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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10/A
(Amendment No. 2)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
TEJAS BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Texas 75-1950688
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
905 South Fillmore, Suite 701, Amarillo, Texas 79101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 373-7900
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
None None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par value per share
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(Title of Class)
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ITEM 1. BUSINESS
GENERAL
TEJAS BANCSHARES, INC.
Tejas Bancshares, Inc. (the "Company") was incorporated as a Texas
corporation on June 22, 1983, to serve as a bank holding company, as defined
in the Bank Holding Company Act of 1956, as amended (the "BHC Act"). On
December 31, 1983 the Company became a bank holding company through the
acquisition of all of the issued and outstanding capital stock of Fritch
State Bank, a Texas banking association. As described herein, during 1997
Fritch State Bank relocated its main office to Amarillo, Texas, and converted
its charter from a Texas banking association to a national banking
association under the title "The First National Bank of Amarillo" (the
"Bank").
The Company owns all of the issued and outstanding capital stock of the
Bank.
As of December 31, 1997, the Company had, on a consolidated basis, total
assets of approxi mately $144,740,000, total deposits of approximately
$106,255,000, total loans of approximately $117,102,000 (net of unearned
discount and allowance for loan losses), and total stockholders' equity of
approximately $37,853,000.
The Company does not, as an entity, engage in separate business
activities of a material nature apart from the activities it performs for the
Bank. The primary activities of the Company are to provide assistance in the
management and coordination of its Bank's financial resources and to provide
capital, business development, long-range planning, and public relations
services for the Bank. The Bank operates under the day-to-day management of
its own officers and the Bank Board formulates its own policies with respect
to banking and business matters.
The Company's primary source of revenue is dividends from the Bank. Any
future dividend payments by the Bank will be determined by the Bank based on
its financial condition and such dividends may only be declared and paid in
compliance with applicable law and regulatory guidelines.
As a bank holding company, the Company is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve") in
accordance with the requirements set forth in the BHC Act and by the rules
and regulations promulgated thereunder by the Federal Reserve.
THE FIRST NATIONAL BANK OF AMARILLO
The Bank is a national banking association with its main office in
Amarillo, Texas. The Bank opened for business on April 10, 1965 as a Texas
banking association and converted to a national banking association effective
June 30, 1997. As a national banking association, the Bank is subject to
regulation by the Comptroller of the Currency (the "Comptroller") in
accordance with the requirements set forth in the National Bank Act and the
rules and regulations promulgated thereunder by the Comptroller. As of
December 31, 1997, the Bank had total assets of approximately $143,981,000,
total deposits of approximately $107,139,000, total loans of approximately
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$117,102,000 (net of unearned discount and allowance for loan losses), and
total stockholders' equity of approximately $36,373,000.
The Bank provides a full range of banking services to business,
industry, public and governmental organizations and individuals located in
Amarillo, Dalhart and Fritch, Texas. The Bank provides its customers with a
variety of commercial banking services. For businesses, the Bank offers
checking facilities, certificates of deposit, short-term loans for working
capital purposes, term loans for fixed assets and expansion needs and other
commercial loans suitable to the needs of its business customers. When the
borrowing needs of a customer exceed the Bank's lending limit, the Bank
participates with other banks in making the loan. Similarly, the Bank
provides other services for its customers through its correspondent and other
relationships with other financial institutions.
The individual services provided by the Bank include checking accounts,
savings accounts, certificates of deposit, Money Market Deposit accounts, NOW
accounts, IRA and qualified retirement plans, safe deposit facilities and
personal loan programs, including home improvement loans, short-term mortgage
loans and installment loans for the purchase of automobiles and other
consumer goods. The Bank also provides cashier's checks, travelers' checks,
money orders, wire transfers, and bank-by-mail services. The Bank does not
presently offer trust services.
CHANGE IN CONTROL OF THE COMPANY AND THE BANK
Effective May 23, 1997, Mr. Donald E. Powell, the Company's and the
Bank's President and Chief Executive Officer, acquired control of all of the
outstanding stock of the Company (the "Acquisition"). Mr. Powell's
acquisition of control of the Company was accomplished pursuant to the terms
of a Stock Purchase Agreement by and among Mr. Powell, the Company and all of
the shareholders of the Company.
The Stock Purchase Agreement provided that the Company would repurchase
approximately 73% of its outstanding common stock from existing shareholders
and that Mr. Powell would acquire the remaining shares from one or more
shareholders. The aggregate purchase price for such shares to be received by
all of the shareholders of the Company was $2,163,697.45, and was determined
through arms'-length negotiations among the shareholders of the Company, the
Company and Mr. Powell. The Stock Purchase Agreement contemplated that
certain non-performing loan assets on the books of the Bank would be
transferred out of the Bank for the benefit of the Company's then-current
shareholders. Immediately prior to the closing of the Acquisition, not all
such non-performing loan assets had been transferred to the shareholders and
remained on the Bank's books. Accordingly, the aggregate purchase price for
the stock of the Company was adjusted downward, and Mr. Powell and the
Company on behalf of its shareholders entered into an agreement pursuant to
which any net recoveries on such non-performing assets received after the
effective date of the Acquisition would be subsequently transferred to the
Company's shareholders on a pro rata basis according to such shareholder's
respective ownership interest in the Company on the closing date of the
Acquisition. The aggregate value of such non-performing loan assets was
approximately $79,000 as of May 23, 1997, the effective date of the
Acquisition.
Immediately prior to consummation of the transaction, the Company had 9,195
shares of common stock, par value $10.00 per share, issued and outstanding and
owned by approximately 21
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shareholders of the Company. Pursuant to the Stock Purchase Agreement, the
Company repurchased 6,695 shares of the common stock for $1,575,416.47, which
shares were subsequently canceled, thereby reducing the number of outstanding
shares of the Company to 2,500. Simultaneously, Mr. Powell acquired the
remaining 2,500 shares of the Company's outstanding shares of common stock
for $588,280.98 from a single shareholder of the Company. As a result of
these simultaneous transactions, referred to herein as the "Acquisition," Mr.
Powell's resulting ownership of 2,500 shares constituted ownership of all of
the outstanding shares of the Company.
The purchase price for the 6,695 shares repurchased by the Company,
$1,575,416.47 in the aggregate, was funded from (i) the proceeds of a
$1,000,000 loan to the Company by Mr. Powell, and (ii) a dividend paid to the
Company by the Bank. The loan to the Company from Mr. Powell, which, pursuant
to the terms of a promissory note given by the Company to Mr. Powell, was to
be repaid over a 10-year period, was secured by a pledge of all of the
capital stock of the Bank owned by the Company. The loan was repaid in full
on September 2, 1997.
Prior to acquiring a controlling interest in the Company, and an
indirect controlling interest in the Bank, Mr. Powell applied for, and
received regulatory approval of the Acquisition from the Federal Reserve Bank
of Dallas and the Texas Department of Banking.
Following completion of Mr. Powell's acquisition of all of the
outstanding stock of the Company, and in anticipation of intrastate public
offering of the Company's common stock, the Articles of Incorporation of the
Company were amended to (i) increase the authorized shares of common stock of
the Company from 10,000 shares to 20,000,000 shares, (ii) reduce the par
value of the common stock of the Company from $10.00 per share to $1.00 per
share, (iii) eliminate the preemptive rights of the shareholders of the
Company, and (iv) generally update the indemnification provisions presently
contained within the Company's organizational documents. As Mr. Powell was
the Company's sole shareholder following consummation of the Acquisition,
such amendments were approved by unanimous written consent following adoption
by the Company's Board of Directors.
In addition, on July 2, 1997, the Company effected a 77.4372-for-1 stock
dividend to all shareholders of record on June 30, 1997 (the "Stock
Dividend"). As a result of this stock dividend, Mr. Powell's 2,500 shares
were converted into 196,093 shares of the Company's common stock,
representing all of the current outstanding shares. The purpose and effect of
the Stock Dividend was to preserve Mr. Powell's investment in the Company
($588,280.98) in relation to the price of the shares offered to the public at
$3.00 per share. Mr. Powell's original $588,280.98 investment in the Company
is the economic equivalent of having purchased 196,093 shares (excluding a
fractional share interest) at $3.00 per share (196,093 shares x $3.00 =
$588.279). The conversion of Mr. Powell's 2,500 shares into 196,093 shares
was accomplished by declaring a dividend of 77.4372 shares for each share of
Common Stock outstanding (2,500 shares outstanding + (77.4372 x 2,500 shares)
= 196,093). Following the Stock Dividend, Mr. Powell's cost basis in such
stock equaled $3.00 per share, which is equivalent to the price of the Common
Stock offered in the public offering. Additional information regarding the
public offering is set forth in Item 10 to the Registration Statement on Form
10.
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CHANGE IN MANAGEMENT AND COMPETITIVE FOCUS.
Prior to the Acquisition, Mr. Powell served as the President, Chief
Executive Officer and Chairman of the Board of Directors of Boatmen's First
National Bank of Amarillo, Amarillo, Texas. Boatmen's First National Bank of
Amarillo, formerly known as The First National Bank of Amarillo prior to
being acquired by Boatmen's Bancshares, Inc., St. Louis, Missouri in 1994,
had an established correspondent banking relationship with the Bank.
Accordingly, because of this relationship, Mr. Powell had developed contacts
with former management of the Bank and the Company. In late August 1996,
NationsBank Corporation, Charlotte, North Carolina, and Boatmen's Bancshares,
Inc. announced that they had entered into a definitive agreement pursuant to
which NationsBank would acquire Boatmen's Bancshares, Inc. As a result
thereof, NationsBank was indirectly acquiring Boatmen's First National Bank
of Amarillo. NationsBank's acquisition of the Boatmen's organization was
subsequently completed in late January 1997.
Although Mr. Powell retained his position as an executive officer and
Chairman of the Board of Boatmen's First National Bank of Amarillo following
completion of the NationsBank transaction in January 1997, Mr. Powell
voluntarily resigned from the Boatmen's organization effective February 5,
1997 to pursue other lifelong pursuits, including the operation of a truly
"community-owned" financial institution. An initial step in fulfilling this
pursuit resulted in the acquisition of control of the Company and indirect
acquisition of control of the Bank.
Immediately following completion of the Acquisition, Mr. Powell became
the President and Chief Executive Officer of the Company. The Company's
former President and Chief Executive Officer of the Company continued to be
employed by the Bank following the Acquisition and currently serves as the
manager of one of the branches of the Bank. In addition, immediately
following the Acquisition, Mr. Powell, as the sole shareholder of the
Company, reconstituted the board of directors of the Company with five
individuals, each of whom, including Mr. Powell, previously served as a
member of the board of directors of Boatmen's First National Bank of
Amarillo, Mr. Powell's former employer. Information regarding the current
executive officer and directors of the Company is set forth in Item 5 to this
Registration Statement on Form 10. In addition, following the Acquisition,
the executive officers and members of the board of directors of the Bank were
reconstituted in similar fashion.
In addition to the management changes noted above, following the
Acquisition, management of the Bank took steps to (1) relocate the main
office of the Bank from Fritch, Texas, to Amarillo, Texas, retaining the
Fritch location as a full-service branch of the Bank, (2) convert the Bank
from a Texas banking association to a national banking association chartered
by the Comptroller, and (3) change the name of the Bank from "Fritch State
Bank" to "The First National Bank of Amarillo". These transactions, the net
result of which was to re-introduce "The First National Bank of Amarillo" to
the community of Amarillo, Texas, were completed on or about June 30, 1997.
In addition, the Bank sought approval to establish two (2) de novo
full-service branches in Amarillo, Texas, and an additional full-service
branch in Dalhart, Texas. The Dalhart branch, which was previously operated
by the Bank as a loan production office, opened on October 15, 1997. The two
Amarillo branch locations opened on January 29, 1998 and February 12, 1998,
respectively.
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To support this physical expansion and growth in market presence, the
Bank hired approximately 45 additional employees between June 30, 1997 and
March 31, 1998, bringing the current number of full-time equivalent employees
to approximately 54. Additional information regarding the increase in
non-interest expense of the Company associated with the larger employee base
is provided at "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION -- Other Operating Income and Expense." Many of
these persons previously worked for Mr. Powell at The First National Bank of
Amarillo or Boatmen's First National Bank of Amarillo following the
acquisition by Boatmen's in 1994 and have significant banking experience in
the Amarillo banking market.
In addition to increasing its physical presence in the Panhandle, the
Bank sought to increase its loan portfolio by enhancing existing customer
relations, aggressively advertising the "return" of The First National Bank
of Amarillo, and offering an expanded array of loan products, including
agricultural loans. See "Business - Lending Activities" for additional
information regarding the Bank's loan products.
Following completion of the Acquisition, and in anticipation of this
significant growth and physical expansion of the Company and the Bank, the
Company took steps to raise approximately $40 million in additional capital
in a community offering principally to residents in the Panhandle of Texas.
The intrastate offering to bona fide residents of the State of Texas was
concluded on August 31, 1997 with the offering being completely subscribed.
Approximately $37.4 million of this newly raised capital was contributed by
the Company to the Bank to support loan and deposit growth, a larger lending
limit and to maintain a capital base at a level that management of the Bank
deemed sufficient to maintain satisfactory capital ratios. Additional
information regarding this capital offering is set forth in Item 10 to this
Registration Statement on Form 10.
A number of key factors which have been primarily attributable to the
recent and significant growth of the Company and the Bank following the
Acquisition include (1) the appointment of an experienced and knowledgeable
Board of Directors of the Company and the Bank, (2) the hiring of an
experienced management team and seasoned group of Bank employees, (3)
formulation and implementation of an aggressive business plan to be an active
lending institution and to penetrate key markets in the Texas Panhandle
using, at least initially, existing customer contacts and contacts known to
the new management team, and (4) a strong local economy. In addition, as the
business of banking is highly personalized, particularly in the markets
served by the Bank, the Bank attributes a great deal of its recent success to
the efforts of the Bank's enhanced staff who provide personalized banking
services to the Bank's customers and the aggressive advertising such highly
personalized service to the Bank's target market. One of the Bank's goals is
to be the premier financial institution in the Panhandle of Texas recognized
for customer service, and the delivery of personalized service has become one
of the most recognizable features of the Bank during the period following the
Acquisition. In addition, the Bank enjoys a unique position as one of the few
locally-owned and operated national banks in Amarillo, Texas. Accordingly,
management attributes a portion of its recent success on the Bank's ability
to capitalize on the customer disruption, dissatisfaction, and turnover which
it believes has resulted from the acquisition by out-of-state holding
companies of a number of community banks located in and around the Panhandle
of Texas, including Amarillo, Texas.
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To some degree, banks and other financial institutions compete on the
basis of rates and service. While the Bank seeks to remain competitive with
the interest rates it charges on loans and offers on deposits, the Bank
believes that its recent success has been and will continue to be dependent
on its emphasis to community banking, customer service and personal
relationships.
COMPETITION
The banking business in the Bank's trade area, which includes Amarillo,
Dalhart and Fritch, Texas, and surrounding areas within the Panhandle of
Texas, has become increasingly competitive over the past several years and
the level of competition facing the Company and the Bank may increase
further. The Company and the Bank experience competition in both lending and
attracting funds from other banks and non-bank financial institutions located
in their market area. Non-bank competitors with respect to deposits and
deposit-type accounts include savings and loan associations, credit unions,
securities firms, money market funds, life insurance companies and the mutual
funds industry. With respect to loans, the Bank encounters competition from
other banks, savings and loan associations, finance companies, insurance
companies, small loan and credit card companies, credit unions, pension
trusts and securities firms.
Recent legislation, court decisions and administrative actions have
expanded the areas of business activities in which bank and non-bank
financial institutions may engage. To the extent that such activities are
engaged in by others, the level of competition for the Company and the Bank
is expected to increase. Some competitors are not subject to the same degree
of regulation and supervision as the Company and the Bank.
Many of the banks and other financial institutions with which the
Company and Bank compete have capital resources and legal loan limits
substantially in excess of those maintained by the Company and Bank. Such
institutions can perform certain functions for their customers, including
trust, securities brokerage and international banking services, which the
Company and Bank presently do not offer directly. Although the Company may
offer these services through correspondent banks, the inability to provide
such services directly may be a competitive disadvantage.
The Company considers its principal competition in the commercial
banking business to be the other full service banks located in its primary
market areas. The products and services offered by the Company and its target
market are most similar to those of area banks and, to some extent, savings
associations.
The Bank seeks to provide a high level of personalized banking service
to professionals and owner-operated businesses, emphasizing quick and
flexible responses to customer demands. The Bank relies heavily on the
efforts of its officers, directors and existing shareholders for the
solicitation and referral of potential customers, and expects this to
continue for the foreseeable future.
LENDING ACTIVITIES
With its new management team in place, one of the Bank's main objectives
is to seek attractive lending opportunities in its service area. Accordingly,
in addition to offering a broad range of deposit services and products
typically available from most banks and savings associations, the
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Bank now offers a full range of retail and commercial credit services
designed to meet the borrowing needs of small- and medium-sized businesses
and customers located within the Bank's service area. Such loan products
include commercial loans (such as lines of credit, term loans, refinancings,
etc.), personal lines of credit, direct installment consumer loans,
residential mortgage loans, construction loans, and letters of credit.
Substantially all of the Bank's loans are made to borrowers located within
the Bank's service area, which includes the Panhandle of Texas. The Bank has,
however, made a small number of loans outside such service area and in
surrounding states. This practice is limited to borrowers (both individuals
and businesses) who have either specific ties to the defined service area of
the Bank or who have businesses located within the Bank's defined service
area. At December 31, 1997, there were 38 loans in the Bank's loan portfolio,
having an aggregate balance of approximately $3,600,000 (representing only 3%
of total loans), which had been made to borrowers outside of the Bank's
defined service area.
The Bank conducts its lending activities pursuant to the loan policy
adopted by the Bank's Board of Directors. See "BUSINESS -- Loan Policies and
Underwriting Practices" for a discussion of the Bank's loan policy.
Substantially all of the loans in the Bank's portfolio have been originated
by the Bank. Some loans in the Bank's portfolio, however, were not originated
by the Bank and were purchased from a competing bank. Such purchased loans
had been originated by members of the Bank's lending staff during their prior
tenure at the competing bank, and were seasoned loans of known customers. All
such purchased loans conform with the Bank's underwriting standards. This
practice was unique to the start-up nature of the Bank during the latter half
of 1997. It is anticipated that future loans will be originated by the Bank's
lending staff. The Bank may, from time to time, purchase loans from other
banks and participations from correspondent banks, which loans will conform
to the Bank's underwriting standards. The Bank has no foreign loans or highly
leveraged transaction loans in its portfolio.
LOAN PORTFOLIO.
For purposes of this discussion, the Bank's loans are divided into four
categories: commercial loans, agriculture loans, real estate loans, and loans
to individuals, each of which is discussed below.
COMMERCIAL LOANS. The Bank's commercial loans are diversified to meet
most business needs. The commercial loans offered by the Bank include (i)
commercial real estate loans (discussed herein), (ii) short-term working
capital and other commercial loans, and (iii) construction loans (discussed
herein). Credit analysis of a commercial loan application involves a review
of a number of related factors including collateral, type of loan, loan
maturity, terms and conditions, and various loan-to-value ratios as they
relate to the Bank's loan policy. The Bank requires commercial borrowers to
submit financial statements at least annually. Any exceptions to this
requirement are extremely rare. In addition, the Bank requires appraisals or
evaluations in connection with loans secured by real estate. Such appraisals
or evaluations are obtained prior to the time funds are advanced. The Bank
also requires personal guaranties on all non-individual/consumer loans,
except when cash collateral or financial strength of the borrower mitigates
this requirement. The total number of loans in the Bank's portfolio that do
not have personal guaranties at December 31, 1997 are insignificant in
relation to the overall value of the Bank's loan portfolio. Terms are granted
commensurate with the useful life of the collateral offered.
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AGRICULTURE LOANS. Agricultural loans include loans to cattle feeding
operations, cattle producers, farmers and ranchers and other agricultural -
related borrowers. These loans are subject to the credit analysis, financial
statement and collateral requirements as mentioned above under the discussion of
commercial loans.
REAL ESTATE LOANS. Real estate loans are divided into three categories:
residential mortgage lending, construction loans and commercial real estate
loans, each of which is discussed in greater detail below.
RESIDENTIAL MORTGAGE LOANS. The Bank's renewed interest in providing
residential mortgage loans was fueled by the following factors: (i) the
commitment of the Bank's new management team to engage in more traditional
lines of banking by providing this product, (ii) a strong real estate market
and (iii) low interest rates. Residential loan originations are generated by
the Bank's in-house originations staff, marketing efforts, present customers,
walk-in customers and referrals from real estate agents, mortgage brokers and
builders. The Bank focuses its lending efforts primarily on the origination
of loans secured by first mortgages on owner-occupied, 1-4 family residences.
Substantially all of the Bank's 1-4 family residential mortgage originations
are secured by properties located in and around Amarillo, Texas. The
outstanding principal amount of such loans secured by properties outside of
the Bank's service area are not significant relative to the value of the
Bank's entire loan portfolio. The Bank does not purchase residential mortgage
loans, but may sell loans it originates on the secondary market.
Residential mortgage products include conventional, fixed-rate loans with
terms that vary from a 15-year balloon to a 30-year fully amortized loan. The
Bank requires loans secured by first mortgages on real estate to have
loan-to-value ratios within specified limits, ranging from 60% for loans secured
by raw land to 95% for improved property.
The Bank reviews information concerning the income, financial condition,
employment and credit history when evaluating the creditworthiness of an
applicant.
CONSTRUCTION LOANS. The Bank's emphasis for construction loans is directed
toward properties that will be owner occupied. The Bank may finance construction
loans for projects built on speculation, but these typically have substantial
secondary sources of repayment. The Bank's construction loans are secured by
property located primarily in the Bank's market area and typically have variable
interest rates during the construction period. Construction loans with fixed
interest rates were not significant at December 31, 1997. Construction loans to
individuals are generally made in connection with the granting of permanent
financing on the property. In determining whether to originate commercial real
estate loans, the Bank considers such factors as the financial condition of the
borrower and the debt service coverage of the borrower.
COMMERCIAL REAL ESTATE LOANS. Commercial real estate loans are used to
provide permanent financing for commercial and retail and office buildings,
warehouse facilities, churches and multiple-family buildings. The majority of
these loans are collateralized by owner occupied properties. Commercial real
estate lending entails a thorough analysis of the financial condition of the
borrower, the borrower's industry, debt service coverage of the borrower, and
current and projected economic
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conditions. Commercial real estate loans are made at both fixed and
adjustable interest rates for terms up to 15 years.
LOANS TO INDIVIDUALS. The Bank is becoming a major consumer lender in its
service area. Loans to individuals include personal loans and consumer loans,
which may be secured or unsecured depending on the credit quality and purpose of
the loan. The Bank requires loan applications and/or personal financial
statements from its personal borrowers on loans that the Bank originates. Loan
officers complete a debt-to-income analysis that must meet established standards
of Bank's lending policy. Consumer loan terms vary according to the type and
value of collateral, length of contract and creditworthiness of the borrower.
The underwriting standards employed by the Bank for consumer loans include an
application, a determination of the applicant's payment history on other debts,
with greatest weight being given to payment history with the Bank, and an
assessment of the borrower's ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the collateral, if any, in relation to the proposed amount of the loan. See
"BUSINESS -- Loan Policies and Underwriting Practices."
Additional information regarding the various components of the Bank's loan
portfolio is provided under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Loan Portfolio."
RISK ELEMENTS.
The risk elements in the Company's loan portfolio are similar to those in
other comparable commercial banks. Risk elements related to specific loan
categories are as follows:
COMMERCIAL LOANS. Commercial loans include a variety of loans to commercial
entities, including loans to finance accounts receivable, inventories and other
business activities. Risk of nonperformance on these loans include the risk that
the borrower's cash flow will be insufficient to service the debt and the risk
that collateral will not be sufficient to offset any loss. Certain loans to
qualified borrowers may be unsecured. Risk of nonperformance on these loans
include the risk that the borrower's cash flow will be insufficient to service
the debt and the risk that there is no or inadequate collateral to offset any
loss.
AGRICULTURAL LOANS. Agricultural loans, in addition to risks similar to
other commercial loans as described above, may be susceptible to commodity
market risk and weather.
REAL ESTATE LOANS. Real estate loans represent the Bank's second greatest
concentration of loans, representing approximately 29% of the portfolio at
December 31, 1997. However, the amount of risk associated with this group of
loans is mitigated in part due to the type of loans involved. At December 31,
1997, the vast majority of the Bank's reals estate loans were collateralized by
properties located in and around Amarillo, Texas, many of which are owner
occupied. Historically, the amount of losses suffered on owner occupied
properties has been small. Due to the volume of real estate loans contained in
the Bank's portfolio, which are collateralized by owner occupied properties, and
the appraisal and other real estate lending policies in place that indicate the
value of the collateral for these loans, management does not consider the
potential impact of these loans on
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the loan loss reserve to be excessive, even though real estate loans
constitute a significant percentage of total loans outstanding. Management
also pursues an aggressive policy of reappraisal on any real estate loan that
becomes troubled and potential exposures are recognized and reserved for as
soon as they are identified.
Real estate properties are particularly sensitive to general economic
conditions and experience devaluation when economic factors decline.
Accordingly, an increase in interest rates or softening of the real estate
market may have the effect of reducing demand for this product.
INSTALLMENT LOANS. Risk of nonperformance on these loans include the
risk the borrower's cash flow will be insufficient to service the debt and
the risk that collateral will not be sufficient to offset any loss.
Currently, the economy in the Bank's service area appears stable. Management
is, however, cognizant of the nationwide increase in the personal bankruptcy
rate, and management expects this trend may some adverse effect on the Bank's
net charge-offs. Most of the Bank's loans to individuals are collateralized,
which management believes will limit the exposure in this area should current
bankruptcy trends continue.
LOAN POLICIES AND UNDERWRITING PRACTICES
GENERAL. The Bank's credit officers strive to accommodate all credit needs
of credit-worthy borrowers. Attempts are made, within the parameters set by the
Bank's loan policy, as discussed below, to make and structure loans designed to
generate future business for the Bank.
It is the Bank's practice to operate within the parameters of the Bank's
loan policy and underwriting standards. Such policies and standards, however,
may not be applicable to all potential borrowers or circumstances and,
accordingly, deviations from the Bank's loan policy or underwriting standards,
whether such deviations relate to collateralization requirements and/or
loan-to-value ratio guidelines, are made only in extreme situations. Such
deviations, which are limited in occurrence and involve loans representing an
insignificant amount relative to the value of the Bank's overall loan portfolio,
are addressed on an individual basis during the underwriting process and must be
approved in advance of funding by the Bank's Loan Committee. While the Bank does
not formally track such deviations from policy as a whole (except with respect
to real estate loans), known deviations are addressed herein.
The following is a summary of the loan policy and underwriting practices of
the Bank.
LOAN POLICY. The Bank maintains a comprehensive loan policy that
establishes guidelines with respect to all categories of lending. In addition,
the loan policy sets forth lending authority for each credit officer to make
secured and unsecured loans in specific dollar amounts. All loans must be
approved by senior credit officers or the Bank's Loan Committee prior to
funding.
Administration of the Bank's loan policy rests with the Bank's Loan
Committee and is administered in accordance with directives established by the
Bank's Board of Directors. The Loan Committee is comprised of four Senior Credit
Officers. The Committee reviews policy and procedures at least annually, or more
frequently as needed, and submits recommendations relative to
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the loan policy to the Bank's Chief Executive Officer for review and
approval. Ultimate approval of the loan policy rests with the Bank's Board of
Directors.
The Bank's primary lending area includes customers principally residing in
specified counties in Texas and, to a lesser extent, in portions of the
surrounding four states of Oklahoma, Kansas, Colorado and New Mexico.
Other principals of the Bank's loan policy are described below:
- - The Bank will not engage in non-recourse lending unless the loan is
specifically approved in advance by the Loan Committee. Non-recourse
lending is defined as loans without any personal liability of the
principals of a borrowing entity when the collateral is the only source
of repayment. Although the Bank prefers to obtain guaranties of payment
from each principal of a closely held corporations, this is not considered
non-recourse lending if there is an additional source of repayment other
than the collateral.
- - If an applicant or loan application reflects a potential credit weakness,
adequate additional support, in the form of co-signers or enforceable
guarantees, are sought. However, these are seldom considered the primary
source of repayment and are, therefore, not heavily relied on by the Bank.
- - Credit officers are responsible for ascertaining the real market value of
any collateral taken on a loan. Appraisal reports or comparable sales
reports are used as guidelines only, and not as an absolute measure of
market value.
- - The Bank satisfies itself as to the repayment source of the borrower,
whether it is cash flow or liquidation of collateral associated with a
normal business cycle (e.g., sale of crops, cattle or inventory turnover).
UNDERWRITING - COLLATERALIZATION. Collateralization is required on most
loans originated by the Bank, and the guidelines for the maximum ratio of a loan
amount to the appraised value of collateral or to the acquisition cost is
dependent upon the type of loan. Collateralization may not be required, however,
if the borrower's documented financial condition and documented cash flow
indicate sufficient liquidity to service the loan. Any such deviations are
approved in advance of funding by the Bank's Loan Committee. Collateralization
usually mirrors the purpose of the loan, i.e. real estate loans secured with the
corresponding real estate, working capital lines of credit are secured with the
current assets of the business, etc.
UNDERWRITING - LOAN-TO-VALUE RATIOS. A loan-to-value ratio between 75% to
80% is considered by management of the Bank to be a safe and prudent level in
most lending circumstances. Certain types of loans offered by the Bank, however,
have specific guidelines regarding loan-to-value ratios and collateralization.
Deviations from such guidelines, which are approved in advance of funding by the
Bank's Loan Committee, may be justified if the borrower's documented financial
condition and documented cash flow indicate sufficient liquidity to service the
loan. Loan-to-value ratios for specific categories of loan, including a
discussion of known deviations from such guidelines, are discussed below.
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ENERGY LOANS - OIL & GAS. Loans relating to energy are collateralized with
proven producing properties having an appraised value equal to twice the loan
amount for non-amortizing revolving credit loans. The aggregate amount of
outstanding energy loans is not material in relation to the overall value of the
Bank's loan portfolio at December 31, 1997, and, accordingly, any deviations
from such stated policy would not be material.
LIVESTOCK. The equity requirement for livestock loans will approximate
20%-25% of (i) the market value of the livestock as determined by lending
personnel, or (ii) the market value of other liquid collateral (e.g.,
marketable securities). If, during the life of the loan, the value of the
equity no longer conforms with the stated policy, management of the Bank will
seek additional collateral from the borrower to keep the ratios in line with
policy. Management of the Bank was not aware of any exceptions to the stated
policy with respect to this loan category at December 31, 1997.
AGRICULTURE RELATED REAL ESTATE - FARM & RANCH. Loan amounts in this
category should not exceed 75% of appraised value or cost, whichever is less.
Loans for feedyards should not exceed 75% of the appraised value of the
property, or an amount equal to $50 multiplied by the cattle capacity of the
yard. Loans with respect to other agricultural real estate should not exceed 75%
of the property's appraised value. Management of the Bank was not aware of any
exceptions to the stated policy with respect to this loan category at December
31, 1997.
RESIDENTIAL CONSTRUCTION LOANS. Loan amounts should not exceed 65%-85% of
appraised/evaluated value, depending on whether the property is presold or
speculative. Management of the Bank was not aware of any exceptions to the
stated policy with respect to this loan category at December 31, 1997.
COMMERCIAL AND INDUSTRIAL CONSTRUCTION LOANS. Loans in this category should
not exceed 80% of the appraised value or 80% of builder's cost, whichever is
less. Management of the Bank was not aware of any exceptions to the stated
policy with respect to this loan category at December 31, 1997.
RESIDENTIAL MORTGAGE LOANS. Loans in this category should not exceed 95%
(for owner-occupied property) or 80% (for non-owner occupied property) of the
appraised/evaluated value or purchase price, whichever is the lesser amount.
Management was aware of four (4) loans in this category, having an aggregate
value of $1,100,400 at December 31, 1997 (representing less than 1% of the value
of the Bank's entire loan portfolio), which did not conform to the loan-to-value
guidelines expressed above for this loan category. As with all deviations to
policy, such loans were approved in advance of funding by the Bank's Loan
Committee.
COMMERCIAL REAL ESTATE LOANS. Loans in this category should not exceed 60%
of appraised value or cost, whichever is less. Management was aware of eight (8)
loans in this category, having an aggregate value of $1,048,128 at December 31,
1997 (representing less than 1% of the value of the Bank's entire loan
portfolio), which did not conform to the loan-to-value guidelines expressed
above for this loan category. As with all deviations to policy, such loans were
approved in advance of funding by the Bank's Loan Committee.
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UNIMPROVED REAL ESTATE LOANS. Loans in this category should not exceed 85%
of appraised value or cost, whichever is less. Management was aware of twenty
(20) loans in this category, having an aggregate value of $5,462,128 at December
31, 1997 (representing approximately 4.6% of the value of the Bank's entire loan
portfolio), which did not conform to the loan-to-value guidelines expressed
above for this loan category. As with all deviations to policy, such loans were
approved in advance of funding by the Bank's Loan Committee.
As of December 31, 1997, the Bank was in compliance with the regulatory and
supervisory limits associated with loan-to-value ratios for real estate loans.
UNDERWRITING - APPRAISAL POLICY. The determination of collateral value is
of critical importance in order to maintain the appropriate loan-to-value ratio.
The Bank's real estate appraisal policy is consistent with the Financial
Institutions Reform, Recovery and Enforcement Act, and the Bank's appraisal
practices are monitored by management to ensure compliance.
LOAN APPROVAL. Individual loan authorities, as set forth in the Bank's loan
policy, are established by the Bank's Board of Directors upon the recommendation
of the Bank's Chief Executive Officer. In establishing individual loan
authority, the experience level of the credit officer is taken into
consideration, as well as the type of lending in which the credit officer is
involved. Under the Bank's current loan policy, the Bank's Loan Committee, which
is comprised of four senior credit officers, reviews all loans. The Board of
Directors reviews on a monthly basis all commercial and residential loans
approved by individual credit officers and the Bank's Loan Committee over
$50,000. All loans are assigned a rating based on creditworthiness and are
periodically monitored for improvement or deterioration.
HIGH RISK LOANS. By extending loans in accordance with the principals
outlined above, the Bank does not believe that it makes higher risk loans. Any
loans considered high risk would not be significant at December 31, 1997.
SUPERVISION AND REGULATION
Banking is a complex, highly regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory agencies and enacted
myriad legislation that governs banks, bank holding companies and the banking
industry. Descriptions of and references to the statutes and regulations below
are brief summaries thereof, do not purport to be complete. The descriptions are
qualified in their entirety by reference to the specific statutes and
regulations discussed.
THE COMPANY
As a bank holding company under the BHC Act, the Company is registered with
and is subject to regulation by the Federal Reserve. Among other things,
applicable statutes and regulations require the Company to file annual and other
reports with and furnish information to the Federal Reserve, which may make
inspections of the Company.
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The BHC Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve for the acquisition of more than five percent
(5%) of the voting stock or substantially all the assets of any bank or bank
holding company. The Company currently does not have any formal agreement to
or commitments with respect to any such transaction. However, the Company
evaluates opportunities to invest in or acquire other banks or bank holding
companies as such opportunities arise and may engage in one or more such
transactions in the future. In addition, the BHC Act restricts the extension
of credit by the Bank to the Company. The BHC Act also provides that, with
certain exceptions, a bank holding company may not (i) engage in any
activities other than those of banking or managing or controlling banks and
other authorized subsidiaries or (ii) own or control more than five percent
(5%) of the voting shares of any company that is not a bank, including any
foreign company. A bank holding company is permitted, however, to acquire
shares of any company, the activities of which the Federal Reserve, after due
notice and opportunity for hearing, has determined to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto. The Federal Reserve has issued regulations setting forth specific
activities that are permissible under that exception. The Company does not
currently have any agreements or commitments to engage in any such nonbanking
activities.
In approving acquisitions by bank holding companies of banks and companies
engaged in banking-related activities, the Federal Reserve considers whether the
performance of any such activity by an affiliate of the holding company can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh such
possible adverse effects as undue consideration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. The
Federal Reserve has cease-and-desist powers over parent holding companies and
nonbanking subsidiaries where their actions would constitute a serious threat to
the safety, soundness or stability of a subsidiary bank. Federal regulatory
agencies also have authority to regulate debt obligations (other than commercial
paper) issued by bank holding companies. That authority includes the power to
impose interest ceilings and reserve requirements on such debt obligations. A
bank holding company and its subsidiaries are also prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit, lease or
sale of property or furnishing of services.
A bank holding company is also permitted to acquire shares of a company
which furnishes or performs services for a bank holding company and to acquire
shares of the kinds and in the amounts eligible for investment by national
banking associations. The Board of Directors of the Company has not at this time
made any plans to make such investments.
Federal banking law provides that a bank holding company may acquire or
establish banks in any state of the United States. In addition, the Texas
banking laws permit a bank holding company which owns stock of a bank located
outside the State of Texas (an "Out-of-State Bank Holding Company") to acquire a
bank or bank holding company located in Texas. Such acquisition may occur only
if the Texas bank to be directly or indirectly controlled by the Out-of-State
Bank Holding Company has existed and continuously operated as a bank for a
period of at least five (5) years. In any event, however, a bank holding company
may not own or control banks in Texas the deposits of which would exceed twenty
percent (20%) of the total deposits of all federally-insured deposits in Texas.
The Board of Directors of the Company has not at this time made any plans to
acquire or establish banks in any state other than Texas.
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THE BANK
The Bank is subject to various requirements and restrictions under the laws
of the United States and the State of Texas, and to regulation, supervision and
regular examination by the Comptroller. The Bank is subject to the power of the
Comptroller to enforce compliance with applicable banking statutes and
regulations. Such requirements and restrictions include requirements to maintain
reserves against deposits, restrictions on the nature and amount of loans may be
made and the interest that may be charged thereon and restrictions relating to
investments and other activities of the Bank.
DIVIDENDS. The Bank may generally pay dividends on its stock so long as
payment of such dividends is in compliance with applicable law and regulation. A
national bank may not pay dividends from its stated capital. Additionally, if
losses have been sustained at any time by a national bank equal to or exceeding
its undivided profits then on hand, no dividend can be paid by the bank, and all
dividends must be paid out of net profits then on hand, after deducting
expenses, including losses and provisions for loan losses. The payment of
dividends out of net profits of a national bank is further limited by a
provision of the National Bank Act that prohibits a national bank from declaring
a dividend on its shares of its stock until ten percent of the bank's net
profits are transferred to surplus each time dividends are declared, unless such
a transfer would increase the surplus of the bank to an amount greater than the
bank's capital. In addition, the prior approval of the Comptroller is required
if the total of all dividends declared by a national bank in any calendar year
exceeds the total of its net profits for that year combined with its net profits
for the two preceding years, less any required transfers to surplus or to funds
for the retirement of any preferred stock. Additionally, under the provisions of
12 U.S. C. Sections 1818, the Comptroller has the right to prohibit the payment
of dividends by a national bank where such payment is deemed to be an unsafe and
unsound banking practice.
TRANSACTIONS WITH AFFILIATES. Among the federal legislation applicable to
the Bank, the Federal Reserve Act, as amended by the Competitive Equality
Banking Act of 1987, prohibits the Bank from engaging in specified transactions
(including, for example, loans) with certain affiliates unless the terms and
conditions of such transactions are substantially the same or at least as
favorable to such banks, as those prevailing at the time for comparable
transactions with or involving other non-affiliated entities. In the absence of
such comparable transactions, any transaction between a bank and its affiliates
must be on terms and under circumstances, including credit standards, that in
good faith would be offered or would apply to non-affiliated companies. In
addition, certain transactions, referred to as "covered transactions," between
the Bank and its affiliates may not exceed ten percent of the Bank's capital,
and surplus per affiliate and an aggregate of twenty percent of its capital and
surplus for covered transactions with all affiliates. Certain transactions with
affiliates, such as loans, also must be secured by collateral of specific types
and amounts. Finally, the Bank is prohibited from purchasing low quality assets
from an affiliate. The Company is an affiliate of the Bank.
LOANS TO INSIDERS. Federal law also constrains the types and amounts of
loans that any bank may make to its respective executive officers, directors and
principal shareholders. Among other things, such loans must be approved by the
Bank's Board of Directors in advance and must be on terms and conditions as
favorable to the Bank as those available to unrelated persons.
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REGULATION OF LENDING ACTIVITIES. Loans made by the Bank are also subject
to numerous federal and state laws and regulations, including truth-in-lending
statutes, the Federal Consumer Credit Protection Act, the Texas Consumer Credit
Code, Texas Consumer Protection Code, the Equal Credit Opportunity Act, the Real
Estate Settlement Procedures Act and adjustable rate mortgage disclosure
requirements. Remedies to the borrower and penalties to the Bank are provided
for failure of the Bank to comply with such laws and regulations. The scope and
requirements of such laws and regulations have expanded significantly in recent
years.
BRANCH BANKING. Pursuant to the Texas Finance Code, all banks located in
the State of Texas are authorized to branch statewide. Accordingly, a bank
located anywhere in Texas has the ability, subject to regulatory approval, to
establish branch facilities near any of the Bank's facilities and within its
market areas. If other banks were to establish branch facilities near the Bank
or any of its facilities, it is uncertain whether such branch facilities would
have a materially adverse effect on the business of the Bank.
In addition, in 1994 Congress adopted the Reigle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the "Reigle Act"). That statute provides
for nationwide interstate banking and branching. During 1995, the Texas
legislature elected to opt out of the branching provisions under the Reigle Act,
which had the effect of prohibiting banks located in states other than Texas
from branching across the Texas border. Similarly, banks located in Texas were
generally prohibited from opening branches outside of Texas. The Texas
legislature's unanimous decision to opt out of the interstate branching
provisions of the Reigle Act was originally intended to be effective until 1999
when the issue will be revisited in the 1999 session.
The decision to opt out of interstate branching, however, did not and does
not affect the ability of an out-of-state bank holding company to directly or
indirectly acquire a separately chartered bank located in Texas. Currently, a
number of out-of-state bank holding companies operate in markets served by the
Bank. The Bank considers its principal market area to be the Panhandle of North
Texas, and management currently does not have any plans to establish a branch
network beyond the borders of Texas. Accordingly, the effect of the Texas
legislature's decision to opt out of the branching provisions of the Reigle Act
has not had a material effect on the competitive position of the Bank or the
Company.
In light of recent developments in a lawsuit in Federal district court
involving NationsBank Corporation's successful attempt to branch across the
borders of Texas, the Commissioner of the Texas Banking Department issued a
press release on May 13, 1998 announcing that the Texas Department of Banking
will begin accepting applications regarding interstate merger and interstate
branching transactions for all state-chartered institutions. The
Commissioner's recent decision is designed to afford competitive parity for
state-chartered institutions that compete with federally chartered
institutions (such as national banks) in Texas.
Given that the Bank's primary service area is within the State of Texas, it
is not anticipated that these recent developments will have any material effect
on the business conducted by the Bank or its competitive position in its primary
markets.
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GOVERNMENTAL MONETARY POLICIES. The commercial banking business is
affected not only by general economic conditions but also by the monetary
policies of the Federal Reserve. Changes in the discount rate on member bank
borrowings, control of borrowings, control of borrowings at the "discount
window," open market operations, the imposition of and changes in reserve
requirements against member banks, deposits and assets of foreign branches,
the imposition of and changes in reserve requirements against certain
borrowings by banks and their affiliates, and the placing of limits on
interest rates which member banks may pay on time and savings deposits are
some of the instruments of monetary policy available to the Federal Reserve.
Those monetary policies influence to a significant extent the overall growth
of the bank loans, investments and deposits and the interest rates charged on
loans or paid on time and savings deposits. The nature of future monetary
policies and the effect of such policies on the future business and earnings
of the Bank, therefore, cannot be predicted accurately.
CAPITAL ADEQUACY. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the Comptroller to
establish minimum levels of capital for national banks and to require national
banks to achieve and maintain adequate capital. Pursuant to this authority, the
Comptroller has promulgated capital adequacy regulations to which all national
banks, such as the Bank, are subject.
The Comptroller's capital adequacy regulations are based upon a risk based
capital determination, whereby a bank's capital adequacy is determined in light
of the risk, both on- and off-balance sheet, contained in the bank's assets.
Different categories of assets are assigned risk weightings and, based thereon,
are counted at a percentage (from 0% to 100%) of their book value. The
regulations divide capital between Tier 1 capital, or core capital, and Tier 2
capital, or supplemental capital. Tier I capital consists primarily of common
stock, noncumulative perpetual preferred stock, related surplus and minority
interests in consolidated subsidiaries. Goodwill and certain other intangibles
are excluded from Tier 1 capital. Tier 2 capital consists of varying percentages
of the allowance for loan and lease losses, all other types of preferred stock
not included in Tier 1 capital, hybrid capital instruments and term subordinated
debt. Investments in and loans to unconsolidated banking and finance
subsidiaries that constitute capital of those subsidiaries, are excluded from
capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50.00% of qualifying total
capital.
Every national bank has to maintain a certain ratio of Tier 1 capital to
risk weighted assets (a "Core Capital Ratio") and a ratio of Tier 1 plus Tier 2
capital to risk weighted assets (a "Risk-Based Capital Ratio"). All banks are
required to achieve and maintain a minimum Core Capital Ratio of at least 4.00%
and a minimum Risk-Based Capital Ratio of 8.00%.
As of December 31, 1997, the Bank's Core Capital Ratio was 29.21% and its
Risk-Based Capital Ratio was 30.47%. In addition, national banks are generally
required to achieve and maintain a Leverage Ratio of at least 4.00%. As of
December 31, 1997, the Bank's Leverage Ratio was 28.31%.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in 1989, includes various provisions that affect or may
affect the Bank. Among other things, FIRREA generally permits bank holding
companies to acquire healthy thrifts as well as failed or
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failing thrifts. FIRREA also removed certain cross-marketing prohibitions
previously applicable to thrift and bank subsidiaries of a common holding
company. Furthermore, a multi-bank holding company may now be required to
indemnify the federal deposit insurance fund against losses it incurs with
respect to such company's affiliated banks, which in effect makes a bank
holding company's equity investments in healthy bank subsidiaries available
to the Federal Deposit Insurance Company (the "FDIC") to assist such
company's failing or failed bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has been
chartered less than two years, has undergone a change in control within the last
two years, is not in compliance with the minimum capital requirements of its
primary federal banking regulator, or is otherwise in a troubled condition must
notify its primary federal banking regulator of the proposed addition of any
person to the board of directors or the employment of any person as a senior
executive officer of the institution at least 30 days before such addition or
employment becomes effective. During such 30-day period, the applicable federal
banking regulatory agency may disapprove of the addition of employment of such
director or officer. The Bank is not presently subject to any such requirements.
FIRREA also expands and increases civil and criminal penalties available
for use by the appropriate regulatory agency against certain
"institution-affiliated parties" primarily including (i)management, employees
and agents of a financial institution, as well as (ii) independent contractors
such as attorneys and accountants and others who participate in the conduct of
the financial institution's affairs and who caused or are likely to cause more
than minimum financial loss to or a significant adverse affect on the
institution, who knowingly or recklessly violate a law or regulation, breach a
fiduciary duty or engage in unsafe or unsound practices. Such practices can
include the failure of an institution to timely file required reports or the
submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate
banking agency to issue cease and desist orders that may, among other things,
require affirmative action to correct any harm resulting from a violation or
practice, including restitution, reimbursement, indemnifications or guarantees
against loss. A financial institution may also be ordered to restrict its
growth, dispose of certain assets or take other action as determined by the
ordering agency to be appropriate. As a result, the Comptroller now has greater
enforcement power than it has had since deregulation of the banking industry in
1978.
THE FDIC IMPROVEMENT ACT. The FDIC Improvement Act of 1991, enacted on
December 19, 1991, ("FDICIA") makes a number of reforms addressing the safety
and soundness of the deposit insurance system, supervision of domestic and
foreign depository institutions, and improvement of accounting standards. This
statute also limits deposit insurance coverage, implements changes in consumer
protection laws and calls for least-cost resolution and prompt regulatory action
with regard to troubled institutions.
FDICIA requires every national bank with total assets in excess of
$500,000,000 to have an annual independent audit made of the bank's financial
statements by a certified public accountant to verify that the financial
statements of the bank are presented in accordance with generally accepted
accounting principles and comply with such other disclosure requirements as
prescribed by the Comptroller.
FDICIA also places certain restrictions on activities of banks depending
on their level of capital. FDICIA divides banks into five different
categories, depending on their level of capital.
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Under regulations recently adopted by the Comptroller, a bank is deemed to be
"well capitalized" if it has a total Risk-Based Capital Ratio of 10.00% or
more, a Core Capital Ratio of 6.00% or more and a Leverage Ratio of 5.00% or
more, and the bank is not subject to an order or capital directive to meet
and maintain a certain capital level. Under such regulations, a bank is
deemed to be "adequately capitalized" if it has a total Risk-Based Capital
Ratio of 8.00% or more, a Core Capital Ratio of 4.00% or more and a Leverage
Ratio of 4.00% or more (unless it receives the highest composite rating at
its most recent examination and is not experiencing or anticipating
significant growth, in which instance it must maintain a Leverage Ratio of
3.00% or more). Under such regulations, a bank is deemed to be
"undercapitalized" if it has a total Risk-Based Capital Ratio of less than
8.00%, a Core Capital Ratio of less than 4.00% or a Leverage Ratio of less
than 4.00%. Under such regulations, a bank is deemed to be "significantly
undercapitalized" if it has a Risk- Based Capital Ratio of less than 6.00%, a
Core Capital Ratio of less than 3.00% and a Leverage Ratio of less than
3.00%. Under such regulations, a bank is deemed to be "critically
undercapitalized" if it has a Leverage Ratio of less than or equal to 2.00%.
In addition, the Comptroller has the ability to downgrade a bank's
classification (but not to "critically undercapitalized") based on other
considerations even if the Bank meets the capital guidelines. According to
these guidelines, the Bank was classified as "well capitalized" as of
December 31, 1997.
In addition, if a national bank is classified as undercapitalized, the bank
is required to submit a capital restoration plan to the Comptroller. Pursuant to
FDICIA, an undercapitalized national bank is prohibited from increasing its
assets, engaging in a new line of business, acquiring any interest in any
company or insured depository institution, or opening or acquiring a new branch
office, except under certain circumstances, including the acceptance by the
Comptroller of a capital restoration plan for the bank.
Furthermore, if a national bank is classified as undercapitalized, the
Comptroller may take certain actions to correct the capital position of the
bank; if a bank is classified as significantly undercapitalized or critically
undercapitalized, the Comptroller would be REQUIRED to take one or more
prompt corrective actions. These actions would include, among other things,
requiring: (i) sales of new securities to bolster capital; (ii) improvements
in management; (iii) limits on interest rates paid; (iv) prohibitions on
transactions with affiliates; (v) termination of certain risky activities;
and (vi) restrictions on compensation paid to executive officers. If a
national bank is classified as critically undercapitalized, FDICIA requires
the bank to be placed into conservatorship or receivership within ninety (90)
days, unless the Comptroller and the FDIC concur that other action would
better achieve the purposes of FDICIA regarding prompt corrective action with
respect to undercapitalized banks.
The capital classification of a bank affects the frequency of examinations
of the bank and impacts the ability of the bank to engage in certain activities
and affects the deposit insurance premiums paid by such bank. Under FDICIA, the
Comptroller is required to conduct a full-scope, on-site examination of every
national bank at least once every twelve months. An exception to this rule is
made, however, that provides that national banks (i) with assets of less than
$100,000,000, (ii) are categorized as "well capitalized," (iii) were found to be
well managed and its composite rating was outstanding and (iv) has not been
subject to a change in control during the last twelve months, need only be
examined by the Comptroller once every eighteen months.
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Under FDICIA, banks may be restricted in their ability to accept brokered
deposits, depending on their capital classification. "Well capitalized" banks
are permitted to accept brokered deposits, but all banks that are not well
capitalized are not permitted to accept such deposits. The FDIC may, on a
case-by-case basis, permit banks that are adequately capitalized to accept
brokered deposits if the FDIC determines that acceptance of such deposits would
not constitute an unsafe or unsound banking practice with respect to the bank.
In addition, under FDICIA, the FDIC is authorized to assess insurance
premiums on a bank's deposits at a variable rate depending on the probability
that the deposit insurance fund will incur a loss with respect to the bank.
(Under prior law, the deposit insurance assessment was a flat rate, regardless
of the likelihood of loss.) In this regard, the FDIC has issued regulations for
a transitional risk-based deposit assessment that determines the deposit
insurance assessment rates on the basis of the bank's capital classification and
supervisory evaluations. Each of these categories have three subcategories,
resulting in nine assessment risk classifications. The three subcategories with
respect to capital are "well capitalized," "adequately capitalized" and "less
than adequately capitalized (which would include "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized" banks). The
three subcategories with respect to supervisory concerns are "healthy,"
"supervisory concern" and "substantial supervisory concern." A bank is deemed
"healthy" if it is financially sound with only a few minor weaknesses. A bank is
deemed subject to "supervisory concern" if it has weaknesses that, if not
corrected, could result in significant deterioration of the bank and increased
risk to the Bank Insurance Fund. A bank is deemed subject to "substantial
supervisory concern" if it poses a substantial probability of loss to the Bank
Insurance Fund.
The federal banking agencies have established guidelines, effective August
9, 1995, which prescribe standards for depository institutions relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
management compensation. The agencies may require an institution which fails to
meet the standards set forth in the guidelines to submit a compliance plan. The
agencies are also currently proposing standards for asset quality and earnings.
The Company cannot predict what effect such guidelines will have on the Bank.
DEPOSIT INSURANCE. The Bank's deposits are insured up to $100,000 per
insured account by the Bank Insurance Fund of the FDIC (the "BIF"). As an
institution whose deposits are insured by BIF, the Bank will be required to pay
deposit insurance premiums to BIF in the amount of approximately $17,000 for the
first two quarters of 1998. The Bank's deposit insurance assessments may
increase depending upon the risk category and subcategory, if any, to which the
Bank is assigned by the FDIC. Any increase in insurance assessments could have
an adverse effect on the Bank's earnings.
INTERSTATE BANKING LEGISLATION. The Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994 (the
"Reigle Act"). Such statute provides for nationwide interstate banking, but does
permit each state to make an election as to whether such state will permit
interstate branching. During its 1995 term, the Texas legislature passed
legislation providing that interstate branching would not be permitted in Texas
until at least 1999. A discussion of the interstate branching provisions of the
Reigle Act in the context of the Texas Legislature's decision to opt-out is
provided under the caption "Supervision and Regulation -- Branch Banking".
21
<PAGE>
Interstate banking (e.g., out-of-state holding companies acquiring Texas
financial institutions), however, cannot be prohibited and must be permitted
by all the states, subject to certain permissible state law limitations on
the ages of the banks to be acquired and limitations on the total amount of
deposits within a state that a bank holding company is permitted to control.
Management of the Company and the Bank cannot predict what other
legislation might be enacted or what other regulations might be adopted or the
effects thereof.
THE FOREGOING IS AN ATTEMPT TO SUMMARIZE SOME OF THE RELEVANT LAWS, RULES
AND REGULATIONS GOVERNING NATIONAL BANKS AND BANK HOLDING COMPANIES, BUT DOES
NOT PURPORT TO BE A COMPLETE SUMMARY OF ALL APPLICABLE LAWS, RULES AND
REGULATIONS GOVERNING BANKS AND BANK HOLDING COMPANIES.
ENVIRONMENTAL FACTORS
To date, the Company has not been required to perform any investigation
or clean up activities, nor has it been subject to any environmental claims.
There can be no assurance, however, that this will remain the case in the
future. In the ordinary course of its business, the Company from time to time
forecloses on properties securing loans. There is a risk that the Company
could be required to investigate and clean up hazardous or toxic substances
or chemical releases at such properties after acquisition by the Company, and
could be held liable to a governmental entity or to third parties for
property damage, personal injury, and investigation and cleanup costs
incurred by such parties in connection with the contamination. The costs of
investigation, remediation or removal of such substances may be substantial,
and the presence of such substances, or the failure to properly remediate
such property, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances also may be
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not the facility is owned or
operated by such person. In addition, the owner or former owners of a
contaminated site may be subject to common law claims by third parties based
on damages and costs resulting from environmental contamination emanating
from such property.
In the course of its business, the Company may acquire properties as a
result of foreclosure. There is a risk that hazardous or toxic waste could be
found on such properties. In such event, the Company could be held responsible
for the cost of cleaning up or removing such waste, and such cost could exceed
the value of the underlying properties.
EMPLOYEES
The Company is a bank holding company and primarily conducts its operations
through its subsidiary, the Bank. The Company has no paid employees. Certain
Bank employees and directors conduct the Company's business, but are not
specifically compensated as Company employees. As of March 6, 1998, the Bank had
69 full-time employees and 9 part-time employees. Employees are provided with
employee benefits, such as life and health insurance plans. The Bank's employees
are
22
<PAGE>
not represented by any collective bargaining group. The Bank considers its
relations with such employees to be good.
DEPENDENCE ON KEY PERSONNEL
The Company's and the Bank's growth and development since completion of the
Acquisition on May 23, 1997 has been largely dependent upon the services of
Donald E. Powell, Chairman of the Board, President and Chief Executive Officer.
The loss of Mr. Powell's services for any reason could have a material adverse
effect on the Company and the Bank.
23
<PAGE>
ITEM 2. FINANCIAL INFORMATION
SELECTED FINANCIAL DATA
The following table sets forth consolidated selected financial data
regarding the results of operations and financial condition of the Company
for the periods and at the dates indicated. Amounts are in thousands, except
for weighted average shares outstanding and pre-share data. The following
financial data is qualified by, and should be read in conjunction with, the
separate financial statements, reports, and other financial information
included elsewhere in this document. Certain consolidated financial data as
of and for the years ended 1997, 1996 and 1995 are based on and derived from
audited financial statements contained elsewhere in this document. Share data
has been adjusted to reflect the 77.4372-for-1 stock dividend effected as of
July 2, 1997.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest income $ 4,020 $ 1,146 $ 1,133 $ 994 $ 1,041
Interest expense 1,260 515 494 408 437
Net interest income 2,760 631 639 586 604
Provision for loan losses 2,700 97 (80) (70) (55)
Noninterest income 162 118 136 101 103
Noninterest expense 2,242 606 546 581 553
Income (loss) before income taxes (2,021) 46 309 176 209
Income taxes (benefit) (39) 7 103 53 66
Net income (loss) (1,981) 39 206 123 143
PER SHARE DATA
Net income (loss) (0.41) 0.20 1.05 0.63 0.20
Book value at end of period 2.84 2.91 2.85 2.40 2.29
Average common shares outstanding 4,824,792 712,035 712,035 712,035 712,035
BALANCE SHEET DATA (END OF PERIOD)
Total assets 144,740 18,212 18,502 17,903 18,560
Investment securities 5,085 10,303 13,308 13,207 12,509
Loans outstanding 117,102 1,464 1,859 1,418 1,495
Allowance for loan losses (2,748) (45) (22) (38) (55)
Total deposits 106,255 16,067 16,381 16,112 16,861
Stockholders' equity 37,853 2,068 2,031 1,709 1,633
SELECTED PERFORMANCE RATIOS
Return on average assets (3.57)% 0.21% 1.11% 0.68% 0.77%
Return on average equity (15.13)% 1.90% 10.86% 7.40% 8.76%
Net interest margin 5.54% 3.66% 3.72% 3.47% 3.28%
ASSET QUALITY RATIOS
Nonperforming loans to gross loans 0.00% 4.78% 0.00% 0.00% 0.00%
Nonperforming assets to stockholders'
equity 0.00% 3.38% 0.00% 0.00% 0.00%
Net charge-offs to average loans 0.00% 4.30% (4.37)% (3.67)% (4.01)%
Allowance to end-of-period loans 2.29% 3.07% 1.21% 2.65% 3.68%
Allowance to end-of-period
nonperforming loans N/A 64.53% N/A N/A N/A
24
<PAGE>
<S> <C> <C> <C> <C> <C>
LIQUIDITY AND CAPITAL RATIOS
(END OF PERIOD)
Loans to deposits 110.21% 9.11% 11.35% 8.80% 8.87%
Equity to assets 26.15% 11.36% 10.98% 9.55% 9.09%
Leverage capital ratio 26.15% 11.36% 10.98% 9.55% 8.80%
</TABLE>
The Bank's growth in loans and deposits during 1997 is primarily
attributable the Bank's relocation of its main office from Fritch, Texas, to
the larger Amarillo, Texas banking market, which is a more economically
vibrant banking market than Fritch, Texas. In addition, deposit and loan
growth can be attributable to the new management team, which has emphasized
growth from the Bank's existing client base and capitalizing opportunities
from its target market (e.g., customers of competing financial institutions),
and the delivery of personalized banking services to the Bank's customers. In
addition, the Bank's loan growth is attributable to the Bank's aggressive
commercial lending program and its virtual re-emergence into agricultural and
real estate lending and strong emphasis on the commercial loan market. See
"BUSINESS -- Change in Management and Competitive Focus" for additional
information regarding the various factors attributable to the Bank's recent
growth.
Growth in total assets during 1997 is primarily attributable to the
increase in the Bank's loan portfolio, which was supported by a significant
capital infusion following completion of a stock offering by the Company
during 1997. See Item 10 to this Registration Statement on Form 10 for
additional information regarding the stock offering.
The increase in interest income attributable to the larger loan
portfolio and the slight increase in noninterest income was offset by
increases in interest expense and noninterest expense coupled with a larger
provision for loan losses, which increase in the provision was deemed
necessary by management in light of the significant increase in the Bank's
loan portfolio. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Provision and Allowance for Loan
Losses" for additional information regarding the increased provision for loan
losses.
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 operations. This section should
be read in conjunction with the Company's consolidated financial statements
and accompanying notes and other detailed financial information included
herein.
GENERAL
The Company is a one-bank holding company that commenced operations on
December 31, 1983. The Bank, the Company's only subsidiary, originally began
operations as Fritch State Bank on April 10, 1965.
Ownership of the Bank constitutes the major activity of the Company.
Activities of the Company are limited and are set forth in Note 11 of the
notes to the Consolidated Financial
25
<PAGE>
Statements of the Company included with this Registration Statement on Form
10. Accordingly, unless specifically noted herein, the activities of the
Company as described in this Management's Discussion and Analysis of
Operations are virtually indistinguishable from those activities of the Bank.
As more fully discussed in Item 1 to this Registration Statement on Form
10 under the caption "General", composition of the management team of each of
the Company and the Bank changed significantly in 1997, and the new
management team significantly changed the geographic, product and service
focus of the Bank. Prior management of the Bank generally limited loans to
selected commercial and consumer installment loans, which loans comprised
less than 10% of average assets. Limited real estate lending was performed,
and agricultural loans were made only on a exception basis. During 1997,
however, the new management team changed the lending philosophy of the Bank
to a more traditional commercial banking activity. Accordingly, loans at
year-end 1997 represented approximately 62% of average total assets, as
compared to approximately 9% at December 31, 1996.
The new management team's philosophy in growing the loan portfolio was
to hire experienced loan officers (nine such loan officers were hired in
1997), primarily from one large competing financial institution in the
Amarillo market, and for those loan officers to aggressively grow the Bank's
lending customers base. Although management aggressively sought new
customers, it was, and continues to be, selective in deciding which loan
customers to pursue so as to operate in a safe and sound manner in accordance
with the Bank's loan policy. Accordingly, management believes that the Bank's
loan portfolio growth has been achieved without relaxing credit underwriting
policies. A discussion of the Bank's loan policy, including a discussion of
underwriting standards, is discussed at length in Item 1 "BUSINESS -- Loan
Policies and Underwriting Practices" to this Registration Statement on Form
10.
Deposit growth was significant during 1997 and was primarily fueled by
the addition of customers gained through the process mentioned above, and by
the Bank's ability to attract deposits because of the reputation of the
management team and the name recognition of "The First National Bank of
Amarillo" in the Bank's market. The Bank does not offer above market rates on
its deposits and has no "brokered" deposits.
FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
Net income for the first three months of 1998 increased to $611,946, or
$.05 per share, from $27,563, or $.04 per share during the same period in
1997. The earnings improvement for the three-month period in 1998 as compared
to 1997 reflected significantly higher net interest income and higher
noninterest income, offset in part by an increased provision for loan losses
and higher noninterest expense.
Net interest income for the three months ended March 31, 1998 increased
by $1,967,640 to $2,114,033 as compared to $146,393 for the first three
months of 1997. This increase is due to significant growth in average earning
assets, partially offset by a decrease in the net interest margin.
Average earning assets increased $122,793,177 (709.9%) for the first
three months of 1998 as compared to the same period in 1997 primarily due to
strong loan growth as further discussed herein. The net interest margin for
the three months ended March 31, 1998 was 6.12% as compared
26
<PAGE>
to 3.43% for the same period last year. This increase reflected a significant
increase in proportion of higher yielding loans to total earning assets
(90.9% in 1998 compared to 8.1% in 1997).
Other operating income increased $75,297 to $102,061 for the first three
months of 1998 as compared to $26,764 for the same period in 1997. This
increase is primarily due to growth in service charges.
Noninterest expense increased $1,130,434 for the three months of 1998 as
compared to the same period in 1997. Staff expense increased by $516,663 and
supplies, stationery and other expense increased by $213,437 as compared to
the first three months of 1997 due to the hiring of additional personnel and
the opening of four new locations. Increases in other expense categories
included higher levels of depreciation, advertising, occupancy and other.
The provision for loan losses totaled $225,000 for the three months of
1998. No provision for loan losses was made during the same period in 1997.
For the three months ended March 31, 1998, loan charge-offs were $4,189 as
compared to $2,189 for the same period in 1997.
At March 31, 1998, total assets were $175,396,526 compared with
$144,740,087 at December 31, 1997. At March 31, 1998, loans totaled
$133,972,180, an increase of 14.4% over the amount at December 31, 1997. Loan
growth was primarily due to implementation of an aggressive business plan as
further discussed under "Business - Change in Management and Competitive
Focus." Loan growth was funded primarily by growth in core deposits.
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, January 1 $ 2,748,418 $ 45,200
Provision charged to operations 225,000 --
Loans charged off (4,189) (2,189)
Recoveries on loans previously charged off 14,733 1,662
----------- --------
BALANCE, MARCH 31 $ 2,983,962 $ 44,673
----------- --------
----------- --------
AT END OF PERIOD:
Loan reserve as % of net loans 2.18% 2.26%
</TABLE>
Nonperforming assets were not significant at March 31, 1998 or 1997.
27
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997
---- ----
<S> <C> <C>
PER COMMON SHARE DATA:
Net income $ 0.05 $ 0.04
Cash dividends paid -- --
SELECTED FINANCIAL RATIOS:
Return on average assets 1.62% .59%
Return on average equity 6.51% 5.40%
Net interest margin 6.12% 3.43%
Equity to assets 21.92% 10.87%
</TABLE>
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
RESULTS OF OPERATIONS
The Company experienced a net loss was $1,981,415 for the year ended
December 31, 1997 as compared to earnings of $38,847 and $205,656 for the
years ended December 31, 1996 and 1995, respectively. Earnings for 1997, 1996
and 1995 were significantly influenced by activity in the allowance for loan
losses, as discussed below. The return on average assets for 1997, 1996 and
1995 was (3.57)%, 0.21% and 1.11%, respectively, and return on average equity
was (15.13)%, 1.90% and 10.86%, respectively.
The decline in return on average assets and average equity from 1996 to
1997 is primarily attributable to an increased loan loss provision which is
more fully discussed under the caption "Other Operating Income and Expense"
to this Section on page 28. The provision for loan losses in 1996 was
approximately $97,000 in comparison to the 1997 provision of $2,700,000. The
larger provision in 1997 was made in connection with the substantial growth
in the loan portfolio of approximately $115 million (representing an increase
of 8,154% over the prior year). With the aforementioned growth in loans in
1997, management believed that the allowance for loan losses should grow
also. Accordingly, management made a subjective determination of the
allowance based on their banking experience and knowledge, comparison to
other peers, and an intentional effort to be conservative. Management expects
that appropriate, additional future provisions will be made as the loan
portfolio grows.
NET INTEREST INCOME
The largest component of operating income is net interest income, which
is the difference between the income earned on assets and interest paid on
deposits. Net interest income is determined by the rates earned on the
Company's interest-earning assets and the rates paid on its interest-bearing
liabilities, the relative amounts of interest-earning assets and
interest-bearing liabilities, and the degree of mismatch and the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
28
<PAGE>
During the years ended December 31, 1997, 1996 and 1995 net interest
income was $2,759,399, $630,340 and $638,720, respectively. The increase in
net interest income from 1996 to 1997 of $2,129,059 (337.8%) is primarily due
to an increase in average interest-earning assets of approximately
$33,651,000, net of an increase in average interest-bearing liabilities of
approximately $16,715,000. The decrease in net interest income from 1995 to
1996 of $8,380 (1.3%) is primarily attributable to a slight decrease in the
net interest spread, the difference between the yield on earning assets and
the rate paid on interest-bearing liabilities, from 3.01% in 1995 to 2.93% in
1996.
The following table sets forth the average consolidated balance sheets
of the Company and subsidiary for the past three years along with an analysis
of net interest earnings for each major category of interest-earning assets
and interest-bearing liabilities, the average yield or rate paid on each
category and net yield on interest-earning assets:
29
<PAGE>
<TABLE>
<CAPTION>
1997 1996
------ ------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE (1) INTEREST RATE BALANCE (1) INTEREST RATE
------------ -------- ---- ----------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans
Commercial and agricultural $17,995,796 $1,402,875 7.80% $ 800,393 $ 65,589 8.19%
Real estate - mortgage 9,802,883 967,649 9.87% 210,570 22,646 10.75%
Installment loans to
individuals 6,571,260 653,917 9.95% 637,431 65,102 10.21%
------------ ----------- ----------- ---------
Total loans 34,369,939 3,024,441 8.80% 1,648,394 153,337 9.30%
Securities
Taxable 8,284,534 547,719 6.61% 13,008,396 856,281 6.58%
Nontaxable (2) - - 0.00% 100,000 13,333 13.33%
Federal funds sold and
other interest-earning assets 8,149,589 447,378 5.49% 2,396,721 127,364 5.31%
------------ ---------- ----------- ---------
Total interest-earning assets 50,804,062 4,019,538 7.91% 17,153,511 1,150,315 6.71%
NONINTEREST-EARNING ASSETS
Cash and due from banks 4,718,760 1,208,987
Other assets 714,565 369,056
Less: allowance for loan losses (706,649) (43,663)
------------ -----------
Total $55,530,738 $18,687,891
------------ -----------
------------ -----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 7,244,335 $192,816 2.66% $4,857,209 $132,199 2.72%
Money market deposits 5,005,414 160,530 3.21% 978,617 29,250 2.99%
Other savings deposits 1,282,500 35,507 2.77% 1,101,010 30,085 2.73%
Time deposits 16,808,512 871,286 5.18% 6,689,379 323,908 4.84%
------------ -------- ---------- --------
Total interest-bearing
liabilities 30,340,761 1,260,139 4.15% 13,626,215 515,442 3.78%
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits $11,894,019 $ 2,903,235
Other 195,956 109,523
Stockholders' equity 13,100,002 2,048,918
----------- -----------
Total $55,530,738 $18,687,891
----------- -----------
----------- -----------
Net interest income
$2,759,399 $634,873
----------
----------
Net yield on earning assets 5.43% 3.70%
------
------
Tax equivalent adjustment (2) $ - $ 4,533
<CAPTION>
1995
------
AVERAGE AVERAGE AVERAGE
BALANCE (1) INTEREST RATE
------------ -------- ----
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans
Commercial and agricultural $ 311,284 $ 29,403 9.45%
Real estate - mortgage 360,860 36,164 10.02%
Installment loans to
individuals 750,389 70,478 9.39%
------------ --------- ------
Total loans 1,422,533 136,045 9.56%
Securities
Taxable 13,054,399 839,907 6.43%
Nontaxable (2) 135,625 17,475 12.89%
Federal funds sold and other
interest-earning assets 2,502,466 145,275 5.81%
------------ --------- ------
Total interest-earning assets 17,115,023 1,138,702 6.65%
NONINTEREST-EARNING ASSETS
Cash and due from banks 1,101,113
Other assets 429,903
Less: allowance for loan losses (35,573)
------------
Total $18,610,466
-----------
-----------
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $4,936,488 $132,966 2.69%
Money market deposits 959,928 28,768 3.00%
Other savings deposits 1,167,087 31,509 2.70%
Time deposits 6,515,883 300,797 4.62%
------------ --------- ------
Total interest-bearing
liabilities 13,579,386 494,040 3.64%
NONINTEREST-BEARING
LIABILITIES AND STOCKHOLDERS'
EQUITY
Demand deposits $ 3,068,411
Other 69,203
Stockholders' equity 1,893,466
------------
Total $18,610,466
------------
------------
Net interest income
$644,662
----------
----------
Net yield on earning assets 3.77%
-----
-----
Tax equivalent adjustment (2) $ 5,942
</TABLE>
- ----------------------------
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
(2) Taxable equivalent adjustment is computed using a 34% tax rate.
30
<PAGE>
The following table sets forth for the period indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
--------------------------------------------- --------------------------------------
VOLUME RATE NET VOLUME RATE NET
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans
Commercial and agricultural $ 1,409,085 $ (71,799) $ 1,337,286 $ 46,200 $ (10,014) $ 36,186
Real estate - mortgage 1,031,620 (86,617) 945,003 (15,061) 1,543 (13,518)
Installment loans to individuals 606,033 (17,218) 588,815 (11,023) 5,647 (5,376)
-------------- ------------- -------------- ---------- ------------ ----------
Total 3,046,738 (175,634) 2,871,104 20,116 (2,824) 17,292
Securities
Taxable (310,949) 2,387 (308,562) (3,525) 19,899 16,374
Nontaxable (13,333) - (13,333) (3,030) 297 (2,733)
Federal funds sold and
other interest-earning assets 305,712 14,302 320,014 (6,181) (11,730) (17,911)
-------------- ------------- -------------- ---------- ------------ ----------
Total interest-earning assets 3,028,168 (158,945) 2,869,223 7,380 5,642 13,022
INTEREST-PAID ON
Deposits
Interest-bearing demand 64,971 (4,354) 60,617 $ (2,135) $ 1,368 $ (767)
Money market deposits 120,357 10,923 131,280 560 (78) 482
Other savings deposits 4,959 463 5,422 (1,784) 360 (1,424)
Time deposits 489,981 57,397 547,378 8,009 15,102 23,111
-------------- ------------- -------------- ---------- ------------ ----------
Total interest-bearing liabilities 680,268 64,429 744,697 4,650 16,752 21,402
-------------- ------------- -------------- ---------- ------------ ----------
Net interest income $ 2,347,900 $ (223,374) $ 2,124,526 $ 2,730 $ (11,110) $ (8,380)
-------------- ------------- -------------- ---------- ------------ ----------
-------------- ------------- -------------- ---------- ------------ ----------
</TABLE>
The change in interest due to volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
OTHER OPERATING INCOME AND EXPENSE
OTHER OPERATING INCOME. Other operating income for 1997 increased by
$43,605 (37.0%) because of increased activity on deposit accounts. Other
operating income for 1996 decreased $18,685 (13.7%) compared to 1995. Certain
subsequent recoveries on bonds that were written down by approximately $39,000
occurred during 1995.
OTHER OPERATING EXPENSES. During 1997, other operating expenses increased
by $1,636,055 (270.2%). The increase in operating expenses was primarily
attributable to the overall growth of the Company, including an increase of 45
full-time equivalent employees from 1996 to 1997 (which accounted for
approximately $690,000 of the increase in operating expenses), increases in
costs to conduct banking operations (which accounted for approximately $670,000
of the increase in operating expenses) and expenses related to the Bank's change
in domicile and charter (which accounted for approximately $275,000 of the
increase in operating expenses). During 1996, other operating expenses increased
$59,151 (10.8%) over 1995. The increase was primarily attributable to additional
compensation of approximately $57,000 related to the transfer of an insurance
policy to the Bank's president.
SECURITIES PORTFOLIO
The objective of the Company in its management of the investment portfolio
is to maintain a portfolio of high quality, relatively liquid investments with
competitive returns. During 1997, the
31
<PAGE>
weighted average yield on taxable securities was 6.61% as compared to 6.58%
during 1996. The Company primarily invests in U.S. Treasury securities and
other U.S. government agency obligations and mortgage-backed securities.
The carrying values of the major classifications of securities were as
follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------------------------------- ----------------------------------------------
1997 1996 1995 1997 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and
corporations $ 2,427,674 $ 306,340 $ 1,319,962 $ - $ 6,940,511 $ 8,149,609
Mortgage-backed securities 2,546,770 1,600,986 1,879,626 - 1,327,785 1,659,888
States and political subdivisions 36,585 - - 77,453 249,259
Other securities 73,875 49,875 49,875 - - -
-------------- ------------- ------------- ------------- -------------- --------------
Total $ 5,084,904 $ 1,957,201 $ 3,249,463 $ - $ 8,345,749 $ 10,058,756
-------------- ------------- ------------- ------------- -------------- --------------
-------------- ------------- ------------- ------------- -------------- --------------
</TABLE>
The following table sets forth the stated maturities of securities at
December 31, 1997, and the weighted average yields of such securities
(calculated on the basis of the cost and effective yield weighted for the
scheduled maturity of each security). Mortgage-backed securities (MBS) are
reported at their estimated average life.
<TABLE>
<CAPTION>
MATURING MATURING AFTER ONE MATURING AFTER FIVE MATURING
WITHIN ONE YEAR BUT WITHIN FIVE YEARS BUT WITHIN TEN YEARS OVER TEN YEARS
----------------------- ----------------------- ---------------------- ---------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U.S. Treasury and other U.S.
government agencies and
corporations and MBS $ 2,201,555 6.12% $ 1,023,146 7.01% $ 1,446,170 6.80% $ 303,573 6.98%
States and political
subdivisions 36,585 5.68% - 0.00% - 0.00% - 0.00%
Other securities (1) - 0.00% - 0.00% - 0.00% 73,875 6.00%
---------- ----------- ------------ ----------
Total $ 2,238,140 6.11% $ 1,023,146 7.01% $ 1,446,170 6.80% $ 377,448 6.78%
---------- ----------- ------------ ----------
---------- ----------- ------------ ----------
</TABLE>
- ------------------
(1) Security does not have a maturity date and is included in over ten years
column.
LOAN PORTFOLIO
During 1997, total loans increased by approximately $118,450,000 from
$1,544,990 at December 31, 1996 to $119,995,205 at December 31, 1997. For the
years 1993 through 1996, total loans were in the range of $1.5 to $1.9
million. At December 31, 1997 and 1996, net loans accounted for 80.9% and
7.8%, respectively, of total assets. The growth in the loan portfolio during
1997 was primarily attributable to previously discussed change of ownership
of the Company and the Bank, the change in management following completion of
the Acquisition and, as a result of such management change, the Bank's
renewed emphasis in lending as an important function of the Bank and
recognition of the importance of loans in the overall asset mix of the Bank.
Prior management of the Bank generally limited loans to selected commercial
and consumer installment loans, which portfolio of loans comprised less than 10%
of total average assets. The Bank conducted limited real estate lending, due
primarily to the stagnant economy in the Bank's primary market, and agricultural
loans were made only on a exceptional basis. During 1997, however, the Bank
relocated to the larger and more economically viable Amarillo market, and new
management
32
<PAGE>
changed the Bank's lending philosophy to be more closely resemble a
traditional commercial banking business. In order to accomplish its goal of
growing the Bank's loan portfolio, management hired nine experienced loan
officers in 1997, primarily from one competing financial institution in
Amarillo. These loan officers were successful in generating new business from
existing customers of the Bank as well as generating new customer
relationships for the Bank. As a result, at December 31, 1997, loans
represented approximately 62% of total average assets, as compared to less
than 10% of total average assets at December 31, 1996. Although taking an
aggressive posture in growing the loan portfolio, management was careful to
build a portfolio consistent with the underwriting parameters set forth in
the Bank's loan policy. Accordingly, management believes that the significant
growth in the Bank's loan portfolio during 1997 has been achieved without
relaxing credit underwriting policies.
Growth in the loan portfolio, as discussed above, also resulted in a
significant change in the portfolio mix. The loan portfolio in 1996 consisted
primarily of commercial loans (representing approximately 36% of total loans)
and installment loans (representing approximately 53% of total loans). With the
change in philosophy as described above, agribusiness and real estate lending
activity increased from 0% and 11% of the loan portfolio, respectively, at
December 31, 1996, to approximately 13% and 29% of total loans, respectively, at
December 31, 1997. The mix of commercial loans remained relatively stable as a
percent of the loan portfolio during the period from December 31, 1996 to
December 31, 1997. Even though the total amount of installment loans increased
by $23,536,709 from $822,872 at December 31, 1996 to $24,359,581 at December 31,
1997, the mix of installment loans in the loan portfolio declined from
approximately 53% at December 31, 1996 to approximately 20% of total loans at
December 31, 1997, as a result of increased activity in other components to the
portfolio described above.
The amount of loans outstanding at the indicated dates are shown in the
following table according to type of loans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------- ------------------------------------------- ---------------------- ---------------
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 45,901,834 38% $ 53,641 36% $ 480,177 25% $ 298,018 20% $ 346,875 23%
Agriculture 15,381,803 13 -- -- 575,000 30 -- -- -- --
Real Estate
Commercial 16,282,655 14 54,321 4 124,772 6 105,373 7 76,675 5
1-4 single family 18,069,332 15 114,156 7 139,453 7 352,634 24 313,583 21
Installment loans to
individuals 24,359,581 20 822,872 53 611,210 32 711,905 49 799,790 51
------------ --- ---------- --- ---------- --- ---------- --- ---------- ---
Total $119,995,205 100% $1,544,990 100% $1,930,612 100% $1,467,930 100% $1,536,922 100%
------------ --- ---------- --- ---------- --- ---------- --- ---------- ---
------------ --- ---------- --- ---------- --- ---------- --- ---------- ---
</TABLE>
33
<PAGE>
The following table shows the maturity analysis of loans outstanding as
of December 31, 1997. Also provided are the amounts due after one year
classified according to the sensitivity to changes in interest rates:
<TABLE>
<CAPTION>
MATURING AFTER
MATURING WITHIN ONE BUT MATURING AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS
--------------- ----------------- --------------
<S> <C> <C> <C>
Loans:
Individuals $14,455,932 $ 5,756,545 $ 4,002,581
Commercial 31,775,802 11,855,694 2,270,339
Real Estate 10,621,945 13,057,928 10,816,635
Agricultural 14,066,971 1,269,835 44,997
--------------- ----------------- --------------
Total $70,920,650 $31,940,003 $17,134,552
--------------- ----------------- --------------
--------------- ----------------- --------------
</TABLE>
<TABLE>
<CAPTION>
MATURING AFTER
MATURING WITHIN ONE BUT MATURING AFTER
ONE YEAR WITHIN FIVE YEARS FIVE YEARS
--------------- ----------------- --------------
<S> <C> <C> <C>
Loans with:
Predetermined interest rates $14,341,052 $15,902,283 $10,711,575
Floating or adjustable interest
rates 56,579,598 16,037,720 6,422,977
--------------- ----------------- --------------
Total $70,920,650 $31,940,003 $17,134,552
--------------- ----------------- --------------
--------------- ----------------- --------------
</TABLE>
The Bank has no specific policies regarding "rollover" of short-term loans
in its portfolio. Although some loans are expected to be renewed at maturity,
the Bank evaluates each maturing loan on a case-by-case basis to determine
whether the loan should be renewed or whether the borrower should be requested
to pay-off the loan at maturity. The Bank is unable to reasonably estimate the
dollar amount of loans maturing during 1998 which may be ultimately be renewed.
34
<PAGE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The following table summarizes the Bank's loan loss experience for each of
the last five years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE OF ALLOWANCE FOR LOAN
LOSSES AT THE BEGINNING OF YEAR $ 45,200 $ 22,574 $ 36,605 $ 55,381 $ 50,325
CHARGE-OFFS
Commercial - 3,826 1,000 - -
Real estate construction - - - 24 -
Real estate mortgage - - - - -
Installment 5,144 - 6,816 2,688 5,593
Agricultural - 79,001 - - -
---------- -------- -------- -------- ----------
Total loan charge-offs 5,144 82,827 7,816 2,712 5,593
---------- -------- -------- -------- ----------
RECOVERIES
Commercial $ 7,906 $ 396 $ 71,062 $ 25,507 $ 50,924
Real estate construction - - - 28,000 3,500
Real estate mortgage - - -
Installment 456 8,054 1,686 1,429 11,225
---------- -------- -------- -------- ----------
Total loan recoveries 8,362 8,450 72,748 54,936 65,649
---------- -------- -------- -------- ----------
NET RECOVERIES (CHARGE-OFFS) 3,218 (74,377) 64,932 55,224 60,056
PROVISION CHARGED (CREDITED)
TO OPERATIONS 2,700,000 97,003 (79,963) (70,000) (55,000)
---------- -------- -------- -------- ----------
BALANCE AT END OF YEAR $2,748,418 $ 45,200 $ 22,574 $ 37,605 $ 55,381
---------- -------- -------- -------- ----------
---------- -------- -------- -------- ----------
RATIO OF NET CHARGE-OFFS DURING
THE PERIOD TO AVERAGE LOANS -
OUTSTANDING DURING THE PERIOD 0.00% 4.30% 4.37% 3.49% 3.79%
---------- -------- -------- -------- ----------
---------- -------- -------- -------- ----------
</TABLE>
Risk elements include accruing loans past due ninety days or more,
nonaccrual loans, and loans which have been restructured to provide a reduction
or deferral of interest or principal for reasons related to the debtors
financial difficulties, potential problem loans and loan concentrations.
35
<PAGE>
The following table summarizes the Bank's nonaccrual, past due and
restructured loans for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LOANS ACCOUNTED FOR ON A
NONACCRUAL BASIS
Commercial $ - $ - $ - $ - $ -
Real estate construction - - - - -
Real estate mortgage - - - - -
Installment - - - - -
Agricultural - - - - -
---------- ---------- ---------- ---------- ----------
Total $ - $ - $ - $ - $ -
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
ACCRUING LOANS WHICH ARE PAST DUE
90 DAYS OR MORE
Commercial $ - $ - $ - $ - $ -
Real estate construction - - - - -
Real estate mortgage - 63,864 - - -
Installment - 6,178 - - -
Agricultural - - - - -
---------- ---------- ---------- ---------- ----------
Total $ - $ 70,042 $ - $ - $ -
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
At December 31, 1997, the Bank had no foreign loans outstanding and no loan
concentrations, except for those indicated in the first table under "Loan
Portfolio," exceeding 10 percent of total loans.
Management believes all material restructured loans have been identified
based upon the Bank's loan data system and management's awareness of the loan
files and customer contact.
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional increases in the loan-loss allowance will not
be required. Activity in the allowance for loan losses for 1997, 1996 and 1995
had a significant impact on earnings.
Additions to the allowance for loan losses, which are recorded as the
provision for loan losses on the Company's statements of earning, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. The amount of
the provision is a function of the level of loans outstanding, the level of
nonperforming loans, historical loan-loss experience, the amount of loan losses
actually charged off or recovered during a given period, and current and
anticipated economic conditions. The Company believes that it is conservative in
the identification and charge off of problems and in certain instances, the
Company has received recoveries on loans that were previously charged off.
At December 31, 1997, 1996 and 1995, the allowance for loan losses was
$2,748,418, $45,200 and $22,574, respectively, which represented 2.29% 3.09% and
1.21% of outstanding loans
36
<PAGE>
at those respective dates. This compares to peer group percentages of the
allowance for loan losses to outstanding loans of 1.47% 1.74% and 1.70% for
1997, 1996 and 1995, respectively.
During 1997, the Company recorded a provision for loan losses of
$2,700,000. The provision was made in connection with the $115,683,550 increase
in the loan portfolio from $1,544,990 to $119,995,205, an increase of 8,154.1%.
The increase in loans is primarily attributable to the change in ownership and
an aggressive posture taken by management to grow the Company. During the year,
the Company hired nine new, experienced loan officers who were successful in
originating many loans.
Determination of the Company's amount of the provision for loan losses
during 1997 was somewhat unique. Prior management of the Company generally
limited its lending activity to commercial and consumer installment loans, and
the loan portfolio constituted less than 10% of average total assets of the
Bank. Because of significant growth in the loan portfolio during 1997, new
management believed that the allowance for loan losses should grow also.
Determining an appropriate level of allowance for loan loss and provision for
loan loss was unique because, given management's decision to offer a broader
range of loan products and to deploy more of the Bank's assets in loans, the
Company had no relevant historical loss history to benchmark against.
Accordingly, management made a subjective determination of the proper level of
allowance based on collective banking experiences, knowledge of the market and
conditions, comparison to other peers, and an intentional effort to be
conservative during this growth phase. Management believes that appropriate
underwriting practices were adhered to in the origination of new loans during
1997, and although the Company had no impaired, potential problem, or
nonperforming loans at December 31, 1997, management recognizes that losses are
often inherent in the lending process. Accordingly, management believes that
loan losses should be provided for as the loan portfolio grows, even if specific
problem loans are not yet identified. Management is also concerned that, while
economic conditions are currently good, it is possible for such conditions to
change in the foreseeable future and that making conservative provisions was
prudent. Determination of an appropriate allowance is subjective in nature and
may be adjusted in the near term because of changes in economic conditions or
review by regulatory examiners. Management expects that appropriate, additional
future provisions will be made as the loan portfolio grows.
The risk elements in the Company's loan portfolio are similar to those
in the loan portfolios of other comparable commercial banks within the Bank's
lending area and are discussed in detail under the caption "GENERAL--Lending
Activities--Risk Elements." Management made a subjective determination of the
proper level of the allowance for loan losses by considering each of these
risk elements as well as drawing from their collective banking experiences
and knowledge of the market in which the Company operates, an evaluation of
overall economic conditions, comparison of the loan portfolio composition in
relation to other peer banks, and an intentional effort to be conservative
during the Bank's significant growth phase. After considering all of these
factors, management determined that an allowance of $2,748,418 (representing
2.29% of outstanding loans) was appropriate. This level of the allowance for
loan losses expressed as a percent of outstanding loans at December 31, 1997
(2.29%) is comparable to the Company's level of allowance for loan losses of
3.09% of outstanding loans at December 31, 1996.
37
<PAGE>
During 1996, the Company recorded a provision for loan losses of
approximately $97,000. In the first quarter of 1996, information came to light
during an FDIC regulatory exam of the Bank regarding a certain $175,000 loan
participation, and the Company recorded a provision of approximately $19,000
related to such participation. Subsequent to March 31, 1996, the loan
participation continued to deteriorate and additional provisions of
approximately $60,000 were made. In late fiscal 1996, a settlement payment of
$52,000 was received and the remaining outstanding balance of approximately
$79,000 was charged off.
In fiscal year ended December 31, 1995, a credit provision to the allowance
for loan losses of $(79,963) was recognized. During 1995, the Company received
approximately $72,000 on a loan that had previously been charged off. After this
recovery, the Company reduced the allowance for loan loss to management's best
estimate of the adequacy of such allowance to absorb possible losses on existing
loans based on an assessment of general loan-loss risk and asset quality as
described above.
The allowance for loan losses is not specifically allocated among the
various categories of loans in the portfolio, and management is unable to
predict with any degree of certainty the anticipated amount of charge-offs by
loan category that may occur in 1998.
At December 31, 1997, 1996 or 1995, there were no significant impaired
loans or loans delinquent greater than 90 days.
Accrual of interest is discontinued on loans when management believes,
after considering economic and business conditions and collection efforts, that
a borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. At the time a loan is placed in nonaccrual
status, all interest which has been accrued on the loan but remains unpaid is
reversed and deducted from earnings as a reduction of reported interest income.
No additional interest is accrued on the loan balance until the collection of
both principal and interest becomes reasonably certain.
Management's policy is to charge-off loans when it determines that the
outstanding principal on the loan is considered uncollectible. Loans charged-off
do not necessarily mean that a loan has absolutely no recovery or salvage value;
rather when management decides to charge off a loan, management has determined
that it is no longer practical or desirable to defer writing off the loan even
though partial recovery may eventually be effected in the future.
Charge-offs during the period from 1993 to 1997 arose primarily because
of the charge-off of a single loan in a principal amount of approximately
$79,000 during 1996. As previously noted in this section, this problem loan
both came to light and was charged-off during the 1996 year. Therefore, no
associated nonaccrual loan was reported at the beginning or end of 1996. The
remaining charge-offs during this period related to small consumer loans and
were not deemed material to the financial condition of the Company.
POTENTIAL PROBLEM LOANS. A potential problem loan is one in which
management has serious doubts about the borrower's future performance under the
terms of the loan contract. These loans are current as to principal and interest
and, accordingly, they are not included in nonperforming assets
38
<PAGE>
categories. At December 31, 1997, the Company had no material loans
considered by management to be potential problem loans. The level of
potential problem loans is one factor to be used in the determination of the
adequacy of the allowance for loan losses.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
DEPOSITS. Average total deposits were $42,234,780, $16,529,450 and
$16,647,797 during 1997, 1996 and 1995, respectively. Average interest-bearing
deposits were $30,340,761 in 1997 as compared to $13,626,215 in 1996 and
$13,579,386 in 1995.
The average daily amount of deposits and rates paid on savings deposits is
summarized for the periods indicated in the following table.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
DEPOSITS
Noninterest-bearing demand $11,894,019 0.00% $ 2,903,235 0.00% $ 3,068,411 0.00%
Interest-bearing demand 7,244,335 2.66% 4,857,209 2.72% 4,936,488 2.69%
Money market deposits 5,005,414 3.21% 978,617 2.99% 959,928 3.00%
Other savings deposits 1,282,500 2.77% 1,101,010 2.73% 1,167,087 2.70%
Time deposits 16,808,512 5.18% 6,689,379 4.84% 6,515,883 4.62%
----------- ----------- -----------
Total $42,234,780 $16,529,450 $16,647,797
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Maturities of time certificates of deposits of $100,000 or more
outstanding as of December 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
3 months or less $14,618,138
Over 3 months through 6 months 4,326,805
Over 6 months through 12 months 6,560,936
Over 12 months 100,000
-----------
$25,605,879
-----------
-----------
</TABLE>
There were no deposits by foreign depositors at December 31, 1997, 1996 or
1995.
39
<PAGE>
SIGNIFICANT FINANCIAL RATIOS
The following table sets forth consolidated operating and capital ratios
for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Return on average assets (3.57)% 0.21% 1.11%
Return on average equity (15.13)% 1.90% 10.86%
Average equity to average asset ratio 23.59 % 10.96% 10.17%
Dividend payout ratio to net income 0.00 % 0.00% 0.00%
</TABLE>
The decline in return on average assets and average equity from 1996 to
1997 is primarily attributable to an increased loan loss provision which is more
fully discussed on page 28 under the caption "Other Operating Income and
Expense". The provision for loan losses in 1996 was approximately $97,000 in
comparison to the 1997 provision of $2,700,000. The larger provision in 1997 was
made in connection with the substantial growth in the loan portfolio of
approximately $115 million (representing an increase of 8,154% over the prior
year). With the aforementioned growth in loans in 1997, management believed that
the allowance for loan losses should grow also. Accordingly, management made a
subjective determination of the allowance based on their banking experience and
knowledge, comparison to other peers, and an intentional effort to be
conservative. Management expects that appropriate, additional future provisions
will be made as the loan portfolio grows.
BORROWED FUNDS
The Company had no borrowed funds at December 31, 1997, 1996 or 1995.
CAPITAL
The cornerstone of the Company's capital structure is its common stock,
which represents 100% of total capitalization at December 31, 1997. The
Company's equity base was strengthened significantly during 1997 through the
issuance of common stock in an intra-state offering to bona fide residents of
the State of Texas completed on August 31, 1997. The Company raised
approximately $40 million in new capital in this offering. Additional details
regarding the common stock offering are set forth in Item 11 to this
Registration Statement on Form 10. The cash raised from the stock offering was
used primarily to increase the capital base of the Bank in order to support
physical expansion of the Bank and significant growth in the Bank's loan
portfolio during the later part of 1997. Additional information regarding the
Bank's physical expansion is set forth under the caption "BUSINESS -- General --
Change in Management and Competitive Focus", and additional information
regarding growth of the Bank's loan portfolio is provided under the caption
"Loan Portfolio" to this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Dependency on such additional capital to support the significant loan
growth was partially offset by the significant increase in the deposit base at
the Bank during the latter part of 1997, which
40
<PAGE>
increased deposit base provided an additional source of funding loan growth.
During the period from December 31, 1996 through December 31, 1997, average
total deposits at the Bank increased $25,705,330, from $16,529,450 to
$42,234,780, an increase of approximately 155.5%. Additional information
regarding such growth in the deposit base is provided under the caption
"Deposits and Other Interest-Bearing Liabilities" to this MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The
combination of the Bank's increased deposit base coupled with the additional
capital provided through the stock offering has been used to support the
significant loan growth at the Bank following completion of the Acquisition.
The Company and Bank are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance- sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I Capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997 that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
The Company and the Bank exceeded their regulatory capital ratios, as set
forth in the following table.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE ACTION
ACTUAL ADEQUACY PURPOSES PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------ ------ ----------- ------ ------------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 39,412,000 31.17% $ 10,116,000 >=8.0% N/A
The Bank 38,528,000 30.47% 10,116,000 >=8.0% $ 12,645,000 >=10.0%
Tier I Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 37,817,000 29.91% $ 5,058,000 >=4.0% N/A
The Bank 36,933,000 29.21% 5,058,000 >=4.0% $ 7,587,000 >= 6.0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $ 37,597,000 28.98% $ 5,224,000 >=4.0% N/A
The Bank 36,969,000 28.31% 5,224,000 >=4.0% $ 6,530,000 >= 5.0%
As of December 31, 1996
Total Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 2,101,000 51.5% 326,000 >=8.0% N/A
The Bank 2,044,000 50.1% 326,000 >=8.0% 408,000 >=10.0%
Tier I Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 2,056,000 50.4% 163,000 >=4.0% N/A
The Bank 1,999,000 49.0% 163,000 >=4.0% 245,000 >= 6.0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $ 2,056,000 11.0% 747,000 >=4.0% N/A
The Bank 1,999,000 10.7% 747,000 >=4.0% 934,000 >= 5.0%
</TABLE>
41
<PAGE>
The Company currently does not have any material commitments for capital
expenditures, and the Company has no present intention to pay dividends on its
common stock. Given the Company's strong capital ratios as expressed in the
preceding table, management believes the Company's capital structure is adequate
to support continued growth of the Company and the Bank in the near future.
LIQUIDITY MANAGEMENT
Liquidity management involves monitoring the Company's sources and uses of
funds in order to meet its day-to-day cash flow requirements while maximizing
profits. Liquidity represents the ability of a Company to convert assets into
cash or cash equivalents without significant loss and to raise additional funds
by increasing liabilities. Liquidity management is made more complicated because
different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of the investment portfolio is
very predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to nearly the same degree of control.
The Company has maintained a level of liquidity that is adequate to
provide the necessary cash requirements. The Company's funds-sold position,
its primary source of liquidity, averaged $8,150,000 during the year ended
December 31, 1997. Management also has lined up potential purchasers of loans
as a tool to maintain liquidity. The Company has numerous loan participations
with other parties, primarily financial institutions. Loan participations are
common commercial banking arrangements whereby the Company sells, on a
nonrecourse basis, a portion of a loan to another party or parties. These
arrangements spread the risk between or among the parties and provides
liquidity to the Company while reducing its risk. Although no formal
agreements or commitments exist, management believes that additional loan
participations in the range of $75 million to $80 million could readily be
sold for liquidity purposes, if necessary. Management regularly reviews the
liquidity position of the Company and has implemented internal policies which
establish guidelines for sources of asset-based liquidity. Management
believes that the continued growth in the deposit base, will enable the
Company to meet its long-term liquidity needs.
INTEREST-RATE RISK SENSITIVITY
The largest component of the Company's net income is derived from the
spread between yields on interest-earning assets and the cost of
interest-bearing liabilities. In a changing interest rate environment this
spread can widen or narrow depending on the relative repricing and maturities of
interest-earning assets and interest-bearing liabilities. It is the Company's
general policy to reasonably match the rate sensitivity of its assets and
liabilities in an effort to prudently manage interest-rate risk. To accomplish
this, the Company monitors its interest-rate sensitivity, or risk, and matching
more closely the cash flows and effective maturities or repricings of its
interest-sensitive assets and liabilities.
Interest rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames at which interest-earning assets and
interest-bearing liabilities are subject to changes in interest rates either at
repricing, replacement or maturity. Sensitivity is measured as the difference
between the volume of assets and
42
<PAGE>
liabilities in the Company's current portfolio that are subject to repricing
in future time periods. The differences at any given point in time is
referred to as the interest sensitivity "gap" and is usually calculated
separately for various segments of time and on a cumulative basis. Any excess
of assets or liabilities results in an interest sensitivity gap. A positive
gap denotes net asset sensitivity and a negative gap represents net liability
sensitivity. An institution is considered to have a negative gap if the
amount of interest-bearing liabilities maturing or repricing within a
specified time period exceeds the amount of interest-earning assets maturing
or repricing within the same period. If more interest-earning assets than
interest-bearing liabilities mature or reprice within a specified period,
then the institution is considered to have a positive gap. Accordingly, in a
rising interest rate environment in an institution with a negative gap, the
cost of its rate sensitive liabilities would theoretically rise at a faster
pace than the yield on its rate sensitive assets, thereby diminishing future
net interest income. In a falling interest rate environment, a negative gap
would indicate that the cost of rate sensitive liabilities would decline at a
faster pace than the yield on rate sensitive assets and improve net interest
income. For an institution with a positive gap, the reverse would be expected.
The Company has sought to increase the sensitivity of its assets to
changing interest rates by emphasizing shorter term and/or adjustable rate
loans. The Company also originates fixed-rate mortgage loans, which are
generally sold in the secondary market. The Company manages the maturity and
repricing characteristics of its liabilities and has sought to keep the
interest sensitivity of its liabilities short by emphasizing shorter term
deposits.
43
<PAGE>
The following table presents rate-sensitive assets and rate-sensitive
liabilities as of December 31, 1997, which mature or reprice in each of the time
periods shown. Except for the effects of prepayments, the table presents
principal cash flows from payments, maturity or repricing. This table does not
necessarily indicate the impact of general interest rate movements on the
Company's net interest income because the repricing of certain categories of
assets and liabilities is subject to competitive and other pressures beyond the
Company's control. As a result, certain assets and liabilities indicated as
maturing or otherwise repricing within a stated period may, in fact, mature or
reprice at different times and at different volumes.
December 31, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
3 Months 3 Months 1 Year
ASSETS SUBJECT TO INTEREST RATE or Less to 1 Year to 3 Years
- ------------------------------- ------- --------- ----------
<S> <C> <C> <C>
ADJUSTMENT
Loans
Combined - fixed rate projected
payments, floating rate by
repricing interval $80,702,246 $9,271,000 $ 5,481,564
Investments
Combined - fixed rate by maturity,
floating rate by repricing interval,
and projected payments
1,020,485 3,293,936 420,400
Federal Funds Sold 3,400,000 -- --
----------- ----------- -----------
Total $85,122,731 $12,564,936 $ 5,901,964
----------- ----------- -----------
----------- ----------- -----------
Cumulative $85,122,731 $97,687,667 $103,589,631
LIABILITIES SUBJECT TO INTEREST RATE
ADJUSTMENT
NOW Accounts $ 7,354,840 -- --
Super NOW Accounts 5,973,686 -- --
Money Market Accounts 15,154,993 -- --
Savings Accounts 1,941,910 -- --
Certificates of Deposit 19,404,239 18,266,694 887,680
----------- ----------- -----------
Total $49,829,668 $18,266,694 $ 887,680
----------- ----------- -----------
----------- ----------- -----------
Cumulative $49,829,668 $68,096,362 $68,984,042
Gap (Net Position of Assets (Liabilities) $35,293,063 $(5,701,758) $ 5,014,283
Cumulative Gap $35,293,063 $29,591,305 $34,605,588
Rate Sensitive Assets as % of Rate
Sensitive Liabilities (Cumulative)
170.83% 143.46% 150.16%
</TABLE>
<TABLE>
<CAPTION>
3 Years 5 Years Over
ASSETS SUBJECT TO INTEREST RATE to 5 Years to 15 Years 15 Years Total
- ------------------------------- ---------- ----------- -------- -----
<S> <C> <C> <C> <C>
ADJUSTMENT
Loans
Combined - fixed rate projected
payments, floating rate by
repricing interval $ 7,079,396 $16,217,846 $ 1,243,154 $119,995,206
Investments
Combined - fixed rate by maturity,
floating rate by repricing interval,
and projected payments
0 79,871 270,212 5,084,904
Federal Funds Sold -- -- -- 3,400,000
----------- ----------- ----------- ------------
Total $ 7,079,396 $16,297,717 $ 1,513,366 $128,480,110
----------- ----------- ----------- ------------
----------- ----------- ----------- ------------
Cumulative $110,669,027 $126,966,743 $128,480,110
Liabilities Subject to Interest Rate
Adjustment
NOW Accounts -- -- -- $7,354,840
Super NOW Accounts -- -- -- 5,973,686
Money Market Accounts -- -- -- 15,154,993
Savings Accounts -- -- -- 1,941,910
Certificates of Deposit 0 0 0 38,558,613
------------ ------------ ------------ -----------
Total $ 0 $ 0 $ 0 $68,984,042
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Cumulative $ 68,984,042 $ 68,984,042 $ 68,984,042
Gap (Net Position of Assets (Liabilities) $ 7,079,396 $ 16,297,717 $ 1,513,366 $ 59,496,067
Cumulative Gap $ 41,684,984 $ 57,982,701 $ 59,496,067
Rate Sensitive Assets as % of Rate
Sensitive Liabilities (Cumulative)
150.16% 160.43% 184.05% 186.25%
</TABLE>
As shown by the table, at December 31, 1997, the maturities of the
Company's interest-bearing assets extend over 15 years, while its
interest-bearing liabilities generally mature in less than one-year. Also,
the Company's interest-bearing assets significantly exceed its interest bearing
liabilities (a positive gap). Accordingly, a rising interest rate environment
would positively effect the
44
<PAGE>
Company's net interest margin and a falling interest rate environment would
negatively effect the Company's net interest margin.
A static gap report consists of an inventory of the dollar amounts of
assets and liabilities that have the potential to mature or reprice within a
particular period. It does not consider the probability that potential
maturities or repricings of interest-sensitive accounts will occur, or to what
extent. Accordingly, although the table provides an indication of the Company's
gap position at a particular point in time, such measurements are not intended
to and do not provide a forecast of the effect of changes in market interest
rates on the Company's gap position and may differ from actual results after
December 31, 1997.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and the Bank are primarily monetary in nature.
Therefore, interest rates have a more significant effect on the Company's
performance than do the effects of changes in the general rate of inflation and
change in prices. In addition, interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
YEAR 2000 ISSUES
The Company is in the process of addressing the possible exposures
related to the impact of the Year 2000 and is conducting a risk assessment
regarding how these issues will affect the operation of the Company and the
Bank. The Company's critical hardware and software applications are supported by
outside vendors with which the Company maintains continuing discussions
regarding Year 2000 compliance. Certain critical applications have already been
updated as Year 2000 compliant, with the balance of critical applications
scheduled to be updated by the end of 1998. As most of the critical software is
purchased from vendors which have either already begun to make the necessary
changes or will be doing so over the next year, the Company is concentrating its
efforts on initial testing of Year 2000 complaint systems.
During 1998, the Company will continue to assess its readiness for the
Year 2000 by forming a Year 2000 Committee to continue ongoing evaluation of
critical software and hardware applications and to expand the risk assessment to
include and evaluation of suppliers of goods and services and the Bank's lending
function. The Company is also developing contingency plans should one or more
suppliers of goods and services to the Company fail to meet their respective
Year 2000 compliance goals. Critical applications that are not compliant will be
replaced.
While internal staff will be assigned to evaluate and test systems and
applications, the Company anticipates that it may utilize outside resources to
test certain hardware and software applications for compliance with Year 2000
issues. The estimated cost of compliance, including reassignment of existing
staff and outside consulting fees, is not anticipated to be material to the
Company's financial condition in any single year.
45
<PAGE>
FORWARD-LOOKING INFORMATION
The statements contained in this Form 10 that are not historical facts,
including, but not limited to, certain statements found in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements that involve a number of risks and uncertainties. The
actual results of the future events described in such forward-looking statements
in this Registration Statement could differ materially from those stated in such
forward- looking statements. Among the factors that could cause actual results
to differ materially are: general economic conditions, competition, government
regulations and possible future litigation, as well as the risks and
uncertainties discussed in this Form 10, including, without limitation, the
portions referenced above.
ITEM 3. PROPERTIES
The Company's executive and administrative offices are located at 905
South Fillmore, in Amarillo, Texas. The Company has executed two leases with an
unaffiliated third party for this location, one for approximately 5,600 square
feet on the seventh floor which is used for the Company's and the Bank's
executive and administrative offices, and one for approximately 2,100 square
feet on the ground floor, which is used for retail banking transactions. These
leases generally expire in June 2004, and provide for rent escalations tied to
either increases in the lessor's operating expenses or fluctuations in the
consumer price index in the relevant geographic market. The term of these leases
may be renewed through June 2012. In addition to the main office, the Bank
maintains four (4) full-service branch offices located in Amarillo (2 branches),
Dalhart and Fritch, Texas.
AMARILLO, TEXAS
As described above, the Bank's main retail office is located on the first
floor of a seven-story office complex at 905 South Fillmore in downtown
Amarillo, Texas. The Bank leases approximately 7,700 square feet of office space
from an unaffiliated third party. This location offers a walk-in lobby, but does
not offer drive-in lanes.
On February 2, 1998 and February 17, 1998, respectively, the Bank opened
two (2) de novo, full-service branches in commercial areas of Amarillo, Texas.
One branch is located at the approximate intersection of U.S. Interstate 40 and
Washington Street and is highly visible to traffic traveling nearby. The other
branch is located at the approximate intersection of 34th Avenue and Bell
Street, also in a highly visible location. The Bank constructed and owns each
branch building and leases the ground space from unaffiliated third parties.
Each stand-alone branch facility is approximately 2,500 square feet and has five
(5) drive-through lanes and one walk-up automated teller machine.
DALHART, TEXAS
On October 15, 1997, the Bank opened a de novo, full-service branch at
1723 Tennessee in Dalhart, Texas. The Dalhart branch, which offers four (4)
drive-through lanes and one drive-up automated teller machine, is located within
a strip shopping center in the business district of Dalhart, Texas and is
surrounded by other commercial businesses. This branch facility, which occupies
46
<PAGE>
approximately 5,500 square feet, is leased from an unaffiliated third party. The
initial term of the lease is scheduled to expire in October 2002, but may be
renewed through October 2012.
FRITCH, TEXAS
The Fritch, Texas branch of the Bank is located at 102 West Broadway
(Highway 136) in downtown Fritch, Texas. This branch facility consists of a
one-story brick building (approximately 3,230 square feet) with three (3)
drive-through lanes and one drive-up automated teller machine. The Fritch branch
facility is owned by the Bank.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
COMMON STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of March 24, 1998,
regarding the number of shares of the common stock, par value $1.00 per share
(the "Common Stock") of the Company beneficially owned by all directors and
executive officers of the Company. Beneficial ownership includes shares, if any,
held in the name of the spouse, minor children or other relatives of the holder
living in such person's home, as well as shares, if any, held in the name of
another person under an arrangement whereby the holder can vest title in himself
at once or at some future time. Except as otherwise indicated, the persons or
entities listed below have sole voting and investment power with respect to all
shares of the Common Stock shown as beneficially owned by them. Percentage
ownership is based on 13,333,334 shares of Common Stock issued and outstanding
as of March 24, 1998.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED COMMON STOCK
------ -------------------- --------------
<S> <C> <C>
William H. Attebury 302,855(1) 2.27%
Danny H. Conklin 63,634 0.48%
Wales H. Madden, Jr 70,301(2) 0.53%
Jay O'Brien 151,810(3) 1.14%
Donald E. Powell 364,897 2.74%
All executive officers and
directors as a group:
(5 persons) 953,497 7.15%
- ----------------------------
</TABLE>
(1) Includes 151,508 shares owned by the Attebury Family Partnership of which
Mr. Attebury is the Managing partner with respect to which shares Mr.
Attebury exercises voting and investment authority, and an aggregate of
45,896 shares held by Mr. Attebury as custodian for eight of his
grandchildren (5,737 shares held for the benefit of each of the eight
grandchildren) with respect to which shares Mr. Attebury exercises voting
and investment authority.
(2) Includes 3,334 shares held in the Wales H. Madden IV Trust, of which Mr.
Madden serves as trustee, 3,334 shares held in the S. Hamilton Madden
Trust, of which Mr. Madden serves as trustee, and 63,633 shares owned by
Gore
47
<PAGE>
Creek Capital, Ltd., of which Mr. Madden is a limited partner and exercises
shared voting and investment authority with respect to such shares.
(3) Includes 117,267 shares held in the Jay O'Brien Pension Trust. Does not
include 15,153 shares owned by Mr. O'Brien's spouse as separate property,
with respect to which Mr. O'Brien disclaims beneficial ownership.
PRINCIPAL HOLDERS OF COMMON STOCK
To the best of the Company's knowledge, no shareholder beneficially owns
five percent (5%) or more of the outstanding shares of the Common Stock.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
GENERAL
The following table lists the executive officers and directors of the
Company and the positions they hold with the Company and with the Bank. Persons
who hold positions with the Bank may be deemed to be executive officers of the
Company even though they do not hold positions with the Company itself.
Directors of the Company and the Bank hold office for a term of one year or
until their successors are duly elected and have qualified. Executive officers
of the Company are elected by the Company's Board of Directors at the Company's
annual meeting and hold office until the next annual meeting of the Company's
Board of Directors or until their respective successors are duly elected and
have qualified. The President of the Bank is elected by the Bank Board at the
Bank's annual meeting and holds office until the next annual meeting of the Bank
Board or until successor is duly elected and has qualified.
<TABLE>
<CAPTION>
Name Age Position with the Company Position with the Bank
---- --- ------------------------- ----------------------
<S> <C> <C> <C>
Donald E. Powell 56 Chairman of the Board, Chairman of the Board,
President and Chief President and Chief
Executive Officer Executive Officer
William H. Attebury 69 Director Director
Danny H. Conklin 63 Director Director
Wales H. Madden, Jr 70 Director Director
Jay O'Brien 53 Director Director
</TABLE>
Except for Danny H. Conklin who serves as a director of New Century
Energies, Inc. and Parallel Petroleum Company, none of the directors of the
Company hold other directorships in a company, or have been nominated to become
a director in a company, with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or subject to the requirements of Section 15(d) of the Exchange Act, or
any company registered as an investment company under the Investment Company Act
of 1940.
48
<PAGE>
EXPERIENCE
The following is a brief description of each of the executive officers
and directors of the Company and the Bank, the positions they hold, and a
description of the principal occupations and business experience of each of them
during the past five years. Unless otherwise indicated, the principal occupation
listed for a person has been that person's occupation for at least the past five
years.
DONALD E. POWELL. (56) Prior to acquiring a controlling interest in the
Company in May 1997, Mr. Powell served as Chairman of the Board, President and
Chief Executive Officer of Boatmen's First National Bank of Amarillo since March
1987, and in other capacities since July 1971. In February 1997, Mr. Powell
voluntarily resigned from his position with Boatmen's First National Bank of
Amarillo to pursue, among other things, the Acquisition. Mr. Powell currently
serves as Chairman of the Board of Regents for the Texas A&M University System.
WILLIAM H. ATTEBURY. (69) Mr. Attebury was formerly a director with
Boatmen's First National Bank of Amarillo and served in that capacity from 1975
until February 1997 when he resigned. Mr. Attebury has served as a director of
the Company and the Bank since June 25, 1997. Mr. Attebury's principal
occupation is a private investor.
DANNY H. CONKLIN. (63) Mr. Conklin was formerly a director with Boatmen's
First National Bank of Amarillo and served in that capacity from 1983 until
February 1997 when he resigned. Mr. Conklin has served as a director of the
Company and the Bank since June 25, 1997. Mr. Conklin's principal occupation is
a petroleum geologist.
WALES H. MADDEN, JR. (70) Mr. Madden was formerly a director with
Boatmen's First National Bank of Amarillo and served in that capacity from 1961
until February 1997 when he resigned. Mr. Madden has served as a director of the
Company and the Bank since June 25, 1997. Mr. Madden is an attorney and a
private investor.
JAY O'BRIEN. (53) Mr. O'Brien was formerly a director with Boatmen's
First National Bank of Amarillo from 1993 until February 1997 when he resigned.
Mr. O'Brien has served as a director of the Company and the Bank since June 25,
1997. Mr. O'Brien's principal occupation is a cattleman.
There are no family relationships among any of the executive officers or
directors of the Company or the Bank. Executive officers are elected by the
Board of Directors on an annual basis and serve at the discretion of the Board
of Directors.
BOARD OF DIRECTORS
The Company had 5 directors as of December 31, 1997. Directors of the
Company are elected by the shareholders for a term of one year and until his or
her successor is duly elected and qualified. In the event of any vacancy, the
Board of Directors may fill such vacancy by vote of a majority of all the
Directors then in office, though less than a quorum. Directors so elected shall
49
<PAGE>
serve for the unexpired term of their predecessors, and until their successor is
duly elected and qualified, unless sooner displaced.
Meetings of the Board of Directors are held regularly. The Board of
Directors held seven meetings in 1997. During 1997, each of the Company's
directors attended at least 75% of the aggregate of the total number of meetings
of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of each of the Company and the Bank currently do
not have any committees.
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company and
the Bank for the last three fiscal years to the Chief Executive Officer of the
Company and the Bank. There were no other officers of the Company or the Bank
who received compensation in excess of $100,000 during the last three fiscal
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Compensation
--------------------------- ---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
DONALD E. POWELL(1) 1997 $ 0 $0 $ 0 $ 337(4)
President and Chief Executive 1996 N/A N/A N/A N/A
Officer of the Company and the Bank 1995 N/A N/A N/A N/A
J.H. (BUSTER) HODGES(2) 1997 $58,891 $0 $ 936(3) $ 0
President and Chief Executive 1996 $57,856 $0 $1,951(3) $57,302(5)
Officer of the Company and the Bank 1995 $56,540 $0 $2,415(3) $ 0
</TABLE>
- -----------------------
(1) Mr. Powell became President and Chief Executive Officer of the Company and
the Bank upon completion of the Acquisition on May 23, 1997.
(2) Mr. Hodges retired from his position as President and Chief Executive
Officer of the Company and the Bank upon completion of the Acquisition on
May 23, 1997.
(3) Constitutes automobile allowance and insurance premiums paid by the Company
of $458 in 1996 and $665 in 1995.
(4) Membership dues in Amarillo Club paid by the Company during 1997 ($48.11
per month).
(5) Constitutes cash surrender value of a life insurance policy previously
owned and maintained by the Company and transferred to Mr. Hodges in
anticipation of the Acquisition.
COMPENSATION OF DIRECTORS
Directors of the Company and the Bank currently do not receive
compensation to serve in such capacities.
50
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between the Company's Board of
Directors or officers responsible for compensation decisions and the board of
directors or compensation committee of any company, nor has any such
interlocking relationship existed in the past.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
Certain of the officers, directors and principal shareholders of the
Company and the Bank, and their affiliates, have deposit accounts and other
transactions with the Bank, including loans in the ordinary course of business.
All loans or other extensions of credit made by the Bank to officers, directors
and principal shareholders of the Company, the Bank and to affiliates of such
persons were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with independent third parties and did not involve
more than the normal risk taken by the lender or present other unfavorable
features. The extensions of credit by the Bank to those persons have not, and do
not currently, involve more than the normal risk of collectibility or present
other unfavorable features. At December 31, 1997, the outstanding principal
amount of indebtedness to the Bank owed by directors and executive officers and
their affiliates, who were indebted to the Bank on that date, aggregated
$10,550,806, which represented approximately 28% of the Bank's equity capital
accounts. The Bank expects to continue to enter into transactions in the
ordinary course of business on similar terms with officers, directors and
principal shareholders of the Company, the Bank, and their affiliates.
In addition to such lending relationships, some of the executive officers
and directors of the Company, and some of their associates, have had
transactions with the Bank in the ordinary course of business, including the
following:
1. A&S Steel Buildings, Inc. served as a contractor with respect to
the construction of a branch of the Bank at 34th and Bell in Amarillo,
Texas. William H. Attebury's son, W. A. Attebury, is the president and a
shareholder of A&S Steel Buildings, Inc., owning approximately 45% of the
stock, and William H. Attebury's other four children each owning
approximately 7% of the stock of A&S Steel Buildings, Inc.
2. Alpha Three Cattle Company, owned by William H. Attebury (25%) and
his sons Edward A. Attebury (25%) and W. A. Attebury (50%), has a
re-advancing agricultural note with the Bank. The highest outstanding
balance on this note during 1997 was $1,800,000. The outstanding balance of
the note as of March 10, 1998 was paid down to $75,000.
All of the foregoing transactions were on substantially the same terms,
including interest rates and collateral to the extent applicable, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than normal risk of collectibility or present other unfavorable
features. Additional transactions in the future may be expected to take place
with the Bank in the ordinary course of business.
51
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
The Company and the Bank are sometimes involved in various legal
proceedings in the normal course of their business. None of such matters, either
singularly or in the aggregate, would have, in the opinion of the management of
the Company and the Bank, a material adverse effect upon the financial
statements of the Company or the Bank.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Company's Common
Stock. Accordingly, there is no comprehensive record of trades or the prices of
any such trades. As a result, the prices reported for the Company's Common Stock
may not be reliable indicators of market value. There can be no assurance that
an active public trading market for the Company's Common Stock will be created
in the future. The following table reflects stock prices for the Company's
Shares, to the extent such information is available, and the dividends declared
with respect thereto during the preceding two years.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- ----------------------------------
Price Range Price Range
----------------------- -------------------
Low High Dividends Low High Dividends
--------- --------- ------------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $ - $ - $ - $ - $ - $ -
2nd Quarter $ 3.00(1) $ 3.00(1) - - - -
3rd Quarter $ 3.00 $ 3.00 - - - -
4th Quarter - - - - - -
</TABLE>
- --------------
(1) Adjusted to reflect 77.4372-for-1 stock dividend on July 2, 1997 to
shareholders of record on June 30, 1997.
None of the Company's shares of Common Stock (i) are subject to
outstanding options or warrants to purchase nor are there any securities
convertible into the Company's Common Stock, or (ii) are being or proposed to be
publicly offered by the Company.
The Company did not pay any cash dividends on its Common Stock in 1996 or
1997. The Company intends to retain all of its earnings to finance its
operations and does not anticipate paying cash dividends for the foreseeable
future. Any decision made by the Board of Directors to declare dividends in the
future will depend on the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Board of Directors.
The Company's ability to pay dividends is also subject to the
restrictions imposed by Texas law. Generally, Texas law prohibits
corporations from paying dividends if after giving effect to the
52
<PAGE>
distribution, the corporation would insolvent or the distribution exceeds the
surplus of the corporation. See "Description of Registrant's Securities to be
Registered" under Item 1 of this Form 10.
The Company is also subject to the dividend restrictions applicable to
national banks because its principal source of income is from the dividends paid
by the Bank to the Company. Under the National Bank Act, dividends may be paid
only out of retained earnings as defined in the statute. The approval of the
Comptroller is required if the dividends for any year exceed the net profits, as
defined, for that year plus the retained net profits for the preceding two
years. In addition, unless a national bank's capital surplus equals or exceeds
the stated capital for its common stock, no dividends may be declared unless the
bank makes transfers from retained earnings to capital surplus. See "Supervision
and Regulation" under Item 1 of this Form 10.
The Bank serves as the Transfer Agent for the Company's Common Stock.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Following completion of the Acquisition, and in anticipation of
significant growth and physical expansion of the Company and the Bank, the
Company took steps to raise additional capital by publicly offering shares of
its Common Stock solely to bona fide residents of the State of Texas pursuant to
Section 3(a)(11) of the Securities Act of 1993, as amended, and Rule 147 issued
thereunder. Management of the Company sought to raise approximately $40 million
in a community offering principally to residents in the Panhandle of Texas and
solely to bona fide residents of the State of Texas so as to qualify for the
exemption noted in the preceding sentence.
On July 3, 1997, the Company filed an Application for Registration of
Securities under the Securities Act of Texas with the Texas Securities Board to
register up to 13,333,334 shares of the Company's Common Stock at an offering
price of $3.00 per share for an aggregate maximum offering price of $40,000,002.
After receiving some additional information from the Company, the State
Securities Board of Texas declared the Application for Registration effective on
August 1, 1997. The intrastate offering to bona fide residents of the State of
Texas was concluded on August 31, 1997 with the offering being completely
subscribed. Accordingly, the Company issued 13,333,334 shares of its Common
Stock for $3.00 per share effective August 31, 1997.
The certificates representing shares of the Common Stock issued pursuant
to the intrastate offering bear a restrictive legend designed to prevent a
resale of such securities to a non-resident of the State of Texas for a period
of nine months following conclusion of the offering and advising each holder
thereof that such securities have not been registered under the Securities Act
of 1933, as amended, and are being issued by the Company pursuant to the
intrastate offering exception of such Act and Rule 147 thereunder.
No other shares of the Company's Common Stock has been issued by the
Company since February 29, 1984 or subsequent to conclusion of the intrastate
offering which concluded on August 31, 1997.
53
<PAGE>
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
GENERAL
The Company is authorized to issue 20,000,000 shares of common stock of
the par value of $1.00 per share (the "Common Stock"). As of March 24, 1998, the
Company had 13,333,334 shares of Common Stock issued and outstanding held by
approximately 1,039 holders of record. The Company does not have any other
securities outstanding. A more detailed description of the Common Stock of the
Company may be found in the Restated Articles of Incorporation, copies of which
are on file at the offices of the Company and with the Secretary of State of
Texas. The summary below is qualified in its entirety by reference to such
document, which is filed as an exhibit to this Form 10 Registration Statement.
COMMON STOCK
VOTING RIGHTS. All voting rights are vested in the holders of the Common
Stock. With respect to any matter that may be acted on by the shareholders, each
shareholder is entitled to one vote per share. The presence, in person or by
proxy, of the holders of a majority of the issued and outstanding Common Stock
entitled to vote at any meeting is necessary to constitute a quorum to transact
business at such meeting.
Shareholders of the Company do not have the right to cumulate their votes
for the election of Directors. Straight voting in the election of directors
requires that a shareholder only vote the number of shares that he or she owns
for each nominee, and not more. By contrast, under cumulative voting, each
shareholder is entitled to an aggregate number of votes equal to the number of
directors to be elected multiplied by the number shares of common stock such
shareholder owns. The shareholder may divide this aggregate number of votes
among the nominees for election as directors as he or she chooses and may, for
example, cast all of his or her votes for one nominee. As a result of the denial
of cumulative voting rights, shareholders owning slightly over fifty percent of
the Common Stock can, in effect, elect all of the Directors of the Company.
The Restated Articles of Incorporation of the Company may be amended at
any regular or special meeting of the shareholders by the affirmative vote of
the holders of at least two-thirds of the outstanding shares of Common Stock of
the Company entitled to vote thereon, unless the vote of the holders of a
greater amount of stock is required by law. A merger, consolidation or
liquidation of the Company also requires a two-thirds vote of all of the shares
of the Common Stock outstanding.
Under Texas law, the dissolution of a corporation requires the
approval of the holders of at least two-thirds of the total outstanding
shares of the corporation, and the holders of two-thirds of the outstanding
shares of each class or series entitled to vote thereon as a class, unless a
different amount, not less than a majority, is specified in the articles of
incorporation. The Articles of Incorporation of the Company do not provide
for a different amount of shares for approval of dissolution.
54
<PAGE>
PREEMPTIVE RIGHTS. Under Texas law, the shareholders of a corporation
have a preemptive right to require additional, unissued, or treasury shares of
the corporation, except to the extent limited or denied by the articles of
incorporation. The Restated Articles of Incorporation of the Company do not
afford shareholders the preemptive right to acquire their pro rata share of
Common Stock (or any other securities) issued by the Company in the future.
Accordingly, any issuance and sale of Common Stock in the future will have a
dilutive effect upon the percentage ownership interest of shareholders of the
Company unless such shareholders purchase a pro rata share of Common Stock. The
Common Stock has no redemption, liquidation or conversion provisions.
DIVIDENDS. A Texas corporation may not make any distributions if (1)
after giving effect to the distribution, the corporation would be insolvent or
(2) the distribution exceeds the surplus of the corporation. Subject to any
other restrictions in the articles of incorporation, a corporation may not make
any distributions if, after giving effect to the distribution, either (1) the
corporation is able to pay its debts as they come due in the usual course of
business or the corporation's total assets would be less than the sum of its
total liabilities and the maximum amount that then would be payable, in any
liquidation, in respect to all outstanding shares having preferential rights in
liquidation. Holders of the Company's Common Stock are entitled to receive
dividends when, as and if declared by the Company's Board of Directors, from
assets legally available therefor based upon conditions then existing, including
the earnings of the Company, the earnings, funding requirements and financial
condition of the Bank and applicable laws and regulations.
The Company is also restricted in its ability to pay dividends by,
among other things, guidelines and regulations of the Federal Reserve and
federal law. The Company is also subject to a Federal Reserve regulation that
requires the Company to receive the prior approval of the Federal Reserve
before paying a dividend on the Common Stock, if, after the payment of the
dividend, the debt-to-equity ratio of the Company would exceed thirty
percent. In addition, the Company's ability to pay dividends depends
primarily on the receipt of dividends from the Bank. The ability of the Bank
to pay dividends is restricted by the requirement that it maintain an
adequate level of capital as required by the Comptroller. The Bank is also
subject to statutory and regulatory restrictions on the payment of dividends.
There is no assurance that dividends paid by the Bank will be sufficient to
enable the Company to meet its obligations. See "SUPERVISION AND REGULATION."
The future dividend policy of the Company will be determined by the
Corporate Board in light of circumstances and conditions existing at the time,
including the earnings of the Company and the Bank, their funding requirements
and financial condition, applicable laws and regulations and general business
conditions. Such dividends, if any, will depend on the future profitability of
the Bank, and there is no guaranty that the Company will pay any dividends or at
any time in the future. Since completion of the Acquisition in May 1997, the
Company has not paid any cash dividends, and it is not anticipated that cash
dividends on the Common Stock will be declared or paid in the foreseeable
future.
LIQUIDATION RIGHTS. In the event of any voluntary or involuntary
dissolution, liquidation or winding-up of the affairs of the Company, after
payment or provision for the payment of (i) all debts and other liabilities of
the Company, (ii) expenses and (iii) any securities issued by the Company that
are senior to the Common Stock, the holders of all the outstanding shares of
Common Stock will be entitled to share, on a pro rata basis, in the distribution
of the Company's remaining assets. Neither
55
<PAGE>
a merger or consolidation of the Company, nor the sale, lease or conveyance
of all or part of its property or business, will be deemed to be a
liquidation, dissolution or winding-up of the affairs of the Company as
contemplated above.
The Company may be dissolved by the written consent of the holders of a
two-thirds majority of the Common Stock. Liquidation may also be effected in
whole or in part through the sale of all or a portion of the Company's assets. A
sale of substantially all of the assets of the Company would have to be approved
by shareholders owning two-thirds of the Common Stock.
BUSINESS COMBINATIONS
The Company is incorporated under the laws of the State of Texas and is
subject to the provisions of the Texas Business Corporation Act (the "TBCA").
Texas law generally permits a merger or share exchange involving the corporation
to become effective without the approval of the corporation's shareholders if
the articles of incorporation of the surviving corporation do not change
following the merger, the amount of the surviving corporation's common stock to
be issued or delivered under the plan of merger does not exceed 20% of the total
shares of outstanding voting stock immediately prior to the merger, and the
board of directors of the surviving corporation adopts a resolution approving
the plan of merger.
Where shareholder approval is required under Texas law, a merger must be
approved by the holders of two-thirds of the outstanding shares of the Texas
corporation entitled to vote thereon, unless there is a class of stock that is
entitled to vote as a class, in which event the merger must be approved by the
holders of two-thirds of the outstanding shares otherwise entitled to vote,
unless a different amount, not less than a majority is specified in the articles
of incorporation. The Company's Articles of Incorporation do not so provide.
The Company is subject to the provisions of the Texas Business
Combination Law (the "Combination Law") (Articles 13.01 through 13.08 of the
TBCA), which provides that a Texas corporation such as the Company may not
engage in certain business combinations, including mergers, consolidations and
asset sales, with a person, or an affiliate or associate of such person, who is
an "Affiliated Shareholder" (generally defined as the holder of 20% or more of
the corporation's voting shares) for a period of three years from the date such
person became an Affiliated Shareholder unless: (i) the business combination or
purchase or acquisition of shares made by the Affiliated Shareholder was
approved by the board of directors of the corporation before the Affiliated
Shareholder became an Affiliated Shareholder or (ii) the business combination
was approved by the affirmative vote of the holders of at least two-thirds of
the outstanding voting shares of the corporation not beneficially owned by the
Affiliated Shareholder, at a meeting of shareholders called for that purpose
(and not by written consent), not less than six months after the Affiliated
Shareholder became an Affiliated Shareholder. The Combination Law is not
applicable to: (i) the business combination of a corporation: (a) where the
corporation's original charter or bylaws contain a provision expressly electing
not to be governed by the Combination Law, (b) that adopts an amendment to its
charter or bylaws before December 31, 1997, expressly electing not to be
governed by the Combination Law, or (c) that adopts an amendment to its charter
or bylaws after December 31, 1997, by the affirmative vote of the holders, other
than Affiliated Shareholders, of at least two-thirds of the outstanding voting
shares of the corporation, expressly electing not to be governed by the
56
<PAGE>
Combination Law; (ii) a business combination of a corporation with an Affiliated
Shareholder that became an Affiliated Shareholder inadvertently, if the
Affiliated Shareholder: (a) as soon as practicable divests itself of enough
shares to no longer be an Affiliated Shareholder and (b) would not at any time
within the three year period preceding the announcement of the business
combination have been an Affiliated Shareholder but for the inadvertent
acquisition; (iii) a business combination with an Affiliated Shareholder that
was the beneficial owner of 20% or more of the outstanding voting shares of the
corporation on December 31, 1996, and continuously until the announcement date
of the business combination; (iv) a business combination with an Affiliated
Shareholder who became an Affiliated Shareholder through a transfer of shares of
the corporation by will or intestate succession and continuously was such an
Affiliated Shareholder until the announcement date of the business combination;
and (v) a business combination of a corporation with a wholly owned subsidiary
if the subsidiary is not an affiliate or associate of the Affiliated Shareholder
other than reason of the Affiliated Shareholder's beneficial ownership of the
voting shares of the corporation. Neither the Company's Articles of
Incorporation nor the Company's Bylaws contain any provision expressly provided
that the Company will not be subject to the Combination Law. The Combination Law
may have the effect of inhibiting a non-negotiated merger or other business
combination involving the Company, even if such event would be beneficial to the
Company's shareholders.
FEDERAL AND STATE REGULATIONS
The Company and the Bank are subject to a variety of Federal statutes and
regulations applicable to national banking associations, including the National
Bank Act, all of which impact the operations of the Bank. See "Supervision and
Regulation" under Item 1 of this Form 10.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02-1 of the TBCA authorizes corporations to indemnify any party
or threatened party to any threatened, pending or completed action, suit or
proceeding who is or was a director, officer, employee or agent of the
corporation and any person who is or was serving at the request of the
corporation as a director, officer, partner, venturer, proprietor, trustee,
employee or agent of another corporation or other enterprise if such individual
acted in good faith and reasonably believed that his or her conduct was in the
corporation's best interests. In the case of any criminal proceeding, the
individual must have no reasonable cause to believe that his or her conduct was
unlawful in order for the corporation to indemnify him or her. Texas law
provides that no indemnification shall be made with respect to any claim, issue
or matter as to which such person shall have been adjudged liable where the
defendant's conduct was judged to be willful or intentional misconduct in the
performance of his or her duty to the corporation, and will be limited to
reasonable expense actually incurred in connection with the proceeding where the
defendant is found liable to the corporation or liable for receipt of improper
personal benefits. Whether such director, officer, employee or agent acted
properly is determined by a majority of a quorum of non-party directors,
independent legal counsel opinion or by non-party shareholders. A corporation
may pay expenses incurred by a director or officer before final disposition of
an action or proceeding, but the director or officer must repay such expenses if
it is determined that he or she was not entitled to indemnification. If such a
person seeking indemnification is wholly successful on the merits or otherwise,
in connection with such a proceeding, such indemnification is mandatory. The
board of directors may determine appropriate
57
<PAGE>
terms and conduct to pay an employee or agent. The corporation may purchase
insurance on a director, officer, employee or agent for liability asserted
against him or her whether or not the corporation could indemnify that party.
The Company's Restated Articles of Incorporation contain provisions which
provide, among other things, that the Company shall indemnify certain persons,
including officers and directors, against judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
any action, suit or proceeding if such person(s) act in good faith and in a
manner reasonably believed to be in or not opposed to the best interest of the
Company, and, with respect to any criminal action or proceeding, have no
reasonable cause to believe his conduct was unlawful. As to any action brought
by or in the right of the Company such indemnification is limited to expenses or
advance payment thereof actually and reasonably incurred in connection with the
defense or settlement of the case, which shall not be made, absent court
approval, if determined that such person is liable for negligence or misconduct
in the performance of his duty to the Company.
The Company is authorized to purchase and maintain insurance or make
other arrangements to protect itself or others, including, its officers and
directors from liability.
The indemnification provisions in the Company's Restated Articles of
Incorporation are individually limited to the extent that they are consistent
with applicable laws and regulations.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted of directors and officers of the Company pursuant
to the foregoing provisions or otherwise, the Company has been advised that,
although the validity and scope of the governing statute has not been tested in
court, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In addition, indemnification may be limited by state
securities laws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto and supplementary data commencing at page F-1 of this Form 10,
which financial statements, report, notes and data are incorporated herein by
reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
58
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Financial Statements F-2
Independent Auditors' Report F-3
Audited Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Summary of Significant Accounting Policies F-9
Notes to Consolidated Financial Statements F-12
Index to Interim Financial Statements F-23
Unaudited Interim Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets F-24
Condensed Consolidated Statements of Operation F-26
Condensed Consolidated Statements of Cash Flows F-27
Notes to Condensed Consolidated Financial Statements F-28
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Articles of Incorporation of Tejas Bancshares, Inc.
3.2 Amended and Restated Bylaws of Tejas Bancshares, Inc.
21.1 Subsidiary of Tejas Bancshares, Inc.
27.1 Financial Data Schedule
</TABLE>
59
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
TEJAS BANCSHARES, INC.
(Registrant)
/s/ Donald E. Powell
-------------------------------------------
Donald E. Powell
President and Chief Executive Officer
Dated: August 17, 1998
60
<PAGE>
TEJAS BANCSHARES, INC.
AND SUBSIDIARY
Amarillo, Texas
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT...............................................F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets...........................................F-4
Consolidated Statements of Operations.................................F-6
Consolidated Statements of Stockholders' Equity.......................F-7
Consolidated Statements of Cash Flows.................................F-8
Summary of Significant Accounting Policies............................F-9
Notes to Consolidated Financial Statements...........................F-12
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Tejas Bancshares, Inc.
Amarillo, Texas
We have audited the accompanying consolidated balance sheets of Tejas
Bancshares, Inc. and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tejas Bancshares,
Inc. and subsidiary as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for the years ended December 31, 1997, 1996 and
1995 in conformity with generally accepted accounting principles.
Clifton Gunderson P.L.L.C.
/s/ Clifton Gunderson P.L.L.C.
Amarillo, Texas
February 27, 1998
F-3
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Cash and due from banks $ 16,726,298 $ 1,885,224
Federal funds sold 3,400,000 4,300,000
Securities available-for-sale 5,084,904 1,957,201
Securities held-to-maturity - 8,345,749
Loans 119,850,682 1,463,914
Less allowance for loan losses (2,748,418) (45,200)
------------- ------------
Loans, net 117,102,264 1,418,714
------------- ------------
Bank premises and equipment
Land 39,000 39,000
Buildings 602,026 164,938
Furniture, fixtures and equipment 496,030 132,793
------------- ------------
Total, at cost 1,137,056 336,731
Less accumulated depreciation 274,800 220,573
------------- ------------
Net property and equipment 862,256 116,158
------------- ------------
Accrued interest receivable 1,160,948 153,571
Net deferred tax asset 324,709 -
Other assets 78,708 35,046
------------- ------------
TOTAL ASSETS $ 144,740,087 $ 18,211,663
------------- ------------
------------- ------------
</TABLE>
F-4
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
LIABILITIES
Deposits
Demand - noninterest bearing $ 37,270,616 $ 2,628,590
Demand - interest bearing 28,483,519 5,600,388
Time and savings 40,500,523 7,838,310
------------- ------------
Total deposits 106,254,658 16,067,288
Accrued interest payable 222,676 27,327
Federal income taxes payable 324,709 -
Net deferred tax liability - 32,022
Other liabilities 84,802 17,339
------------- ------------
Total liabilities 106,886,845 16,143,976
------------- ------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value ($10 in 1996);
20,000,000 shares authorized (10,000
in 1996), 13,333,334 and 10,000 issued
in 1997 and 1996, respectively 13,333,334 100,000
Paid-in capital 26,137,427 1,514,807
Retained earnings (deficit) (1,653,848) 603,189
Net unrealized holding gain on
available-for-sale securities, net
of tax of $(18,715) and $(6,046) in
1997 and 1996, respectively 36,329 11,736
------------- ------------
37,853,242 2,229,732
Less cost of treasury stock, 805 shares - (162,045)
------------- ------------
Total stockholders' equity 37,853,242 2,067,687
------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 144,740,087 $ 18,211,663
------------- ------------
------------- ------------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying summary of significant accounting policies and notes
to consolidated financial statements.
F-5
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 3,024,441 $ 153,337 $ 136,045
Interest and dividends on investment securities 547,719 865,081 851,440
Interest on federal funds sold 447,378 127,364 145,275
----------- ---------- -----------
Total interest income 4,019,538 1,145,782 1,132,760
INTEREST EXPENSE ON DEPOSITS 1,260,139 515,442 494,040
----------- ---------- -----------
Net interest income 2,759,399 630,340 638,720
PROVISION (CREDIT) FOR LOAN LOSSES 2,700,000 97,003 (79,963)
----------- ---------- -----------
Net interest income after provision
(credit) for loan losses 59,399 533,337 718,683
----------- ---------- -----------
OTHER OPERATING INCOME
Service charges 83,543 71,970 71,972
Other 77,967 45,935 64,618
----------- ---------- -----------
Total other operating income 161,510 117,905 136,590
----------- ---------- -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits 1,027,236 337,423 272,390
Depreciation 119,853 18,639 18,478
Advertising 53,134 13,374 14,294
Occupancy expense 178,588 29,565 30,442
Federal Deposit Insurance Corporation
premiums, net 1,830 2,000 18,421
Professional fees 94,558 19,239 19,812
Supplies, stationery and office expenses 411,766 19,744 21,399
Taxes other than on income and salaries 6,106 4,925 4,209
Data processing 80,805 69,751 71,708
Postage 36,925 21,278 21,190
Other 230,836 69,644 54,088
----------- ---------- -----------
Total other operating expenses 2,241,637 605,582 546,431
----------- ---------- -----------
Earnings (loss) before income taxes (2,020,728) 45,660 308,842
INCOME TAXES (BENEFIT) (39,313) 6,813 103,186
----------- ---------- -----------
NET EARNINGS (LOSS) $(1,981,415) $ 38,847 $ 205,656
----------- ---------- -----------
----------- ---------- -----------
NET EARNINGS (LOSS) PER SHARE $ (0.41) $ 0.05 $ 0.29
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-6
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING GAIN
(LOSS) ON
RETAINED AVAILABLE-
COMMON PAID-IN EARNINGS FOR-SALE TREASURY
STOCK CAPITAL (DEFICIT) SECURITIES STOCK TOTAL
----- ------- --------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 100,000 $ 1,514,807 $ 358,686 $(64,389) $ (162,045) $ 1,747,059
Net earnings - - 205,656 - - 205,656
Net change in unrealized
depreciation on available-
for-sale securities, net
of tax effects of $ 40,570 - - - 78,754 - 78,754
------------ ------------ ----------- ------- ----------- ------------
Balance at December 31, 1995 100,000 1,514,807 564,342 14,365 (162,045) 2,031,469
Net earnings - - 38,847 - - 38,847
Net change in unrealized
appreciation on available-
for-sale securities, net
of tax effects of $(1,354) - - - (2,629) - (2,629)
------------ ------------ ----------- ------- ----------- ------------
Balance at December 31, 1996 100,000 1,514,807 603,189 11,736 (162,045) 2,067,687
Net loss - - (1,981,415) - - (1,981,415)
Purchase of treasury stock
(6,695 shares) - - - - (1,575,417) (1,575,417)
Goodwill arising from
acquisition of the Company - 65,625 - - - 65,625
Retirement of treasury stock
(7,500 shares) (75,000) (1,580,433) (82,029) - 1,737,462 -
Reduction in par value from
$10 to $1 per share (22,500) 22,500 - - - -
Stock split effected in the
form of a dividend of
77.4372-for-1 193,593 - (193,593) - - -
Common stock issued
(13,333,334 shares), net of
issue costs of $159,558 13,333,334 26,507,110 - - - 39,840,444
Purchase and retirement of
common stock (196,093
shares) (196,093) (392,182) - - - (588,275)
Net change in unrealized
appreciation on available-
for-sale securities, net
of tax effects of $12,669 - - - 24,593 - 24,593
------------ ------------ ----------- ------- ----------- ------------
Balance at December 31, 1997 $ 13,333,334 $ 26,137,427 $ (1,653,848) $ 36,329 $ - $37,853,242
------------ ------------ ----------- ------- ----------- ------------
------------ ------------ ----------- ------- ----------- ------------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-7
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (1,981,415) $ 38,847 $ 205,656
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 119,853 18,639 18,478
Deferred income taxes (369,400) 6,813 103,186
Provision (credit) for loan losses 2,700,000 97,003 (79,963)
Gain on sale of land - (6,937) -
Amortization of premium or (accretion) of
discount relating to investment securities, net 13,594 (3,854) (8,654)
Change in:
Accrued interest receivable (1,007,377) 53,011 (49,209)
Other assets (43,663) 22,939 (1,056)
Accrued interest payable 195,349 (6,901) 8,791
Federal income taxes payable 324,709 - -
Other liabilities 67,463 (12,124) 11,987
------------- ----------- -----------
Net cash provided by operating activities 19,113 207,436 209,216
------------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs
on securities held-to-maturity 1,900,277 4,619,770 3,418,465
Proceeds from maturities and pay-downs
on securities available-for-sale 3,365,437 1,277,418 928,511
Purchases of securities held-to-maturity - (2,892,048) (4,319,123)
Purchases of securities available-for-sale (24,000) - -
Change in loans to customers (118,383,550) 320,278 (375,224)
Expenditures for bank premises and equipment (800,325) (9,146) (10,770)
Proceeds from sale of land - 31,766 -
------------- ----------- -----------
Net cash provided (used) by investing activities (113,942,161) 3,348,038 (358,141)
------------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 90,187,370 (313,429) 267,997
Proceeds from sale of common stock, net of
issue costs of $159,558 39,840,444 - -
Proceeds from loan from stockholder 1,000,000 - -
Repayment of loan to stockholder (1,000,000) - -
Purchases of treasury stock (2,163,692) - -
------------- ----------- -----------
Net cash provided (used) by financing activities 127,864,122 (313,429) 267,997
------------- ----------- -----------
Net increase in cash and cash equivalents 13,941,074 3,242,045 119,072
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,185,224 2,943,179 2,824,107
------------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 20,126,298 $ 6,185,224 $ 2,943,179
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-8
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1997, 1996 AND 1995
NATURE OF OPERATIONS
Tejas Bancshares, Inc. (the Company) provides a variety of financial services to
individuals and corporate customers in the community of Amarillo, Texas and the
surrounding geographical area. The Company's primary deposit products are demand
deposits and time and savings accounts. Its primary lending products are
consumer, commercial, agriculture and real estate loans.
During 1997, the corporate structure of the Company changed significantly as
follows:
- - In May 1997, Mr. Donald E. Powell acquired control of all of the
outstanding common stock of the Company. In connection with the
acquisition, the Corporation repurchased 6,695 shares of its common stock
for approximately $1,575,400 and Mr. Powell acquired the remaining 2,500
shares of its common stock for approximately $588,300 and loaned the
Company $1,000,000 at the prime interest rate (8.5%). Goodwill in
connection with the acquisition amounted to approximately $65,600.
- - Following completion of the acquisition, the authorized shares of the
Company were increased from 10,000 to 20,000,000, the par value of the
common stock was reduced from $10 to $1 and 7,500 shares of treasury stock
were retired. The domicile of the Company's wholly-owned subsidiary, Fritch
State Bank, was also moved to Amarillo, Texas, and it was converted to a
national banking association named The First National Bank of Amarillo (the
Bank).
- - In July 1997, the Company's common stock was split 77.4372-for-1 in the
effect of a stock dividend. During August 1997, the Company completed an
offering of its common stock and issued 13,333,334 shares at an issue price
of $3 per share. Subsequent to the offering, Mr. Powell's original 196,093
shares were repurchased for approximately $588,300 and were retired and his
$1,000,000 loan was repaid.
- - The Company experienced significant growth in loans and deposits during
1997 primarily because of the Bank's relocation of its main office from
Fritch, Texas, to the larger Amarillo, Texas banking market, which is a
more economically vibrant banking market than Fritch, Texas. In addition,
deposit and loan growth can be attributable to the new management team,
which has emphasized growth from the Bank's existing client base and
capitalizing opportunities from its target market (e.g., customers of
competing financial institutions), and the delivery of personalized banking
services to the Bank's customers. In addition, the Bank's loan growth is
attributable to the Bank's aggressive commercial lending program and its
virtual re-emergence into agricultural and real estate lending and strong
emphasis on the commercial loan market.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1997, 1996 AND 1995
INVESTMENT SECURITIES
The Company classifies its investment securities in one of three categories;
trading, available-for-sale or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in the near term.
The Company had no investment securities classified as trading at December
31, 1997 or December 31, 1996. Held-to-maturity securities are those in which
the Company has the ability and intent to hold the security until maturity.
All other securities not included in trading or held-to-maturity are
classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains
and losses on trading securities are included in earnings. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholders' equity until realized. Transfers of securities
between categories are recorded at fair value at the date of transfer. In
connection with the aforementioned acquisition, during June 1997 the Company
transferred all of its held-to-maturity securities (total carrying value of
approximately $6,436,000) to available-for-sale. Unrealized holding gains and
losses are recognized in earnings for transfers into trading securities.
The unrealized holding gains or losses included in the separate component of
equity for securities transferred from available-for-sale to held-to-maturity
are maintained and amortized into earnings over the remaining life of the
security as an adjustment to yield in a manner consistent with the
amortization or accretion of premium or discount on the associated security.
A decline in the market value of any available-for-sale or held-to- maturity
security below cost that is deemed other than temporary is charged to
earnings resulting in the establishment of new cost basis for the security.
Premiums and discounts are amortized or accredited over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned. Realized
gains and losses for securities classified as available-for-sale and
held-to-maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses and unearned income. Unearned income on certain installment
loans is taken into income over the term of the loan by the sum-of-the-months
digits method. The effect of not using the interest method is not material to
the financial position or results of operations of the Company. Interest on
other loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the market
price or the fair value of the collateral if the loan is collateral
dependent. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest payments received on nonaccrual loans are
generally applied to principal.
F-10
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DECEMBER 31, 1997, 1996 AND 1995
LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of individual credits, prior loan loss
experience and general economic conditions. If management believes the
allowance is in excess of possible losses, a credit to the provision is made.
The allowance is subjective in nature and may be adjusted in the near term
because of changes in economic conditions or review by regulatory examiners.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation,
which is computed using the straight-line method over the estimated useful lives
of the assets.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting primarily of commitments to
extend credit. Such financial instruments are recorded in the consolidated
financial statements when they become payable.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers due from
banks and federal funds sold to be cash equivalents. Federal funds sold are
generally purchased and sold for one-day periods.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per share are computed based on the weighted average number
of shares outstanding. For the years ended December 31, 1997, 1996 and 1995 the
weighted average shares outstanding were 4,824,792, 712,035 and 712,035,
respectively, after giving effect for the above-mentioned stock split effected
in the form of a dividend.
This information is an integral part of the accompanying consolidated
financial statements.
F-11
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available- for-sale securities by major security type
at December 31, 1997, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $ 498,199 $ 1,140 $ - $ 499,339
Government agency securities 1,921,817 6,518 - 1,928,335
Mortgage-backed securities 2,499,384 48,476 (1,090) 2,546,770
State and political obligations 36,585 - - 36,585
Other securities 73,875 - - 73,875
---------- ------- ------- ----------
TOTAL AVAILABLE-FOR-SALE $5,029,860 $56,134 $(1,090) $5,084,904
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
Maturities of investment securities classified as available-for-sale were as
follows at December 31, 1997 (maturities of mortgage-backed securities have been
presented based upon estimated cash flows, assuming no change in the current
interest rate environment). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Available-for-sale:
Due one year or less $2,213,912 $2,238,140
Due from one to five years 1,012,070 1,023,146
Due after ten years 1,430,515 1,446,170
Other 373,363 377,448
---------- ----------
TOTAL AVAILABLE-FOR-SALE $5,029,860 $5,084,904
---------- ----------
---------- ----------
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses and fair value for available-for-sale and held-to-maturity securities by
major security type at December 31, 1996, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities $ 299,899 $ 6,441 $ - $ 306,340
Mortgage-backed securities 1,589,646 11,887 (547) 1,600,986
Other securities 49,875 - - 49,875
---------- ------- ----- ----------
TOTAL AVAILABLE-FOR-SALE $1,939,420 $18,328 $(547) $1,957,201
---------- ------- ----- ----------
---------- ------- ----- ----------
</TABLE>
F-12
<PAGE>
NOTE 1 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Held-to-maturity:
U.S. Treasury securities $2,241,662 $11,857 $ - $2,253,519
Other U.S. government
- agency obligations 4,698,849 31,999 - 4,730,848
State and political obligations 77,453 - - 77,453
Mortgage-backed securities 1,327,785 32,441 (3,033) 1,357,193
---------- ------- ------- ----------
TOTAL HELD-TO-MATURITY $8,345,749 $76,297 $(3,033) $8,419,013
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
Investment securities with a carrying value of approximately $1,996,000 and
$3,262,000 at December 31, 1997 and 1996, respectively, were pledged to secure
public deposits as required or permitted by law.
NOTE 2 - LOANS
The major classification of loans are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate - primarily mortgage $ 34,351,987 $ 168,477
Agriculture 15,381,803 -
Commercial 45,901,834 553,641
Installment loans to individuals 24,359,581 822,872
Unearned income (144,523) (81,076)
------------- -----------
TOTAL LOANS $ 119,850,682 $ 1,463,914
------------- -----------
------------- -----------
</TABLE>
The Bank grants consumer, commercial, agriculture and real estate loans to
customers in primarily the community of Amarillo, Texas and the surrounding
geographical area. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their commitments is
dependent upon the real estate and agricultural sectors.
The changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $ 45,200 $ 22,574 $ 37,605
Provision charged (credited) to expense 2,700,000 97,003 (79,963)
Loans charged off (5,144) (82,827) (7,816)
Recoveries on loans previously charged off 8,362 8,450 72,748
----------- -------- --------
BALANCE AT END OF YEAR $ 2,748,418 $ 45,200 $ 22,574
----------- -------- --------
----------- -------- --------
</TABLE>
At December 31, 1997 and 1996 there were no material amounts of impaired loans.
F-13
<PAGE>
NOTE 3 - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more was
approximately $25,606,000 and $945,000 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of all certificates of deposits
were substantially all within one year.
NOTE 4 - INCOME TAXES
The following is a summary of the components of income tax expense (benefit):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current - federal $ 330,087 $ - $ -
Deferred (369,400) 6,813 103,186
--------- ------ --------
Total income tax expense (benefit) $ (39,313) $6,813 $103,186
--------- ------ --------
--------- ------ --------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 842,379 $ -
Bank premises and equipment basis and
depreciation differences 90,776 -
Allowance for investment security losses 31,981 33,544
Net operating loss tax credit carryforward - 16,110
Other 22,313 -
Valuation allowance (644,015) -
--------- --------
343,424 49,654
--------- --------
Deferred tax liabilities:
Allowance for loan losses - (75,630)
Available-for-sale securities (18,715) (6,046)
(18,715) (81,676)
--------- --------
NET DEFERRED TAX ASSET (LIABILITY) $ 324,709 $(32,022)
--------- --------
--------- --------
</TABLE>
Because of the Company's limited history to generate substantial taxable income,
a valuation allowance has been established to limit the recognition of net
deferred tax assets to approximate the amount of taxes expected to be paid in
the current year.
F-14
<PAGE>
NOTE 4 - INCOME TAXES (CONTINUED)
Total income taxes for the years ended December 31, 1997, 1996 and 1995 are
allocated $(39,313), $6,813 and $103,186, respectively, to income tax from
operations and $12,669, $(1,354) and $40,570, respectively, to stockholders'
equity for the tax effect of unrealized holding gains on available-for-sale
securities recognized for financial reporting purposes.
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% in 1997, 1996 and 1995 to earnings (loss) before
income taxes as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $(687,048) $ 15,524 $ 105,006
Effect of valuation allowance 644,015 - -
Tax-exempt income (1,126) (5,001) (3,920)
Other, net 4,846 (3,710) 2,100
--------- -------- ---------
TOTAL INCOME TAX EXPENSE (BENEFIT) $ (39,313) $ 6,813 $ 103,186
--------- -------- ---------
--------- -------- ---------
</TABLE>
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
The Company's directors and their associates, including companies and firms of
which they are officers or in which they and/or their families have an ownership
interest, are customers of the Company. The following is a summary of loan
activity with these parties for the year ended December 31, 1997:
<TABLE>
<S> <C>
Balances at beginning of period $ -
Advances 12,507,324
Repayment (1,956,518)
------------
Balances at end of year $ 10,550,806
------------
------------
</TABLE>
Loans to related parties during 1996 and 1995 were not significant.
The Company also has deposit activities with related parties in the normal
course of business which amounted to $3,735,935 at December 31, 1997. Deposit
activities with related parties for 1996 and 1995 were not significant.
Other transactions with Mr. Donald E. Powell are described in the Summary of
Significant Accounting Policies.
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash disbursed for interest for the years ended December 31, 1997, 1996 and 1995
was $1,064,790, $522,343, and $485,249, respectively. Cash disbursed for income
taxes was not significant for the years ended December 31, 1997, 1996 and 1995.
F-15
<PAGE>
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (CONTINUED)
During the year ended December 31, 1997, noncash investing activities consisted
of the recognition in stockholders' equity of the net unrealized holding gains
on available-for-sale securities of $24,593, net of deferred taxes of $12,669.
During the year ended December 31, 1996, noncash investing activities consisted
of the recognition in stockholders' equity of the net unrealized holding gains
on available-for-sale securities of $(2,629), net of deferred taxes of $(1,354).
During the year ended December 31, 1995, noncash investing activities consisted
of the recognition in stockholders' equity of the net unrealized holding gains
on available-for-sale securities of $78,754, net of deferred taxes of $40,570.
Other noncash transactions during 1997 included the retirement of treasury stock
having a carrying value of approximately $2,325,700, a stock split effected in
the form of a dividend of 77.4372-for-1, the reduction in par value from $10 to
$1 and the transfer of investments of approximately $6,436,000 from the held-to-
maturity category to the available-for-sale category in connection with the
acquisition previously discussed.
NOTE 7 - LEASE COMMITMENTS
The Company leases certain land and office space under noncancelable operating
leases expiring in various years through 2027. Certain leases contain renewal
options from five to ten years based on existing or escalated terms. Future
minimum lease payments under these leases are as follows:
<TABLE>
<S> <C>
1998 $ 135,300
1999 137,600
2000 149,700
2001 161,800
2002 157,600
Later years 838,100
----------
TOTAL $1,580,100
----------
----------
</TABLE>
Total rental expense for the year ended December 31, 1997 was approximately
$59,700. Rental expense for the years ended December 31, 1996 and 1995 was not
significant.
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have variable interest rates, fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn
F-16
<PAGE>
NOTE 8 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary upon
extension of credit is based on management's credit evaluation. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties. The exposure to credit
loss in the event of nonperformance by the other party to the commitments to
extend credit is represented by the contractual amount. Unfunded loan
commitments at December 31, 1997 were approximately $54,063,000. Unfunded loan
commitments were not material at December 31, 1996. Management does not
anticipate any losses as a result of these transactions.
NOTE 9 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments, the results of applying such methods and
assumptions to the financial instruments and limitations inherent in fair value
estimates:
CASH, DUE FROM BANKS AND FEDERAL FUNDS SOLD
The assets are considered short-term instruments for which the carrying amount
is a reasonable estimate of fair value.
INVESTMENT SECURITIES
For investment securities, excluding restricted equity securities, fair value is
equal to the quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities or bid quotations received from securities dealers. The carrying
value of restricted equity securities approximate fair values. Securities
available-for-sale had a carrying value (which approximates fair value) of
approximately $5,085,000 and $1,957,000 at December 31, 1997 and 1996,
respectively. Securities held-to-maturity had a carrying value of approximately
$8,346,000 and a fair value of approximately $8,419,000 at December 31, 1996.
LOANS
Fair values of loans are estimated by discounting the future cash flows through
the estimated maturity using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The carrying value of loans, net
of the allowance for loan losses, was $117,102,264 and $1,418,714 at December
31, 1997 and 1996, respectively. The fair value of loans at those dates was
approximately the same as carrying value.
DEPOSITS
The fair value of demand deposits, both interest and noninterest bearing, and
savings accounts is the amount payable on demand at the reporting date. The fair
value of time deposits is estimated using the rates currently offered for
deposits of similar remaining maturities. At December 31, 1997 and 1996, the
F-17
<PAGE>
NOTE 9 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
carrying value of deposits was $106,254,658 and $16,067,288. The fair value
of deposits at those dates was approximately the same as carrying value.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
NOTE 10 - REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I Capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997 that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1997, the most recent notification from the Bank's
regulator categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the following table. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
F-18
<PAGE>
NOTE 10 - REGULATORY MATTERS (CONTINUED)
The Company's and Bank's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $39,412,000 31.17% $10,116,000 >= 8.0% N/A
The Bank 38,528,000 30.47% 10,116,000 >= 8.0% $12,645,000 >=10.0%
Tier I Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $37,817,000 29.91% $ 5,058,000 >= 4.0% N/A
The Bank 36,933,000 29.21% 5,058,000 >= 4.0% $ 7,587,000 >= 6.0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $37,597,000 28.98% $ 5,224,000 >= 4.0% N/A
The Bank 36,969,000 28.31% 5,224,000 >= 4.0% $ 6,530,000 >= 5.0%
As of December 31, 1996
Total Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 2,101,000 51.50% $ 326,000 >= 8.0% N/A
The Bank 2,044,000 50.10% 326,000 >= 8.0% $ 408,000 >=10.0%
Tier I Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $ 2,056,000 50.40% $ 163,000 >= 4.0% N/A
The Bank 1,999,000 49.00% 163,000 >= 4.0% $ 245,000 >= 6.0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $ 2,056,000 11.00% $ 747,000 >= 4.0% N/A
The Bank 1,999,000 10.70% 747,000 >= 4.0% $ 934,000 >= 5.0%
</TABLE>
There are certain regulatory guidelines on the amount of dividends that can be
paid by the Bank to the Company. These guidelines do not currently have a
significant effect on the amount of dividends paid by the Bank. The Bank is also
required to maintain certain daily reserve balances on hand in accordance with
requirements of the Board of Governors of the Federal Reserve System. For the
years ended December 31, 1997 and 1996, the Bank maintained average cash and due
from bank balances of approximately $4,720,000 and $1,210,000, respectively, in
order to satisfy such requirements.
NOTE 11 - PARENT COMPANY FINANCIAL INFORMATION
The condensed balance sheets, statements of operations and cash flows for Tejas
Bancshares, Inc. (parent only) follow:
F-19
<PAGE>
NOTE 11 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash on deposit with Bank $ 884,154 $ 56,881
Investment in Bank 36,969,088 2,010,806
----------- ----------
TOTAL ASSETS $37,853,242 $2,067,687
----------- ----------
----------- ----------
STOCKHOLDERS' EQUITY $37,853,242 $2,067,687
----------- ----------
----------- ----------
CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividend received from Bank $ 632,938 $ - $ -
Other - 6,937 -
----------- ------- --------
632,938 6,937 -
----------- ------- --------
EXPENSES
Other 82,417 11,727 1,657
EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF BANK (2,531,936) 43,637 207,313
----------- ------- --------
NET EARNINGS (LOSS) $(1,981,415) $38,847 $205,656
----------- ------- --------
----------- ------- --------
</TABLE>
F-20
<PAGE>
NOTE 11 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net earnings (loss) $ (1,981,415) $ 38,847 $ 205,656
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by
operating activities:
Equity in undistributed loss (income)
of Bank 2,531,936 (43,637) (207,313)
Gain on sale of real estate - (6,937) -
------------ -------- ---------
Net cash provided (used) by
operating activities 550,521 (11,727) (1,657)
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of real estate - 31,764 -
------------ -------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES
Purchase of treasury stock (2,163,692) - -
Proceeds from sale of common stock,
net of issue costs of $159,558 39,840,444 - -
Cash investment in Bank (37,400,000) - -
Proceeds from loan to stockholder 1,000,000 - -
Repayment of loan to stockholder (1,000,000) - -
------------ -------- ---------
Net cash provided by financing activities 276,752 - -
------------ -------- ---------
Increase (decrease) in cash 827,273 20,037 (1,657)
CASH, BEGINNING OF YEAR 56,881 36,844 38,501
------------ -------- ---------
CASH, END OF PERIOD $ 884,154 $ 56,881 $ 36,844
------------ -------- ---------
------------ -------- ---------
</TABLE>
This information is an integral part of the accompanying consolidated financial
statements.
F-21
<PAGE>
TEJAS BANCSHARES, INC.
AND SUBSIDIARY
AMARILLO, TEXAS
CONDENSED CONSOLIDATED INTERIM
FINANCIAL STATEMENTS
(Unaudited)
For the Quarter Ended March 31, 1998
F-22
<PAGE>
INDEX TO INTERIM FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (unaudited)......................F-24
Condensed Consolidated Statements of Operations
and Comprehensive Income (unaudited)................................F-26
Condensed Consolidated Statements of Cash Flows (unaudited)............F-27
Notes to Condensed Consolidated Financial Statements...................F-28
</TABLE>
F-23
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Cash and due from banks $ 15,226,794 $ 16,726,298
Federal funds sold 16,000,000 3,400,000
Securities available-for-sale 5,356,818 5,084,904
Loans 136,956,142 119,850,682
Less allowance for loan losses (2,983,962) (2,748,418)
------------- -------------
Loans, net 133,972,180 117,102,264
------------- -------------
Bank premises and equipment
Land 39,000 39,000
Buildings 1,554,737 602,026
Furniture, fixtures and equipment 703,857 496,030
------------- -------------
Total, at cost 2,297,594 1,137,056
Less accumulated depreciation (322,482) (274,800)
------------- -------------
Net property and equipment 1,975,112 862,256
Accrued interest receivable 2,288,880 1,160,948
Net deferred tax asset 326,272 324,709
Other assets 250,470 78,708
------------- -------------
TOTAL ASSETS $ 175,396,526 $ 144,740,087
------------- -------------
------------- -------------
</TABLE>
F-24
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
LIABILITIES
Deposits
Demand - noninterest bearing $ 37,624,053 $ 37,270,616
Demand - interest bearing 23,373,529 28,483,519
Time and savings 75,200,726 40,500,523
------------- -------------
Total deposits 136,198,308 106,254,658
Accrued interest payable 424,107 222,676
Federal income taxes payable 103,465 324,709
Other liabilities 208,491 84,802
------------- -------------
Total liabilities 136,934,371 106,886,845
STOCKHOLDERS' EQUITY
Common stock 13,333,334 13,333,334
Paid-in capital 26,137,427 26,137,427
Retained earnings (deficit) (1,041,902) (1,653,848)
Net unrealized holding gain on
available-for-sale securities,
net of tax 33,296 36,329
------------- -------------
Total stockholder's equity 38,462,155 37,853,242
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 175,396,526 $ 144,740,087
------------- -------------
------------- -------------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-25
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations and Comprehensive Income
Three Months ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,797,406 $ 34,950
Interest and dividends on investment
securities 79,228 159,808
Interest on fed funds sold 101,469 80,044
----------- --------
Total interest income 2,978,103 274,802
INTEREST EXPENSE ON DEPOSITS 864,070 128,409
----------- --------
Net interest income 2,114,033 146,393
PROVISION FOR LOAN LOSSES 225,000 --
----------- --------
Net interest income after provision for loan losses 1,889,033 146,393
----------- --------
OTHER OPERATING INCOME
Service charges 66,901 15,366
Other 35,160 11,398
----------- --------
Total other operating income 102,061 26,764
----------- --------
OTHER OPERATING EXPENSE
Salaries and employee benefits 583,187 66,524
Depreciation 40,617 3,193
Advertising 98,823 2,487
Occupancy 78,462 7,675
FDIC premiums 3,420 0
Professional fees 30,496 5,314
Supplies, stationery and office expense 219,962 4,525
Taxes other than on income and salaries 47,499 1,275
Data processing 31,199 20,448
Postage 18,331 5,784
Other 108,396 12,733
----------- --------
Total other operating expenses 1,260,392 129,958
----------- --------
Earnings before income taxes 730,702 43,199
INCOME TAXES 118,756 15,636
----------- --------
NET EARNINGS $ 611,946 $ 27,563
OTHER COMPREHENSIVE INCOME
Change in unrealized gains/
(losses) on securities, net of tax (3,033) 943
----------- --------
COMPREHENSIVE INCOME $ 608,913 $ 28,506
----------- --------
----------- --------
NET EARNINGS PER SHARE $ .05 $ .04
----------- --------
----------- --------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-26
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of
Cash Flows Three months ended
March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 611,946 $ 27,563
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation and amortization 47,682 3,193
Deferred income taxes -- 15,635
Provision for loan losses 225,000 --
Amortization of premium or (accretion) of
discount relating to investment securities,
net (1,871) (5,094)
Change in:
Accrued interest receivable (1,127,932) 7,053
Other assets (171,763) 15,583
Accrued interest payable 201,431 692
Federal income taxes payable (221,244) --
Other liabilities 123,690 1,440
------------ -----------
Net cash provided (used) by operating activities (313,061) 66,066
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and pay-downs on
securities held-to-maturity -- 1,318,481
Proceeds from maturities and pay-downs on
securities available-for-sale 867,161 37,356
Purchases of securities available-for-sale (1,141,800) --
Change in loans to customers (17,094,916) (516,334)
Expenditures for bank premises and equipment (1,160,538) --
------------ -----------
Net cash provided (used) by investing activities (18,530,093) 839,503
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 29,943,650 1,024,219
------------ -----------
Net cash provided by financing activities 29,943,650 1,024,219
------------ -----------
Net increase in cash and cash equivalents 11,100,496 1,929,787
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,126,298 6,185,224
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 31,226,794 $ 8,115,011
------------ -----------
------------ -----------
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying summary of significant accounting policies and
notes to consolidated financial statements.
F-27
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) GENERAL
See the Summary of Significant Accounting Policies included in the
consolidated financial statements in the Company's report on Form 10.
The unaudited condensed consolidated financial statements included herein
were prepared from the books of the Company in accordance with generally
accepted accounting principles and reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management,
necessary to a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally
conform to the presentation reflected in the Company's Annual Report to
Stockholders. The current interim period reported herein is included in the
fiscal year subject to independent audit at the end of that year and is not
necessarily an indication of the expected results for the fiscal year.
Effective January 1, 1998, the Company adopted the provisions of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income." Under this
standard, comprehensive income is now reported for all periods.
Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains
and losses on securities available-for-sale, net of tax.
(2) NET EARNINGS PER SHARE
Net earnings per share are computed based on the weighted average number of
shares outstanding. For the three months ended March 31, 1998 and 1997, the
weighted average shares outstanding were 13,333,334 and 712,035,
respectively.
(3) SECURITIES
The amortized cost and estimated fair values of securities are as follows
at March 31, 1998:
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Securities available-for-sale
U.S. Treasury securities $ 248,930 $ 250,068
Government agency securities 1,422,082 1,430,354
Mortgage-backed securities 2,393,035 2,434.073
State and political obligations 26,648 26,648
Other securities 1,215,675 1,215,675
---------- ----------
$5,306,370 $5,356,818
---------- ----------
---------- ----------
</TABLE>
F-28
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(3) SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Securities available-for-sale
U.S. Treasury securities $ 498,199 $ 499,339
Government agency securities 1,921,817 1,928,335
Mortgage-backed securities 2,499,384 2,546,770
State and political obligations 36,585 36,585
Other securities 73,875 73,875
---------- ----------
$5,029,860 $5,084,904
---------- ----------
---------- ----------
</TABLE>
(4) LOANS
Loans are comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---- ----
<S> <C> <C>
Real estate $ 43,839,370 $ 34,351,987
Agriculture 26,745,615 15,381,803
Commercial 44,742,059 45,901,834
Installment loans to individuals 21,769,853 24,359,581
Unearned income (140,755) (144,523)
------------- -------------
TOTAL LOANS $ 136,956,142 $ 119,850,682
------------- -------------
------------- -------------
</TABLE>
(5) ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance, January 1 $ 2,748,418 $ 45,200
Provision charged to operations 225,000 --
Loans charged off (4,189) (2,189)
Recoveries on loans previously charged off 14,733 1,662
----------- --------
BALANCE, MARCH 31 $ 2,983,962 $ 44,673
----------- --------
----------- --------
</TABLE>
This information is an integral part of the accompanying condensed
consolidated financial statements.
F-29
<PAGE>
EXHIBIT LIST
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
3.1 Restated Articles of Incorporation of Tejas Bancshares, Inc.*
3.2 Amended and Restated Bylaws of Tejas Bancshares, Inc.*
21.1 Subsidiary of Tejas Bancshares, Inc.*
27.1 Financial Data Schedule*
</TABLE>
- ----------------------
* Previously filed.
