to absorb probable losses. Management determines the adequacy of the allowance based upon reviews of individual loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans, and other pertinent factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Banks allowances for possible loan losses. Loans deemed uncollectible are charged to the allowance. The allowance is increased by provisions charged to operating expense and recoveries on loans previously charged off. 32 33 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Impaired loans are measured based on (1) the present value of expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or (3) the fair value of the collateral if the loan is collateral dependent. BANK PREMISES AND EQUIPMENT Land is carried at cost. Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized on straight-line 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 under the sum-of-the-digits (Rule of 78's) method. Income recognized under the sum-of-the-digits method is not materially different than income that would be recognized under the level yield or "interest method." Interest on other loans is accrued and credited to income based on the principal amount outstanding. Generally, the accrual of interest on impaired loans is discontinued when principal or interest payments become 90 days past due, and/or in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed and charged to current year operations. Interest income is subsequently recognized only to the extent cash payments are received. LOAN ORIGINATION FEES AND COSTS Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the yield over the contractual term of the related loan. OTHER REAL ESTATE OWNED Real estate acquired by foreclosure is carried in other assets at the lower of the recorded investment in the property or the fair value of the property less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income, are included in other expenses. INTANGIBLE ASSETS The excess cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line basis over twenty-five years. 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 33 34 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled as prescribed in SFAS No. 109, "Accounting for Income Taxes." As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provisions for income taxes. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. In accordance with AICPA Statement of Position (SOP) No. 90-7, income tax benefits recognized from preconfirmation net operating loss carryforwards were used first to reduce reorganization value in excess of amounts allocable to identifiable assets and thereafter to increase additional paid-in capital (See Note 15). CASH AND CASH EQUIVALENTS For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the consolidated balance sheet caption "cash and due from banks." OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS In the ordinary course of business, the subsidiary Banks have entered into off-balance-sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The Company or its subsidiaries are not a party to any off-balance-sheet derivative financial instruments such as interest rate futures or swap contracts. NET INCOME PER SHARE OF COMMON STOCK The Company has adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share", (SFAS No. 128) effective December 31, 1997. This Statement requires the computation and presentation of both "basic" and "diluted" earnings per share for all companies with complex capital structures. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. COMPREHENSIVE INCOME The Company has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or liquidity. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION The Company has adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes standards for the way that public business enterprises report information about operation segments in annual financial statements and requires that those enterprises report selected information about operation segments in interim financial reports issued to shareholders. 34 35 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of this statement did not have an impact on financial position or results of operations. RECLASSIFICATIONS Certain amounts have been reclassified from prior presentations at December 31, 1997 and 1996 to conform to classifications at December 31, 1998. There is no effect on previously reported net income or retained earnings. 2. PRIOR PERIOD ADJUSTMENT The Company's financial statements as of December 31, 1998, 1997 and 1996, have been restated to correct an error in the application of the accounting method used for income tax accounting. The Company has various net deferred tax assets made up primarily of the expected future tax benefit of net operating loss carryforwards and reserves not yet deductible for tax purposes. A valuation allowance was provided against these net deferred tax assets upon the Company's emergence from bankruptcy in May 1992 when "fresh-start" reporting was adopted. The benefits received from subsequent reductions in the deferred tax asset valuation allowance were recorded as reductions of current year income tax expense, which was inconsistent with Financial Accounting Standard No. 109 and Statement of Position No. 90-7. The benefits from the reductions have been restated as an increase in additional paid-in capital as directed by the accounting pronouncements listed above. The restatement does have the effect of reducing reported net income while increasing additional paid-in capital in an amount equal to the decrease in retained earnings. It has no effect upon the cash on hand, book value, cash flow, the amount of the tax loss carryforward, or the amount of taxes due or owing. The effect of the restatement is as follows:
FOR THE YEARS ENDING DECEMBER 31, ----------------------------------------------------------------------------- 1998 1997 1996 ----------------------- ------------------------- ------------------------ AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED -------- -------- -------- -------- -------- -------- Balance Sheet: Additional Paid-In Capital $ 16,355 $ 28,629 $ 16,341 $ 25,742 $ 16,341 $ 23,131 Retained Earnings 40,957 28,683 32,796 23,395 25,321 18,531 Total Stockholders' Equity 52,206 52,206 51,098 51,098 42,909 42,909 Income Statement: Income Before Federal Income Taxes $ 8,344 $ 8,344 $ 7,675 $ 7,675 $ 5,916 $ 5,916 Federal Income Tax Expense 183 3,056 200 2,811 206 2,155 -------- -------- -------- -------- -------- -------- Net Income $ 8,161 $ 5,288 $ 7,475 $ 4,864 $ 5,710 $ 3,761 ======== ======== ======== ======== ======== ======== Basic Earnings Per Share $ 1.81 $ 1.17 $ 1.60 $ 1.04 $ 1.23 $ 0.81 Diluted Earnings Per Share $ 1.76 $ 1.14 $ 1.57 $ 1.02 $ 1.22 $ 0.80
3. ACQUISITIONS 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. 35 36 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On July 18, 1997, the Company acquired three branches of Wells Fargo Bank in Giddings, Marble Falls and Taylor, Texas. The Company acquired approximately $103.4 million in deposits and $2.6 million in the owned branch facilities branch furniture, fixtures and certain equipment. The Company paid a purchase price of approximately $9.9 million for the acquisitions. 4. INVESTMENT SECURITIES Investment securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of investment securities of the Company and their approximate fair values at December 31 were as follows: (Dollars in thousands)
DECEMBER 31, 1998 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE -------- -------- --------- -------- SECURITIES AVAILABLE FOR SALE: U.S. Treasury securities $127,081 $ 7,038 $ -- $134,119 U.S. Government agency and mortgage-backed securities 1,977 24 -- 2,001 Other securities including Federal Reserve Bank stock 8,354 -- (1,916) 6,438 ======== ======== ======== ======== Total $137,412 $ 7,062 $ (1,916) $142,558 ======== ======== ======== ======== SECURITIES HELD TO MATURITY: U.S. Treasury securities $ 87,885 $ 4,464 $ -- $ 92,349 U.S. Government agency and mortgage-backed securities 1,973 13 -- 1,986 Foreign debt securities 65 2 (3) 64 ======== ======== ======== ======== Total $ 89,923 $ 4,479 $ (3) $ 94,399 ======== ======== ======== ========
DECEMBER 31, 1997 ------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED APPROXIMATE COST GAINS LOSSES FAIR VALUE -------- -------- --------- -------- SECURITIES AVAILABLE FOR SALE: U.S. Treasury securities $133,545 $ 2,543 $ -- $136,088 U.S. Government agency and mortgage-backed securities 1,584 17 -- 1,601 Other securities including Federal Reserve Bank stock 1,677 405 -- 2,082 ======== ======== ======== ======== Total $136,806 $ 2,965 $ -- $139,771 ======== ======== ======== ======== SECURITIES HELD TO MATURITY: U.S. Treasury securities $103,932 $ 1,646 $ (4) $105,574 U.S. Government agency and mortgage-backed securities 2,635 34 -- 2,669 Foreign debt securities 64 -- (8) 56 ======== ======== ======== ======== Total $106,631 $ 1,680 $ (12) $108,299 ======== ======== ======== ========
During the year ended December 31, 1998, the Company transferred securities with a fair value of $1,475,425 from the available for sale category into the trading category. A gain of $430,325 was realized upon the transfer. During the year ended December 31, 1997, the Company did not transfer any securities between the held to maturity and available for sale categories. 36 37 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The unrealized gains and losses on investment securities held at December 31, 1998 and 1997 have been judged to be temporary market fluctuations with no material financial impact on the Company. Unrealized net holding gains on trading securities of $103,000 were included in earnings in 1997. ($0 in 1998 and 1996) Investment securities carried at approximately $55,824,000 and $36,167,000 at December 31, 1998 and 1997, 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, 1998 were as follows (Dollars in thousands):
DECEMBER 31, 1998 -------------------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY ----------------------- ----------------------- AMORTIZED APPROXIMATE AMORTIZED APPROXIMATE COST FAIR VALUE COST FAIR VALUE --------- ----------- --------- ----------- Due in one year or less $ 17,026 $ 17,191 $ 15,035 $ 15,252 Due in one year to five years 69,397 72,457 52,940 55,276 Due from five to ten years 42,162 45,986 19,974 21,884 Due after ten years 316 320 -- -- -------- -------- -------- -------- Total $128,901 $135,954 $ 87,949 $ 92,412 Equity Securities 7,764 5,848 -- -- Mortgage-backed securities 407 416 1,974 1,987 Federal Reserve Bank Stock 340 340 -- -- ======== ======== ======== ======== Total $137,412 $142,558 $ 89,923 $ 94,399 ======== ======== ======== ========
Gross realized gains and gross realized losses on sales of securities available for sale were $1,128,294 and $25,148, respectively, in 1998, $1,412,000 and $279,000, respectively, in 1997, and $13,000 and $19,000, respectively, in 1996. 37 38 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES The components of loans in the consolidated balance sheets were as follows (Dollars in thousands):
DECEMBER 31, ------------------------ 1998 1997 --------- --------- Commercial Loans $ 30,242 $ 17,347 Real Estate - Construction 12,125 10,338 Real Estate - Commercial 56,420 35,929 Real Estate - Residential 63,234 45,823 Agriculture Loans 3,712 4,809 Consumer Loans 26,277 22,395 Other Loans 1,435 755 --------- --------- 193,445 137,396 Unearned Discount (1,226) (1,083) --------- --------- 192,219 136,313 Allowance for Possible Loan Losses (2,670) (2,458) --------- --------- $ 189,549 $ 133,855 ========= =========
Changes in the allowance for possible loan losses were as follows (Dollars in thousands):
DECEMBER 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Balance at beginning of year $ 2,458 $ 2,408 $ 1,906 Provisions (credits) for possible loan losses 232 80 (5) Allowance on acquired loans -- -- 467 Losses charged to the allowance (290) (272) (251) Recoveries credited to the allowance 270 242 291 ------- ------- ------- Balance at end of year $ 2,670 $ 2,458 $ 2,408 ======= ======= =======
The restoration of loan loss provision of $5,000 for the year ended December 31, 1996 resulted from significant collections of previously charged-off loans, and from improved performance and quality of the loan portfolio. Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans include (1) all non-accrual loans, (2) loans which are 90 days or more past due, unless they are well secured (i.e. the collateral value is sufficient to cover principal and accrued interest) and are in the process of collection, and (3) other loans which management believes are impaired. Substantially all of the Company's impaired loans are measured at the fair value of the collateral. In limited cases the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent. As of December 31, 1998, 1997, and 1996, the Banks have impaired loans of $899,000, $1,314,000, and $1,195,000, respectively. The allowance for loan losses related to those loans was $75,000, $117,000, and $97,300 at December 31, 1998, 1997, and 1996, respectively. The average recorded investment in impaired loans during the year ended December 31, 1998, 1997, and 1996 was $1,546,000, $1,254,000, and $1,186,000, respectively. Interest income of approximately $50,000, $287,000, and $478,000 on impaired loans was recognized for cash payments received during the year ended December 31, 1998, 1997, and 1996, respectively. Management of the Company recognizes the risks 38 39 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS associated with these impaired loans. However, management's decision to place loans in this category does not necessarily mean that the Company expects losses to occur. The Banks' nonperforming loans at December 31, 1998 consisted of $311,000 in accruing loans over 90 days past due and $899,000 in nonaccrual loans. The reduction in interest income associated with nonaccrual loans during the year ended December 31, 1998, 1997, and 1996 was approximately $185,000, $151,000, and $187,000, respectively. 6. BANK PREMISES AND EQUIPMENT The components of bank premises and equipment included in the consolidated balance sheets were as follows (Dollars in thousands):
DECEMBER 31, ------------------- 1998 1997 ------- ------- Land $ 4,345 $ 3,517 Buildings and Leasehold Improvements 12,881 8,694 Equipment and Furniture 7,296 5,859 ------- ------- Total Cost 24,522 18,070 Less: Accumulated Depreciation 6,729 5,532 ------- ------- Net Book Value $17,793 $12,538 ======= =======
Depreciation expense totaled $1,197,000, $919,000, and $705,000 for the years ended December 31, 1998, 1997, and 1996, respectively. NBC-Eagle Pass has committed to spend approximately $5 million to build and equip a 30,000 square foot branch in San Antonio, Texas. The branch was completed during the first quarter of 1999. Capitalized interest on three branch construction projects totaled $87,230 for the year ended December 31, 1998. 7. OTHER ASSETS Other assets include the following (Dollars in thousands):
DECEMBER 31, ------------------- 1998 1997 ------- ------- Accrued Interest Receivable $ 4,750 $ 4,757 Deferred Tax Asset 900 1,751 Other Real Estate Owned 1,195 271 Other 595 539 ------- ------- Total $ 7,440 $ 7,318 ======= =======
8. DEPOSITS Included in total deposits are $103,768,000 and $94,477,000 of Mexican National deposits at December 31, 1998 and 1997, respectively. The aggregate amount of short-term jumbo certificates of deposit (CDs), each with a minimum denomination of $100,000, was approximately $79,722,000 and $65,763,000 at December 31, 1998 and 1997, respectively. 39 40 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1998, the scheduled maturities of CDs are as follows (Dollars in thousands): Year ending December 31, 1999 $ 206,354 2000 10,167 2001 1,797 2002 321 2003 and thereafter 388 ---------- $ 219,027 ==========
9. OTHER BORROWINGS AND LONG-TERM NOTES PAYABLE On December 31, 1998, a subsidiary bank holding company maintained a margin account which is secured by investment securities. The interest rate is variable (6.25% at December 31, 1998).The balance at December 31, 1998 was $2,272,061. 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, 1998 and 1997 was approximately $177,000 and $182,000, 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, 1998 and 1997 was approximately $159,000 and $164,000, respectively. In September 1998, Laredo borrowed $100,000 from the Federal Home Loan Bank of Dallas. This advance bears an interest rate of 5.15% and has a maturity date of October 2018. Principal and interest payments are due monthly in the approximate amount of $668. The outstanding balance at December 31, 1998 was $99,500. In December 1998, Laredo borrowed $1,250,000 from the Federal Home Loan Bank of Dallas. This advance bears an interest rate of 5.13% and has a maturity date of January 2004. Principal and interest payments are due monthly in the approximate amount of $24,000. The outstanding balance at December 31, 1998 was $1,250,000. On October 2, 1998, the Company executed a $7.5 million revolving line of credit with The Independent Bankers Bank in Dallas. The note bears a variable interest rate at New York prime (8.00% at December 31, 1998). Interest only payments are due quarterly beginning January 2, 1999 with the balance of unpaid principal plus accrued interest due at maturity. The note matures on October 2, 1999. The note is collateralized by the common stock of NBT of Delaware, Inc. and the stock of the subsidiary banks. The outstanding balance at December 31, 1998 was $6,187,000. Aggregate maturities at December 31, 1998 are as follows: Year ending December 31, 1999 $ 8,849,817 2000 244,913 2001 257,847 2002 271,463 2003 and thereafter 519,534 ----------- $10,143,574 ===========
40 41 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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 17 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. This lease expires on March 31, 1999. The Company also entered into a twelve month lease for a loan production office which expired on January 31, 1999. Gross rental expense for the year ended December 31, 1998, 1997, and 1996 was $134,738, $108,458, and $76,040, respectively. Future minimum lease payments at December 31, 1998 are as follows: Year ending December 31, 1999 $ 56,242 2000 -- 2001 -- ---------- $ 56,242 ==========
11. EARNINGS PER SHARE In 1997, The Financial Standards Board issued Statement No. 128, "Earnings Per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. Basic earnings per share is computed by dividing net income for the year by the weighted average number of shares outstanding. Diluted earnings per share is determined by dividing net income for the year by the weighted average number of shares of common stock and common stock equivalents outstanding. Common stock equivalents assume exercise of stock options and use of proceeds to purchase treasury stock at the average market price for the period. 41 42 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following provides a reconciliation of basic and diluted earnings per share (Dollars in thousands, except shares and per share amounts):
DECEMBER 31, --------------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Net income $ 5,288 $ 4,864 $ 3,761 Weighted average shares outstanding: Basic 4,503,427 4,658,734 4,639,955 Diluted 4,625,323 4,749,200 4,696,521 Earnings per share - Basic $ 1.17 $ 1.04 $ 0.81 ============= ============= ============= Effect of diluted securities: stock options (0.03) (0.02) (0.01) ------------- ------------- ------------- Earnings per share - Diluted $ 1.14 $ 1.02 $ 0.80 ============= ============= =============
12. EMPLOYEE BENEFITS The Company has a defined contribution plan for the benefit of substantially all employees. The plan includes a 401(k) retirement plan feature. Employees are allowed to make contributions to the plan. Each subsidiary Bank's contribution to the plan is determined annually by that Bank's Board of Directors. Plan expense for the years ended December 31, 1998, 1997 and 1996 totaled $140,767, $104,873, and $49,515, respectively. 13. 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. 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 1998 and 1996, 2,500 and 1,200 of these options were exercised, respectively. None of these granted options were exercised in 1997, 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 42 43 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1998, options representing 40,850 shares were granted to certain officers and directors of the Company at an option price of $13.25 per share, after the approval of 230,000 additional shares of common stock being added to the 1995 plan. Also in 1998, 850 shares included in the 1995 plan were reacquired by the Company. In 1997, options representing 50,000 shares were granted to certain officers and directors of the Company at an option price of $13.25 per share. 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-fifth increments commencing one year after the grant date and subject to any longer or shorter periods the Administrator may impose. The option, however, may not be exercised, in whole or in part, after five years from the date of grant. At December 31, 1998, there were 204,100 shares available for future grants 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 Options granted under the 1995 Plan (exercisable at $13.25) 50,000 -------- Options outstanding as of December 31, 1997 198,700 Options granted under the 1995 Plan (exercisable at $13.25) 40,850 Options reacquired (850) Options exercised in 1998 (2,500) -------- Options outstanding as of December 31, 1998 236,200 ========
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 1998, 1997, and 1996. 43 44 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. OTHER OPERATING EXPENSES Other operating expenses include the following (Dollars in thousands):
DECEMBER 31, -------------------------------- 1998 1997 1996 ------- ------- ------- Data processing expenses $ 267 $ 247 $ 418 FDIC insurance 49 34 6 Insurance 107 101 109 Office supplies 603 572 375 Postage and courier 498 601 379 Professional fees 905 784 689 Miscellaneous 1,955 1,558 1,183 ------- ------- ------- Total $ 4,384 $ 3,897 $ 3,159 ======= ======= =======
15. FEDERAL INCOME TAX The provision for federal income tax consisted of the following (Dollars in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ------- ------- ------- Currently Paid or Payable $ 168 $ 154 $ 145 Deferred Expense 2,888 2,657 2,010 ------- ------- ------- Total $ 3,056 $ 2,811 $ 2,155 ======= ======= =======
The provision for federal income tax is less than that computed by applying the federal statutory rate of 34% to income before income taxes as indicated in the following analysis (Dollars in thousands):
YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ------- ------- ------- Tax Based on Statutory Rate $ 2,837 $ 2,610 $ 2,011 Effect of Tax-exempt Income (15) (26) (33) Interest and other Nondeductible Expenses 9 8 7 Alternative Minimum Tax 167 156 132 Goodwill 28 24 12 Other - Net 30 39 26 ------- ------- ------- $ 3,056 $ 2,811 $ 2,155 ======= ======= =======
44 45 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the deferred income tax assets and liabilities consist of the following (Dollars in thousands):
YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 -------- -------- Deferred Tax Assets Related to: Net Operating Loss Carryforward $ 30,928 $ 33,788 Other Real Estate Owned 72 78 Allowance for Loan Losses -- 89 Securities Valuation Reserve 55 64 Non-accrual Loan Interest 140 135 Other 40 74 -------- -------- 31,235 34,228 Less: Valuation Allowance 27,919 30,792 -------- -------- Total Deferred Tax Assets 3,316 3,436 -------- -------- Deferred Tax Liabilities Related to: Allowance for Loan Losses (31) (189) Depreciation (146) (203) Bond Accretion (395) (225) Goodwill (94) -- Other -- (60) Net Unrealized Appreciation on Securities Available for Sale (1,750) (1,008) -------- -------- Total Deferred Tax Liabilities (2,416) (1,685) -------- -------- Net Deferred Tax Asset $ 900 $ 1,751 ======== ========
For federal income tax purposes, the Company had approximately $95 million in net operating loss carryforwards as of December 31, 1998 which will be available to reduce income tax liabilities in future years. The preconfirmation net operating loss carryforwards arose from the Company's emergence from a reorganization under Chapter 11 of the United States Bankruptcy Code in May 1992. If unused, approximately $91 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, 1998 and 1997, the deferred tax asset valuation allowance was reduced by $2,873,000 and $2,611,000, respectively, to adjust the recorded net deferred tax asset to an amount considered more likely than not to be realized. The deferred tax asset net of the valuation allowance and recorded on the books of the Company was $900,000 at December 31, 1998. Realization of this asset is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Realization could also be affected by a significant ownership change of the Company over a period of three years as prescribed by income tax law. Although realization of the net deferred tax asset is not assured because of these uncertainties, management believes it is more likely than not that all of the recorded deferred tax asset will be realized. In accordance with AICPA SOP No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", income tax benefits recognized from preconfirmation net operating loss carryforwards and other tax assets are used first to reduce the reorganization value in excess of amounts allocable to identifiable assets and then to increase additional paid-in capital. 45 46 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. 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, 1998 and 1997 was $5,906,000 and $4,203,000, respectively. During the year ended December 31, 1998 and 1997, new loans to such related parties amounted to $2,884,000 and $1,405,000, respectively, and repayments amounted to $1,181,000 and $904,000, respectively. No outside directors of the Company have any outstanding loans. During 1998 and 1997, the Company utilized a stock brokerage firm, which is 100% owned by the Company's Chairman, to execute certain transactions on its behalf. The Company uses an unrelated company to act as custodian and clearing firm for its investment assets. Net revenues earned by the traders at the brokerage firm, excluding the Company Chairman, related to investment transactions by the Company in 1998 and 1997 totaled $35,918 and $1,579 on purchase and sale transactions of $78,810,916 and $6,137,000, respectively. 17. 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. A summary of the notional amounts of the Bank's financial instruments with off-balance sheet risk at December 31, 1998 is as follows:
NOTIONAL AMOUNT Commitments to extend credit $17,194,000 Commitments to extend credit - Credit Cards 269,000 Financial standby letters of credit 1,236,000 Performance standby letters of credit 131,000
46 47 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: CARRYING AMOUNTS APPROXIMATE FAIR VALUES for cash and due from banks; interest bearing deposits in banks; federal funds sold; trading securities, 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. The estimated fair values of the Company's financial instruments were as Follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ---------------------- --------------------- (Dollars in Thousands) CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial Assets: Cash and Due from Banks $ 16,473 $ 16,473 $ 27,278 $ 27,278 Interest Bearing Deposits in Banks 2,343 2,343 216 216 Federal Funds sold 37,195 37,195 29,940 29,940 Trading Securities -- -- 3,433 3,433 Securities Available for Sale 142,558 142,558 139,771 139,771 Securities Held to Maturity 89,923 94,399 106,631 108,299 Loans - net 189,549 191,160 133,855 132,924 Accrued Interest Receivable 4,750 4,750 4,757 4,757 Financial Liabilities: Demand Deposits 67,160 67,160 66,346 66,346 NOW, Money market, and Savings Accounts 161,469 161,469 151,605 151,605 Time Deposits 219,027 260,056 196,464 196,956 Accrued Interest Payable 1,429 1,429 1,291 1,291 Other Debt 10,143 10,143 2,646 2,646
47 48 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of off-balance sheet assets and liabilities is not considered significant. LIMITATIONS: Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax asset, bank premises and equipment, other real estate owned, and other assets. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. 18. CONCENTRATIONS OF CREDIT Substantially all of the Banks' loans, commitments, and standby letters of credit have been granted to customers in the Banks' market areas which include South and Central Texas. Substantially all of these customers are depositors of the Banks. Investments in state and municipal securities also involve governmental entities within the Banks' market areas. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding. Standby letters of credit are granted primarily to commercial borrowers. 19. REGULATORY MATTERS The amount of dividends that may be declared by the Banks without prior approval of the various regulatory agencies is limited by statutory and regulatory rules. The Company and its subsidiary Banks are required to maintain minimum ratios of Tier 1 capital to total average assets and minimum ratios of Tier 1 and total capital to risk weighted assets, as defined by the banking regulators. The Company and its subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of the Company and its subsidiary banks assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and its subsidiary banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Company and its subsidiary banks meet all capital adequacy requirements to which it is subject. 48 49 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 1998, the most recent notification from the Banking regulators categorized the Company and its subsidiary banks as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized" the Company and its subsidiary banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institutions' categories. The Company and its subsidiary banks actual capital amounts and ratios are also presented in the table (Dollars in thousands).
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE AS OF DECEMBER 31, 1998: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- -------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- --------- -------- ---------- Total Capital to Risk Weighted Assets: CONSOLIDATED $ 41,033 19.62% $ 16,730 => 8.00% $ 20,912 => 10.00% Eagle Pass 18,656 16.36% 9,120 => 8.00 11,400 => 10.00 Laredo 8,638 16.78% 4,119 => 8.00 5,149 => 10.00 Rockdale 7,112 24.36% 2,336 => 8.00 2,920 => 10.00 Luling 3,933 21.31% 1,477 => 8.00 1,846 => 10.00 Tier 1 Capital to Risk Weighted Assets: CONSOLIDATED $ 38,418 18.37% $ 8,365 => 4.00% $ 12,547 => 6.00% Eagle Pass 17,231 15.11% 4,560 => 4.00 6,840 => 6.00 Laredo 8,040 15.61% 2,060 => 4.00 3,089 => 6.00 Rockdale 6,747 23.11% 1,168 => 4.00 1,752 => 6.00 Luling 3,699 20.04% 738 => 4.00 1,108 => 6.00 Tier 1 Capital to Average Assets: CONSOLIDATED $ 38,418 8.12% $ 19,707 => 4.00% $ 24,633 => 5.00% Eagle Pass 17,231 6.49% 10,622 => 4.00 13,277 => 5.00 Laredo 8,040 9.95% 3,233 => 4.00 4,041 => 5.00 Rockdale 6,747 6.12% 4,408 => 4.00 5,510 => 5.00 Luling 3,699 13.03% 1,135 => 4.00 1,419 => 5.00
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE AS OF DECEMBER 31, 1997: ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------------- -------------------- ----------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- -------- --------- -------- ---------- Total Capital to Risk Weighted Assets: CONSOLIDATED $ 41,767 29.02% $ 11,513 => 8.00% $ 14,391 => 10.00% Eagle Pass 16,478 23.47% 5,617 => 8.00 7,021 => 10.00 Laredo 8,166 15.78% 4,140 => 8.00 5,174 => 10.00 Rockdale 6,178 28.92% 1,709 => 8.00 2,136 => 10.00 Luling 3,550 22.84% 1,243 => 8.00 1,554 => 10.00 Tier 1 Capital to Risk Weighted Assets: CONSOLIDATED $ 39,960 27.77% $ 5,757 => 4.00% $ 8,635 => 6.00% Eagle Pass 15,554 22.15% 2,809 => 4.00 4,213 => 6.00 Laredo 7,622 14.73% 2,070 => 4.00 3,105 => 6.00 Rockdale 5,911 27.67% 855 => 4.00 1,282 => 6.00 Luling 3,352 21.57% 622 => 4.00 933 => 6.00 Tier 1 Capital to Average Assets: CONSOLIDATED $ 39,960 9.13% $ 17,509 => 4.00% $ 21,886 => 5.00% Eagle Pass 15,554 6.69% 9,307 => 4.00 11,634 => 5.00 Laredo 7,622 11.02% 2,767 => 4.00 3,459 => 5.00 Rockdale 5,911 5.32% 4,443 => 4.00 5,554 => 5.00 Luling 3,352 12.46% 1,076 => 4.00 1,345 => 5.00
49 50 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS Condensed balance sheet information of National Bancshares Corporation of Texas (The Parent Company) at December 31, 1998 and 1997, and the related statements of income and cash flows for the years ended December 31, 1998, 1997 and 1996 are as follows (Restated, see Note 2) (Dollars in thousands): BALANCE SHEETS:
DECEMBER 31, ---------------------- 1998 1997 -------- -------- ASSETS: Cash $ 360 $ 616 Investment in Subsidiaries 54,389 49,025 Fixed Assets - net 166 58 Federal Tax Benefits Due 827 679 Deferred Tax Asset 3,117 2,995 Other assets 199 112 -------- -------- Total Assets $ 59,058 $ 53,485 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Notes Payable $ 6,187 $ 2,300 Accrued Interest Payable and Other Liabilities 240 87 -------- -------- Total Liabilities 6,427 2,387 -------- -------- Common Stock 5 5 Surplus - Common Stock 28,629 25,742 Retained Earnings 28,683 23,395 Accumulated Other Comprehensive Income 3,395 1,956 Treasury Stock, at cost (463,675 shares in 1998) (8,081) -- -------- -------- Total Stockholders' Equity 52,631 51,098 -------- -------- $ 59,058 $ 53,485 ======== ========
STATEMENTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, ---------------------------- 1998 1997 1996 ------ ------ ------ INCOME: Dividends from Subsidiaries $2,300 $1,535 $2,697 Undistributed Earnings of Subsidiaries 3,924 4,245 1,543 Other Income 412 40 352 Net Realized Gains on Sales of Securities -- -- 11 Gain on Sale of Other Real Estate Owned -- -- 17 Interest Income -- -- 61 ------ ------ ------ 6,636 5,820 4,681 ------ ------ ------ EXPENSES: Salaries and Employee Benefits 690 498 404 Occupancy and Equipment Expenses 141 91 217 Interest Expense 202 275 47 Other Operating Expenses 487 325 298 ------ ------ ------ 1,520 1,189 966 ------ ------ ------ INCOME BEFORE FEDERAL INCOME TAX BENEFIT 5,116 4,631 3,715 Federal Income Tax Benefit 172 233 46 ------ ------ ------ NET INCOME $5,288 $4,864 $3,761 ====== ====== ======
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, 1998, 1997 AND 1996 (DOLLARS IN THOUSANDS)
1998 1997 1996 ------- ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,288 $ 4,864 $ 3,761 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiaries (6,224) (5,780) (4,240) Dividends received 2,300 1,535 2,697 Depreciation and amortization 28 16 109 Tax benefit realized from utilization of deferred tax assets 2,873 2,611 1,949 Net realized gains on securities available for sale -- -- (11) Gain on sale of other real estate owned and other assets -- -- (17) Increase in accrued interest receivable and other assets (357) 3 (307) Increase in accrued interest payable and other liabilities 153 (255) 99 ------- ------- ------- Net cash provided by operating activities 4,061 2,994 4,040 CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in interest bearing accounts -- 32 283 Purchases of securities available for sale -- -- (3,657) Proceeds from sales of securities available for sale -- -- 1,042 Proceeds from maturities of securities available for sale -- -- 74 Capital expenditures (136) (38) (188) Proceeds from sale of other real estate owned -- -- 266 Contribution to subsidiary -- (2,500) -- Net payments for acquisitions -- -- (1,209) ------- ------- ------- Net cash used in investing activities (136) (2,506) (3,389) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from advances on debt 6,386 5,500 140 Principal payments on other debt (2,500) (6,839) (140) Exercise of common stock options 14 -- 8 Purchase of treasury stock (8,081) -- -- ------- ------- ------- Net cash (used in) provided by financing activities (4,181) (1,339) 8 Net (decrease) increase in cash and due from banks (256) (851) 659 Cash and due from banks at beginning of year 616 1,467 808 ------- ------- ------- Cash and due from banks at end of year 360 $ 616 $ 1,467 ======= ======= =======
51 52 NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 1999 Annual Meeting of Shareholders to be held May 21, 1999. Information required by this Item with respect to executive officers of the Company who are not also directors of the Company is set forth below. ANNE R. RENFROE, age 34, has been the Chief Financial Officer of the Company since May 1995. Formerly, Ms. Renfroe was Vice-President and Controller of Texas Independent Bank, Dallas, Texas from December 1992 to January 1995. In addition, from August 1989 to December 1992 Ms. Renfroe was an audit supervisor with Fisk Robinson, P.C., Dallas, Texas. From 1986 to 1989, Ms. Renfroe was Assistant Controller for NorthPark National Bank in Dallas, Texas. Ms. Renfroe is a certified public accountant. MORRIS D. WEISS, age 39, has been Senior Vice President and General Counsel for the Company since April 1997 with responsibilities for overseeing and managing the legal affairs of the Company. Prior to joining the Company, Mr. Weiss was a partner with the law firm of Weil, Gotshal & Manges, LLP from January 1994 until April 1997 in the Business Finance and Restructuring Department, and had been an associate as such firm since October 1985. In addition, Mr. Weiss has been General Counsel of Equibond, Inc., a stock brokerage firm, and Senior Vice President and General Counsel of NBI, Inc., since April 1997. The Company also employs eight significant employees who are not directors or executive officers of the Company but who make or are expected to make significant contributions to the business of the Company. The following sets forth biographical information of the persons: FRANK D. BARROW, age 54, has been Chairman of the Board and President of NBC-Rockdale since 1986. MARIO J. GONZALEZ, age 35, has been President and Chief Executive Officer of NBC-Laredo since March 1998. Formerly, Mr. Gonzalez was Executive Vice President of NBC-Laredo from April 1993 to March 1998. In addition, Mr. Gonzalez was a National Bank Examiner with the OCC, from October 1986 until April 1993. WILLIAM D. HALES, age 52, has been President of NBC-Luling since March 1988. R. SAMUEL JUVE, age 46, has been President of NBC-Eagle Pass since January 1997. Formerly, Mr. Juve has been Executive Vice President of NBC-Eagle Pass, since April 1993 and Senior Vice President of NBC-Eagle Pass from February 1990 until March 1993. DWAYNE J. KOLLY, age 46, has been Executive Vice President, Chief Operations Officer and Information Services Coordinator of NBC-Laredo since March 1998. Formerly, Mr. Kolly was Senior Vice President Information Services Coordinator and Cashier for NBC-Laredo from October 1993 to March 1998. In addition, Mr. Kolly was Vice President and Cashier of First National Bank, Uvalde, Texas, from 1986 to 1993. THOMAS MCMORRIS, age 58, has been Executive Vice President of NBC-Eagle Pass and President of NBC-San Antonio since February 1998. Formerly, Mr. McMorris was Senior Vice President/Community Investment Group of NationsBank of Texas, San Antonio from 1990 to 1998. GEORGE W. SCHUH, age 52, 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. 52 53 HECTOR VASQUEZ, JR., age 45, has been Senior Vice President and Information Services Manager of NBC Holdings - Texas, Inc. since February 1997. Formerly Mr. Vasquez was Senior Vice President and Management Information Services Director for Citizens Bank of Corpus Christi, Texas from July 1973 to February 1997. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item is incorporated by reference from the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders to be held May 21, 1999. 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 1999 Annual Meeting of Shareholders to be held May 21, 1999. 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 1999 Annual Meeting of Shareholders to be held May 21, 1999. 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 ................................. * 10.7 Office Lease for 100 Wilshire Boulevard, Santa Monica, CA .................................... ** 10.8 Sublease for 100 Wilshire Boulevard .......................................................... *** 10.9 Form of Stock Subscription Agreement for 1994 Private Placement .............................. *** 10.10 1995 Stock Option Plan ....................................................................... *** 10.11 Form of Outside Director's Stock Option Agreement for 1995 Stock Option Plan ................. *** 10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan ...................... *** 11.1 Computation of Earnings Per Share ............................................................ 21.1 Subsidiaries of the Company .................................................................. * 27 Restated Financial Data Schedule ............................................................. 99.1 First Amended Disclosure Statement with Respect to the Second Amended Joint Plan of Reorganization ................................................................. **
53 54 * Previously filed on November 14, 1994, with the Company's Form 10-SB. ** Previously filed on March 2, 1995, with the Company's Amendment No. 1 to Form 10-SB. *** Previously filed on June 19, 1995, with the Company's Form SB-2, File no. 33-93638. 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 23rd day of April, 1999, 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 April 23, 1999 - ------------------------- Jay H. Lustig /s/ Marvin E. Melson Director, President April 23, 1999 - ------------------------- Chief Executive Officer Marvin E. Melson /s/ H. Gary Blankenship Director April 23, 1999 - ------------------------- H. Gary Blankenship /s/ John W. Lettunich Director April 23, 1999 - ------------------------- John W. Lettunich /s/ Charles T. Meeks Director April 23, 1999 - ------------------------- Charles T. Meeks
55 56 EXHIBIT INDEX
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 ..............................* 10.7 Office Lease for 100 Wilshire Boulevard, Santa Monica, CA ................................** 10.8 Sublease for 100 Wilshire Boulevard .....................................................*** 10.9 Form of Stock Subscription Agreement for 1994 Private Placement .........................*** 10.10 1995 Stock Option Plan ..................................................................*** 10.11 Form of Outside Director's Stock Option Agreement for 1995 Stock Option Plan ............*** 10.12 Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan .................*** 11.1 Computation of Earnings Per Share ....................................................... 21.1 Subsidiaries of the Company .............................................................* 27 Restated 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 No. 1 to Form 10-SB. *** Previously filed on June 19, 1995, with the Company's Form SB-2, File no. 33-93638. EX-11.1 2 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)
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------ 1998 1997 1996 --------------------------------- --------------------------------- ---------------------------------- Income Shares Per-Share Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------- ----------- ------ --------- ----------- ------ --------- ----------- ------ Income $ 5,287 $ 4,864 $ 3,761 --------- ----------- ------ --------- ----------- ------ --------- ----------- ------ BASIC EPS Income available to common shareholders $ 5,287 $ 4,503 $ 1.17 $ 4,864 4,659 $ 1.04 $ 3,761 4,640 $ 0.81 ====== ====== ====== EFFECT OF DILUTIVE SECURITIES Stock options 122 90 57 ------- ------ ------- ------ ------- ------ DILUTED EPS Income available to common shareholders + assumed conversions $ 5,287 4,625 $ 1.14 $ 4,864 4,749 $ 1.02 $ 3,761 4,697 $ 0.80 ======= ====== ====== ======= ====== ====== ======= ====== ======
EX-27 3 RESTATED FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1998 DEC-31-1998 16,473 2,343 37,195 0 142,558 89,923 94,399 192,219 2,670 512,078 447,656 8,459 2,073 1,684 0 0 5 52,201 512,078 16,632 14,845 1,586 33,063 14,568 347 18,148 232 1,885 15,273 8,344 8,344 0 0 5,288 1.17 1.14 7.72 899 311 0 6,076 2,458 290 269 2,670 2,670 0 1,592
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