10-Q 1 a10-q.txt 10-Q ================================================================================ U.S. 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, 2000 COMMISSION FILE NUMBER: 1-13472 * * * * * * NATIONAL BANCSHARES CORPORATION OF TEXAS (Exact name of registrant as specified in its charter) TEXAS 74-1692337 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811 (Address of principal executive offices) (210) 403-4200 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Check 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No____ State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 4,022,272 shares of Common Stock, $.001 par value, outstanding as of July 18, 2000. ================================================================================ Part I. Financial Information Item 1. Financial Statements NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) ASSETS

See Notes to Consolidated Financial Statements. 2 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) (Unaudited)

See Notes to Consolidated Financial Statements. 3 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands) (Unaudited)

Disclosure of reclassification amount: 2000 ---- Unrealized loss on securities arising during period $ (491) Reclassification adjustment for gains included in income, net of tax of $180 347 --------- Net unrealized loss on securities, net of tax $ (144) ========= 1999 ---- Unrealized loss on securities arising during period $ (4,063) Reclassification adjustment for losses included in income, net of tax benefit of ($558) (1,083) --------- Net unrealized loss on securities, net of tax $ (5,146) =========

See Notes to Consolidated Financial Statements. 4 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)

See Notes to Consolidated Financial Statements. 5 NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of National Bancshares Corporation of Texas and its wholly-owned subsidiaries have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of the parent company and all subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain items in prior period's financial statements have been reclassified in conformity with the current year's presentation. The consolidated financial statements are unaudited, but include all adjustments (consisting primarily of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results of the periods presented. The results of operations for the six-month period ended June 30, 2000 are not necessarily indicative of the results that may be reported for the entire period. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 1999. NOTE 2 - SUBSIDIARIES The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, NBT Securities Holdings, Inc. and NBT of Delaware, Inc. It also includes the accounts of NBT Securities Holdings, Inc.'s wholly-owned subsidiary, NBC Financial, Inc. and the accounts of NBT of Delaware, Inc.'s wholly-owned subsidiaries (i) NBC Bank, N.A. (Eagle Pass, Texas); (ii) NBC Bank - Laredo, N.A. (Laredo, Texas); (iii) NBC Bank (Rockdale, Texas); (iv) NBC Bank - Central, N.A. (Luling, Texas); and (v) NBC Holdings - Texas, Inc. (San Antonio, Texas). NOTE 3 - INVESTMENT SECURITIES The following tables present the amortized cost and approximate fair value of the investment securities portfolio as of June 30, 2000 and December 31, 1999 (Dollars in thousands):

Unrealized gains and losses on investment securities held at June 30, 2000 and December 31, 1999 have been determined to be temporary market fluctuations. The following table shows the maturity schedule of the Company's investment portfolio as of June 30, 2000 (Dollars in thousands):

The carrying value of investment securities pledged to secure public funds amounted to approximately $87,354,000 at June 30, 2000 and $92,225,000 at December 31, 1999. NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses for the six months ended June 30, 2000 and 1999 is presented below:

7 A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled principal and interest payments. At June 30, 2000 and 1999, the Banks had impaired loans of $1,763,000 and $1,884,000, respectively. The allowance for loan losses related to those loans was $297,000 and $242,000, respectively. The average recorded investment in impaired loans during the six months ended June 30, 2000 and 1999, was $1,898,000 and $1,189,000, respectively. Interest income of approximately $43,000 and $27,000 on impaired loans was recognized for cash payments received during the six months ended June 30, 2000 and 1999, respectively. NOTE 5 - OTHER BORROWINGS AND NOTES PAYABLE On June 30, 2000, NBT of Delaware, Inc. maintained a margin account which is secured by investment securities. The interest rate is variable (8.00% at June 30, 2000). The balance at June 30, 2000 was $320,000. On October 2, 1999, the Company executed a $3,237,000 note with The Independent BankersBank in Dallas. The note bears a variable interest rate at prime rate as published by the Wall Street Journal (9.50% at June 30, 2000). Principal payments of $161,825 plus interest are due quarterly beginning January 2, 2000 with unpaid principal plus accrued interest due at maturity. The note matures on October 2, 2002. The note is collateralized by the common stock of NBT of Delaware, Inc. and the stock of the subsidiary banks. The balance at June 30, 2000 was $1,761,000. The Company also executed a one year $1 million revolving line of credit dated October 29, 1999 with The Independent BankersBank. The line bears interest at Wall Street Journal prime (9.50% at June 30) with any outstanding interest to be paid quarterly. The outstanding balance at June 30, 2000 was $916,000. The Company has met or obtained waivers for all debt covenants at June 30, 2000. In July 1995, September 1998, December 1998 and January 1999, a subsidiary Bank borrowed $175,000, $100,000, $1,250,000 and $1,000,000, respectively, from the Federal Home Loan Bank of Dallas. The notes bear interest rates of 6.393%, 5.15%, 5.126%, and 5.216%, respectively. The maturity dates of the notes are August 2015, October 2018, January 2004, and February 2004, respectively. Principal and interest payments are due monthly in the approximate amount of $45,000 per month in the aggregate with the remaining balances due at maturity. The aggregate balance outstanding at June 30, 2000 was $1,931,000. NOTE 6 - INCOME TAX EXPENSE The provision for Federal income tax expense is less than that computed by applying the federal statutory rate of 34% as indicated in the following analysis:

For Federal income tax purposes, the Company has approximately $88 million in net operating loss carryforwards as of June 30, 2000 which will be available to reduce income tax liabilities in future years. The preconfirmation net operating loss carryforwards arose from the Company's emergence from a reorganization under Chapter 11 of the United States Bankruptcy Code in May 1992. If unused, approximately $84 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. 8 Pursuant to SFAS No. 109, the Company has available certain deductible temporary differences and net operating loss carryforwards for use in future tax reporting periods, which created deferred tax assets. SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During the six months ended June 30, 2000 and 1999, the deferred tax asset valuation allowance was reduced by $482,000 and $971,000, respectively, to adjust the recorded net deferred tax asset to an amount considered more likely than not to be realized. The deferred tax asset net of the valuation allowance and recorded on the books of the Company was $3,691,000 at June 30, 2000. Realization of this asset is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Realization could also be affected by a significant ownership change of the Company over a period of three years as set forth in the Internal Revenue Code. Although realization of the net deferred tax asset is not assured because of these uncertainties, management believes it is more likely than not that the recorded deferred tax asset will be realized. In accordance with AICPA SOP No. 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code", income tax benefits recognized from preconfirmation net operating loss carryforwards and other tax assets are used first to reduce the reorganization value in excess of amounts allocable to identifiable assets and then to increase additional paid-in capital. NOTE 7 - INTANGIBLE ASSETS The excess cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line basis over 25 years. Intangible assets are included in other assets. All such intangible assets are periodically evaluated as to the recoverability of their carrying value. The Company acquired three Wells Fargo branches in July 1997 and the First National Bank in Luling in September 1996 which created the goodwill. NOTE 8 - STOCK REPURCHASE PLAN The Company has a stock repurchase plan authorizing management to purchase up to 900,000 shares of the Company's common stock through the open market based on market conditions. In the first six months of 2000 and 1999, 150,462 shares and 34,500 shares were purchased by the Company through the open market at an average cost of $13.53 and $16.34 per share, respectively. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY ANALYZES THE MAJOR ELEMENTS OF THE COMPANY'S CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME. THIS DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND ACCOMPANYING NOTES APPEARING ELSEWHERE IN THIS REPORT. RESULTS OF OPERATIONS Net income for the three months ended June 30, 2000 was $1,363,000 or $0.33 per diluted share compared with $1,153,000 or $0.27 per diluted share for the three months ended June 30, 1999. Net interest income for the three months ended June 30, 2000 increased $256,000 over the same period of 1999 which is due primarily to a 10.8% growth in the loan portfolio. Non-interest expenses were up $415,000, or 9.8%, for the three months ended June 30, 2000 compared to the three months ended June 30, 1999. This was due in part to salaries and benefits associated with the opening of the broker-dealer, NBC Financial, Inc., which began operations in September 1999 in addition to approximately $80,000 due to occupancy and salary expenses of a third branch opened in Laredo, Texas in April 2000. Non-interest income increased $736,000 for the three months ended June 30, 2000 compared to the three months ended June 30, 1999. The non-interest income increase included a realized gain on the sale of securities of $520,000 compared to $35,000 in the second quarter of 1999 for the gains on the sales of securities and other real estate. Excluding the non-recurring items, non-interest income increased $251,000 or 26% due primarily to the increase in service charges and fee income from $894,000 for the period ended June 1999 to $1,149,000 for the period ended June 2000. Excluding the non-recurring items, net income for the three months ended June 30, 2000 and June 30, 1999 was $1,035,000 or $0.25 per diluted share and $968,000 or $0.23 per diluted share, respectively. Net income for the six months ended June 30, 2000 was $2,302,000 or $0.55 per diluted share compared to $1,990,000 or $0.47 per diluted share for the six months ended June 30, 1999. Excluding non-recurring items of $537,000 and $90,000 for securities and other real estate gains as of June 30, 2000 and 1999, respectively, net income was $1,972,000 or $0.47 per diluted share compared to $1,888,000 or $0.44 per diluted share, respectively. Average assets have increased $44 million or 8.5% to $564 million for the six months ended June 30, 2000 from an average of $520 million for the six months ended June 30, 1999. Average earning assets increased 9.3% for the six months ended June 30, 2000 compared to June 30, 1999. NET INTEREST INCOME Net interest income constitutes the principal source of income for the Banks and represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The increase of $651,000 or 6.8% in net interest income for the six months ended June 30, 2000 compared to the same period in 1999 was due primarily to internal loan growth. For the six months ended June 30, 2000 average loans increased $38 million or 18.5% over the same period in 1999. Interest income increased $2,074,000 or 12.1% over the same period in 1999 due primarily to internal loan growth. Interest expense increased $1,423,000 or 18.9% over the same period in 1999 due primarily to an increase in the rates being paid on deposits. The net interest margin for the six months ended June 30, 2000 decreased 8 basis points to 4.11% when compared to June 30, 1999. The net interest margin is the net return on earning assets which is computed by dividing taxable equivalent net interest income by average total earning assets. The net interest spread decreased 19 basis points to 3.51% for the six months ended June 30, 2000 from 3.70% at June 30, 1999. The decrease in the net interest spread is primarily due to the increase in rates being paid on deposits. 10 INTEREST EARNED/INCURRED AND RATES (Dollars in thousands)

---------------------- (A) Non-accrual loans are included in the average balances used in calculating this table. (B) The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities. (C) The net interest margin is the annualized taxable-equivalent net interest income divided by average interest-earning assets. (D) The return on assets ratio was computed by dividing annualized net income by average total assets. (E) The return on equity ratio was computed by dividing annualized net income by average total stockholders' equity. (F) The average balance has been adjusted to exclude the effect of the unrealized gain or loss on securities available for sale. 12 The following table analyzes the increase in taxable-equivalent net interest income stemming from changes in interest rates and from asset and liability volume, including mix, for the three and six months ended June 30, 2000 and 1999. Non-accruing loans have been included in assets for calculating this table, thereby reducing the yield on loans. The changes in interest due to both rate and volume in the table below have been allocated to volume or rate change on a pro-rata basis. ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME

Taxable-equivalent net interest income for the six months ended June 30, 2000 increased $648,000 or 6.7% over the same period in 1999. The increase is reflected in the increase in the volume of earning assets offset by the increase in the volume and rate of interest bearing liabilities. INTEREST RATE SENSITIVITY Management seeks to maintain consistent growth of net interest income through periods of changing interest rates by avoiding fluctuating net interest margins. Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to repricing characteristics of interest earning assets and liabilities. 13 The following table indicates the Company's interest rate sensitivity position at June 30, 2000: INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES (Dollars in thousands)

The interest rate sensitivity table reflects a cumulative liability sensitive position during the one-year period shown. Generally, this indicates that the liabilities reprice more quickly than the assets in a given period, and that a decline in market rates will benefit net interest income. An increase in market rates would have the opposite effect. NON-INTEREST INCOME The major components of non-interest income are service charges and fees earned on deposit accounts. The following table summarizes changes in non-interest income for the six months ended June 30, 2000 and 1999: NON-INTEREST INCOME (Dollars in thousands)

The $699,000 or 32.9% increase in non-interest income for the six months ended June 30, 2000 over the six months ended June 30, 1999 is due to a $455,000 increase in service charges and fees. In addition, there was 14 a $447,000 increase in non-recurring gains on the sales of securities and other real estate. Excluding the non-recurring items, non-interest income increased $252,000 or 12.4% over the six months ended June 30, 1999. NON-INTEREST EXPENSE Non-interest expense includes all expenses of the Company other than interest expense, loan loss provision and income tax expense. The following table summarizes the changes in non-interest expense for the six months ended June 30, 2000 and 1999: NON-INTEREST EXPENSE (Dollars in thousands)

Total non-interest expense for the six months ended June 30, 2000 increased $719,000 or 8.5% over 1999. Salaries and benefits rose $434,000 or 9.8% in 2000. Salaries and benefits increased due to the hiring of personnel for NBC Financial, Inc., the broker-dealer that began operations in September 1999, in addition to the hiring of additional personnel for a new branch opened in Laredo, Texas in April 2000. The $158,000 or 10.3% increase in occupancy and equipment expenses is due to increased equipment costs and rent for the Company's data center and because of the expenses associated with the new equipment and building at the new branch opened in Laredo, Texas in April 2000. INCOME TAXES The Company recognized income tax expense of $1,316,000 for the six months ended June 30, 2000 compared to $1,050,000 for the six months ended June 30, 1999. At June 30, 2000, the Company had approximately $88 million in net operating loss carryforwards that will be available to reduce income tax liabilities in future years. If unused, approximately $84 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. 15 LOANS The following table presents the composition of the Company's loan portfolio by type of loan: LOAN PORTFOLIO (Dollars in thousands)

Total loans have decreased 1.0% since December 31, 1999 and increased 10.5% since June 30, 1999, respectively. Real estate mortgage loans have shown a 3.7% and 13.5% increase since December 31, 1999 and June 30, 1999, respectively. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is established through charges to operations in the form of a provision for loan losses. Loans, or portions thereof, which are considered to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The allowance represents the amount, which in the judgment of the Company's management will be adequate to absorb possible losses. The adequacy of the allowance is determined by management's continuous evaluation of the loan portfolio and by the employment of third party loan review consultants. Industry concentrations, specific credit risks, past loan loss experience, delinquency ratios, current loan portfolio quality and projected economic conditions in the Banks' market areas are pertinent factors in determining the adequacy of the allowance for possibleloan losses. Loans identified as losses by management, external loan review or bank examiners are charged-off. The Company recorded net recoveries of $3,000 for the six months ended June 30, 2000 compared to net charge-offs of $49,000 for the six months ended June 30, 1999. 16 The following table summarizes, for the periods presented, the activity in the allowance for loan losses arising from provisions credited to operations, loans charged off and recoveries of loans previously charged off. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES (Dollars in thousands)

NON-PERFORMING ASSETS Non-performing assets consist of non-accrual loans and foreclosed real estate. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. All installment loans past due 90 days or more are placed on non-accrual, unless the loan is well secured or in the process of collection. On non-accrual loans, interest income is not recognized until actually collected. At the time the loan is placed on non-accrual status, interest previously accrued but not collected is reversed and charged against current income. Foreclosed real estate consists of property which has been acquired through foreclosure. At the time of foreclosure, the property is recorded at the lower of the estimated fair value less selling expenses or the loan balance with any write down charged to the allowance for loan losses. Any future write-downs on the property are charged to operations. 17 The following table discloses non-performing assets and loans 90 days past due and still accruing interest as of June 30, 2000 and December 31, 1999: (Dollars in thousands) NON-PERFORMING ASSETS (Dollars in Thousands)

Independent third party loan reviews of the subsidiary Banks are performed on an annual basis. The loans are also reviewed by banking regulators, typically on an eighteen-month basis. On a monthly basis, the Board of Directors' Loan Committee of each Bank reviews new loans, renewals and delinquencies. Management of each Bank monitors on a continuing basis those loans which it believes should be followed closely. The Banks are required by regulation to periodically appraise foreclosed real estate. LIQUIDITY Liquidity is the ability to have funds available at all times to meet the commitments of the Company. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and short-term investments in time deposits in banks, federal funds sold and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the Company's trade area. The Banks have not and do not solicit brokered deposits as a funding source. The liquidity of the Company is enhanced by the fact that 75% of total deposits at June 30, 2000 were "core" deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000. At June 30, 2000, the Company's liquid assets totaled $287 million or 50% of total gross assets, compared to 47% at June 30, 1999. Secondary sources of liquidity include the Banks' ability to sell loan participations and purchase federal funds. NBC-Eagle Pass has an approved federal funds line at a correspondent bank. NBC-Laredo has an approved line of credit with the Federal Home Loan Bank. The Company's principal source of funds consists of dividends received from the Banks, which derive their funds from deposits, interest and principal payments on loans and investment securities, sales of investment securities and borrowings. CAPITAL RESOURCES Total stockholders' equity increased $411,000 to $51.7 million at June 30, 2000 from $51.3 million at June 30, 1999. The ratio of total stockholders' equity to total assets was 9.1% at June 30, 2000 compared with 9.7% at June 30, 1999. The Company began a stock repurchase plan in 1997 and has repurchased 708,462 common shares at a cost of $12.1 million through June 30, 2000 of which $3.0 million has been purchased since June 30, 1999. Total stockholders' equity has been affected by the $1.9 million decrease in the unrealized gain or loss on available for sale securities portfolio since June 30, 1999. 18 The Company and subsidiary Banks are subject to minimum capital ratios mandated by their respective banking industry regulators. The table below illustrates the Company and subsidiary Banks' compliance with the risk-based capital guidelines of the Federal Reserve Bank (FRB) and the Office of the Comptroller of the Currency (OCC). These guidelines are designed to measure Tier 1 and total capital while taking into consideration the risk inherent in both on and off balance sheet items. Off balance sheet items include unfunded loan commitments and letters of credit. Currently under the regulatory guidelines, the net unrealized gain or loss on securities available for sale is not included in the calculation of risk-based capital and the leverage ratio. The leverage ratio is Tier 1 capital divided by average total assets. A leverage ratio of 3.0 percent is the minimum requirement for only the most highly rated banking organizations and all other institutions are required to maintain a leverage ratio of 3 to 5 percent. Tier 1 capital includes common stockholders' equity less goodwill. Total capital includes Tier 1 capital and a portion of the allowance for loan losses. The ratios are calculated by dividing the qualifying capital by the risk-weighted assets. The table below illustrates the Company and each of its subsidiary Banks' compliance with the risk-based capital guidelines as of June 30, 2000:

FINANCIAL MODERNIZATION On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act ("GLBA"). This comprehensive legislation eliminates the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. GLBA provides for a new type of financial holding company structure under which affiliations among these entities may occur, subject to the "umbrella" regulation of the FRB and regulation of affiliates by the functional regulators, including the Securities and Exchange Commission ("SEC") and state insurance regulators. Under GLBA, a financial holding company may engage in a broad list of financial activities and any non-financial activity that the FRB determines is complementary to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. In addition, GLBA permits certain non-banking financial and financially related activities to be conducted by financial subsidiaries of a national bank. In addition, GLBA imposes strict new privacy disclosure and opt-out requirements regarding the ability of financial institutions to share personal non-public customer information with third parties. Under GLBA, a bank holding company may become certified as a financial holding company by filing a declaration with the FRB, together with a certification that each of its subsidiary banks is well capitalized, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 ("CRA"). The Company has elected to become a financial holding company under GLBA and the election was made effective by the FRB as of March 11, 2000. The Company is engaging in certain insurance related activities permitted by GLBA. 19 FORWARD-LOOKING INFORMATION The Company may from time to time make "forward-looking" statements as such term is defined in The Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, the interest rate environment, governmental regulation and supervision, technological change, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from such forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS There has been no material change in the market risks faced by the Company since December 31, 1999. For information regarding the Company's market risk, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 20 PART II - OTHER INFORMATION: ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of the Corporation was held on May 19, 2000. The following matters were submitted to a vote of the Corporation's shareholders. 1. Election of Directors: Election of all five director nominees to serve until the 2001 Annual Meeting of Shareholders. ---------------------------------------- ---------------------------------- ---------------------------------- NOMINEE TOTAL VOTES FOR TOTAL VOTES ABSTAINED ---------------------------------------- ---------------------------------- ---------------------------------- Jay H. Lustig 3,856,883 34,868 Marvin E. Melson 3,864,901 26,850 H. Gary Blankenship 3,864,901 26,850 John W. Lettunich 3,864,901 26,850 Charles T. Meeks 3,864,901 26,850

2. To approve certain amendments to the 1995 Stock Plan: Total Votes For 3,828,219 Total Votes Against 50,537 Total Votes Abstained 12,995 3. Ratification of Independent Auditors: Total Votes For 3,880,162 Total Votes Against 1,200 Total Votes Abstained 10,389

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 11.1 Statement regarding computation of Earnings Per Share 27.1 Financial Data Schedule (b) Reports on Form 8-K None. 21 SIGNATURES In accordance with the requirements of the Securities Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NATIONAL BANCSHARES CORPORATION OF TEXAS Date: August 14, 2000 By: /s/ Anne R. Renfroe ---------------------------------------------------- Anne Renfroe, Chief Accounting Officer and Principal Financial Officer 22

NATIONAL BANCSHARES CORP OF TEXAS 10-Q