10-Q 1 a2049307z10-q.txt 10-Q ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-Q [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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: 3,770,501 shares of Common Stock, $.001 par value, outstanding as of May 3, 2001. ================================================================================ Part I. Financial Information Item 1. Financial Statements NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited)

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)

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 three-month period ended March 31, 2001 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, 2000. 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 NBC Bank, N.A. (Eagle Pass, Texas) (the "Bank") and NBC Holdings - Texas, Inc. (San Antonio, Texas). As of March 31, 2001, NBC Bank - Laredo, N.A. and NBC Bank were merged into NBC Bank, N.A. NOTE 3 - INVESTMENT SECURITIES The following tables present the amortized cost and approximate fair value of the investment securities portfolio as of March 31, 2001 and December 31, 2000 (Dollars in thousands):

Unrealized gains and losses on investment securities held at March 31, 2001 and December 31, 2000 have been determined to be temporary market fluctuations. The following table shows the maturity schedule of the Company's investment portfolio as of March 31, 2001 (Dollars in thousands):

The carrying value of investment securities pledged to secure public funds amounted to approximately $123,700,000 at March 31, 2001 and $90,166,000 at December 31, 2000. NOTE 4 - LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES An analysis of the allowance for possible loan losses for the three months ended March 31, 2001 and 2000 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 March 31, 2001 and 2000, the Banks had impaired loans of $2,052,000 and $1,919,000, respectively. The allowance for loan losses related to those loans was $209,000 and $293,000, respectively. The average recorded investment in impaired loans during the three months ended March 31, 2001 and 2000, was $2,108,000 and $2,006,000, respectively. Interest income of approximately $13,000 and $32,000 on impaired loans was recognized for cash payments received during the three months ended March 31, 2001 and 2000, respectively. NOTE 5 - OTHER BORROWINGS AND NOTES PAYABLE 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 (8.00% at March 31, 2001). 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 Bank. The balance at March 31, 2001 was $1,030,000. The Company also executed a one year $4 million revolving line of credit dated October 29, 1999 with The Independent BankersBank. The line bears interest at Wall Street Journal prime (8.00% at March 31, 2001) with any outstanding interest to be paid quarterly. The outstanding balance at March 31, 2001 was $1,386,000. The Company has met or obtained waivers for all debt covenants at March 31, 2001. In July 1995, September 1998, December 1998 and January 1999, the 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 March 31, 2001 was $1,601,000. 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 (dollars in thousands):

For Federal income tax purposes, the Company has approximately $81 million in net operating loss carryforwards as of March 31, 2001 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 $77 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. 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 8 realized. During the three months ended March 31, 2001 and 2000, the deferred tax asset valuation allowance was reduced by $464,000 and $498,000, respectively, to adjust the recorded net deferred tax asset to an amount considered more likely than not to be realized. The deferred tax asset related to the operating loss carry forwards net of the valuation allowance and recorded on the books of the Company was approximately $3,100,000 at March 31, 2001. 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, net of the valuation allowance, 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 began a stock repurchase plan in 1997 authorizing management to purchase up to 1,300,000 shares of the Company's common stock through the open market based on market conditions. In the first three months of 2001 and 2000, 5,000 shares and 40,387 shares, respectively, were purchased by the Company through the open market at an average cost of $13.81 and $13.50 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 March 31, 2001 was $1,058,000 or $0.28 per diluted share compared with $939,000 or $0.22 per diluted share for the three months ended March 31, 2000. The three months ended March 31, 2001 included a non-recurring expense of $87,500 for a charge incurred for the non-renewal of an employment contract. Excluding the non-recurring item, net income for the three months ended March 31, 2001 was $1,117,000, net of tax, or $0.29 per diluted share, an increase of 19% compared to last year's first quarter results. Net interest income for the three months ended March 31, 2001 increased $113,000 over the same period of 2000. Non-interest expenses were up $226,000, or 5.0%, which includes the $87,500 non-recurring expense mentioned above for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. Non-interest income increased $175,000 or 15.9% for the three months ended March 31, 2001 compared to the three months ended March 31, 2000. Non-interest income increased primarily due to the increase in service charges and fee income from $984,000 for the period ended March 31, 2000 to $1,206,000 for the period ended March 31, 2001. The return on average assets for the three months ended March 31, 2001 was 0.73% compared to 0.67% for the three months ended March 31, 2000. Average assets have increased $26 million or 4.7% to $586 million for the three months ended March 31, 2001 from an average of $560 million for the three months ended March 31, 2000. Average earning assets increased 7.0% for the three months ended March 31, 2001 compared to March 31, 2000. NET INTEREST INCOME Net interest income constitutes the principal source of income for the Bank and represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. The increase of $113,000 or 2.2% in net interest income for the three months ended March 31, 2001 compared to the same period in 2000 was due primarily to earning asset growth. For the three months ended March 31, 2001 average loans increased $12 million or 4.9% over the same period in 2000. Interest income increased $743,000 or 7.9% over the same period in 2000 due primarily to earning asset growth. Interest expense increased $630,000 or 14.4% over the same period in 2000 due primarily to an increase in the rates being paid on deposits. The net interest margin for the three months ended March 31, 2001 decreased 14 basis points to 3.97% when compared to March 31, 2000. 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 to 3.23% for the three months ended March 31, 2001 from 3.55% at March 31, 2001. 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 taxable-equivalent annualized 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, excluding the effect of the unrealized gain or loss on securities available for sale. (E) The return on equity ratio was computed by dividing annualized net income by average total stockholders' equity, excluding the effect of the unrealized gain or loss on securities available for sale. (F) The average balance has been adjusted to exclude the effect of the unrealized gain or loss on securities available for sale. 11 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 months ended March 31, 2001 and 2000. 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 three months ended March 31, 2001 increased $110,000 or 2.2% over the same period in 2000. 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. 12 The following table indicates the Company's interest rate sensitivity position at March 31, 2001: 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 nine months ended March 31, 2001 and 2000: NON-INTEREST INCOME (Dollars in thousands)

The $175,000 or 15.9% increase in non-interest income for the three months ended March 31, 2001 over the three months ended March 31, 2000 is due primarily to a $222,000 increase in service charges and fees resulting from changes in certain fee structures within the deposit accounts. 13 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 three months ended March 31, 2001 and 2000: NON-INTEREST EXPENSE (Dollars in thousands)

Total non-interest expense for the three months ended March 31, 2001 increased $226,000 or 5.0% over 2000. Salaries and benefits included an $87,500 non-recurring expense due to a charge for the non-renewal of an employment contract. Employee benefits also increased $2,000 over the prior year. INCOME TAXES The Company recognized income tax expense of $555,000 for the three months ended March 31, 2001 compared to $542,000 for the three months ended March 31, 2000. At March 31, 2001, the Company had approximately $81 million in net operating loss carryforwards that will be available to reduce income tax liabilities in future years. If unused, approximately $77 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006. LOANS The following table presents the composition of the Company's loan portfolio by type of loan: LOAN PORTFOLIO (Dollars in thousands)

14 Total loans have increased 3.3% since December 31, 2000 and 9.3% since March 31, 2000, respectively. Real estate mortgage loans have shown a 3.0% and 5.6% increase since December 31, 2000 and March 31, 2000, 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 charge-offs of $26,000 for the three months ended March 31, 2001 compared to net charge-offs of $22,000 for the three months ended March 31, 2000. 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)

15 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. The following table discloses non-performing assets and loans 90 days past due and still accruing interest as of March 31, 2001 and December 31, 2000: (Dollars in thousands) NON-PERFORMING ASSETS (Dollars in Thousands)

An independent third party loan review of the Bank is performed on an annual basis. The loans are also reviewed by banking regulators, typically on a twelve to eighteen-month basis. On a monthly basis, the Board of Directors' Loan Committee of the Bank reviews new loans, renewals and delinquencies. Management of the Bank monitors on a continuing basis those loans which it believes should be followed closely. The Bank is 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 Bank has not and does not solicit brokered deposits as a funding source. The liquidity of the Company is enhanced by the fact that 73.4% of total deposits at March 31, 2001 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 March 31, 2001, the Company's liquid assets totaled $309 million or 51% of total gross assets, compared to 50% at March 31, 2000. Secondary sources of liquidity include the Bank's ability to sell loan participations and purchase federal funds. The Bank has an approved federal funds line at a correspondent bank and has an approved line of credit with the Federal Home Loan Bank. 16 The Company's principal source of funds consists of dividends received from the Bank, who 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 $12.8 million to $63.9 million at March 31, 2001 from $51.1 million at March 31, 2000. The ratio of total stockholders' equity to total assets was 10.5% at March 31, 2001 compared with 9.0% at March 31, 2000. The Company began a stock repurchase plan in 1997 and has repurchased 981,333 common shares at a cost of $16 million through March 31, 2001 of which $5.2 million has been purchased since March 31, 2000. Total stockholders' equity has been affected by the $10.4 million increase in the unrealized gain on available for sale securities portfolio since March 31, 2000. The Company and the Bank are subject to minimum capital ratios mandated by their respective banking industry regulators. The table below illustrates the Company and the Bank's 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 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 the Bank's compliance with the risk-based capital guidelines as of March 31, 2001:

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 17 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. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES The Financial Accounting Standards Board's Statement No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", replaces the Financial Accounting Standards Board's Statement No. 125 ("SFAS No. 125") "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", but carries over most of SFAS No. 125's provisions without change. SFAS No. 140 elaborates on the qualifications necessary for a special-purpose entity, clarifies sales accounting criteria in certain circumstances, refines accounting for collateral, and adds disclosures for collateral, securitizations, and retained interests in securitized assets. This statement should be applied prospectively and is effective for transactions occurring after March 31, 2001. Disclosure requirements of this statement and any changes in accounting for collateral are effective for fiscal years ending after December 15, 2000. The Company has adopted the disclosure requirements and does not expect the adoption of the remaining provisions of SFAS No. 140 to have a material impact on its consolidated financial statements. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Certain Hedging Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company does not currently hold any derivative instruments and does not have any hedging activity. The adoption of SFAS 133 did not have an impact on the Company's consolidated financial statements. 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 18 There has been no material change in the market risks faced by the Company since December 31, 2000. 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, 2000. 19 PART II - OTHER INFORMATION: ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 11.1 Statement regarding computation of Earnings Per Share (b) Reports on Form 8-K None. 20 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: May 15, 2001 By: /s/ ANNE R. RENFROE ---------------------------------- Anne Renfroe, Chief Accounting Officer and Principal Financial Officer 21

NATIONAL BANCSHARES CORP OF TEXAS 10-Q