1
1994
ANNUAL REPORT
BANCTEXAS GROUP INC.
2
TABLE OF CONTENTS
Page
----
Letter to Stockholders 1
Selected Consolidated and Other Financial Data 3
Management's Discussion and Analysis of Financial Condition
and Results of Operations 4
Management's Report 23
Independent Auditors' Report 24
Financial Statements:
Consolidated Balance Sheets 25
Consolidated Statements of Operations 27
Consolidated Statements of Changes in Stockholders' Equity 28
Consolidated Statements of Cash Flows 29
Notes to Consolidated Financial Statements 30
Quarterly Consolidated Statements of Operations 58
Management 59
Corporate Information 60
3
BANCTEXAS GROUP INC.
To our shareholders, customers and friends:
Initially, 1994 appeared to be a disappointment to BancTEXAS and its
shareholders. Clearly, the net loss of $905,000, or $.02 per share,
when compared with net income of $219,000, or $.01 per share for 1993,
was not desirable. Asset quality continued to improve throughout 1994,
with nonperforming assets representing only .61% of total assets at
December 31, 1994, compared to 1.25% at December 31, 1993. This stellar
asset quality did not translate into improved income, as the Company's
net interest margin declined from 3.94% in 1993 to 3.46% in 1994.
Furthermore, substantial nonrecurring charges caused noninterest
expenses to be abnormally high. However, underlying the financial
statements are significant changes in BancTEXAS which suggest a much
brighter future is ahead.
Recognizing the need to establish a solid base upon which to build the
future of BancTEXAS, management and the Board of Directors focused its
efforts in 1994 on three objectives: (a) to increase the capital
position to allow meaningful growth, either internally or through
acquisitions; (b) to redirect the organizational structure, internal
systems and corporate psychology to enable BancTEXAS to significantly
reduce its overhead; and (c) to realign the asset/liability structure of
the Company to provide a level of control over interest rate risk
commensurate with that achieved over credit risk. Looking back at these
objectives at year end, each has either been completed, or is well under
way.
The most prominent event of 1994 was the private placement of $30
million of Class B common stock, which was completed in August. This
was significant not only because it required the approval of the
shareholders at the Annual Meeting and it established a capital position
substantially in excess of all regulatory requirements, but also because
it created the opportunity to aggressively address the other objectives.
Concurrent with the private placement, the Company initiated another
review of its cost structure recognizing that new economies might now be
available through the services offered by a larger organization. Of
particular concern were its various benefits plans, which had become
extremely expensive to the Company. After thorough consideration,
management and the Board determined that it was no longer economically
feasible to continue the accumulation of benefits under its defined
benefits pension plan or to continue to offer Company contributions to
its post retirement medical benefits plan. At the same time, it was
recognized that given this decision, it was also not reasonable to
continue to amortize the unfunded cost of the accumulated benefits under
these plans into the future. Therefore, the Company recorded a one-time
accrual of $1.7 million to reflect these obligations.
Since today's banking environment requires that staffing levels be
adjusted to accomplish its overhead objectives, the Company reevaluated
its personnel requirements considering the availability of various
services and personnel on an "as needed" basis from its new shareholder,
First Banks. While this is always a difficult task, the presence of
these services provides added flexibility in staffing which was not
previously possible. In order to provide for the costs of this process,
the Company recorded an accrual of $430,000.
Once the capital base was in place, management and the Board focused
their attention on the asset/liability structure of the Company,
particularly its investment portfolio. Unlike the two preceding years,
1994 was a year of rapidly increasing interest rates. In this
environment, the strategy of acquiring a substantial portfolio of
mortgage-backed securities, a significant portion of which was purchased
with borrowed funds, was reevaluated. It was determined that the rate of
1
4
increase in the cost of the borrowed funds significantly exceeded the
related increases in the yield of the investment portfolio, contributing
to a declining net interest margin. Faced with the prospect that this
margin might become negative on a major portion of the Company's assets,
management and the Board decided to dispose of over $113 million of
securities, or approximately one-third of the total assets of BancTEXAS.
The funds generated by this were used to reduce the related liabilities,
as well as to fund the Company's loan growth. Although this resulted in
realizing a loss of over $7 million, it was a significant factor in the
increase in net interest margin from 3.11% in the second quarter of 1994
to 3.84% in the fourth quarter.
As a final step in this process, the Company entered into a series of
interest rate hedging transactions to mitigate the effects which further
interest rate changes might have on its net interest margin. Although
in the short-run hedging has the effect of reducing net interest margin,
it improves the ability of management to maintain its margin during
periods of changing rates.
In December 1994, BancTEXAS' Board elected to implement another change
which is referred to as a "quasi-reorganization". This is an accounting
procedure which results in restating the carrying values of the
Company's assets and liabilities to their current fair values, and
eliminating the deficit which had accumulated over many years in
retained earnings. This had no effect on earnings or cash flow, but was
the last measure required to "put the past behind us" and begin working
together to build the future BancTEXAS organization on a sound base.
In keeping with its announced intention of acquiring other financial
institutions, with the increased capacity afforded by the capital
position, management actively continued its pursuit of acquisition
candidates, particularly in its primary market areas of Dallas and
Houston. After discussing possible combinations with several prospects,
it became apparent that the pricing expectations of the selling
shareholders exceeded the fair value of their institutions. In light of
this development, management and the Board are considering expanding the
geographic area of its acquisition criteria to direct its focus toward
more productive acquisition efforts.
Having set in motion all of these activities, the Company's Chairman,
Chief Executive Officer and President, Mr. Nathan C. ("Nate") Collins
announced his decision in November to retire. Nate joined BancTEXAS
after the recapitalization in 1987 and steered the Company through the
turbulent times which preceded the failure of BankTEXAS Dallas N. A. in
1990. He then led the rebuilding process to bring BancTEXAS to its
present position. Having accomplished this, Nate felt that his task at
BancTEXAS was completed. We are sure that you will join the management
and Board of Directors of BancTEXAS in expressing our thanks and our
best wishes to Nate and his family in his well deserved retirement.
March 17, 1995
James F. Dierberg
Chairman of the Board,
Chief Executive Officer and President
David F. Weaver
Executive Vice President
2
5
BANCTEXAS GROUP INC.
Selected Consolidated And Other Financial Data
The following table presents selected consolidated financial
information for BancTEXAS Group Inc. for each of the years in the
five-year period ended December 31, 1994.
Year ended December 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars expressed in thousands)
Income statement data:
Interest income $ 22,649 21,966 24,735 23,742 29,389
Interest expense 11,072 9,750 11,229 13,226 18,064
Net interest income 11,577 12,216 13,506 10,516 11,325
Provision for possible loan losses 1,258 490 507 934 1,544
Income (loss) from operations
before extraordinary items (905) 219 702 (3,504) (8,489)
Net income (loss) (905) 219 1,064 (3,039) 27,641
Per share data:
Income (loss) from operations (.02) .01 .03 (.18) (.44)
Net income (loss) (.02) .01 .05 (.16) 1.44
Dividends paid nil nil nil nil nil
Balance sheet data:
Assets 331,790 368,608 322,769 290,817 265,899
Loans, net of unearned discount 203,314 167,732 174,695 183,371 192,246
Allowance for possible loan losses. 2,756 2,637 3,044 4,479 5,666
Deposits 241,570 242,897 270,730 251,586 242,092
Long-term debt 1,054 1,054 1,066 1,066 2,032
Stockholders' equity 39,714 14,952 14,107 13,013 16,055
Book value per common share .68 .75 .73 .68 .84
Financial ratios:
Return on average assets N/A .07% .34% N/A 8.64%
Return on average equity N/A 1.49% 7.90% N/A N/A
Average equity as a percent of
average assets 6.80% 4.40% 4.28% 5.38% (3.66)%
Asset quality ratios:
Allowance for possible loan losses
to total loans 1.36% 1.57% 1.74% 2.44% 2.95%
Allowance for possible loan losses
to nonperforming loans 578.99% 185.05% 193.39% 102.66% 93.11%
Nonperforming assets to total
assets .61% 1.25% 2.10% 3.87% 6.08%
Nonperforming assets to loans
and foreclosed assets .99% 2.69% 3.77% 5.91% 7.99%
Other statistics:
Number of employees (at year end) 154 164 170 172 200
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6
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
GENERAL
BancTEXAS Group Inc. is a registered bank holding company incorporated
in Delaware. At December 31, 1994 BancTEXAS Group Inc. and
subsidiaries (BancTEXAS or the Company) had approximately $331.8
million in total assets, $203.3 million in total loans, net of unearned
discount, $241.6 million in total deposits and $39.7 million in total
stockholders' equity. The Company operates through its subsidiary
bank, BankTEXAS N. A. (the Bank).
Through the Bank's six banking locations in Houston, Dallas, McKinney
and Irving, Texas, the Company offers a broad range of commercial and
personal banking services, including certificates of deposit,
individual retirement and other time deposit accounts, checking and
other demand deposit accounts, interest checking accounts, savings
accounts and money market accounts. The Bank offers various loan
products to its customers, including commercial and industrial,
commercial and residential real estate, real estate construction and
development, and consumer loans. In addition, the Bank makes available
to its customers other financial services, which include automatic
teller machines, credit related insurance and safe deposit boxes.
The Company's management philosophy is to centralize overall corporate
policies, procedural and administrative functions and to provide
operational support functions for the Bank. Primary responsibility for
managing the Bank remains with its officers and directors.
On August 31, 1994, BancTEXAS issued and sold 37,500,000 shares of
Class B common stock (the Class B Stock) in a private placement in
exchange for $30 million in cash. This increased the capital of
BancTEXAS to levels substantially in excess of regulatory requirements.
As a result of this transaction, the purchaser of the Class B Stock,
First Banks, Inc. (First Banks) became the owner of approximately 65.05%
of the outstanding voting stock of BancTEXAS at August 31, 1994 (see
note 2 to the consolidated financial statements).
FINANCIAL CONDITION AND AVERAGE BALANCES
The Company's average total assets were $363.7 million, $333.6 million
and $314.8 million for the years ended December 31, 1994, 1993 and
1992, respectively. The increase in total assets primarily reflected
an expansion of the investment portfolio to an average of $141.7
million for the year ended December 31, 1994, compared with $132.6
million and $100.2 million for the years ended December 31, 1993 and
1992, respectively. This was the result of an investment strategy
which the Company was following during this period whereby funds were
borrowed, principally repurchase agreements and advances from the
Federal Home Loan Bank, which were in turn used to purchase securities.
Consequently, there was a corresponding increase in average short-term
borrowings to $89.7 million for the year ended December 31, 1994
compared with $55.6 million and $34.6 million for the years ended
December 31, 1993 and 1992, respectively.
The loan portfolio, the Company's largest category of earning assets
decreased from an average of $183.3 million for the year ended December
31, 1992 to $171.9 million in 1993, and increased to $182.9 million in
1994. BancTEXAS has had a strong presence in automobile financing,
primarily on an indirect basis through dealers in Houston and Dallas,
Texas. Because of this presence and its expertise in this type of
lending, BancTEXAS originated loans in excess of its portfolio
capacity. Consequently, the excess loan production was periodically
sold to unrelated entities, primarily other financial institutions. In
addition, in 1993, the Company began originating for resale FHA Title I
home improvement loans. As a result, BancTEXAS sold an aggregate of
$55.6 million and $37.9 million of loans during the years ended
December 31, 1994 and 1993, respectively. The ability to sell loans in
this manner allows BancTEXAS the flexibility of controlling the
aggregate level and mix of its loan portfolio, as well as providing a
source of noninterest income.
4
7
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
During this period, BancTEXAS was endeavoring to change its deposit
structure. Noninterest-bearing demand accounts increased from an
average of $38.9 million for the year ended December 31, 1992 to $45.1
million and $49.1 million for the years ended December 31, 1993 and
1994, respectively. This growth provided the Company with an
opportunity to reduce its reliance on time deposits of $100,000 and
over. These deposits were reduced from an average of $35.1 million, or
13.4% of total deposits in 1992, to $33.0 million, or 12.7% of total
deposits in 1993, and $19.9 million, or 8.1% of total deposits in 1994.
However, in spite of these changes, BancTEXAS experienced a declining
net interest income and net interest margin during this period. The
following table sets forth certain information relating to the
Company's average balance sheet and the related interest income or
expense and average interest yield earned and rate paid for the years
ended December 31:
1994 1993 1992
-------------------------- -------------------------- ---------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
(dollars expressed in thousands)
Earning assets:
Time deposits with banks $ 5,379 269 5.00% $ 825 31 3.76% $ 409 15 3.67%
Investment securities <F2> 141,720 6,965 4.91 132,563 6,650 5.02 100,184 6,367 6.36
Federal funds sold and securities
purchased under agreements to
resell 4,817 219 4.55 4,517 133 2.94 7,199 249 3.46
Loans <F1> <F2> 182,922 15,196 8.31 171,889 15,152 8.82 183,315 18,104 9.85
------- ------ ------- ------ ------- ------
Total earning assets 334,838 22,649 6.76 309,794 21,966 7.09 291,107 24,735 8.47
------- ------ ------- ------ ------- ------
Nonearning assets:
Cash and due from banks 9,782 8,253 7,486
Premises and equipment 11,110 11,452 11,714
Other assets 10,584 6,977 8,587
Allowance for loan losses (2,607) (2,894) (4,094)
------- ------- -------
Total assets $363,707 $333,582 $314,800
======= ======= =======
Interest bearing liabilities:
Interest-bearing demand and
savings deposits $ 83,381 2,195 2.63% $ 88,986 2,268 2.55% $ 92,783 3,020 3.25%
Time deposits of $100,000
or more 19,918 852 4.28 33,035 1,226 3.71 35,141 1,581 4.49
Other time deposits 92,126 4,073 4.42 92,648 4,183 4.51 94,807 5,145 5.41
------- ------ ------- ------ ------- ------
Total interest bearing deposits 195,425 7,120 3.64 214,669 7,677 3.58 222,731 9,746 4.38
Federal funds purchased, short-term
borrowings and Federal Home
Loan Bank advances 89,699 3,857 4.30 55,576 1,978 3.56 34,612 1,388 4.01
Long-term debt 1,054 95 9.01 1,055 95 9.00 1,063 95 8.91
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 286,178 11,072 3.87 271,300 9,750 3.59 258,406 11,229 4.33
------- ------ ------- ------ ------- ------
Noninterest bearing liabilities:
Demand deposits 49,125 45,106 38,925
Other liabilities 3,683 2,498 4,000
------- ------- -------
Total liabilities 338,986 318,904 301,331
Stockholders' equity 24,721 14,678 13,469
------- ------- -------
Total liabilities and
stockholders' equity $363,707 $333,582 $314,800
======= ======= =======
Net interest income $ 11,577 12,216 13,506
======= ====== ======
Interest rate spread 2.89 3.50 4.14
Net interest margin 3.46% 3.94% 4.63%
==== ==== ====
<FN>
---------------
<F1> Nonaccrual loans are included in the average loan amounts. Interest on nonaccrual loans is recorded when received.
<F2> BancTEXAS has no tax-exempt income.
5
8
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
INTEREST VOLUME AND RATE VARIANCE
The following table indicates the changes in interest income and
expense which are attributable to changes in average volume and changes
in average rates when compared with the preceding year. The combined
rate/volume variance represents that portion of the change which is not
solely attributable to either the change in volume or the change in rate.
1994 Change from 1993 1993 Change from 1992
------------------------------------------ ------------------------------------------
Change Due to: Change Due to:
------------------------------ ------------------------------
Total Rate/ Total Rate/
Change Volume Rate Volume Change Volume Rate Volume
------ ------ ---- ------ ------ ------ ---- ------
(dollars expressed in thousands)
Earning assets:
Time deposits with banks $ 238 171 10 57 16 16 - -
Investment securities <F2> 315 459 (135) (9) 283 2,057 (1,341) (433)
Federal funds sold and
securities purchased under
agreements to resell 86 9 72 5 (116) (93) (37) 14
Loans <F1> <F2> 44 973 (873) (56) (2,952) (1,128) (1,945) 121
----- ----- ------- ---- ------- ------- ------ ----
Total interest income 683 1,612 (926) (3) (2,769) 852 (3,323) (298)
----- ----- ------- ---- ------- ------- ------ ----
Interest bearing funds:
Interest-bearing demand
and savings deposits (73) (148) 79 (4) (752) (124) (655) 27
Time deposits of $100,000
or more (374) (487) 187 (74) (355) (95) (277) 17
Other time deposits (110) (23) (87) - (962) (117) (865) 20
Short-term borrowings 1,879 1,214 412 253 590 841 (156) (95)
Long-term debt - - - - - (1) 1 -
----- ----- ------- ---- ------- ------- ------ ----
Total interest expense 1,322 556 591 175 (1,479) 504 (1,952) (31)
----- ----- ------- ---- ------- ------- ------ ----
Net interest income $ (639) 1,056 (1,517) (178) (1,290) 348 (1,371) (267)
===== ===== ======= ==== ======= ======= ====== ====
<FN>
---------------
<F1> Nonaccrual loans are included in the average loan amount. Interest on nonaccrual loans is recorded when received.
<F2> BancTEXAS has no tax-exempt income.
NET INTEREST INCOME
The primary source of the Company's earnings is its net interest
income, which is the difference between the interest earned on assets
and the interest paid on liabilities. Net interest income was
$11,557,000, or 3.46% of average earning assets for the year ended
December 31, 1994, compared with $12,216,000, or 3.94% of average
earning assets, and $13,506,000, or 4.63% of average earning assets for
the years ended December 31, 1993 and 1992, respectively.
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9
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
With the general decline in interest rates during 1992 and 1993, the
yield on the Company's loan portfolio decreased from 9.85% in 1992 to
8.82% in 1993. Because the Company's loan portfolio consists
predominately of automobile loans, which are generally fixed rate loans
with relatively short average lives, as new loans were originated they
were generally at rates below those of the existing portfolio. In
addition, during this time the Company was selling its excess loan
originations, primarily from loans which were seasoned six to nine
months. Since in a declining rate environment the rates on these loans
tended to be somewhat higher than those on newly originated loans, this
had the effect of reducing the average portfolio yield at a more rapid
rate than would have occurred if loans were not sold.
In 1994, as interest rates increased, BancTEXAS found that its ability
to sell loans had decreased substantially. Furthermore, intense
competition for automobile loans, particularly with non-bank entities,
caused market rates to increase more slowly than interest rates in
general. Consequently, the amounts and rates at which new loans were
originated were each less than anticipated. The combination of this
trend and the continued repayments of the older loans, which were
generally at higher rates, caused the yield on the loan portfolio to
continue its decline to 8.31% for the year ended December 31, 1994,
compared with 8.82% for the year ended December 31, 1993.
While the yield on the loan portfolio declined during this period, the
Company's cost of interest-bearing deposits, the principal source of
funding for the loan portfolio, failed to decrease in tandem. From the
average of 4.38% for the year ended December 31, 1992, the cost of
interest-bearing deposits declined to 3.58% for the year ended December
31, 1993, or 80 basis points. However, during the same period the
decrease in yield of the loan portfolio was 103 basis points. For the
year ended December 31, 1994, the cost of interest-bearing liabilities
was 3.64%, an increase of six basis points over that of 1993. At the
same time, however, the average yield on the loan portfolio decreased
51 basis points, further compressing the net interest margin.
Realizing the need to provide other sources of generating net interest
income, the Company began following an investment strategy in 1992
whereby funds were borrowed, principally as advances and short-term
repurchase agreements from the Federal Home Loan Bank, which were
invested in mortgage-backed securities. This generated an incremental
spread, thereby enhancing income. In order to limit the amount of
interest rate exposure in this strategy, the majority of the securities
acquired had adjustable rates. All of the adjustable rate securities
acquired were based on the Eleventh District Cost of Funds Index
(COFI), which by its nature is an index which generally reacts more
slowly to interest rate changes than more frequently used indices.
Consequently, as rates declined in 1992 and 1993, this index decreased
more slowly than interest rates generally, causing the spread between
these investments and the corresponding cost of funds to widen. This
contributed significantly to the net interest margin for the year.
However, as the interest rate declines slowed in 1993 and rates
increased in 1994, this contribution to net interest margin was
substantially reduced. The following is a comparison of the yield
earned on the investment portfolio and the cost of short-term
borrowings for the years ended December 31:
Year Ended December 31,
---------------------------
1994 1993 1992
---- ---- ----
Average yield on investments 4.91% 5.02% 6.36%
Average cost of short-term borrowings 4.30 3.56 4.01
---- ---- ----
Interest spread .61% 1.46% 2.35%
==== ==== ====
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10
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Although a substantial portion of the investment portfolio was funded
from other sources, this decreasing interest spread on that portion
funded from short-term borrowings was a significant factor in the
decline in net interest margin during this period. Furthermore, as the
securities portfolio increased in amount, the portion of this portfolio
which was funded with borrowed funds increased.
Concerned that further increases in interest rates might cause the
interest spread on these securities to become negative, in September
1994, the Company sold $113,852,000 of securities, realizing a loss of
$7,055,000, and reducing the amount of borrowed funds. While this had
a substantial negative impact on earnings for the year ended December
31, 1994, it contributed to an increase in the net interest income for
the fourth quarter, which was $3,130,000, compared with $2,854,000 for
the third quarter of 1994. Similarly, net interest margin increased to
3.84% for the fourth quarter of 1994, compared with 3.23% for the third
quarter of 1994.
COMPARISON OF RESULTS OF OPERATIONS FOR 1994 AND 1993
Net loss for the year ended December 31, 1994 was $905,000, compared
with net income of $219,000 for the year ended December 31, 1993. The
results of operations for 1994 were significantly affected by the
decline in net interest income to $11,557,000 compared with $12,216,000
for 1993, as well as the net loss on sales of investment securities of
$7,007,000 in 1994, both of which are discussed above. In addition,
there were several other factors affecting the 1994 results, some of
which were nonrecurring.
The provision for possible loan losses was $1,258,000 for the year
ended December 31, 1994, compared to $490,000 for 1993. Although asset
quality continued to improve, net charge-offs increased to $1,139,000
for 1994, compared to $897,000 for 1993. When combined with an
increase in total loans, management assessed the adequacy of the
allowance for possible loan losses and determined that it would be
prudent to strengthen it through the additional provision.
Following the completion of the private placement of Class B common
stock in August 1994, the Company analyzed its deferred income tax
assets and liabilities, and particularly the probability of their
utilization. Because of the history of BancTEXAS, the ability of the
Company to consistently generate sufficient taxable income to realize
the benefits of the various tax attributes which were available to it
was uncertain. For this reason, the Company had fully reserved its net
deferred tax assets in 1993. With the receipt of the additional capital
from the private placement, and the cash proceeds therefrom, it was
determined that the ability of BancTEXAS to generate future taxable
income was substantially enhanced. Although the nature of the
transaction caused the imposition of certain limitations under the
Internal Revenue Code, which will result in the expiration of a portion
of the tax attributes before they can be utilized, the analysis
indicates that a substantial portion remains which can be utilized. As
a result of this analysis, the Company reduced the valuation allowance
established in connection with the deferred tax assets. This
contributed to the recognition of a credit for deferred income taxes
for the year ended December 31, 1994 of $9,461,000.
8
11
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Noninterest income and expense for the years ended December 31, 1994
and 1993 were comprised of the following:
Increase (Decrease)
-------------------
1994 1993 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts $ 1,427 1,542 (115) (7.5)%
Other service charges and fees 169 174 (5) (2.9)
Gains on sale of loans 38 698 (660) (94.6)
Loan servicing fees 290 201 89 44.3
Other income 572 210 362 172.4
------ ------ ------
2,496 2,825 (329) (11.6)%
======
Gain (loss) on sale of
investment securities (7,007) 243 (7,250) N/A
------ ------ ------
Total noninterest income (loss) $ (4,511) 3,068 (7,579) N/A
====== ====== ======
Noninterest expense:
Salaries and employee benefits $ 8,911 6,483 2,428 37.5%
Occupancy, net of rental income 1,321 1,348 (27) (2.0)
Furniture and equipment 843 919 (76) (8.3)
Federal Deposit Insurance
Corporation premiums 684 754 (70) (9.3)
Communications and supplies 1,058 1,060 (2) (.2)
Legal, examination and
professional fees 1,203 1,580 (377) (23.9)
Data processing 890 911 (21) (2.3)
Losses and expenses on foreclosed
real estate 192 166 26 15.7
Litigation settlement expense - 592 (592) -
Other 1,072 762 310 40.7
------ ------ ------
Total noninterest expense $ 16,174 14,575 1,599 11.0%
====== ====== ====== ======
Noninterest Income
Service charges on deposit accounts decreased approximately $115,000,
or 7.5% in 1994 compared with 1993. In 1992 the Company had tightened
its policy of verifying the credit history of new deposit customers to
reduce its exposure to losses from checks drawn on accounts with
insufficient funds. At the same time, service charge increases were
instituted in several areas, principally affecting demand deposit
accounts. While this resulted in an immediate increase in service
charge income, gradually those customers who customarily maintained
relatively small accounts, and therefore incurred larger service
charges relative to the amount of funds on deposit, began changing
their account relationships. Many of those with funds in other
accounts transferred sufficient funds to their demand accounts to
reduce the amount of the service charges. Others who did not have
those funds available closed their accounts. This resulted in a net
reduction of the number of customer accounts serviced by BancTEXAS
during this period, but an increase in the average balance of the
remaining accounts.
9
12
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In 1993, BancTEXAS realized gains of $698,000 from the sale of loans,
primarily the sale of automobile loans originated which exceeded the
capacity of the loan portfolio. As interest rates increased in 1994,
the Company's ability to sell these loans was substantially reduced, and
the gains on such sales decreased to $38,000. In connection with these
loan sales, BancTEXAS retained the related servicing rights. The
Company received only a portion of the annual servicing fees in 1993 on
those loans sold during the year, but a full year's fees in 1994.
Consequently, income from servicing loans for others increased from
$201,000 in 1993 to $290,000 in 1994.
The increase in other noninterest income for the year ended December
31, 1994 related principally to the receipt of $255,000 in settlement of
litigation relating to the failure of BancTEXAS Dallas N.A. in 1990.
Noninterest Expense
Total noninterest expense was $16,174,000 for the year ended December
31, 1994, compared with $14,575,000 for the year ended December 31,
1993. Included in 1994 expenses were several non-recurring charges
reflecting changes initiated during the year by BancTEXAS. These
included: (a) accruals of $430,000 for severance benefits relating to
the realignment of staffing levels; (b) an increase in the expense for the
deferred benefit pension plan of $839,000 for which the accumulation of
benefits was discontinued in 1994; and (c) an accrual of $898,000 for the
unfunded liability relating to the post-retirement medical benefits plan,
Company funding of which was discontinued in 1994 with respect to future
retirees.
Because most of the effects of these non-recurring charges were
reflected as personnel expenses, these expenses increased to $8,911,000
for the year ended December 31, 1994, compared with $6,483,000 for the
year ended December 31, 1993, an increase of $2,428,000, or 37.5%. The
components of this increase were as follows:
Increase
------------------
1994 1993 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Salaries and wages $ 5,346 5,224 122 2.3%
Payroll taxes 418 408 10 2.5
Employee benefits 980 816 164 20.1
Severance benefits 430 35 395 -
Nonrecurring benefits accruals 1,737 - 1,737 -
------ ------ ------
Total personnel expense $ 8,911 6,483 2,428 37.5%
====== ====== ====== ========
Occupancy expense, net of rental income, decreased from $1,348,000 for
the year ended December 31, 1993 to $1,321,000 for the year ended
December 31, 1994. This decrease primarily resulted from rental income
of the McKinney building by unrelated tenants, which increased from
$245,000 for the year ended December 31, 1993 to $286,000 for the year
ended December 31, 1994, an increase of 16.7%. This increase in rental
income was partially offset by rent expense on the Company's Abrams
facility, which was opened in September 1993.
10
13
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Expenses related to furniture and equipment decreased in 1994 to
$843,000 from $919,000 for 1993, a decrease of $76,000, or 8.3%. In
the past, the Company has leased substantial portions of the equipment
required for bank operations. Most of these leases expired during 1993
and 1994 and were not renewed. As the leases expired, the Company
purchased that equipment which was still required for operations, if
the equipment was serviceable and the cost was reasonable. Other
equipment was acquired as necessary. Consequently, rent expense on
equipment leases decreased from $255,000 for the year ended December
31, 1993 to $157,000 for the year ended December 31, 1994.
Premiums paid to the Federal Deposit Insurance Corporation decreased
from $754,000 for the year ended December 31, 1993 to $684,000 for the
year ended December 31, 1994, a decrease of $70,000, or 9.3%, primarily
as a result of reductions in the rate assessed BancTEXAS between the
two years.
Legal, examination and professional fees decreased from $1,580,000 in
the year ended December 31, 1993 to $1,203,000 for the year ended
December 31, 1994, a decrease of $377,000, or 23.9%. In 1993, the
Company settled a class action lawsuit relating to a 1984 private
placement of common stock. The cost of this settlement was reflected
as a separate expense during the year ended December 31, 1993. In
addition, in February 1994, the court ruled in favor of the Company in
a significant lawsuit in which claims of lender liability had been
asserted. While this litigation is being appealed by the plaintiffs,
the legal fees required to defend the Company's position in connection
with this action, as well as the class action, was substantially
reduced in 1994.
Other noninterest expenses increased to $1,072,000 for the year ended
December 31, 1994, compared with $762,000 for the year ended December
31, 1993, an increase of $310,000, or 40.7%. Included in other
expenses for 1994 was a non-recurring charge of $295,000 incurred in
connection with a change in the Company's vendors single interest
insurance policies relating to its indirect automobile lending program.
In addition, during the year ended December 31, 1993, BancTEXAS
reversed approximately $354,000 of estimated accrued costs relating to
the failure of BancTEXAS Dallas N. A., BancTEXAS' former subsidiary,
that were no longer considered necessary.
COMPARISON OF RESULTS OF OPERATIONS FOR 1993 AND 1992
Net income for the year ended December 31, 1993 was $219,000, compared
with net income of 1,064,000 for the year ended December 31, 1992.
However, before an extraordinary credit of $362,000, net income for
1992 was $702,000. Net income for 1993 was significantly affected by
the reduction of net interest income from $13,506,000, or 4.63% of
average earning assets in 1992 to $12,216,000, or 3.94% of average
earning assets in 1993, which was discussed previously. However, this
was partially offset by an increase in noninterest income from
$2,629,000 in 1992 to $3,068,000 in 1993.
11
14
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Noninterest income and expense for the years ended December 31, 1993
and 1992 were comprised of the following:
Increase (Decrease)
-------------------
1993 1992 Amount Percent
---- ---- ------ -------
(dollars expressed in thousands)
Noninterest income:
Service charges on deposit accounts $ 1,542 1,772 (230) (13.0)%
Other service charges and fees 174 13 161 -
Gain on sale of loans 698 372 326 87.6
Loan servicing fees 201 70 131 187.1
Other income 210 299 (89) (29.8)
------- ------- ------
2,825 2,526 299 11.8%
=======
Gain on sale of investment
securities 243 103 140 N/A
------- ------- ------
Total noninterest income $ 3,068 2,629 439 N/A
======= ======= ======
Noninterest expense:
Salaries and employee benefits $ 6,483 6,160 323 5.2%
Occupancy, net of rental income 1,348 1,464 (116) (7.9)
Furniture and equipment 919 691 228 33.0
Federal Deposit Insurance
Corporation premiums 754 530 224 42.3
Communications and supplies 1,060 1,042 18 1.7
Legal, examination and professional
fees 1,580 1,517 63 4.2
Data processing 911 856 55 6.4
Losses and expenses on foreclosed
real estate 166 1,128 (962) (85.3)
Litigation settlement expense 592 - 592 -
Other 762 1,174 (412) (35.1)
------- ------- ------
Total noninterest expense $ 14,575 14,562 13 .1%
======= ======= ====== =======
Noninterest Income
Noninterest income for 1993 included securities gains of $243,000,
compared to $103,000 for 1992. Service charges on deposit accounts and
other service charges and fees decreased $69,000, or 4%, from 1992 to
1993. This decrease includes reduced revenue resulting from closing the
safe deposit function at one of BancTEXAS's locations of $34,000 and
decreased revenue from return check charges of $31,000. Income from
loan sales increased to $698,000 for 1993, compared with $372,000 in
1992, an increase of $326,000. The increased volume of loan sales also
resulted in an increase in loan servicing income, which was $201,000 in
1993 compared to $70,000 in 1992. As of December 31, 1993, BancTEXAS is
servicing $39 million of consumer loans for third parties compared to
$19 million as of December 31, 1992.
Other noninterest income decreased $89,000 from 1992 to 1993, or 29.8%,
primarily the result of a reduction of annuity income of $46,000.
12
15
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Noninterest Expense
Total noninterest expense for 1993 increased $13,000 or .1% from 1992.
The magnitude of increase is indicative of the continued effort to
control expenses. Personnel expense increased $323,000 or 5.2% from
1992 to 1993. This increase reflected normal merit raises for the year
and severance payments made for a minor staff reduction at year-end
1993.
Occupancy expense decreased $116,000 or 7.9% from 1992 to 1993. This
decrease was due to more favorable terms in renegotiated leases and
receiving more tenant income from the Bank's building in McKinney.
Equipment expense increased $228,000 or 33.0% from 1992 to 1993. This
increase is primarily due to the purchase of new equipment to maintain
pace with current technology.
Insurance premiums paid to the Federal Deposit Insurance Corporation
increased $224,000 or 42.3% from 1992. During 1993, the FDIC initiated
a new rate schedule. The average premium charged for the Bank for FDIC
Insurance on its deposits in 1993 was 30 cents per $1,000 compared to 23
cents per $1,000 in 1992.
Losses and expenses on foreclosed real estate decreased $962,000 or
85.3% from 1992 to 1993. This is primarily the result of lower real
estate taxes and a lower provision for future losses. Included in
losses and expenses on foreclosed real estate were provisions for losses
of $382,000 in 1993 and $1.1 million in 1992.
Included in noninterest expense in 1993 is a litigation settlement of
$592,000. As more fully discussed in note 18 of the accompanying
consolidated financial statements, this litigation related to a class
action lawsuit involving a private placement of common stock completed
in 1984. This action was settled in 1993.
Other noninterest expenses decreased $412,000 or 35.1% from 1992 to
1993. These decreases resulted primarily from the reversal of $354,000
in estimated costs relating to the failure of BancTEXAS's former
subsidiary that were no longer necessary.
INVESTMENT SECURITIES
BancTEXAS classifies the securities within its investment portfolio as
held-to-maturity or available-for sale. BancTEXAS does not engage in
the trading of investment securities. As more fully described in the
Net Interest Income section hereof and note 4 of the accompanying
consolidated financial statements, during 1994 management conducted a
review of its investment portfolio and practices. As a result of the
review, it was decided to reclassify the remaining securities within the
held-to-maturity portfolio to available-for-sale and sell certain of
these available-for-sale securities. In addition, as more fully
described in the Interest Rate Risk management section hereof and notes
1 and 19 of the accompanying consolidated financial statements,
BancTEXAS implemented a hedging program to reduce the interest rate risk
of the available-for-sale portfolio. BancTEXAS specifically hedges the
interest rate risk of the available-for-sale portfolio with interest
rate futures contracts.
13
16
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LOANS
Interest earned on the loan portfolio is the primary source of income
for the Bank. Loans, net of unearned discount, represented 61.3% of
total assets as of December 31, 1994, as compared to 45.5% as of
December 31, 1993. For 1994, loan growth, net of unearned discount, was
$35.6 million. The growth is primarily attributable to consumer
automobile loans.
The Bank sold loans of $55.6 million and $37.9 million during 1994 and
1993, respectively. Loans serviced for investors totaled $21 million
and $39 million at December 31, 1994 and 1993, respectively.
During 1993 the Company began originating FHA Title I home improvement
residential mortgage loans which are held for resale to investors.
Loan Portfolio
December 31,
-------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
----------------- ----------------- ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Commercial and financial $ 14,556 7.4% $ 7,653 5.2% $ 11,576 6.8% $ 14,133 7.7% $ 31,436 16.4%
Real estate construction
and development 13,793 7.0 9,072 6.2 7,117 4.2 4,116 2.2 2,242 1.1
Real estate mortgage 14,796 7.6 12,862 8.8 18,646 11.0 27,133 14.8 36,335 18.9
Consumer and installment,
net of unearned discount 152,916 78.0 117,116 79.8 132,356 78.0 137,989 75.3 122,233 63.6
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans, excluding loans
held for sale 196,061 100.0% $146,703 100.0% 169,695 100.0% 183,371 100.0% 192,246 100.0%
===== ===== ===== ===== =====
Loans held for sale:
Consumer 6,578 15,429 5,000 - -
FHA Title I Home
Improvement 675 5,600 - - -
------- ------- ------- ------- -------
Total loans $203,314 $167,732 $174,695 $183,371 $192,246
======= ======= ======= ======= =======
Loans at December 31, 1994 mature as follows:
Over One Year
Through Five Years Over Five Years
------------------ ---------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------- ---- ---- ---- ---- -----
(dollars expressed in thousands)
Commercial and financial $ 9,652 1,095 3,321 471 17 14,556
Real estate construction
and development 13,260 - 533 - - 13,793
Real estate mortgage 5,417 1,631 6,135 636 977 14,796
Consumer and installment 284 143,258 - 9,374 - 152,916
Loans held for sale - 6,578 - 675 - 7,253
------- -------- ------ ------- ---- --------
$ 28,613 152,562 9,989 11,156 994 203,314
======= ======== ====== ======= ==== ========
14
17
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
NONPERFORMING ASSETS
Nonperforming assets include nonaccrual loans, restructured loans,
foreclosed property and loans past due 90 days or more but not included
in nonaccrual loans. Loans are placed on nonaccrual when, in the
opinion of management, collection of principal or interest is doubtful.
Loans past due 90 days or more with respect to principal or interest
are placed on nonaccrual unless they are both well secured and in the
process of collection. The following table presents the categories of
nonperforming assets for the past five years.
December 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars expressed in thousands)
Nonaccrual loans $ 293 622 1,426 4,203 5,813
Loans past due 90 days or more but
not included in nonaccrual loans 183 803 148 160 272
------ ------ ------ ------- -------
Total nonperforming loans 476 1,425 1,574 4,363 6,085
Foreclosed property, net 1,553 3,171 5,211 6,882 10,076
------ ------ ------ ------- -------
Total $ 2,029 4,596 6,785 11,245 16,161
====== ====== ====== ======= =======
Ratio of nonperforming assets to
total assets .61% 1.25 2.10 3.87 6.08
====== ====== ====== ======= =======
Ratio of nonperforming assets to
total loans and foreclosed property .99% 2.69 3.77 5.91 7.99
====== ====== ====== ======= =======
As of December 31, 1994 and 1993, approximately $2.5 million and
$2.3 million, respectively, of loans not included in the table above
were identified by management as having potential credit problems which
raised doubts as to the ability of the borrowers to comply with the
present loan repayment terms.
ALLOWANCE AND PROVISION FOR LOAN LOSSES
At December 31, 1994, the allowance for loan losses was $2.8 million,
or 1.36% of total loans, compared to $2.6 million, or 1.57% of total
loans, at December 31, 1993. Allowance for loan losses to total
nonperforming loans was 578.99% and 185.05% for 1994 and 1993,
respectively. The improvement from 1993 to 1994 was primarily due to
nonperforming loans declining from $1.4 million to $476,000 at December
31, 1993 and 1994, respectively.
Management considers the allowance for loan losses to be adequate at
December 31, 1994. The adequacy of the reserve is determinable only on
an approximate basis since estimation of the magnitude and timing of
loan losses involves subjective judgments. In evaluating the adequacy
of the reserve at December 31, 1994, consideration was given to such
factors as management's evaluation of specific loans; the level and
composition of classified loans; historical loss experience; results of
examinations by regulatory agencies; an internal asset review process
that is independent of the Bank's management; expectations of future
economic conditions and their impact on particular industries and
individual borrowers; concentrations of credit; management depth and
experience; and other judgmental factors.
15
18
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The provision for loan losses for 1994 was $1.3 million, compared to
$490,000 for 1993 and $507,000 for 1992. Net charge-offs were $1.1
million for 1994, compared to $897,000 for 1993 and $1.9 million for
1992. Net charge-offs for 1994 and 1993 represented .62% and .52% of
average loans, respectively.
The following table summarizes the activity in the allowance for loan
losses for the past five years.
Summary of the Allowance for Loan Losses
December 31,
---------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars expressed in thousands)
Balance at beginning of year $ 2,637 3,044 4,479 5,666 6,498
-------- -------- -------- -------- --------
Loans charged off:
Commercial and financial (7) (268) (801) (846) (446)
Real estate construction and
development - - - - (101)
Real estate mortgage (375) (8) (409) (1,103) (1,864)
Consumer and installment (1,876) (1,622) (2,347) (2,543) (2,909)
-------- -------- -------- -------- --------
Total charge-offs (2,258) (1,898) (3,557) (4,492) (5,320)
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
Commercial and financial 184 164 324 499 1,340
Real estate construction and
development - - - - 17
Real estate mortgage 258 154 251 715 492
Consumer and installment 677 683 1,040 1,157 1,095
-------- -------- -------- -------- --------
Total recoveries 1,119 1,001 1,615 2,371 2,944
-------- -------- -------- -------- --------
Net charge-offs (1,139) (897) (1,942) (2,121) (2,376)
-------- -------- -------- -------- --------
Provision for loan losses 1,258 490 507 934 1,544
-------- -------- -------- -------- --------
Balance at end of year $ 2,756 2,637 3,044 4,479 5,666
======== ======== ======== ======== ========
Average total loans $ 182,922 171,889 183,315 187,962 213,328
======== ======== ======== ======== ========
Net charge-offs as a percentage
of average loans .62% .52 1.06 1.13 1.11
======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of year-end loans 1.36 1.57 1.74 2.44 2.95
======== ======== ======== ======== ========
Allowance for loan losses as a
percent of nonperforming loans 578.99% 185.05 193.39 102.66 93.11
======== ======== ======== ======== ========
The allocation of the allowance for loan losses at year-end represents
management's judgment as to the inherent risk in the various categories
of the current loan portfolio. The allocations represent the
conditions at a point in time and are subject to change as conditions
dictate. This allocation is not intended to predict future potential
loan losses. The breakdown of the allowance by loan category is based
in part on evaluations of individual loans, past history and economic
16
19
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
conditions within specific industries or geographic areas. In
addition, all large borrowers, at a minimum, are required to provide
annual statements of condition and profit and loss statements. When
the loan is secured by income producing real estate, detailed rent
rolls and operational expenses are provided by the borrower. The
frequency of information provided by all types of borrowers ranges from
monthly to annually, depending on the size of the transaction, the
collateral and the financial condition of the borrower. All criticized
loans, at a minimum, are reviewed by management on a quarterly basis.
The following table summarizes the allocation of the allowance for loan
losses and percent of each loan category to total loans for the past
five years.
December 31,
-------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
(dollars expressed in thousands)
Allocation amount:
Commercial and financial $ 197 229 456 1,162 1,294
Real estate construction and
development 187 237 71 132 11
Real estate mortgage 201 720 1,003 1,023 2,269
Consumer and installment 2,171 1,451 1,514 2,162 2,092
------- ------- ------- ------- -------
Total $ 2,756 2,637 3,044 4,479 5,666
======= ======= ======= ======= =======
Percent of each loan
category to total loans:
Commercial and financial 7.1% 4.6 6.6 7.7 16.3
Real estate construction and
development 6.8 5.4 4.1 2.2 1.2
Real estate mortgage 7.3 7.7 10.7 14.8 18.9
Consumer and installment 75.2 69.8 75.7 75.3 63.6
Loans held for sale 3.6 12.5 2.9 - -
------ ------ ------ ------ ------
Total 100.0% 100.0 100.0 100.0 100.0
====== ====== ====== ====== ======
DEPOSITS
Deposits are the primary source of funds for the Bank. The Bank's
deposits consist principally of core deposits from its local market
areas. The Bank does not accept brokered deposits. The following table
sets forth the distribution of the Bank's average deposit account
balances for the years ended December 31 and the related weighted
average interest rates by category of deposit:
1994 1993 1992
--------------------- --------------------- ---------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
(dollars expressed in thousands)
Noninterest bearing demand $ 49,125 - $ 45,106 - $ 38,925 -
Interest bearing demand and
money market accounts 65,016 2.73% 70,455 2.56% 75,093 3.28%
Savings 18,365 2.30 18,531 2.50 17,690 3.11
Time deposits of $100,000
or more 14,679 4.85 12,675 4.54 13,931 5.38
Public funds 5,239 3.42 20,360 3.20 21,210 3.90
Other time 92,126 4.42% 92,648 4.51% 94,807 5.41%
------- ------- -------
Total average deposits $244,550 $259,775 $261,656
======= ======= =======
17
20
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
The following table presents the maturity structure of domestic
certificates of deposit of $100,000 and over at December 31, 1994, 1993
and 1992.
December 31,
-------------------------------
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
3 months or less $ 10,016 2,882 17,224
Over 3 through 6 months 3,857 9,615 17,484
Over 6 through 12 months 1,919 1,546 1,608
Over 12 months 7,271 7,669 5,184
------ ------- -------
Total $ 23,063 21,712 41,500
======= ======= =======
CAPITAL
On August 31, 1994, BancTEXAS issued and sold for $30 million in a
private placement 37,500,000 shares of Class B Stock to First Banks,
Inc., a multi-bank holding company headquartered in St. Louis, Missouri.
The Class B Stock is generally equivalent to the Company's Common Stock,
except that it is not registered or transferable by First Banks, other
than to an affiliated entity, and has dividend rights which are junior
to those of the Company's Common Stock. From the net proceeds of this
private placement, after issuance expenses of $377,000, $17 million was
contributed to the capital of the Bank. The remainder is held by
BancTEXAS for future use in connection with acquisitions or other
corporate purposes. As a result of this transaction, First Banks owned
64.6% of the total outstanding voting stock as of December 31, 1994.
Risk-based capital guidelines for financial institutions were adopted
by regulatory authorities effective after December 31, 1990. These
guidelines are designed to relate regulatory capital requirements to the
risk profiles of the specific institutions and to provide more uniform
requirements among the various regulators. Under these guidelines,
BancTEXAS and the Bank are required to maintain a minimum risk-based
capital to risk-weighted assets ratio of 8.0%, with at least 4.0% being
"Tier 1" capital. Tier 1 capital is composed of total stockholders'
equity. The minimum leverage ratio (Tier 1 capital to total assets) of
3.0% must be maintained. However, for all but the most highly rated
financial institutions and for bank-holding companies seeking to expand,
regulatory authorities expect a leverage ratio of 3.0% plus 100 to 200
basis points will be maintained.
At December 31, 1994 and 1993, BancTEXAS' and the Bank's capital ratios
were as follows:
Risk-Based Capital Ratios
------------------------------------------
Total Tier 1 Leverage Ratio
------------------ ------------------ ------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
(dollars expressed in thousands)
BancTEXAS 17.50% 8.47 16.28 7.02 11.97 4.27
Bank 9.25 8.55 8.04 7.30 5.82 4.55
====== ===== ====== ===== ====== =====
18
21
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
INTEREST RATE RISK MANAGEMENT
Managing interest rate risk is fundamental to banking. Banking
institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking activities to achieve
a desired interest rate sensitivity position and to limit their
exposure to interest rate risk. The Bank's inherent maturity and
repricing characteristics of the lending and deposit activities creates
a naturally liability-sensitive structure. By using a combination of
on- and off-balance sheet financial instruments, the Bank manages its
interest rate sensitivity to within the policy guidelines.
The Asset Liability Committee (ALCO) of the Bank's Board of Directors
reviews the overall interest rate risk management activity. The ALCO,
which includes the Chief Executive Officer and Senior Officers
representing the investment, credit and finance areas, oversees the
interest rate risk management process and approves policy guidelines.
The Asset Liability Management Group monitors the day-to-day exposure
to interest rate risk and implements necessary adjustments as directed
by the ALCO and provided by the policy guidelines. Such adjustments
may be necessary in response to changes in interest rates and loan and
deposit volumes.
BancTEXAS' objective regarding interest rate risk management is to
position BancTEXAS such that changes in interest rates do not have a
material adverse impact upon the net market value and net income of
BancTEXAS. To measure the impact from interest rate changes, BancTEXAS
recalculates its net income over a one-year horizon and net market
value on a proforma basis assuming instantaneous, permanent parallel
shifts in the yield curve, in varying amounts both upward and downward.
Larger increases or decreases in BancTEXAS' net market value and net
income as a result of these assumed interest rate changes indicates
greater levels of interest rate sensitivity than do smaller increases
and decreases in BancTEXAS' net market value and net income. BancTEXAS
endeavors to maintain a position whereby the proforma impact to the net
market value and net income would not exceed 4.0% and 10.0% for an
assumed 50 and 100 basis points increases and decreases in general
interest rates, respectively.
Within the overall interest rate risk management strategy, during
1994, BancTEXAS expanded its use of off-balance sheet derivative
financial instruments as a cost and capital efficient way to manage
interest rate sensitivity. These off-balance sheet derivative
financial instruments are utilized to modify the repricing or maturity
characteristics of on-balance sheet assets and liabilities. As more
fully described in notes 1 and 19 to the accompanying consolidated
financial statements, BancTEXAS holds a combination of off-balance
sheet derivative financial instruments, generally limited to interest
rate cap agreements and interest rate futures contracts. The use of
such derivative financial instruments is strictly limited to reducing
the interest rate risk exposure of BancTEXAS to within the
aforementioned prescribed policy guidelines.
19
22
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
In addition to the simulation model employed by BancTEXAS, a more
traditional interest rate sensitivity position is prepared and reviewed
in conjunction with the results of the simulation model. The following
table presents the projected maturities and periods to repricing of the
Company's rate sensitive assets and liabilities as of December 31,
1994, adjusted to account for anticipated prepayments:
Interest Rate Sensitivity Analysis
Over three
Three through through Over one Over
months six twelve through five
Immediate or less months months five years years Total
--------- ------- ------ ------ ---------- ----- -----
(dollars expressed in thousands)
Interest-earning assets:
Loans<F1> $ 23,288 13,082 14,707 28,379 121,113 2,745 203,314
Investment securities - 19,235 6,428 12,726 16,096 6,915 61,400
Federal funds sold 8,000 - - - - - 8,000
Interest-bearing deposits with
other financial institutions 25,042 - - - - - 25,042
------- -------- -------- -------- -------- ------- --------
Total interest-earning assets 56,330 32,317 21,135 41,105 137,209 9,660 297,756
------- -------- -------- -------- -------- ------- --------
Interest-bearing liabilities:
Interest-bearing demand accounts - 9,131 5,753 3,624 2,688 3,482 24,678
Money market demand accounts 37,354 - - - - - 37,354
Savings accounts - 2,894 2,402 1,994 2,947 6,786 17,023
Time deposits - 25,453 19,767 28,329 42,692 856 117,097
Other borrowed funds 24,233 4,097 7,218 3,469 6,491 - 45,508
------- -------- -------- -------- -------- ------- --------
Total interest-bearing liabilities 61,587 41,575 35,140 37,416 54,818 11,124 241,660
------- -------- -------- -------- -------- ------- --------
Interest-sensitivity gap:
Periodic $ 5,257 (9,258) (14,005) 3,689 82,391 1,464 56,096
========
Cumulative (5,257) (14,515) (28,520) (24,831) 57,560 56,096
======= ======== ======== ======== ======== =======
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic .91% .78 .60 1.10 2.50 .87 1.23
========
Cumulative .91 .86 .79 .86 1.25 1.23
======= ======== ======== ======== ======== =======
Management makes certain assumptions in preparing the table above.
These assumptions include: loans will repay at historic repayment
speeds; mortgage-backed securities, included in investment securities,
will repay at projected repayment speeds; interest-bearing demand
accounts and savings accounts are interest-sensitive at a rate of 37%
and 17%, respectively, of the remaining balance for each period
presented; and fixed maturity deposits will not be withdrawn prior to
maturity.
The interest-sensitivity position is one of several measurements of
the impact of interest rate changes on net interest income. Its
usefulness in assessing the effect of potential changes in net interest
income varies with the constant change in the composition of the
Company's assets and liabilities. For this reason, the Company uses
the simulation model.
20
23
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
LIQUIDITY
The liquidity of BancTEXAS and the Bank is the ability to maintain a
cash flow which is adequate to fund operations and meet obligations and
other commitments on a timely basis. The Bank receives funds for
liquidity from customer deposits, loan payments, maturities, and sales
of investments and earnings. In addition, the Bank may avail itself of
more volatile sources of funds through issuance of certificates of
deposit in denominations of $100,000 or more, federal funds borrowed,
securities sold under agreements to repurchase and borrowings from the
Federal Home Loan Bank (FHLB). The aggregate funds acquired from these
sources were $44.5 million and $107.2 million at December 31, 1994 and
1993, respectively. The decrease is attributable to the repayment of
certain borrowings from the proceeds received upon sales of investment
securities and sale of Class B Stock to First Banks.
Management believes that the available liquidity and operating results
of the Bank will be sufficient to provide funds for growth and to meet
BancTEXAS' operating and debt service requirements both on a short-term
and long-term basis.
REGULATION AND SUPERVISION
The Company and the Bank are extensively regulated under Federal and
state law. These laws and regulations are intended to protect
depositors, not stockholders.
In December of 1991, the Federal Deposit Insurance Corporation
Improvement Act (FDICIA) was enacted; it included many significant
provisions that affect the Company's and the Bank's operations. The
Act established new and expanded reporting and auditing standards,
expanded regulatory supervision and established new consumer
provisions.
EFFECT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board (FASB) issued
SFAS 114, "Accounting by Creditors for Impairment of a Loan" (SFAS
114). During October 1994, the FASB issued SFAS 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (SFAS 118), which amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criterion
for loan impairment and the measurement methods for certain impaired
loans and loans whose terms have been modified in troubled debt
restructurings (a restructured loan). Specifically, a loan is
considered impaired when it is probable a creditor will be unable to
collect principal and interest according to the contractual terms of
the loan agreement. When measuring impairment, the expected future
cash flows of an impaired loan are required to be discounted at the
loan's effective interest rate. Alternatively, impairment can be
measured by reference to an observable market price, if one exists, or
the fair value of the collateral when the creditor determines
foreclosure is probable. Additionally, impairment of a restructured
loan is measured by discounting the total expected future cash flows at
the loan's effective rate of interest as stated in the original loan
agreement.
21
24
BANCTEXAS GROUP INC.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
SFAS 118 amended SFAS 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. Prior to the
issuance of SFAS 118, SFAS 114 provided for two alternative income
recognition methods to be used to account for changes in the net
carrying amount of an impaired loan subsequent to the initial
measurement of impairment. Under the first income recognition method,
a creditor would accrue interest on the net carrying amount of the
impaired loan and report other changes in the net carrying amount of
the loan as an adjustment to the provision for loan losses. Under the
second income recognition method, a creditor would recognize all
changes in the net carrying amount of the loan as an adjustment to the
provision for loan losses. While those income recognition methods are
no longer required, SFAS 118 does not preclude a creditor from using
either of those methods.
The impact of initially applying SFAS 114 and SFAS 118 will be
reported as a component of the provision for possible loan losses
charged to operations, rather than as an accounting change.
Consequently, the Company does not believe implementation of these
Statements would have a material effect on its consolidated financial
position or results of operations. SFAS 114 and SFAS 118 are effective
for fiscal years beginning after December 14, 1994.
During October 1994, the FASB issued SFAS 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS 119). SFAS 119 requires disclosures about the
amounts, nature, and terms of derivative financial instruments that are
not subject to SFAS 105, "Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" (SFAS 105) because they do not result in
off-balance-sheet risk of accounting loss. SFAS 119 requires that a
distinction be made between financial instruments held or issued for
trading purposes and financial instruments held or issued for purposes
other than trading.
SFAS 119 amended SFAS 105 to require disaggregation of information
about financial instruments with off-balance-sheet risk of accounting
loss by class, business activity, risk, or other category that is
consistent with the entity's management of those instruments. SFAS 119
also amended SFAS 107, "Disclosure about Fair Value of Financial
Instruments" (SFAS 107) to require that fair value information be
presented without combining, aggregating, or netting the fair value of
derivative financial instruments with the fair value of nonderivative
financial instruments and be presented together with the related
carrying amounts in the body of the financial statements, a single
footnote, or a summary table in a form that makes it clear whether the
amounts represent assets or liabilities.
SFAS 119 is effective for financial statements issued for fiscal years
ending after December 14, 1994. The Company implemented SFAS 119 on
December 31, 1994, which resulted in no effect on the consolidated
financial statements other than additional disclosure requirements
included in the footnotes to the consolidated financial statements.
EFFECTS OF INFLATION
Financial institutions are less affected by inflation than other types
of companies. Financial institutions make relatively few significant
asset acquisitions which are directly affected by changing prices.
Instead, the assets and liabilities are primarily monetary in nature.
Consequently, interest rates are more significant to the performance of
financial institutions than the effect of general inflation levels.
While a relationship exists between the inflation rate and interest
rates, the Company believes this is generally manageable through its
asset/liability management program.
22
25
BANCTEXAS GROUP INC.
Management's Report
Management of BancTEXAS Group Inc. has established and maintains a
system of internal controls that provides reasonable assurance as to
the integrity and reliability of the financial statements, the
protection of assets from unauthorized use or disposition, and the
prevention and detection of fraudulent financial reporting. The system
of internal controls provides for appropriate division of
responsibility and is documented by written policies and procedures.
Management continually monitors the system of internal controls for
compliance. BancTEXAS Group Inc. maintains a strong internal auditing
program that independently assesses the effectiveness of the internal
controls and recommends possible improvements thereto. In addition,
the financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. As part of its audit of the
financial statements, KPMG Peat Marwick LLP completed a study and
evaluation of selected internal accounting controls to establish a
basis for reliance thereon in determining the nature, timing, and
extent of audit tests to be applied. Management believes that, as of
December 31, 1994, the system of internal controls is adequate to
accomplish the objectives discussed herein.
Management has made available to KPMG Peat Marwick LLP all the
financial records and related data, as well as the minutes of
stockholders' and directors' meetings. Furthermore, management
believes that all representations made to KPMG Peat Marwick LLP during
its audit were valid and appropriate.
The Audit Committee of the Board of Directors is composed of directors
who are not employees of BancTEXAS Group Inc. or any of its
subsidiaries. The Audit Committee meets periodically with management,
the internal auditors and the independent accountants to review
accounting, auditing, internal accounting controls and financial
reporting matters.
------------------------------ ------------------------------
James F. Dierberg Allen H. Blake
Chairman of the Board, Chief Financial Officer and Secretary
President and Chief Executive Officer
23
26
BANCTEXAS GROUP INC.
Independent Auditors' Report
To the Board of Directors and Stockholders
BancTEXAS Group Inc:
We have audited the accompanying consolidated balance sheet of
BancTEXAS Group Inc. and subsidiaries (the Company) as of December 31,
1994, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The
accompanying 1993 and 1992 consolidated financial statements of
BancTEXAS Group Inc. and subsidiaries were audited by other auditors,
whose report dated March 18, 1994 on those statements, included an
explanatory paragraph describing the Company's adoption of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes" and SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" in 1993.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the 1994 consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of BancTEXAS Group Inc. and subsidiaries as of December 31, 1994, and
the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 10, 1995
24
27
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars expressed in thousands, except per share data)
December 31,
---------------------
Assets 1994 1993
------- ---- ----
Cash and cash equivalents:
Cash and due from banks $ 14,029 8,565
Interest-bearing deposits with other financial
institutions with maturities of three months or less 25,042 2,525
Federal funds sold 8,000 14,400
-------- --------
Total cash and cash equivalent 47,071 25,490
-------- --------
Investment securities:
Available-for-sale 61,400 43,707
Held-to-maturity - 116,451
Loans:
Commercial and financial 14,556 7,653
Real estate construction and development 13,793 9,072
Real estate mortgage 14,796 12,862
Consumer and installment 157,570 122,119
Loans held for sale 7,253 21,029
-------- --------
Total loans 207,968 172,735
Unearned discount (4,654) (5,003)
Allowance for possible loan losses (2,756) (2,637)
-------- --------
Net loans 200,558 165,095
-------- --------
Office properties, furniture and equipment, net of
accumulated depreciation 6,511 11,338
Accrued interest receivable 1,146 1,247
Foreclosed property, net 1,553 3,171
Deferred tax assets 12,517 -
Other assets 1,034 2,109
-------- --------
Total assets $ 331,790 368,608
======== ========
25
28
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(dollars expressed in thousands, except per share data)
December 31,
-----------------------
Liabilities 1994 1993
------------ ---- ----
Deposits:
Demand:
Noninterest bearing $ 45,418 44,409
Interest bearing 24,678 21,949
Savings 54,377 62,281
Time deposits:
Time deposits of $100 or more 23,063 21,712
Other time deposits 94,034 92,546
-------- --------
Total deposits 241,570 242,897
Federal funds purchased 4,800 -
Securities sold under agreements to repurchase 19,433 95,208
Other short-term borrowings 809 1,096
Federal Home Loan Bank long-term advances 19,412 10,918
Deferred tax liabilities 1,299 -
Accrued and other liabilities 3,699 2,483
Long-term debt 1,054 1,054
-------- --------
Total liabilities 292,076 353,656
-------- --------
Stockholders' Equity
---------------------
Common stock:
Common stock, $.01 par value; authorized 163,000,000
and 50,000,000 shares at 12/31/94 and 12/31/93,
respectively; issued and outstanding 20,554,025 shares
and 19,583,025 shares as of December 31, 1994
and 1993, respectively 206 196
Class B common stock, $.01 par value; authorized
60,000,000 shares, issued and outstanding
37,500,000 shares as of December 31, 1994 375 -
Capital surplus 39,133 273,035
Retained earnings since elimination of accumulated
deficit of $259,117 effective December 31, 1994 - -
Accumulated deficit - (258,212)
Net fair value adjustment for securities available-
for-sale - (67)
-------- --------
Total stockholders' equity 39,714 14,952
-------- --------
Total liabilities and stockholders' equity $ 331,790 368,608
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
26
29
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(dollars expressed in thousands, except per share data)
Year ended December 31,
-----------------------------------
1994 1993 1992
---- ---- ----
Interest income:
Interest and fees on loans $ 15,196 15,152 18,104
Investment securities 6,965 6,650 6,367
Federal funds sold 219 133 249
Other 269 31 15
------- ------ ------
Total interest income 22,649 21,966 24,735
------- ------ ------
Interest expense:
Deposits:
Interest bearing demand 911 854 940
Savings 1,284 1,414 2,079
Time deposits of $100 or more 852 1,226 1,580
Other time deposits 4,073 4,183 5,147
Securities sold under agreements to repurchase 2,599 1,821 1,366
Federal Home Loan Bank advances 1,175 133 -
Long-term debt and other borrowings 178 119 117
------- ------ ------
Total interest expense 11,072 9,750 11,229
------- ------ ------
Net interest income 11,577 12,216 13,506
Provision for loan losses 1,258 490 507
------- ------ ------
Net interest income after provision for loan losses 10,319 11,726 12,999
------- ------ ------
Noninterest income:
Service charges on deposit accounts 1,596 1,716 1,785
Loan sales and servicing income 328 899 442
Other income 572 210 299
Gain (loss) on sales of securities, net (7,007) 243 103
------- ------ ------
Total noninterest income (loss) (4,511) 3,068 2,629
------- ------ ------
Noninterest expense:
Salaries and employee benefits 8,911 6,483 6,160
Occupancy, net of rental income 1,321 1,348 1,464
Furniture and equipment 843 919 691
Federal Deposit Insurance Corporation premiums 684 754 530
Communications and supplies 1,058 1,060 1,042
Legal, examination and professional fees 1,203 1,580 1,517
Data processing 890 911 856
Losses and expenses on foreclosed property 192 166 1,128
Litigation settlement expense - 592 -
Other 1,072 762 1,174
------- ------ ------
Total noninterest expense 16,174 14,575 14,562
------- ------ ------
Income (loss) before provision for income taxes
and extraordinary item $ (10,366) 219 1,066
Provision (credit) for income taxes (9,461) - 364
------- ------ ------
Income (loss) before extraordinary item (905) 219 702
Extraordinary tax benefit from net operating loss
carryforward - - 362
------- ------ ------
Net income (loss) $ (905) 219 1,064
======= ====== ======
Earnings (loss) per common share:
Income (loss) before extraordinary item $ (.02) .01 .03
Extraordinary item - - .02
------- ------ ------
Net income (loss) $ (.02) .01 .05
======= ====== ======
Weighted average common stock and common stock
equivalents outstanding (in thousands) 36,412 23,301 23,117
======= ====== ======
The accompanying notes are an integral part of the consolidated financial statements.
27
30
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Changes
in Stockholders' Equity
Three years ended December 31, 1994
(dollars expressed in thousands, except per share data)
Net fair
value adjustment
Class B Retained for securities Total
Common common Capital earnings available- stockholders'
stock stock surplus (deficit) for-sale equity
----- ----- ------- --------- -------- -----
Consolidated balances,
January 1, 1992 $ 191 - 272,317 (259,495) - 13,013
Year ended December 31, 1992:
Consolidated net income - - - 1,064 - 1,064
Exercise of stock options 1 - 29 - - 30
----- ----- ------- -------- ------- ------
Consolidated balances,
December 31, 1992 192 - 272,346 (258,431) - 14,107
Year ended December 31, 1993:
Consolidated net income - - - 219 - 219
Exercise of stock options 4 - 82 - - 86
Compensation paid in stock - - 67 - - 67
Shares issuable in settlement
of litigation - - 540 - - 540
Net fair value adjustment for
securities available-for-sale - - - - (67) (67)
----- ----- ------- -------- ------- ------
Consolidated balances,
December 31, 1993 196 - 273,035 (258,212) (67) 14,952
Year ended December 31, 1994:
Consolidated net loss - - - (905) - (905)
Exercise of stock options 6 - 130 - - 136
Compensation paid in stock - - 67 - - 67
Proceeds received from sale of
37,500,000 shares of Class
B common stock - 375 29,248 - - 29,623
Issuance of shares in connection
with litigation 4 - (4) - - -
Net fair value adjustment for
securities available-for-sale - - - - (1,018) (1,018)
Effect of quasi-reorganization
effective December 31, 1994 - - (263,343) 259,117 1,085 (3,141)
----- ----- -------- -------- ------- ------
Consolidated balances,
December 31, 1994 $ 206 375 39,133 - - 39,714
===== ===== ========= ======== ======= =======
The accompanying notes are an integral part of the consolidated financial statements.
28
31
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended December 31,
-------------------------------
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Operating activities:
Net income (loss) $ (905) 219 1,064
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Provision for loan losses 1,258 490 507
Provision for losses on foreclosed property 305 382 1,148
Credit for deferred income taxes (9,461) - -
Depreciation, amortization and accretion 1,298 1,621 1,345
Stock compensation and litigation settlement 67 607 -
(Gain) loss on sale of investment securities 7,007 (243) (103)
Gain on sale of assets - (139) (175)
Gain on sale of loans (38) (698) (372)
Net (increase) decrease in other assets 1,424 (497) 416
Net increase (decrease) in other liabilities 968 (548) (2,093)
Proceeds from loans originated for sale 55,587 37,917 -
Loans originated for sale (42,205) (20,597) -
------- -------- -------
Net cash provided by operations 15,305 18,514 1,737
------- -------- -------
Investing activities:
Proceeds from loan sales - - 25,514
Proceeds from maturities of investment securities 24,345 62,929 21,988
Proceeds from sales of investment securities 106,845 15,142 9,337
Purchase of investment securities (41,562) (125,170) (72,707)
Increase in loans (excluding loans originated for sale) (51,184) (11,194) (21,169)
Recoveries on loans previously charged off 1,119 1,001 1,615
Proceeds from sales of foreclosed property 1,313 1,437 1,901
Purchases of office properties, furniture and equipment,
net of retirements (264) (615) (351)
------- -------- -------
Net cash provided (used) by investing activities 40,612 (56,470) (33,872)
------- -------- -------
Financing activities:
Net increase (decrease) in deposits (1,327) (27,833) 19,144
Net increase (decrease) in securities sold under agreements
to repurchase (75,775) 62,738 13,070
Net increase (decrease) in other short-term borrowings 4,513 (269) 739
Net proceeds from issuance and sale of Class B
common stock 29,623 - -
Federal Home Loan Bank long-term advances and other
long-term debt 8,494 10,906 -
Proceeds from exercise of stock options 136 86 30
------- -------- -------
Net cash provided (used) by financing activities (34,336) 45,628 32,983
------- -------- -------
Net increase in cash and cash equivalents 21,581 7,672 848
Cash and cash equivalents, January 1 25,490 17,818 16,970
------- -------- -------
Cash and cash equivalents, December 31 $ 47,071 25,490 17,818
======= ======== =======
Supplemental disclosure of cash paid for interest $ 10,994 9,839 11,485
======= ======== =======
Supplemental disclosure of noncash investing and
financing activities:
Additions to foreclosed property $ - - 1,147
======= ======== =======
Subsequent loans to facilitate the sale of foreclosed
property $ 123 358 42
======= ======== =======
Transfer of investment securities to available-for-sale $ 114,552 43,707 -
======= ======== =======
The accompanying notes are an integral part of the consolidated financial statements.
29
32
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements of BancTEXAS Group
Inc. and subsidiaries (BancTEXAS or the Company) have been prepared in
accordance with generally accepted accounting principles and conform to
practices prevalent among financial institutions. The following is a
summary of the more significant policies followed by BancTEXAS:
Business
BancTEXAS provides a full range of banking services to individual and
corporate customers through its subsidiary bank, BankTEXAS N.A. (the
Bank), located in Houston, Dallas, McKinney and Irving, Texas.
BancTEXAS and the Bank are subject to regulations of various federal
agencies and undergo periodic examinations by these regulatory agencies.
Basis of Presentation
In preparing the consolidated financial statements, management is
required to make estimates and assumptions which significantly affect
the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet. The most significant estimate, which is
particularly susceptible to significant change in the near-term, relates
to the determination of the allowance for possible loan losses.
As discussed in Note 2, the Board of Directors of BancTEXAS elected
to implement an accounting adjustment referred to as a "quasi-
reorganization", effective December 31, 1994. In accordance with
accounting provisions applicable to a quasi-reorganization, the assets
and liabilities of BancTEXAS have been adjusted to their fair values and
the accumulated deficit in retained earnings has been eliminated.
Principles of Consolidation
The consolidated financial statements include the accounts of the parent
company and its subsidiaries, all of which are wholly owned. All
significant intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents
The Bank maintains deposit balances with various banks which are
necessary for check collection and account activity charges. Cash in
excess of immediate requirements is invested on a daily basis in federal
funds or interest-bearing deposits with other financial institutions.
Cash, due from banks, federal funds sold, and interest-bearing deposits
with original maturities of three months or less are considered to be
cash and cash equivalents for purposes of the consolidated statements of
cash flows.
The Bank is required to maintain certain daily reserve balances in
accordance with regulatory requirements. These reserve balances were
$2,756,000 and $2,637,000 at December 31, 1994 and 1993, respectively.
30
33
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investment Securities
BancTEXAS adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" (SFAS 115) at December 31, 1993. Under SFAS 115,
BancTEXAS classifies the debt and equity securities within its
investment portfolio at the time of purchase as being held-to-maturity
or available-for-sale. This classification is made at the time of
purchase, except for the reclassification of investment securities in
September 1994 described in Note 4. At December 31, 1994, all
investment securities are classified as available-for-sale. BancTEXAS
does not engage in the trading of investment securities.
Investment securities designated as held-to-maturity are those debt
securities which BancTEXAS has the positive intent and ability to hold
until maturity. Held-to-maturity securities are stated at amortized
cost, in which the amortization of premiums and accretion of discounts
are recognized over the contractual maturities or estimated lives of
the individual securities using the level-yield method.
Investment securities classified as available-for-sale are those debt
and equity securities for which BancTEXAS has no immediate plan to sell,
but which may be sold in the future if circumstances warrant.
Available-for-sale securities are stated at current fair value.
Realized gains and losses are included in other noninterest income upon
commitment to sell, based on the amortized cost of the individual
security sold. Unrealized holding gains and losses are recorded, net of
related income tax effects, in a separate component of stockholders'
equity. All previous fair value adjustments included in stockholders'
equity are reversed upon sale.
Transfers of securities between categories are recorded at fair value at
the date of transfer.
Loans
Interest and fees on commercial, real estate and simple interest
installment loans are recognized in income using the interest method.
Interest on other installment loans is recorded under the
sum-of-the-digits method, which approximates the interest method. Loans
held for portfolio are stated at cost as BancTEXAS has the ability and
it is management's intention to hold them to maturity. Loans held for
sale are stated at lower of cost or fair value. Fair value is estimated
based on the present values of the expected cash flows from principal
amortization assuming historical prepayment experience and appropriate
risk-adjusted spreads to the U.S. Treasury curve. Gains or losses
recognized upon the sale of loans are determined on a specific
identification basis.
The accrual of interest on loans is discontinued when it appears that
interest or principal may not be paid in a timely manner in the normal
course of business. Generally, payments received on nonaccrual loans
are recorded as principal reductions. Interest income is recognized
after all principal has been repaid or an improvement in the condition
of the loan has occurred which would warrant resumption of interest
accruals.
Loan Origination Fees
Loan origination and commitment fees and certain direct loan origination
costs relating to loans retained in the portfolio are deferred and
amortized over the expected lives of the loans using a method which
approximates the level yield method. Deferred fees and costs relating
to loans which are sold are included in the basis of the loans for
purposes of determining gain or loss.
31
34
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level
considered adequate to provide for potential losses. The provision for
possible loan losses is based on periodic analysis of the loans held for
portfolio and sale, considering, among other factors, current economic
conditions, loan portfolio composition, past loan loss experience,
independent appraisals, loan collateral, and payment experience. In
addition to the allowance for estimated losses on identified problem
loans, an overall unallocated allowance is established to provide for
unidentified credit losses which are inherent in the portfolio. As
adjustments become necessary, they are reflected in the results of
operations in the periods in which they become known.
Office Properties, Furniture and Equipment
As discussed in Note 2, effective December 31, 1994, the Board of
Directors of BancTEXAS elected to implement a quasi-reorganization
pursuant to which the assets and liabilities of BancTEXAS have been
adjusted to their fair values. As a result of this, the carrying values
of the office properties were reduced by $4,363,000. Prior to December
31, 1994, office properties, furniture and equipment were stated at
cost, in accordance with applicable requirements.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the related assets. Amortization of leasehold
improvements is calculated using the straight-line method over the
shorter of the useful life of the improvement or the term of the lease.
Office properties and improvements are depreciated over 40 years.
Furniture, fixtures and equipment are depreciated over two to ten years.
Maintenance and repairs that do not extend the useful life of the office
properties and equipment are charged to expense as incurred.
Foreclosed Property
Foreclosed property, consisting of real estate acquired through
foreclosure or deed in lieu of foreclosure and other repossessed assets,
is stated at the lower of fair value less applicable selling costs or
cost at the time the property is acquired. The excess of cost over fair
value of the property at the date of acquisition is charged to the
allowance for possible loan losses. Declines in the fair value below
cost are recognized as a valuation allowance. If the fair value
subsequently increases above its carrying value, the valuation allowance
is reduced, but not below zero. Increases or decreases in the valuation
allowance are charged or credited to operations.
The valuation of foreclosed property is subjective in nature and may be
adjusted in the future because of changes in economic conditions or by
review by regulatory examiners.
Gains on sales of foreclosed properties are recognized when the title
has passed to the purchaser, minimum down payment requirements have been
met, the terms of any notes received by BancTEXAS satisfy continuing
payment requirements, and BancTEXAS is relieved of any requirement for
continued involvement in the properties. Losses on sales are recognized
as incurred.
32
35
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income Taxes
BancTEXAS and all of its subsidiaries, except CSWI International Finance
N.V. (CSWI), join in filing consolidated Federal income tax returns.
Each subsidiary pays its allocation of federal income taxes to
BancTEXAS, or receives payment from BancTEXAS to the extent that tax
benefits are realized. Separate state franchise tax returns are filed
in Texas, Delaware and Nevada for the appropriate entities.
In February 1992, the Financial Accounting Standards Board (FASB) issued
SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109
requires a change from the deferred method of accounting for income
taxes, pursuant to Accounting Principles Board Opinion No. 11 (APB 11),
to the asset and liability method of accounting for income taxes. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss carry-
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled.
Effective January 1, 1993, BancTEXAS adopted SFAS 109. There was no
one-time cumulative effect of this change in accounting for income taxes
at that date, because a valuation reserve was established in an amount
equal to the net deferred tax asset. However, as a result of the
private placement of Class B common stock during the year ended December
31, 1994 described in Note 2, the probability of the realization of the
net deferred tax assets was substantially increased. Therefore, a
credit for income taxes of $9,461,000 was recorded for the year ended
December 31, 1994. See Note 11.
Pursuant to the deferred method under APB 11, which was applied in 1992
and prior years, deferred income taxes are recognized for income and
expense items that are reported in different years for financial
reporting purposes and income tax purposes using the tax rate applicable
for the year of the calculation. Under the deferred method, deferred
taxes are not adjusted for subsequent changes in tax rates.
Securities Sold Under Agreements to Repurchase
BancTEXAS enters into sales of securities under agreements to repurchase
at a specified future date. Such repurchase agreements are considered
financing agreements and, accordingly, the obligation to repurchase
assets sold is reflected as a liability in the consolidated balance
sheets. Repurchase agreements are collateralized by debt and
mortgage-backed securities.
Financial Instruments
A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that conveys or imposes on an
entity the contractual right or obligation to either receive or deliver
cash or another financial instrument.
During 1994, the FASB issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments" (SFAS
119). SFAS 119 requires disclosures about the amounts, nature, and
terms of derivative financial instruments that are
33
36
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
not subject to SFAS No. 105, "Disclosure of Information About Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk" because they do not result in
off-balance-sheet risk of accounting loss. SFAS 119 is effective for
financial statements issued for fiscal years ending after December 15,
1994. The Company implemented SFAS 119 on December 31, 1994, which
resulted in no effect on the consolidated financial statements other
than the additional disclosure requirements presented in Note 19.
Financial Instruments with Off-Balance Sheet Risk
BancTEXAS uses financial instruments to reduce the interest rate risk
arising from its financial assets and liabilities. These instruments
involve, in varying degrees, elements of interest rate risk and credit
risk in excess of the amount recognized in the consolidated balance
sheets. "Interest rate risk" is defined as the possibility that
interest rates may move unfavorably from the perspective of the Company.
The risk that a counterparty to an agreement entered into by the Company
may default is defined as "credit risk". These financial instruments
include interest rate cap agreements and interest rate futures
contracts.
BancTEXAS is party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the
financing needs of its customers. These commitments involve elements of
interest rate and credit risk in excess of the amount recognized in the
consolidated balance sheets.
Interest Rate Cap Agreements
The Company enters into interest rate cap agreements to manage interest
rate risk. The purpose of this is to reduce the future impact of
unfavorable interest rate fluctuations on certain of the Company's
interest-bearing liabilities. Interest rate cap agreements are accounted
for on an accrual basis with the net interest differential being
recognized as an adjustment to interest expense of the related
liability. Premiums and fees paid upon the purchase of interest rate
cap agreements are amortized to interest expense over the life of the
agreements using the interest method. In the event of early termination
of an interest rate cap agreement, the net proceeds received or paid are
deferred and amortized over the shorter of the remaining contract life
or the maturity of the related liability. If however, the amount of the
underlying hedged liability is repaid, then the gain or loss on the
agreement is recognized immediately in the consolidated statements of
operations. The unamortized premiums and fees paid are included in
other assets in the accompanying consolidated balance sheets.
Interest Rate Futures Contracts
Interest rate futures contracts are utilized to manage the interest rate
risk of the available-for-sale securities portfolio. Gains and losses
on interest rate futures, which qualify as hedges, are deferred.
Amortization of the net deferred gains or losses is applied to the
interest income of the available-for-sale securities portfolio using the
straight-line method. The net deferred gains and losses are applied to the
carrying value of the available-for-sale securities portfolio as part of
the mark to market valuation. In the event the hedged assets are sold,
the related gain or loss of the interest rate futures contract is
immediately recognized in the statement of operations.
34
37
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Regulatory Environment
Regulatory requirements for bank capital changed on December 31, 1990
to a risk-based measurement system that also includes leverage
requirements. Overall, the risk-based capital guidelines primarily
define the components of capital, categorize assets into different risk
classes and include certain off-balance sheet items in the calculation
of capital requirements. At December 31, 1994, the Bank was in
compliance with all regulatory capital requirements.
On December 9, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) became law. FDICIA substantially
revises bank regulatory, deposit insurance and funding provisions of the
Financial Deposit Insurance Act and makes revisions to several other
banking statutes. Based generally on capital ratios, FDICIA classifies
financial institutions into five categories. At December 31, 1994, the
Bank's capital ratios exceeded those levels necessary to be considered
in the "adequately capitalized" category.
Earnings (Loss) Per Share
Earnings (loss) per share is calculated by dividing net income (loss),
by the weighted average number of common shares and common stock
equivalents outstanding.
Reclassifications
Certain 1993 and 1992 amounts have been reclassified to conform with the
1994 presentation.
(2) FINANCIAL RESTRUCTURING
On August 31, 1994, BancTEXAS issued and sold for $30 million in a
private placement 37,500,000 shares of Class B common stock (the "Class
B Stock") to First Banks, Inc. (First Banks), a multi-bank holding
company headquartered in St. Louis, Missouri. The Class B Stock is
generally equivalent to the Company's other class of common stock
(the "Common Stock"), except that it is not registered or transferable by
First Banks, other than to an affiliated entity, and has dividend rights
which are junior to those of the Company's Common Stock. From the net
proceeds of this private placement, after issuance expenses of $377,000,
$17 million was contributed to the capital of the Bank. The remainder
is held by BancTEXAS for future use in connection with acquisitions or
other corporate purposes. As a result of this transaction, First Banks
owned 64.6% of the total outstanding voting stock as of December 31,
1994.
Recognizing the substantial transition which the Company had experienced
in recent years, culminating in the sale of the Class B Stock, the Board
of Directors elected to implement a quasi-reorganization, effective
December 31, 1994. This resulted in restating the carrying values of
assets and liabilities to their current fair values, and eliminating the
deficit in retained earnings which had accumulated over many years. The
principal adjustments necessary to revalue the balance sheet were the
reduction in the value of office properties by $4,363,000 and an
increase in deferred tax assets of $1,222,000. These adjustments
resulted in a net reduction of consolidated stockholders' equity, but
did not affect the results of operations or cash flow for the year ended
December 31, 1994. At the same time, the accumulated deficit in
retained earnings of $259,117,000 and the net fair value adjustment for
securities available-for-sale of $1,085,000 were eliminated by a
reduction in capital surplus. Management determined that in view of the
many changes which had occurred within the Company, the factors which
had given rise to the losses which had been accumulated had
35
38
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
been eliminated. Consequently, the quasi-reorganization established a
more appropriate basis upon which to evaluate the financial position and
results of operations of BancTEXAS in the future.
(3) MERGER WITH FIRST BANK/LAS COLINAS
On December 31, 1992, the Bank acquired First Bank/Las Colinas in a
transaction which was accounted for as a pooling of interests. Under
the pooling of interests method of accounting, the historical basis of
the assets and liabilities of BancTEXAS and First Bank/Las Colinas are
combined and carried forward at their previously recorded amounts.
Accordingly, the consolidated statement of operations for the year ended
December 31, 1992 includes the results of operations of First Bank/Las
Colinas. There were no intercompany transactions between the companies
at the time of the merger. In the merger, BancTEXAS issued 2.2 million
shares of stock to the shareholders of First Bank/Las Colinas.
(4) INVESTMENT SECURITIES
During 1994, management reviewed its portfolio of mortgage-backed
securities, and the methods which it was employing to fund those
securities, in the context of the rapidly increasing interest rate
environment which existed most of the year. As a result of this review,
it determined that its original intent to hold the majority of these
securities to maturity was no longer appropriate. Consequently, in
September 1994, the Company reclassified all the remaining securities
within its held-to-maturity portfolio as available-for-sale, and sold an
aggregate of $113,852,000 of these securities, resulting in a realized
loss of $7,055,000. The proceeds from this sale were primarily used to
reduce securities sold under agreements to repurchase and other
short-term borrowings. As part of the financial restructuring discussed
in Note 2, the carrying values of the investment portfolio were restated
to current fair values at December 31, 1994. This adjustment eliminated
the Company's net fair value adjustment for securities
available-for-sale of $1,085,000. As of December 31, 1994, all of the
securities in the investment portfolio were classified as
available-for-sale.
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses and estimated fair values of investments securities at
December 31, 1994 and 1993 were as follows:
Gross Gross
Amortized unrealized unrealized Estimated
cost holding gains holding losses fair value
---- ------------- -------------- ----------
(dollars expressed in thousands)
December 31, 1994:
-------------------
Available-for-sale:
U.S. Government agencies
and corporations:
Mortgage-backed securities $ 52,938 - - 52,938
Other 300 - - 300
Federal Home Loan and
Federal Reserve Bank stock 8,162 - - 8,162
------- ------- ------- -------
Total $ 61,400 - - 61,400
======= ======= ======= =======
36
39
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Gross Gross
Amortized unrealized unrealized Estimated
cost holding gains holding losses fair value
---- ------------- -------------- ----------
(dollars expressed in thousands)
December 31, 1993:
-------------------
Available-for-sale:
U.S. Treasury securities $ 144 - - 144
U.S. Government agencies
and corporations - mortgage-
backed securities 43,630 - 67 43,563
------- ------- ------ -------
Total 43,774 - 67 43,707
======= ======= ====== =======
Held-to-maturity:
U.S. Treasury securities $ 1,781 - 7 1,774
U.S. Government agencies
and corporations - mortgage-
backed securities 109,644 - 1,100 108,544
Federal Home Loan and
Federal Reserve Bank stock 5,026 - - 5,026
------- ------- ------ -------
Total $ 116,451 - 1,107 115,344
======= ======= ====== =======
The carrying values, by contractual maturity, at December 31, 1994 and
1993 are presented below. The expected maturities of mortgage-backed
securities differ from contractual maturities since the borrowers have
the right to call or prepay the obligations with or without prepayment
penalties.
Over one Over five Weighted
One year through through Over average
or less five years ten years ten years yield
------- ---------- --------- --------- -----
(dollars expressed in thousands)
December 31, 1994:
------------------
U.S. Government agencies
and corporations:
Mortgage-backed securities $ 12,803 - 24,432 15,703 7.15%
Other - 300 - - 6.17
Federal Home Loan and Federal
Reserve Bank stock (no stated
maturity) 8,162 - - - 5.89
------- ------ ------- ------- ------
Total $ 20,965 300 24,432 15,703 6.89%
======= ====== ======= ======= ======
Weighted average yield 6.07% 5.70 7.73 6.24%
======= ====== ======= =======
December 31, 1993
-----------------
U.S. Treasury securities $ 1,625 300 - - 3.31%
U.S. Government agencies
and corporations - mortgage-
backed securities - - 26,914 126,293 4.73
Federal Home Loan and Federal
Reserve Bank stock (no stated
maturity) 5,026 - - - 5.22
------- ------ ------- ------- ------
Total $ 6,651 300 26,914 126,293 4.73%
======= ====== ======= ======= ======
Weighted average yield 4.74% 3.61 5.16 4.64%
======= ====== ======= =======
37
40
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Proceeds from sale of investment securities were $106,845,000,
$15,142,000 and $9,337,000 for the years ended December 31, 1994, 1993
and 1992, respectively. Gross gains of $48,000, $243,000 and $103,000
were realized for the years ended December 31, 1994, 1993 and 1992,
respectively. Gross losses of $7,055,000 were realized in the year
ended December 31, 1994. No losses were realized in the years
ended December 31, 1993 or 1992.
The Bank maintains investments in the Federal Home Loan Bank (FHLB) and
the Federal Reserve Bank (FRB). These investments are recorded at cost,
which represents redemption value. The investment in FLHB stock is
maintained at a minimum amount equal to the greater of 1% of the
aggregate outstanding balance of loans secured by residential real
estate, or 5% of advances from the FHLB. The investment in the FRB
stock is maintained at a minimum of 6% of the Bank's capital stock and
capital surplus.
Investment securities with a carrying value of approximately $40,045,000
at December 31, 1994 were pledged in connection with deposits of public
and trust funds, securities sold under agreements to repurchase and for
other purposes required by law.
(5) LOANS
Included in the loan portfolio were $6.6 million of installment loans
and $675,000 of mortgage loans at December 31, 1994, and $15.4 million
of installment loans and $5.6 million of mortgage loans at December 31,
1993 that are classified as available-for-sale.
Changes in the allowance for possible loan losses for years ended
December 31, were as follows:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Balance, January 1 $ 2,637 3,044 4,479
------ ------ ------
Loans charged-off (2,258) (1,898) (3,557)
Recoveries of loans previously charged-off 1,119 1,001 1,615
------ ------ ------
Net loans charged-off (1,139) (897) (1,942)
Provision for possible loan losses charged
to operations 1,258 490 507
------ ------ ------
Balance, December 31 $ 2,756 2,637 3,044
====== ====== ======
Loans on which interest is not being accrued amounted to $293,000 and
$622,000 at December 31, 1994 and 1993, respectively. Nonperforming
loans include loans on which interest is not being accrued, loans past
due 90 days or more on which interest is still being accrued and loans
restructured with respect to principal or interest because of the
financial deterioration of the borrower. Interest on nonaccrual loans,
which would have been recorded under the original terms of the loans was
as follows:
38
41
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Year ended December 31,
-------------------------------
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Income that would have been recorded in
accordance with original terms $ 15 54 252
Income actually recorded (14) (2) -
---- --- ---
Income not recorded $ 1 52 252
==== === ===
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan "(SFAS 114). SFAS 114 was amended by SFAS 118.
SFAS 114 requires that impaired loans be measured based upon the present
value of expected future cash flows discounted at the loan's effective
interest rate or the fair value of the underlying collateral, if the
loan is collateral dependent. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the loan's contractual terms.
BancTEXAS was required to adopt SFAS 114, as amended by SFAS 118,
effective January 1, 1995. The adoption did not have a material impact
on the Company's consolidated financial position or results of
operations.
(6) OFFICE PROPERTIES, FURNITURE AND EQUIPMENT
As part of the financial restructuring discussed in Note 2, effective
December 31, 1994, carrying values of the Company's office properties,
furniture and equipment were adjusted to their current fair values and
the balance of accumulated depreciation was eliminated. As a result of
this procedure, total office properties, net of accumulated
depreciation, were reduced by an aggregate of $4,363,000.
Office properties, furniture and equipment were comprised of the
following at December 31:
1994 1993
---- ----
(dollars expressed in thousands)
Land $ 1,806 2,424
Buildings and improvements 3,732 10,670
Furniture, fixtures and equipment 928 4,202
Leasehold improvements - 2,217
Construction in progress 45 -
------ -------
Total 6,511 19,513
Less accumulated depreciation and
amortization - (8,175)
------ -------
Office properties, furniture and
equipment, net $ 6,511 11,338
====== =======
Depreciation expense for the years ended December 31, 1994, 1993 and
1992 totaled $728,181, $822,709 and $853,845, respectively.
39
42
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) FORECLOSED PROPERTY
BancTEXAS' foreclosed property at December 31, was as follows:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Foreclosed property $ 1,769 3,271 5,625
Allowance for losses on foreclosed property (216) (100) (414)
------ ------ ------
Foreclosed property, net $ 1,553 3,171 5,211
====== ====== ======
Changes in the allowance for losses on foreclosed property for the years
ended December 31 were as follows:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Balance at beginning of year $ 100 414 390
Provision for losses 305 382 1,148
Charge-offs (189) (696) (1,124)
----- ----- -------
Balance at end of year $ 216 100 414
===== ===== =======
Net operating expenses relating to foreclosed property were $192,000,
$166,000 and $1,128,000 for the years ended December 31, 1994, 1993 and
1992, respectively. Net operating expenses include the provision for
losses on foreclosed property, gains and losses from sales of foreclosed
assets, real estate taxes, insurance and other costs, net of any related
rental income.
(8) SHORT-TERM BORROWINGS
BancTEXAS satisfies its short-term borrowing requirements through the
use of Federal funds purchased and securities sold under repurchase
agreements generally on a daily basis. Repurchase agreements are
borrowings which have a maturity of less than a year. Investment
securities and interest-bearing deposits with FHLB of $17.4 million and
$24.5 million, respectively, are pledged as collateral for these short-
term borrowings. Other short-term borrowings include notes payable
to the Federal Reserve Bank for Treasury, Tax and Loan Deposits, and
various other borrowings that have maturities of less than one year.
Information relating to these short-term borrowings for the years ended
December 31 is provided below:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Securities sold under repurchase agreements:
Balance at year-end $ 19,433 95,208 32,470
Average daily balance 65,226 51,991 33,866
Maximum month-end balance 111,588 95,208 50,221
Average annual interest rate 3.96% 3.50 4.03
Weighted average interest rate at year-end 6.35 3.33 3.99
40
43
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Federal funds purchased and
other short-term borrowings:
Balance at year-end $ 5,609 1,096 1,365
Average daily balance 2,011 819 746
Maximum month-end balance 5,609 1,227 1,422
Average annual interest rate 4.14% 2.93 2.95
Weighted average interest rate at year-end 6.36 2.73 2.78
(9) FEDERAL HOME LOAN BANK ADVANCES
Advances from the FHLB at December 31 are as follows:
1994 1993
---- ----
(dollars expressed in thousands)
Amortizing advances maturing in:
1995 $ 5,032 -
1998 3,673 4,918
Single payment advances maturing in:
1995 7,868 3,000
1996 2,839 3,000
------- -------
Total advances $ 19,412 10,918
------- -------
Weighted average interest rate 7.47% 4.44%
======= =======
Mortgage-backed securities of $22.6 million are pledged as collateral
for these advances.
(10) LONG-TERM DEBT
At December 31, 1994 and 1993, CSWI, a wholly owned subsidiary of
BancTEXAS, had $1,054,000 of 9% convertible subordinated debentures due
May 15, 1996. These debentures are guaranteed by BancTEXAS and are
convertible into common stock of BancTEXAS at $406.25 per share. At
December 31, 1994, BancTEXAS had reserved 2,594 shares of its common
stock for conversion of these debentures.
(11) INCOME TAXES
As discussed in Note 1, BancTEXAS adopted SFAS 109 effective January 1,
1993. There was no one-time cumulative effect of this change in
accounting for income taxes because a valuation reserve was established
in an amount equal to the net deferred tax asset.
Total income tax credits for the year ended December 31, 1994 were
allocated $9,461,000 to operations, $535,000 to stockholders' equity for
the tax effect of unrealized holding losses on available-for-sale
securities and $1,222,000 to the tax effect of the quasi-reorganization.
41
44
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income tax expense (benefit) attributable to income from continuing
operations for the years ended December 31 consists of:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Current income tax expense:
Federal $ - - -
State - - -
------ ------- -------
Total current income tax expense $ - - -
------ ------- -------
Deferred income tax expense (credit):
Federal $ (9,461) - 364
State - - -
------ ------- -------
Total income tax expense (credit) $ (9,461) - 364
====== ======= =======
The effective rates of federal income taxes for the years ended December
31 differ from statutory rates of taxation as follows:
1994 1993 1992
--------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(dollars expressed in thousands)
Income (loss) before income
taxes and extraordinary item $ (10,366) $ 219 $1,066
======= ====== =====
Tax at federal income tax rate $ (3,628) (35.0)% $ 77 35.0% $ 362 34.0%
Reasons for difference in federal
income tax and effective rate:
Change in the deferred tax
valuation allowance (35,346) (340.9) (3,904) (1,782.6) - -
Change in tax attributes avail-
able to be carried forward 29,373 283.3 3,827 1,747.6 - -
Change in tax credit
carryforwards 140 1.4 - - 2 -
------- ------ ------ -------- ----- ------
Tax at effective rate $ (9,461) (91.2)% - - % $ 364 34.0%
======= ====== $ ====== ======== ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities for
periods after the adoption of SFAS 109 are as follows:
December 31,
------------------
1994 1993
---- ----
(dollars expressed in thousands)
Deferred tax assets:
Allowance for possible loan losses $ 965 562
Foreclosed property 2,191 7,382
Book losses on investment securities not
currently allowable for tax purposes 1,431 262
Postretirement medical plan 372 -
Quasi-reorganization adjustment of office
properties 1,527 -
Other 393 613
42
45
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31,
----------------
1994 1993
---- ----
(dollars expressed in thousands)
Deferred tax assets (continued):
Net operating loss carryforwards 8,582 31,125
Tax credit carryforwards - 140
------- -------
Gross deferred tax assets 15,461 40,084
Valuation allowance (2,944) (38,290)
------- -------
Net deferred tax assets $ 12,517 1,794
======= =======
Deferred tax liabilities:
Office properties, furniture and equipment $ 706 735
Safe harbor leases 499 666
Other 94 393
------- -------
Gross deferred tax liabilities 1,299 1,794
------- -------
Net deferred tax assets $ 11,218 -
======= =======
Changes to the deferred tax assets valuation allowance for the years
ended December 31 were as follows:
1994 1993
---- ----
(dollars expressed in thousands)
Balance, January 1 $ 38,290 42,194
Current year deferred provision, change in
deferred tax valuation allowance (35,346) (3,904)
------- ------
Deferred tax assets valuation allowance,
December 31 $ 2,944 38,290
======= ======
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1994, will be credited
directly to capital surplus under the terms of the quasi-reorganization
described in Note 2 and the provisions of SFAS 109.
With the completion of the sale of the Class B common stock described in
Note 2, the Internal Revenue Code provides that the net operating loss
carryforwards generated prior to the transaction are subject to an
annual limitation for all subsequent tax years. This annual limitation
is $1,362,000. The amount of the limitation is equal to the total value
of BancTEXAS stock issued and outstanding immediately prior to the
acquisition multiplied by the federal long-term tax-exempt rate at the
time. If taxable income for a post-transaction year does not equal or
exceed the annual limitation, the unused limitation is carried forward
to increase the limitation amount for the succeeding years until the
excess limitation is utilized. This does not affect the original
expiration dates of the net operating loss. The order in which the
attributes can be utilized is specified in the Internal Revenue Code.
Subsequent to the completion of the private placement of Class B common
stock, a detailed analysis of the net operating loss and tax credit
carryforwards was performed. A large portion of the net operating
losses and all of the tax credit carryforwards will expire prior to
their utilization, and were therefore removed from the analysis. This
is reflected in the reduction in the valuation allowance. After giving
effect to the applicable limitations in the Internal Revenue Code, for
federal income tax purposes, BancTEXAS had net operating loss
43
46
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
carryforwards of approximately $24,519,000 available to offset future
taxable income. These net operating loss carryforwards expire as
follows (dollars expressed in thousands):
Year ending December 31:
1996 $ 858
1998 4,140
1999 2,271
2000 103
2001 through 2009 17,147
-------
Total net operating loss carryforwards $ 24,519
=======
The remaining net deferred tax assets were reevaluated to determine
whether it is more likely than not that the deferred tax assets will be
recognized in the future. With the completion of the private placement
of Class B common stock and the receipt of the resulting cash proceeds
of $30 million, BancTEXAS will be capable of pursuing acquisitions,
expanding its services and reducing its reliance on borrowed funds.
BancTEXAS and First Banks have formulated a plan to further reduce
operating costs and expand into other revenue generating areas. First
Banks will be offering to provide certain services at substantially
reduced costs such as data processing, item processing, loan servicing,
commercial non-credit services, accounting and tax assistance and
various insurance programs. By utilizing the services and personnel
available from First Banks, implementing various other cost reduction
plans, and pursuing its acquisition objectives, BancTEXAS' management
believes it is more likely than not that its income will be increased
to a level that permits utilization of all or a substantial portion of
net deferred tax assets including NOL carryforwards. Taking all
positive and negative criteria into consideration, it was determined
that the allowance established should be reduced to $2,944,000.
(12) EMPLOYEE BENEFIT PLANS
Pension Plan
BancTEXAS has a noncontributory defined benefit pension plan covering
substantially all officers and employees. Under the plan, retirement
benefits are computed primarily based on the years of service and the
highest five-year average salary during the last ten years of service.
It is the policy of BancTEXAS to fund the net periodic pension cost,
but not less than the minimum required nor greater than the maximum
deductible contribution determined in accordance with applicable income
tax regulations. During 1994, BancTEXAS discontinued the accumulation
of benefits under the plan. As a result of this change, total expense
with respect to the defined benefit pension plan was $1,064,000 for the
year ended December 31, 1994. Contributions to the plan were $512,000,
$268,000 and $40,000 for the plan years 1994, 1993 and 1992,
respectively.
44
47
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table shows the plan's funded status as follows:
January 1,
------------------
1994 1993
---- ----
(dollars expressed in thousands)
Actuarial present value of benefit obligations:
Vested benefits $ 7,435 7,665
Nonvested benefits 73 174
------ ------
Accumulated benefit obligations 7,508 7,839
Effect of projected future compensation levels - 752
------ ------
Projected benefit obligation 7,508 8,591
Plan assets at fair value 7,882 7,981
------ ------
Plan assets (in excess of) deficient from projected
benefit obligation (374) 610
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions - (1,783)
Unrecognized transition asset being amortized over 11 years - 815
------ ------
Prepaid pension cost $ (374) (358)
====== ======
Net periodic pension expense (income) cost for the years ended December
31, 1994, 1993 and 1992 included the following:
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Service cost - benefits earned during the period $ 289 262 241
Interest cost on projected benefit obligation 572 563 562
Actual return on assets 161 (832) (388)
Net amortization and deferral 42 47 (494)
----- ---- -----
Net periodic pension expense (income) $ 1,064 40 (79)
===== ==== =====
The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.00%,
7.75% and 8.00% on January 1, 1994, 1993 and 1992, respectively. The
projected rate of increase in future salary levels was 4.5% in 1994,
4.5% in 1993, and 5.0% in 1992. The expected long-term rate of return
on assets used in determining the net pension cost was 8.0% for 1994,
8.5% for 1993 and 9.5% in 1992. The plan assets consist of money market
funds, bank managed common trust funds and corporate securities.
Employees 401(k) Plan
BancTEXAS has a 401(k) Plan which constitutes a qualified cash or
deferred profit sharing plan under Section 401(k) of the Internal
Revenue Code of 1986. The 401(k) Plan is administered by a committee
appointed by the Board of Directors of the Company. The assets of the
401(k) Plan are held and managed under a trust agreement with the trust
department of an unaffiliated bank.
Prior to the year ended December 31, 1994, BancTEXAS contributed between
ten and twenty percent of the amount of employee contributions with a
maximum contribution of five
45
48
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
percent of each employee's salary. In connection with the
discontinuation of benefits accumulation in the defined benefit pension
plan in 1994 discussed above, the Company increased its matching
contribution for the 401(k) Plan to fifty percent of employee
contributions, retaining the maximum contribution of five percent of
each employee's salary. Contributions by participating employees
pursuant to the terms of the 401(k) Plan are automatically fully vested
and nonforfeitable. Funds contributed to the 401(k) Plan by the Company
for the account of a participating employee become vested and
nonforfeitable after the employee has completed five years of service
with BancTEXAS. The Company accrued $25,000, $24,000 and $24,000 for
contribution to the 401(k) Plan for the years ended December 31, 1994,
1993 and 1992, respectively.
Postretirement Benefits Other Than Pensions
BancTEXAS makes certain health care and life insurance benefits
available for substantially all of its retired employees, a portion of
the cost of which is paid by the Company. Effective January 1, 1993,
BancTEXAS adopted SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). SFAS 106
required that the estimated cost of such postretirement benefits be
accrued as an expense during the period of the employees active service
to the Company. BancTEXAS previously expensed the cost of these
benefits as payments were made. For the year ended December 31, 1993,
BancTEXAS elected to recognize the cumulative effect of this change in
accounting over a period of twenty years, as permitted by SFAS 106. In
1993, BancTEXAS recognized $120,000 as an expense for postretirement
health care and life insurance benefits. During 1994, BancTEXAS
reevaluated the cost of this plan and changed it to provide Company
contributions for coverage only to those individuals receiving benefits
on that date. Employees retiring after that date would be allowed to
purchase coverage, but must pay the entire cost associated with such
coverage. As a result of this change, the unfunded accumulated
postretirement benefit obligations were reduced from approximately
$1,622,000 at December 31, 1993 to $898,000 at the date of the change.
This amount was then accrued as an expense. The following table sets
forth the postretirement benefit plan's accumulated obligation at
December 31, 1994 and 1993:
1994 1993
---- ----
(dollars expressed in thousands)
Retirees $ 863 921
Fully eligible plan participants - 211
Other active plan participants - 490
---- ------
Accumulated postretirement benefit obligation 863 1,622
Fair value of plan assets - -
---- ------
Accumulated postretirement benefit obligations
in excess of plan assets 863 1,622
Unrecognized prior service cost 77 (100)
Unrecognized net gain (loss) 34 (161)
Unrecognized transition obligation - (1,262)
---- ------
Accrued postretirement benefit cost $ 974 99
==== ======
46
49
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net postretirement benefit cost for the years ended December 31, 1994
and 1993 consisted of the following components:
1994 1993
---- ----
(dollars expressed in thousands)
Service cost - benefits earned during the period $ 46 46
Interest cost on accumulated postretirement benefit
obligation 89 106
Amortization of transition obligation 59 67
---- ----
Total net postretirement benefit cost 194 219
Curtailment gain under SFAS 106 (97) -
Recognition of transition obligation 898 -
---- ----
Total expense $ 995 219
==== ====
The health care cost trend rate assumed in measuring the accumulated
postretirement benefit obligation as of January 1, 1994 was 12%
decreasing linearly each successive year until it reaches 5.5% in 2010,
after which it was assumed to remain constant. A one percent increase
in the assumption of health care cost trend rate for each year would
increase the accumulated postretirement benefit obligation as of January
1, 1994 and net postretirement health care cost by approximately 9%.
The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% for 1994 and 7% for 1993.
(13) DIRECTOR BENEFIT PLANS
Stock Bonus Plan
The 1993 Directors' Stock Bonus Plan provides for annual grants of
Company common stock to the non-employee directors of BancTEXAS.
Directors compensation of $67,000 annually was recorded relating to this
plan for the years ended December 31, 1994 and 1993. These amounts
represented the market values of the 37,500 shares granted annually
under the Stock Bonus Plan as of the date of each grant.
The plan will be self-operative, and the timing, amounts, recipients and
terms of individual grants will be determined automatically. On July 1
of each year, each non-employee director will automatically receive a
grant of 7,500 shares of common stock. Future grants under the plan
would apply equally to current directors and to any individual who
becomes a director of BancTEXAS in the future. The maximum number of
plan shares that may be issued shall not exceed 250,000 shares. The
plan will expire on July 1, 2001.
Directors' Retirement Plan
BancTEXAS adopted a noncontributory defined benefit pension plan
covering non-employee directors of the holding company in 1993. Under
the plan, retirement benefits are primarily a function of years of
service as a director. During 1994, coverage under the plan was
extended to include non-employee directors of the Bank.
47
50
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table shows the plan's funded status at December 31,
1994 and 1993:
1994 1993
---- ----
(dollars expressed in thousands)
Actuarial present value of benefit obligations:
Vested benefits $ 218 198
Nonvested benefits - -
---- -----
Accumulated benefit obligation 218 198
Effect of projected future compensation levels - -
---- -----
Projected benefit obligation 218 198
Plan assets at fair value - -
---- -----
Plan assets in deficit of projected benefit obligation 218 198
Unrecognized net loss from past experience different
from that assumed and effects of changes in assumptions 15 (12)
Unrecognized prior service cost (110) (128)
---- -----
Accrued pension cost $ 123 58
==== =====
Net periodic pension cost for the years ended December 31, 1994 and 1993
included the following:
1994 1993
---- ----
(dollars expressed in thousands)
Service cost - benefits earned during the period $ 33 29
Interest cost on projected benefit obligation 14 11
Actual return on assets - -
Net amortization and deferral 18 18
---- -----
Net periodic pension cost $ 65 58
==== =====
The weighted average assumed discount rate used in determining the
actuarial present value of the projected benefit obligation was 8% and
7% for the years ended December 31, 1994 and 1993, respectively.
(14) COMMITMENTS AND CONTINGENCIES
Lease Commitments
BancTEXAS leases land, office properties and some items of equipment
under operating leases which expire between 1995 and 2019. Certain of
the leases contain renewal options and escalation clauses. Total rental
expense was $589,000, $642,000 and $529,000 for the years ended December
31, 1994, 1993 and 1992, respectively. Under the terms of those
48
51
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
noncancellable leases with initial terms in excess of one year, minimum
future rental payments are approximately as follows:
(dollars expressed in thousands)
Year ending December 31:
1995 $ 414
1996 415
1997 363
1998 214
1999 152
2001 through 2019 2,787
------
Aggregate $ 4,345
======
BancTEXAS has a data processing service agreement with an unaffiliated
third party that expires on May 31, 1996. Under the terms of the
agreement, the basic monthly fee is $40,000 per month plus additional
charges for ATM processing and program support. The base fee is subject
to semiannual cost of living adjustments throughout the term of the
contract.
The Company owns its banking facility located in McKinney, Texas. The
building has approximately 51,200 square feet, 10,800 square feet of
which is occupied by the Bank. The remaining space is leased to
unrelated parties. Total rental income was $286,000, $245,000 and
$208,000 for the years ended December 31, 1994, 1993 and 1992,
respectively. The future rental income for noncancellable operating
leases with initial or remaining terms in excess of one year is
approximately as follows (dollars expressed in thousands):
Year ending December 31:
1995 $ 288
1996 144
1997 85
1998 18
1999 5
------
Aggregate $ 540
======
Loan Commitments
The Company is a party to commitments to extend credit and commercial and
standby letters of credit in the normal course of business to meet the
financing needs of its customers. These instruments involve, to varying
degrees, elements of credit risk and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The interest rate
risk associated with these credit commitments relate primarily to the
commitments to originate fixed-rate loans. The credit risk amounts are
equal to the contractual amounts, assuming that the amounts are fully
advanced and that, in accordance with the requirements of SFAS No. 105,
"Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk",
collateral or other security is of no value. BancTEXAS uses the same
credit policies in granting commitments and conditional obligations as it
does for on-balance sheet items.
49
52
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments to extend credit at December 31 are as follows:
1994 1993
---- ----
(Dollars expressed in thousands)
Credit card commitments $ 2,251 2,117
Other loan commitments 22,193 10,751
Standby letters of credit 70 217
======= =======
Credit card and other loan commitments 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. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary upon extension of credit, is based on credit evaluation of the
customer. Collateral held varies but may include accounts receivable,
inventory, property, plant, equipment, income-producing commercial
properties and single family residential properties. Collateral is
generally required except for consumer credit card commitments.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The
letters of credit are primarily issued to support private borrowing
arrangements and commercial transactions. Most letters of credit extend
for less than one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Bank holds marketable securities,
certificates of deposit, inventory or other assets as collateral
supporting those commitments for which collateral is deemed necessary as
the commitments are issued. Collateral values generally exceed the
amounts advanced under the commitments.
(15) CONCENTRATIONS OF CREDIT
BancTEXAS' primary market areas are the regions around Houston, Dallas
and Ft. Worth, Texas. At December 31, 1994, approximately 93% of the
total loan portfolio, and 94% of the commercial, financial and
agricultural loan portfolio, were to borrowers within this region. In
the past, these areas have been heavily influenced by the energy sector
of the economy, particularly the oil and gas industry. Problems which
surfaced in this area in recent years have tended to cause the economic
base to broaden, contributing to a more stable lending environment. The
Company does not have any loans directly related to the energy segment
of the economy.
Indirect automobile lending constituted the only significant
concentration of credit risk. Financial instruments related to indirect
automobile financing, including loans and commitments, comprised
approximately 82% of such instruments, all of which was
consumer-related.
In general, BancTEXAS is a secured lender. At December 31, 1994,
approximately 98% of the loan portfolio was secured. Collateral is
required in accordance with the normal credit evaluation process based
upon the creditworthiness of the customer and the credit risk associated
with the particular transaction.
50
53
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) STOCKHOLDERS' EQUITY
Stock Options
On April 19, 1990, the Board of Directors of BancTEXAS adopted the 1990
Stock Option Plan (1990 Plan). Pursuant to the 1990 Plan, six directors
(none of whom are officers or employees of BancTEXAS or its
subsidiaries) were each granted a stock option to acquire 100,000 shares
and 17 officers of BancTEXAS and its subsidiaries, who were selected by
the Board of Directors, were granted stock options to acquire, in the
aggregate, 1,860,000 shares. All of these options, except one covering
25,000 shares at 37.5 cents per share, were issued with a purchase price
of 25 cents per share which was 100% of the fair market value of the
common stock on the date the options were granted. The 1990 Plan
currently provides that no more than 3,000,000 shares of common stock
will be available for stock options. One-fourth of each stock option
becomes exercisable at the date of the grant and at each anniversary
date of the grant. The options expire ten years from the date of the
grant. The 1990 Plan was ratified by BancTEXAS' stockholders at the
1991 Annual Meeting of Stockholders.
At December 31, 1994, there were 552,500 shares available for future
stock options and 1,472,000 shares of common stock reserved for the
exercise of outstanding options. Transactions relating to the 1990 Plan
for the years ended December 31 were as follows:
1994 1993 1992
----------------------- ----------------------- -----------------------
Average Average Average
option option option
Amount price Amount price Amount price
------ ----- ------ ----- ------ -----
Outstanding options, January 1 2,005,500 $ .25 2,350,000 $ .25 2,467,500 $ .25
Options exercised (533,500) .25 (344,500) .25 (117,500) .25
---------- ---------- ----------
Outstanding options, December 31 1,472,000 $ .25 2,005,500 $ .25 2,350,000 $ .25
========== ========== ==========
Options exercisable, December 31 1,472,000 1,999,250 1,756,250
========== ========== ==========
Warrants
As part of the 1987 restructuring of BancTEXAS, warrants to purchase
common stock were issued to certain commercial banks which were then its
senior lenders and to the Federal Deposit Insurance Corporation (FDIC).
The senior lenders received warrants to purchase 984,943 shares of
common stock and the FDIC received warrants to purchase 1,969,885 shares
of common stock both at an exercise price of $5.41 per share. At the
date of issuance, the warrants were considered to have nominal fair
market value, if any. Thus, for financial reporting purposes, no value
was assigned to these warrants. These warrants have antidilution
protection and substantial registration rights and will expire twenty
years after issuance. At December 31, 1994, no common stock has been
issued from the exercise of these warrants.
Pursuant to the FDIC's Order dated October 16, 1990, BancTEXAS amended
and restated the FDIC warrants. On November 30, 1990, the FDIC and
BancTEXAS executed an Agreement Concerning Warrants. Pursuant to this
agreement, BancTEXAS issued warrants to the FDIC, dated November 30,
1990, granting the right to purchase up to an aggregate of 1,970,033
shares of BancTEXAS' common stock at a price of five cents per share in
exchange for those granted under the Company's 1987 restructuring. The
1987 FDIC
51
54
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
warrants were canceled. The 1990 warrants cannot be exercised before
October 16, 1995 and will expire, if not previously exercised, on July
17, 2007. The 1990 warrants are protected by antidilution provisions
relating both to number of shares and the exercise price. BancTEXAS has
reserved 2,954,976 shares of its common stock, equal to the aggregate
amount of all warrants outstanding.
Distribution of Earnings of Subsidiaries
The distribution of earnings of the Bank has been restricted by various
state and federal regulations, as well as the accumulated deficit which
was eliminated by the quasi-reorganization described in Note 2. Because
of these limitations, the Bank has been precluded from the payment of
any dividends in the past. As a result of the capital contributed to
the Bank following the private placement of Class B common stock and the
quasi-reorganization described in Note 2, the Bank may be allowed to
pay dividends in the future from any earnings accumulated after January
1, 1995, subject to applicable regulatory limitations.
(17) TRANSACTIONS WITH RELATED PARTIES
Following the private placement of Class B common stock described in
Note 2, BancTEXAS began purchasing certain services and supplies from or
through its majority shareholder, First Banks. During the remaining
four months of 1994 this was primarily limited to the purchase of
insurance policies, office supplies and other commonly-used banking
products which could be acquired more economically than BancTEXAS had
previously been able to realize separately. The amount of these
purchases were not material to the consolidated financial position or
results of operations of BancTEXAS for the year ended December 31, 1994.
As more fully described in Note 4, BancTEXAS sold an aggregate of
$113,852,000 in investment securities in September 1994, of which
$60,091,000 were sold to a subsidiary of First Banks at fair value.
In December 1994, the Board of Directors of the Bank approved a data
processing agreement and a management fee agreement with First Banks.
Under the data processing agreement, a subsidiary of First Banks will
provide data processing and various related services to BancTEXAS
beginning in February 1995. The proposed fees for such services are
significantly lower than BancTEXAS is currently paying its
non-affiliated vendors. The management fee agreement provides that
BancTEXAS will compensate First Banks on an hourly basis for its use of
personnel for various functions including internal auditing, loan
review, income tax preparation and assistance, accounting,
asset/liability and investment services, loan servicing and other
management and administrative services. Hourly rates for such services
compare favorably with those for similar services from unrelated
sources, as well as the internal costs of BancTEXAS personnel which were
used previously, and it is estimated that the aggregate cost for the
services will be significantly more economical than those previously
incurred by BancTEXAS separately. Fees paid under these agreements
during 1994 were $14,000.
52
55
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Outside of normal customer relationships, no directors, executive
officers or shareholders holding over 5% of BancTEXAS' voting stock, and
no corporations or firms with which such persons or entities are
associated, currently maintain or have maintained, since January 1,
1994, any significant business or personal relationships with BancTEXAS
or its subsidiaries, other than that which arises by virtue of such
position or ownership interest in BancTEXAS, except as described above.
(18) LITIGATION
In 1993, BancTEXAS settled a class action lawsuit relating to a private
placement of common stock which it had completed in 1984. As a result
of this settlement, the Company issued to the plaintiffs 400,000 shares
of its common stock and conveyed other consideration having a cost to
the Company of approximately $52,000. The total cost of this
settlement, $592,000, was reflected as an expense for the year ended
December 31, 1993.
There are several other claims and legal actions pending against
BancTEXAS and/or the Bank with regard to matters arising out of the
conduct of their businesses. It is the opinion of management, in
consultation with legal counsel, that the ultimate liability, if any,
resulting from such claims and legal actions will not materially affect
the financial condition, results of operations or liquidity of BancTEXAS
or the Bank.
(19) INTEREST RATE RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
WITH OFF-BALANCE SHEET RISK
BancTEXAS' objective regarding interest rate risk management is to
position the Company such that changes in interest rates do not have a
material adverse impact upon the net market value and net interest
income of BancTEXAS. To assist in achieving that objective, BancTEXAS
uses a combination of derivative financial instruments, including
interest rate cap agreements and interest rate futures contracts.
To measure the impact from interest rate changes, BancTEXAS recalculates
its net market value and net interest income on a proforma basis over a
one year horizon assuming instantaneous, permanent parallel shifts in
the yield curve, with varying amounts of increases and decreases in
rates. Larger increases or decreases in the Company's net market value
and net interest income as a result of these assumed interest rate
changes indicate greater levels of interest rate sensitivity than do
smaller increases or decreases. BancTEXAS endeavors to maintain a
position whereby the proforma effect on the net market value and net
interest income would not exceed 4.0% and 10.0% for an assumed 50 and
100 basis point increase or decrease in general interest rates,
respectively.
Derivative financial instruments held by BancTEXAS for purposes of
managing interest rate risk are summarized as follows:
December 31,
--------------------------------------------
1994 1993
--------------------- --------------------
Notional Credit Notional Credit
amount amount amount amount
------ ------ ------ ------
(dollars expressed in thousands)
Interest rate futures contracts $ 768,000 - - -
Interest rate cap agreements 10,000 577 10,000 352
The notional amounts of derivative financial instruments do not represent
amounts exchanged by the parties and, therefore are not a measure of the
Company's credit exposure through its use of derivative financial
instruments. The amounts exchanged are determined by reference to the
notional amounts and the other terms of the derivatives.
53
56
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BancTEXAS is exposed to credit risk in the event of nonperformance by
counterparties to derivative financial instruments but does not expect
the failure of any counterparties in meeting their obligations. Where
appropriate, master netting agreements are arranged or collateral is
obtained in the form of cash or rights to securities. In addition,
BancTEXAS deals only with highly rated counterparties. The credit
exposure of derivative financial instruments is the positive fair value
of the instruments, net of the fair value of collateral received.
Interest rate futures contracts are commitments to either purchase or
sell designated financial instruments at a future date for a specified
price and may be settled in cash or through delivery of such financial
instruments. Changes in the contract values are settled daily. Futures
contracts have little credit risk because futures exchanges are the
counterparties. BancTEXAS sells interest rate futures contracts to hedge
the interest rate risk of its available-for-sale securities portfolio.
The Company has sold futures on Eurodollar deposits because their
liquidity is more consistent with the objectives of the
available-for-sale securities portfolio. The contracts sold, which have
expiration dates from March 1995 to December 1996, were selected to
approximate the effective maturity of the available-for-sale securities
portfolio. At December 31, 1994, the unamortized balance of net deferred
gains on interest rate futures contracts of $886,000 was applied to the
carrying value of the securities as part of the adjustment to current
fair values. There were no interest rate futures contracts outstanding
during 1993 and 1992.
BancTEXAS purchased an interest rate cap agreement to limit the interest
expense associated with certain of its interest-bearing liabilities. In
exchange for an initial fee, the interest rate cap agreement entitles
BancTEXAS to receive interest payments when a specified index rate
exceeds a predetermined rate. The agreement outstanding at December 31,
1994 effectively limits the interest rate to 5.0% on $10 million of
interest-bearing liabilities from October 15, 1997 to May 15, 2000. At
December 31, 1994 and 1993, the unamortized costs were $577,000 and
$352,000, respectively, and were included in other assets. There are no
amounts receivable under the agreement.
During late 1994, BancTEXAS increased its use of derivative financial
instruments. This increased use of derivative financial instruments was
necessary to reduce the overall interest rate risk to within the newly
prescribed net market value and net interest income exposure limits as
established by BancTEXAS' Board of Directors. The prescribed limits were
determined after a comprehensive review and evaluation of BancTEXAS'
exposure to interest rate risk. The use of derivative financial
instruments is strictly limited to reducing the interest rate risk that
is inherent in the different maturity and repricing characteristics of
the lending and deposit-taking activities. BancTEXAS will continue to
utilize a combination of on- and off-balance sheet financial instruments
to manage interest rate sensitivity to within the prescribed limits.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated
fair value amounts have been determined by BancTEXAS using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop
54
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BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts BancTEXAS could realize in
a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
December 31, 1994 December 31, 1993
----------------- -----------------
Estimated Estimated
Carrying fair Carrying fair
amount value amount value
------ ----- ------ -----
(dollars expressed in thousands)
Assets:
Cash and cash equivalents $ 47,071 47,071 25,490 25,490
Investment securities 60,514 60,514 160,158 159,051
Loans, net 200,558 200,558 165,095 168,163
Accrued interest receivable 1,146 1,146 1,247 1,247
Liabilities:
Demand and savings deposits 124,473 124,473 128,639 128,639
Time deposits 117,097 117,097 114,258 116,661
Accrued interest payable 716 716 517 517
Federal funds purchased and
securities sold under agree-
ments to repurchase 24,233 24,233 95,208 95,208
FHLB advances 19,412 19,412 10,918 10,962
Long-term debt 1,054 1,054 1,054 1,180
Off balance sheet:
Interest rate cap agreement 577 577 352 352
Interest rate futures contracts 886 886 - -
Unfunded loan commitments - - - -
The fair value of investment securities is based on prices obtained from
independent pricing services. The fair value of loans, time deposits,
and other financial instruments is estimated based on present values of
expected cash flows from amortization and historical prepayment
experience using applicable risk-adjusted spreads to the U.S. Treasury
curve for current market rates offered for instruments with similar
terms to approximate current entry-value interest rates applicable to
each category of such financial instruments.
Cash and cash equivalents, accrued interest receivable, demand and
savings deposits, accrued interest payable, and Federal funds purchased
and securities sold under agreement to repurchase are valued at book
value which approximates fair value. This valuation is due to the fact
that the amounts due or payable consist of maturities less than 30 days
or on demand. The fair value for interest rate futures contracts are
based upon quoted market prices. The fair value of these contracts has
been reflected in the consolidated balance sheet in the carrying value
of the securities available-for-sale portfolio as part of the mark to
market valuation. The fair value of the interest rate cap agreement is
estimated by comparing the contractual rates to market rates quoted on
new agreements with similar creditworthiness. BancTEXAS' unfunded
commitments consists primarily of variable rate interim construction
commitments and $2.3 million of unfunded credit card commitments.
Accordingly, the unfunded commitments estimated fair value is
immaterial.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1994 and 1993.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements
since the presentation date and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
55
58
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) BANCTEXAS GROUP INC. (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31,
----------------------
1994 1993
---- ----
Assets (dollars expressed in thousands)
------
Cash $ 575 200
Mortgage-backed and other securities available for sale 12,803 13,541
Investment in subsidiaries 25,481 16,060
Deferred tax assets 3,499 -
Other assets 46 357
------- -------
Total assets $ 42,404 30,158
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Payable to subsidiaries $ 1,789 1,882
Securities sold under agreement to repurchase - 12,675
Accrued and other liabilities 901 649
------- -------
Total liabilities 2,690 15,206
Stockholders' equity 39,714 14,952
------- -------
Total liabilities and stockholders' equity $ 42,404 30,158
======= =======
CONDENSED STATEMENTS OF OPERATIONS
Year ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Income:
Interest $ 498 684 442
Gain (loss) on sale of securities, net (661) 15 -
Other 35 (40) 40
------ ----- -----
(128) 659 482
------ ----- -----
Expense:
Interest 451 601 386
Provision for (reversal of) loan losses 24 - (25)
Reversal of officers severance accrual - - (600)
Litigation settlement expense - 592 -
Reversal of estimated costs of former subsidiary - (804) (590)
Other 453 220 183
------ ----- -----
928 609 (646)
------ ----- -----
Income (loss) before taxes (1,056) 50 1,128
Provision (credit) for income taxes (3,527) - 384
------ ----- -----
Income (loss) before equity in
undistributed income (loss) of subsidiaries
and extraordinary item 2,471 50 744
Equity in undistributed income (loss) of
subsidiaries (3,376) 169 (64)
------ ----- -----
Income (loss) before extraordinary item (905) 219 680
Extraordinary tax benefit from net operating loss
carryforward - - 384
------ ----- -----
Net income (loss) $ (905) 219 1,064
====== ===== =====
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59
BANCTEXAS GROUP INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(21) BANCTEXAS GROUP INC. (PARENT COMPANY ONLY) (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
Year ended December 31,
------------------------------------
1994 1993 1992
---- ---- ----
(dollars expressed in thousands)
Operating activities:
Net income (loss) $ (905) 219 1,064
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
(Credit) for deferred income taxes (3,527) - -
Equity in undistributed loss (income) of
subsidiaries 3,376 (169) 64
Other, net 1,277 (354) (1,270)
------- ------ -------
Net cash provided (used) by operations 221 (304) (142)
------- ------ -------
Investing activities:
Purchase of investment securities (12,803) (3,612) (16,511)
Proceeds from maturity of investment securities - 3,020 3,566
Proceeds from sales of investment securities 12,873 1,037 -
Capital contributions to subsidiaries (17,000) - -
Other, net - 100 45
------- ------ -------
Net cash provided (used) by
investing activities (16,930) 545 (12,900)
------- ------ -------
Financing activities:
Net proceeds from issuance and sale of
Class B common stock 29,623 - -
Exercise of stock options 136 86 30
Net increase (decrease) in federal funds
purchased and securities sold under
agreements to repurchase (12,675) (731) 13,394
------- ------ -------
Net cash provided (used) by
financing activities 17,084 (645) 13,424
------- ------ -------
Net increase (decrease) in cash and cash equivalents 375 (404) 382
Cash and cash equivalents at beginning of year 200 604 222
------- ------ -------
Cash and cash equivalents at end of year $ 575 200 604
------- ------ -------
Supplemental disclosure of cash paid for interest $ 428 564 301
======= ====== =======
Supplemental disclosure of noncash investing
and financing activities:
Transfer of investment securities to
available-for-sale $ - 13,541 -
======= ====== =======
57
60
BANCTEXAS GROUP INC. AND SUBSIDIARIES
QUARTERLY CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
1994 1993
------------------------------------------- -------------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands, except per share data)
Interest income $ 5,603 5,903 5,715 5,428 5,324 5,325 5,565 5,752
Interest expense 2,473 3,049 2,965 2,585 2,565 2,424 2,356 2,405
------- ------ ------ ------ ------ ------ ------ ------
Net interest income 3,130 2,854 2,750 2,843 2,759 2,901 3,209 3,347
Provision for loan losses 653 455 75 75 160 100 90 140
------- ------ ------ ------ ------ ------ ------ ------
Net interest income
after provision for
loan losses 2,477 2,399 2,675 2,768 2,599 2,801 3,119 3,207
Noninterest income:
Securities gains (losses) 48 (7,055) - - 59 147 - 37
Other 516 564 785 631 790 762 660 613
------- ------ ------ ------ ------ ------ ------ ------
Total noninterest
income (loss) 564 (6,491) 785 631 849 909 660 650
Noninterest expense 3,562 5,606 3,417 3,589 4,170 3,406 3,453 3,546
Income tax benefit (252) (9,209) - - - - - -
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss) $ (269) (489) 43 (190) (722) 304 326 311
======= ====== ====== ====== ====== ====== ====== ======
Net income (loss) per share $ - (.01) - (.01) (.03) .01 .01 .01
======= ====== ====== ====== ====== ====== ====== ======
Weighted average common
shares and common share
equivalent outstanding (in
thousands) 61,400 36,324 23,596 23,329 23,314 23,379 23,214 23,243
======= ====== ====== ====== ====== ====== ====== ======
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61
BANCTEXAS GROUP INC.
MANAGEMENT
DIRECTORS OF BANCTEXAS GROUP INC.
Allen H. Blake - Chief Financial Officer and Secretary, BancTEXAS Group
Inc., Houston, Texas, Senior Vice President, Chief Financial Officer and
Secretary, First Banks, Inc., St. Louis, Missouri.
Charles A. Crocco, Jr. - Partner in the law firm of Crocco & De Maio,
P.C., New York, New York.
James F. Dierberg - Chairman of the Board, Chief Executive Officer and
President of BancTEXAS Group Inc., Houston, Texas, Chairman of the
Board, Chief Executive Officer and President of First Banks, Inc., St.
Louis, Missouri.
Edward T. Story, Jr. - President and Chief Executive Officer of SOCO
International, Inc., an international oil and gas exploration and
production company headquartered in Houston, Texas.
Mark T. Turkcan - Senior Vice President, Retail Banking, First Banks,
Inc., St. Louis, Missouri.
OFFICERS OF BANCTEXAS GROUP INC.
James F. Dierberg - Chairman of the Board, President and Chief Executive
Officer
David F. Weaver - Executive Vice President
Allen H. Blake - Chief Financial Officer and Secretary
SENIOR OFFICERS OF BANKTEXAS N.A.
David F. Weaver - Chairman of the Board, Chief Executive Officer and
President
Kathryn Aderman - Vice President - Administration and Director of Human
Resources
Jerry V. Garrett - Senior Vice President - Consumer Lending
James W. Parmley - Vice President and Manager of Dealer Finance
59
62
BANCTEXAS GROUP INC.
CORPORATE INFORMATION
FORM 10-K
BancTEXAS's Annual Report on Form 10-K, as filed with the Securities
and Exchange Commission, is available without charge to any stockholder
upon request. Requests should be directed to Kathryn Aderman,
Assistant Secretary, BancTEXAS Group Inc., P.O. Box 630369, Houston,
Texas 77263-0369.
COMMON STOCK
The common stock of BancTEXAS Group Inc. is traded on the New York
Stock Exchange with the ticker symbol "BTX" and is frequently reported
in newspapers of general circulation with the symbol "BanTex" and in
the Wall Street Journal with the symbol "BancTEXAS."
COMMON STOCK TRANSFER AGENT AND REGISTRAR
Chemical Bank
Securityholder Relations Department
450 West 33rd Street, 8th Floor
New York, New York 10001
Telephone: 1-800-635-9270
INFORMATION
For information concerning BancTEXAS Group Inc. contact:
David F. Weaver Allen H. Blake
Executive Vice President Chief Financial Officer and Secretary
P. O. Box 630369 135 North Meramec
Houston, Texas 77263-0369 St. Louis, Missouri 63105
Telephone : 713/954-2400 Telephone: 314/854-4600
60