1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-8937
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BancTEXAS GROUP INC.
--------------------
(Exact name of registrant as specified in its charter)
DELAWARE 75-1604965
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
P.O. Box 630369, Houston, TEXAS 77263-0369
--------------------------------------------------
(address of principal executive offices) (Zip Code)
(713) 954-2400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1995
----- --------------
Common Stock, $.01 par value 20,764,025
Class B Common Stock, $.01 par value 37,500,000
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INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1995
and December 31, 1994 . . . . . . . . . . . . -2-
Consolidated Statements of Income for the three and six months
ended June 30, 1995 and 1994 . . . . . . . . . . . -4-
Consolidated Statements of Cash Flows for the six months
ended June 30, 1995 and 1994 . . . . . . . . . . . -5-
Notes to Consolidated Financial Statements . . . . . . . . -6-
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . -8-
PART II OTHER INFORMATION
Item 6. Exhibits . . . . . . . . . . . . . . . . -14-
Signatures . . . . . . . . . . . . . . . . . . . -15-
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BancTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
June 30, December 31,
ASSETS 1995 1994
------ ------------ ------------
Cash and cash equivalents:
Cash and due from banks........................................ $ 10,862 14,029
Interest-bearing deposits with other financial institutions-
with maturities of three months or less..................... 661 25,042
Federal funds sold............................................. - 8,000
------------ ------------
Total cash and cash equivalents......................... 11,523 47,071
------------ ------------
Investment securities - available-for-sale, at market value....... 81,415 61,400
------------ ------------
Loans:
Commercial, financial and agricultural......................... 15,597 14,556
Real estate construction and development....................... 16,735 13,793
Real estate mortgage........................................... 13,271 14,796
Consumer and installment....................................... 172,565 157,570
Loans held for sale............................................ - 7,253
------------ ------------
Total loans............................................. 218,168 207,968
Unearned discount.............................................. (2,721) (4,654)
Allowance for possible loan losses............................. (2,270) (2,756)
------------ ------------
Net loans............................................... 213,177 200,558
------------ ------------
Bank premises and equipment, net of accumulated depreciation...... 6,491 6,511
Accrued interest receivable....................................... 999 1,146
Foreclosed property, net.......................................... 1,023 1,553
Deferred income taxes............................................. 15,904 12,517
Other assets...................................................... 1,275 1,034
------------ ------------
Total assets............................................ $ 331,806 331,790
============ ============
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BancTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
(dollars expressed in thousands, except per share data)
(continued)
June 30, December 31,
LIABILITIES 1995 1994
----------- ------------ ------------
Deposits:
Demand:
Non-interest bearing....................................... $ 45,708 45,418
Interest bearing........................................... 19,784 24,678
Savings...................................................... 56,851 54,377
Time:
Time deposits of $100 or more.............................. 27,885 23,063
Other time deposits........................................ 92,885 94,034
------------ ------------
Total deposits.......................................... 243,113 241,570
Federal Home Loan Bank advances................................... 9,071 19,412
Federal funds purchased........................................... 2,500 4,800
Securities sold under agreements to repurchase.................... 29,376 19,433
Other borrowings.................................................. 2,185 1,863
Accrued interest payable.......................................... 727 716
Deferred income taxes............................................. 4,042 1,299
Accrued and other liabilities..................................... 2,828 2,983
------------ ------------
Total liabilities....................................... 293,842 292,076
------------ ------------
STOCKHOLDERS' EQUITY
--------------------
Common Stock:
Common stock, $.01 par value; 163,000,000 shares
authorized; 20,749,025 and 20,554,025 shares
issued and outstanding as of June 30, 1995 and
December 31, 1994, respectively............................ 207 206
Class B common stock, $.01 par value; 60,000,000 shares
authorized; 37,500,000 shares issued and outstanding....... 375 375
Capital surplus................................................... 39,180 39,133
Retained earnings since elimination of accumulated deficit
of $259,117 effective December 31, 1994...................... 440 -
Net fair value adjustment for securities available-for-sale....... (2,238) -
------------ ------------
Total stockholders' equity.............................. 37,964 39,714
------------ ------------
Total liabilities and stockholders' equity.............. $ 331,806 331,790
============ ============
See accompanying notes to consolidated financial statements
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BancTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
(dollars expressed in thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------- ---------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Interest income:
Interest and fees on loans.............................................. $ 4,474 3,654 8,732 7,178
Investment securities................................................... 1,433 2,012 2,658 3,862
Federal funds sold and other............................................ 57 49 323 103
---------- ---------- ---------- ----------
Total interest income............................................. 5,964 5,715 11,713 11,143
---------- ---------- ---------- ----------
Interest expense:
Deposits:
Interest-bearing demand.............................................. 173 119 236 235
Savings.............................................................. 486 411 1,108 801
Time deposits of $100 or more........................................ 296 203 569 424
Other time deposits.................................................. 1,328 984 2,398 1,960
Federal Home Loan Bank advances.......................................... 268 354 740 486
Securities sold under agreements to repurchase........................... 375 860 578 1,581
Other borrowings......................................................... 5 34 79 63
---------- ---------- ---------- ----------
Total interest expense............................................ 2,931 2,965 5,708 5,550
---------- ---------- ---------- ----------
Net interest income............................................... 3,033 2,750 6,005 5,593
Provision for possible loan losses.......................................... 650 75 1,100 150
---------- ---------- ---------- ----------
Net interest income after provision for possible loan losses...... 2,383 2,675 4,905 5,443
---------- ---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts and customer service fees........ 361 384 703 794
Loan servicing fees, net............................................. 43 95 108 270
Other income......................................................... 85 306 961 352
---------- ---------- ---------- ----------
Total noninterest income.......................................... 489 785 1,772 1,416
---------- ---------- ---------- ----------
Noninterest expenses:
Salaries and employee benefits....................................... 1,044 1,670 2,247 3,440
Occupancy, net of rental income...................................... 284 314 560 644
Furniture and equipment.............................................. 183 209 346 440
Federal Deposit Insurance Corporation premiums....................... 153 174 306 348
Postage, printing and supplies....................................... 118 120 214 280
Data processing fees................................................. 81 239 494 471
Legal, examination, and professional fees............................ 294 368 553 757
Communications....................................................... 182 122 294 239
Losses and expenses on foreclosed real estate, net of gains.......... 6 4 128 23
Other expenses....................................................... 461 197 869 364
---------- ---------- ---------- ----------
Total noninterest expenses........................................ 2,806 3,417 6,011 7,006
---------- ---------- ---------- ----------
Income before provision for income taxes.......................... 66 43 666 (147)
Provision for income taxes.................................................. 18 - 226 -
---------- ---------- ---------- ----------
Net income (loss)................................................. $ 48 43 440 (147)
========== ========== ========== ==========
Earnings (loss) per common share............................................ $ - - 0.01 (0.01)
========== ========== ========== ==========
Weighted average shares of common stock and common stock
equivalents outstanding (in thousands)................................... 61,174 23,596 61,143 23,464
========== ========== ========== ==========
See accompanying notes to consolidated financial statements
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BancTEXAS GROUP INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
(dollars expressed in thousands)
Six months ended
June 30,
-----------------------
1995 1994
---------- ----------
Cash flows from operating activities:
Net income (loss)................................................ $ 440 (147)
Adjustments to reconcile net income to net cash:
Depreciation and amortization ................................ (300) 723
Provision for possible loan losses............................ 1,100 150
(Increase) decrease in accrued interest receivable............ 147 (280)
Increase (decrease) in loans originated for sale.............. - 13,690
Interest accrued on liabilities............................... 5,708 5,550
Payments of interest on liabilities........................... (5,697) (5,609)
Provision for income taxes.................................... 226 -
Other......................................................... (342) 806
---------- ---------
Net cash provided by (used in) operating activities....... 1,282 14,883
---------- ---------
Cash flow from investing activities:
Maturities of investment securities............................. 41,227 17,781
Purchases of investment securities.............................. (58,922) (29,604)
Net (increase) decrease in loans................................ (14,005) (18,378)
Recoveries of loans previously charged-off...................... 286 679
Purchases of bank premises and equipment........................ (256) (96)
Other investing activities...................................... (4,376) 914
---------- ---------
Net cash provided by (used in) investing activities....... (36,046) (28,704)
---------- ---------
Cash flow from financing activities:
Increase (decrease) in deposits................................. 1,544 (5,716)
Increase (decrease) in borrowed funds.......................... (2,376) 4,879
Other financing activities....................................... 48 17
---------- ---------
Net cash provided by (used in) financing activities....... (784) (820)
---------- ---------
Net increase (decrease) in cash and cash equivalents...... (35,548) (14,641)
Cash and cash equivalents, beginning of period...................... 47,071 25,490
---------- ---------
Cash and cash equivalents, end of period............................ $ 11,523 10,849
========== =========
Noncash investing and financing activities:
Transfer of loans held for sale (to) from loans................. $ (7,253) 8,999
Loans to facilitate sale of foreclosed real estate.............. - 90
========== =========
See accompanying notes to consolidated financial statements
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BancTEXAS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements of
BancTEXAS Group Inc. (BancTEXAS or Company) are unaudited and
should be read in conjunction with the consolidated financial
statements contained in the 1994 annual report on Form 10K. In
the opinion of management, all adjustments, consisting of normal
recurring accruals considered necessary for a fair presentation,
have been included. Operating results for the three and six
months ended June 30, 1995 are not necessarily indicative of the
results that may be expected for the year ending December 31,
1995.
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.
Certain reclassifications of 1994 amounts have been made
to conform with the 1995 presentation.
(2) Loans and Allowance for Possible Loan Losses
In May 1993, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (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.
The Company adopted SFAS 114 and SFAS 118 effective for
the year beginning January 1, 1995. As a result of applying SFAS
114, as amended by SFAS 118, certain impaired loans subject to
the Statements are reported at the present value of expected
future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price, if one exists, or
the fair value of the collateral if the loan is collateral
dependent.
SFAS 118 amends SFAS 114 to allow a creditor to use
existing methods for recognizing interest on an impaired loan.
The Company has elected to continue to use its existing methods
for recognizing interest on impaired loans. The Company
continues to apply all payments received to the outstanding
balance of the impaired loan until the collection of the
outstanding balance is no longer in doubt. When this occurs,
interest payments are recorded as interest income. When the
condition of the loan improves sufficiently, the accrual of
interest is resumed.
Impaired loans, consisting of certain nonaccrual loans,
were $323,000 at June 30, 1995 and averaged $343,000 for the six
months ended June 30, 1995.
The initial application of SFAS 114 and 118 did not have
a material effect on the Company's financial position or results
of operations.
-6-
8
BancTEXAS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS- continued
(3) Transactions with Related Party
Following the private placement of Class B common stock
with First Banks, Inc. (First Banks), BancTEXAS began
purchasing certain services and supplies from or through its
majority shareholder, First Banks. This included the purchase
of insurance policies, office supplies and other commonly-used
banking products which could be acquired more economically than
had previously been possible for BancTEXAS separately. The
amount of these purchases was not material to the consolidated
financial position or results of operations of BancTEXAS for
the six months ended June 30, 1995.
In December 1994, the Board of Directors of BankTEXAS
N.A. (the Bank), a wholly owned subsidiary of BancTEXAS,
approved a data processing agreement and a management fee
agreement with First Banks. Under the data processing
agreement, a subsidiary of First Banks began providing data
processing and various related services to the Bank beginning
in February 1995. The fees for such services are significantly
less than the Bank was paying to its non-affiliated vendors.
The management fee agreement provides that the Bank 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 the
Bank personnel which were used previously, and it is estimated
the aggregate cost for the services will be significantly more
economical than those previously incurred by the Bank
separately. Fees paid under these agreements were $200,600 and
$416,600 for the three and six month periods ended June 30,
1995.
-7-
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Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
BancTEXAS is a registered bank holding company,
incorporated in Delaware and headquartered in Houston, Texas. At
June 30, 1995, the Company had approximately $332 million in
total assets; $215 million in total loans, net of unearned
discount; $243 million in total deposits; and $38 million in
total stockholders' equity. The Company operates through its
subsidiary bank, BankTEXAS N.A. (the Bank).
Through the Bank, the Company offers a broad range of
commercial and personal banking services including certificate of
deposit accounts, individual retirement and other time deposit
accounts, checking and other demand deposit accounts, interest
checking accounts, savings accounts and money market accounts.
Loans include commercial, financial, agricultural, real estate
construction and development, residential real estate and
consumer and installment loans. Other financial services include
credit-related insurance, automatic teller machines and safe
deposit boxes.
Financial Condition
The Company's total assets were $331.81 million and
$331.79 million at June 30, 1995 and December 31, 1994,
respectively. The primary fluctuations from December 31, 1994
were increases in investment securities and loans, net of
unearned discount, of $20.0 million and $12.1 million,
respectively, and a decrease in cash and cash equivalents of
$35.5 million.
Results of Operations
Net Income
Net income for the three months ended June 30, 1995 was
$48,000 in comparison to $43,000 for the same period in 1994.
Net income for the six months ended June 30, 1995 was $440,000
compared to a net loss of $147,000 for the same period in 1994.
The improved operating results for the three and six month
periods ended June 30, 1995 are more fully described below.
Net Interest Income
Net interest income was $3.0 million, or 4.08% of average
interest earning assets, for the three months ended June 30,
1995, compared to $2.75 million, or 3.11% for the same period in
1994. Net interest income was $6.0 million, or 4.13% of average
interest earning assets, for the six months ended June 30, 1995
in comparison to $5.6 million, or 3.26% for the same period in
1994. The increase in net interest income is primarily
attributable to the additional capital of $30 million from the
sale of Class B common stock to First Banks on August 31, 1994.
The interest income earned from the use of the additional capital
was substantially offset by a reduction of net interest income
resulting from a decrease in the average earning assets of
approximately $59.2 million and $58.0 million for the three and
six month periods ended June 30, 1995, respectively, in
comparison to the same periods in 1994. The decrease in average
earning assets for 1995 in comparison to 1994 were primarily
attributable to sales of investment securities which occurred in
the fourth quarter of 1994.
-8-
10
Provision for Possible Loan Losses
The provision for possible loan losses was $650,000 and $1.1
million for the three and six months ended June 30, 1995,
respectively, in comparison to $75,000 and $150,000 for the same
periods in 1994. This compares to net loan charge-offs of $1.2
million and $1.6 million for the three and six months ended June
30, 1995, respectively, and $215,000 and $318,000 for the same
periods in 1994.
The increase in the provision for possible loan losses is
attributable to the increased level of loan charge-offs within
the automobile loan portfolio and management's evaluation of the
quality of the loans in the portfolio. The increased level of
loan charge-offs is partly due to a change in the practice and
timing of recording such charge-offs. Previously, the Company
charged-off the remaining balance of a loan after reducing that
amount by the estimated value of the collateral, primarily
automobiles, at the time the collateral was in the possession of
the Company. Currently, the Company charges-off the remaining
balance of a loan after the loan has become 120 days or more past
due, even if the collateral is not yet in the possession of the
Company. When the collateral is subsequently received by the
Company, the charged-off amount is adjusted for the value of the
collateral. In addition, in an effort to further reduce the
overall level of loan charge-offs within this portfolio, the
Company has increased its collection efforts and has implemented
more stringent lending practices, including regular reviews of
new loans originated and strict adherence to approved policies
and practices. The Company expects the level of loan charge-offs
of its automobile loan portfolio to decrease as the current
practices are applied to the existing portfolio and new loan
originations.
Noninterest Income
Noninterest income decreased by $296,000 to $489,000 from
$785,000 for the three months ended June 30, 1995 and 1994,
respectively. The decrease is primarily due to a $255,000 legal
settlement received and recorded as income in the second quarter
of 1994 and decreased loan servicing fees of $52,000 for the
three months ended June 30, 1995 in comparison to the same period
in 1994. For the six months ended June 30, 1995 and 1994,
noninterest income increased by $356,000 to $1,772,000 from
$1,416,000, respectively. The increase is associated with the
return of $802,000 to BancTEXAS which was maintained in a trust,
partially offset by the legal settlement received and recorded as
income during 1994 and the decrease in loan servicing fees of
$162,000 to $108,000 from $270,000 for the six months ended June
30, 1995 and 1994, respectively.
The legal settlement related to a lawsuit filed against the
Federal Deposit Insurance Corporation regarding the closure of
the Company's former subsidiary, BankTEXAS Dallas.
The $802,000 returned to BancTEXAS related to a trust which
was established during 1990 and subsequently funded by BancTEXAS
to provide limited protection against personal claims being taken
or threatened against BancTEXAS' officers and directors and
potential costs of litigation. Prior to BancTEXAS' affiliation
with First Banks, officer and director liability insurance was
not economically feasible. Considering the cost of such
insurance, certain legal claims pending against BancTEXAS at that
time and the potential for additional claims, BancTEXAS elected
to establish and fund this trust. Since officer and director
coverage is now available at a reasonable price, the trust fund
is no longer necessary and, accordingly, was terminated, at which
time the funds were returned to BancTEXAS.
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11
The reduction in loan servicing fees is due to the decrease
in loans serviced for others to $14 million from $34 million at
June 30, 1995 and 1994, respectively. Loans serviced for others
consist of automobile loans that were sold for which the
servicing was retained by the Company. The decrease in the loan
servicing portfolio is attributable to the Company's decision to
retain new loan originations in its loan portfolio.
Noninterest Expenses
Noninterest expenses decreased by $611,000 to $2,806,000
from $3,417,000 for the three months ended June 30, 1995 and
1994, respectively. For the six months ended June 30, 1995 and
1994, noninterest expenses decreased by $995,000 to $6,011,000
from $7,006,000. While virtually each functional area of
BancTEXAS has experienced reductions in noninterest expenses, the
decrease is primarily attributable to salaries and employee
benefits, partially offset by increases in other expenses.
The decrease in salaries and employee benefits of $626,000
and $1,193,000 for the three and six months ended June 30, 1995
and 1994, respectively, is consistent with the reevaluation of
the operating cost structure of the Company, which commenced
during the third quarter of 1994. The restructuring of personnel
and assimilation of certain functions into existing systems of
First Banks is expected to be completed during the third quarter
of 1995.
Offsetting the decrease in salaries and employee benefits
were increases in other expenses of $264,000 and $505,000 for the
three and six months ended June 30, 1995, respectively, which
were primarily attributable to the conversion and centralization
of data processing and certain operating functions to First
Banks' systems and procedures.
The Company expects noninterest expenses to continue to
decline during the third and fourth quarters of 1995 in
comparison to the three and six month periods ended June 30,
1995.
Lending and Credit Management
Interest earned on the loan portfolio is the primary source
of income of the Company. Total loans, net of unearned discount,
represented 64.9% and 61.3% of total assets as of June 30, 1995
and December 31, 1994, respectively. The Company has experienced
modest improvements in commercial and consumer loan demand during
the six month period ended June 30, 1995. Total loans, net of
unearned discount, increased by $12.1 million to $215.4 million
at June 30, 1995 from $203.3 million at December 31, 1994.
The Company's nonperforming loans consist of loans on a
nonaccrual status and loans on which the original terms have been
restructured. Nonperforming loans were $507,000 and $293,000 at
June 30, 1995 and December 31, 1994, respectively. Impaired
loans, consisting of nonaccrual loans, were $323,000 at June 30,
1995 and averaged $343,000 for the six months ended June 30,
1995.
The allowance for possible loan losses is based on past loan
loss experience, on Company management's evaluation of the
quality of the loans in the portfolio and on the anticipated
effect of national and local economic conditions relative to the
ability of loan customers to repay. Each quarter, the allowance
for possible loan losses is revised relative to the Company's
internal watch list and other data to determine its adequacy.
The provision for possible loan losses is management's estimate
of the amount necessary to maintain the allowance at a level
consistent with this evaluation. As adjustments to the allowance
for possible loan losses are considered necessary, they are
reflected in the results of operations.
-10-
12
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
Company's inherent maturity and repricing characteristics of the
lending and deposit-taking activities creates a naturally
liability-sensitive structure. By using a combination of on- and
off-balance sheet financial instruments, the Company manages its
interest rate sensitivity to within policy guidelines.
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. As more fully described in the
1994 Annual Report on Form 10K, BancTEXAS uses a combination of
derivative financial instruments including interest rate cap
agreements, interest rate futures contracts and options on
interest rate futures contracts to assist in achieving that
objective.
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, of 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:
June 30, 1995 December 31, 1994
------------------- --------------------
Notional Credit Notional Credit
amount exposure amount exposure
-------- -------- -------- --------
(dollars expressed in thousands)
Interest rate futures contracts $918,000 - 768,000 -
Interest rate cap agreements 10,000 392 10,000 577
Options on interest rate futures contracts 300,000 - - -
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.
The Company sells interest rate futures contracts to hedge
the interest rate risk of its available-for-sale securities
portfolio. In addition, during the second quarter of 1995 the
Company purchased options on interest rate futures contracts.
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. Options on interest rate
futures contracts confer the right to purchase or sell financial
futures contracts at a specified price and are settled in cash.
Changes in contract values are settled daily. Options and
futures contracts have little credit risk because futures
exchanges are the counterparties. The contracts outstanding at
June 30, 1995, which have expiration dates from December 1995 to
September 1998 were selected to approximate the effective
maturity of the available-for-sale securities portfolio.
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13
At June 30, 1995, the unamortized balance of net deferred
losses on interest rate futures contracts was $4.7 million, which
was applied to the carrying value of the available-for-sale
securities portfolio as part of the mark-to-market valuation. 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 available-for-sale securities portfolio in
connection with the quasi-reorganization, as more fully described
in Note 2 to the consolidated financial statements contained in
the 1994 Annual Report on Form 10K. At June 30, 1995, the
unamortized premium paid on the options to purchase interest rate
futures contracts was $84,000 and were also applied to the
carrying value of the available-for-sale securities portfolio as
part of the mark-to-market valuation.
The net change in the unamortized balance of net deferred
losses is attributable to the significant decline in interest
rates which occurred during the period from December 31, 1994
through June 30, 1995. The losses incurred on the interest rate
futures contracts were partially offset by gains in the
available-for-sale securities portfolio. The net loss in value,
which totaled $2.2 million for the six month period ended June
30, 1995, resulted from an increase in the projected prepayments
of principal underlying the available-for-sale securities
portfolio. These increased prepayment projections
disproportionately shortened the expected lives of the available-
for-sale securities portfolio in comparison to the effective
maturity created with the hedge position. As a result, the
Company adjusted its hedge position to coincide with the current
expected life of the available-for-sale securities portfolio by
reducing the number of outstanding interest rate futures
contracts and purchasing options on interest rate futures
contracts. The options will gain significant value in a falling
interest rate environment.
BancTEXAS also has 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 June 30, 1995
effectively limits the interest rate to 5.0% on $10 million of
interest-bearing liabilities from October 15, 1997 to May 15,
2000. At June 30, 1995 and December 31, 1994, the unamortized
costs were $521,000 and $577,000, respectively, and were included
in other assets. There are no amounts receivable under the
agreement.
BancTEXAS will continue to utilize a combination of on- and
off-balance sheet financial instruments to manage interest rate
sensitivity to within the prescribed policy limits.
Liquidity
The liquidity of the Company and the Bank is the ability to
maintain a cash flow which is adequate to fund operations,
service its debt obligations and meet other commitments on a
timely basis. The primary sources of funds for liquidity are
derived from customer deposits, loan payments, maturities, sales
of investments and operations. In addition, the Company and the
Bank may avail themselves 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. The aggregate funds acquired from those sources were
$68.8 million at June 30, 1995 and $66.7 million at December 31,
1994.
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At June 30, 1995, the Company's more volatile sources of
funds mature as follows:
(dollars expressed in thousands)
Three months or less......................................... $47,112
Over three months through six months......................... 4,154
Over six months through twelve months........................ 4,217
Over twelve months........................................... 13,349
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Total....................................................... $68,832
=======
Management believes the available liquidity and earnings of
the Bank will be sufficient to provide funds for growth and to
meet the Company's operating and debt service requirements both
on a short-term and long-term basis.
Capital
Risk-based capital guidelines for financial institutions 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. The Company and the
Bank are required to maintain a minimum risk-based capital to
risk-weighted assets ratio of 8.00%, with at least 4.00% being
"Tier 1" capital. Tier 1 capital is composed of total
stockholders' equity, less the excess of net deferred tax assets,
which is more fully described below. In addition, a minimum
leverage ratio (Tier 1 capital to total assets) of 3.00% plus an
additional cushion of 100 to 200 basis points is expected.
At June 30, 1995 and December 31, 1994, the Company's and
the Bank's capital ratios were as follows:
Risk-based capital ratios
-------------------------
Total Tier 1 Leverage Ratio
----- ------ --------------
1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
Company.................... 12.95% 17.50% 12.07% 16.28% 9.62% 11.97%
Bank....................... 8.31 9.25 7.42 8.04 5.92 5.82
The decrease in the risk-based capital and leverage ratios
for the Company are primarily due to an increase in the risk-
weighted assets of $12 million at June 30, 1995 in comparison to
December 31, 1994, and a change in regulation affecting the
treatment of net deferred tax assets. The change in regulation,
which was effective for the Company on April 1, 1995, limits the
amount of net deferred tax assets, as adjusted for any amounts
applicable to the SFAS 115 "Accounting for Certain Investments in
Debt and Equity Securities", that are included in Tier 1 capital.
The amount of net deferred tax assets that may be included in
Tier 1 capital is limited to the lesser of the amount of net
deferred tax assets that the Company expects to realize over the
next twelve month period or 10% of Tier 1 capital. The amount
expected to be realized by the Company over the next twelve month
period has been estimated at $1.6 million and is included in Tier
1 capital as it is less than 10% of Tier 1 capital. The
remaining amount of the net deferred tax assets, as adjusted, of
$9.4 million for the Company has been subtracted from
stockholders' equity in arriving at Tier 1 capital at June 30,
1995.
The decrease in the risk-based capital ratios for the Bank
is primarily due to an increase in the risk-weighted assets of
the Bank of $27 million at June 30, 1995 in comparison to
December 31, 1994. The regulation affecting the treatment of net
deferred tax assets was already in effect for the Bank as of
December 31, 1994. The increase in the Bank's leverage ratio is
primarily due to the earnings of the Bank for the six month
period ended June 30, 1995.
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PART II - OTHER INFORMATION
Item 6 - Exhibits
These exhibits are numbered in accordance with the Exhibit
Table of Item 601 of Regulation S-K.
Exhibit
Number Description
------- -----------
27 Article 9 - Financial Data Schedule
(EDGAR only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BancTEXAS GROUP INC.
Registrant
Date: August 11, 1995 By: /s/James F. Dierberg
--------------------
James F. Dierberg
Chairman, President
and Chief Executive
Officer
Date: August 11, 1995 By: /s/ Allen H. Blake
------------------
Allen H. Blake
Chief Financial Officer
and Secretary
(Principal Financial Officer)
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