UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the fiscal year ended December 31, 1998.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ________ to ________.
Commission File number 0-24023
TEJAS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1950688
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
905 South Fillmore, Suite 701, Amarillo, Texas 79101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 373-7900
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock, $1.00 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of registrant's voting stock held by nonaffiliates (which
excludes the registrant's Board of Directors) as of February 28, 1999, was
$38,157,000. This amount is based on the book value per share of the
registrant's voting stock. There is no established public trading market for the
registrant's voting stock and there exists no accurate method to determine its
current market price.
On February 28, 1999, the Company had 13,397,934 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents Part of Form 10-K
Definitive Proxy Statement related to 1999 Part III
annual meeting of shareholders
<PAGE>
PART I
ITEM 1. BUSINESS.
General
Tejas Bancshares, Inc.
Tejas Bancshares, Inc. (the "Company"), was incorporated as a Texas
corporation on June 22, 1983, 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 by acquiring all 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 issued and outstanding capital stock of the Bank.
As of December 31, 1998, the Company had, on a consolidated basis, total
assets of approxi mately $247,288,000; total deposits of approximately
$205,139,000; total loans of approximately $183,551,000 (net of unearned
discount and allowance for loan losses); and total stockholders' equity of
approximately $41,164,000.
The Company does not, as an entity, engage in separate business activities
of a material nature apart from its activities for the Bank. The Company's
primary activities are to assist in the management and coordination of the
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 for 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 any dividends may be declared and paid only 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 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 in the National Bank Act and the rules and regulations
promulgated thereunder by the Comptroller. As of
1
<PAGE>
December 31, 1998, the Bank had total assets of approximately $247,289,000;
total deposits of approximately $205,853,000; total loans of approximately
$183,551,000 (net of unearned discount and allowance for loan losses); and total
stockholders' equity of approximately $40,377,000.
The Bank provides a full range of banking services to business, industry,
public and governmental organizations, and individuals in Amarillo, Dalhart, and
Fritch, Texas. The Bank serves 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 for 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, Donald E. Powell, the Company's and the Bank's
Chairman of the Board, President, and Chief Executive Officer, acquired control
of all outstanding stock of the Company (the "Acquisition"). Mr. Powell's
acquisition of control of the Company was accomplished pursuant to a stock
purchase agreement by and among Mr. Powell, the Company, and all shareholders of
the Company (the "Stock Purchase Agreement").
The Stock Purchase Agreement stated that the Company would repurchase
approximately 73 percent 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 the shares to be received by
all 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
before the closing of the Acquisition, some non-performing loan assets had not
been transferred to the shareholders and remained on the Bank's books.
Accordingly, the aggregate purchase price for the Company's stock 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 the 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 each shareholder's respective ownership interest in the Company on
the closing date of the Acquisition. The aggregate value of the non-performing
loan assets was approximately $79,000 as of May 23, 1997, the effective date of
the Acquisition.
2
<PAGE>
Immediately before consummating the transaction, the Company had 9,195
shares of common stock, par value $10.00 per share, issued and outstanding and
owned by 21 shareholders. 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. As a result of these simultaneous transactions, Mr. Powell
owned 2,500 shares, which were all issued and 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. Mr. Powell's loan to the Company, which, pursuant to the Company's
promissory note to Mr. Powell, was to be repaid over a ten-year period and was
secured by a pledge of all capital stock of the Bank owned by the Company. The
loan was repaid in full on September 2, 1997.
Before 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.
After Mr. Powell's acquisition of all outstanding stock of the Company, and
in anticipation of an intrastate public offering of the Company's common stock,
its Articles of Incorporation were amended to (i) increase the authorized shares
of common stock of the Company from 10,000 to 20,000,000 shares; (ii) reduce the
par value of the common stock of the Company from $10.00 to $1.00 per share;
(iii) eliminate the preemptive rights of the shareholders of the Company; and
(iv) generally update the indemnification provisions in the Company's
organizational documents. Since Mr. Powell was the Company's sole shareholder
following the Acquisition, these amendments were approved by unanimous written
consent following their 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 the Stock Dividend, Mr. Powell's 2,500 shares were converted into
196,093 shares of the Company's common stock, representing all 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 the stock equaled $3.00 per share, which is equivalent to the
price of the Common Stock offered in the public offering.
3
<PAGE>
Change in Management and Competitive Focus.
Before the Acquisition, Mr. Powell served as the Chairman of the Board,
President, and Chief Executive Officer 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 before it was 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
("NationsBank"), and Boatmen's Bancshares, Inc.("Boatmen's"), announced that
they had entered into a definitive agreement pursuant to which NationsBank would
acquire Boatmen's. As a result thereof, NationsBank indirectly acquired
Boatmen's First National Bank of Amarillo. NationsBank's acquisition of
Boatmen's was 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 after the
NationsBank transaction in January 1997, he voluntarily resigned from Boatmen's
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 the Company and indirect
acquisition of control of the Bank.
Immediately after the Acquisition, Mr. Powell became the President and
Chief Executive Officer of the Company. The Company's former President and Chief
Executive Officer continued to be employed by the Bank following the Acquisition
and currently serves as the manager of one of the Bank's branches. In addition,
immediately following the Acquisition, Mr. Powell, as the sole shareholder of
the Company, reconstituted the Company's board of directors with five persons,
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 given in Part III to this Annual Report on Form 10- K. 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 reintroduce "The First National Bank of Amarillo" to Amarillo, were
completed on or about June 30, 1997. In addition, the Bank sought approval to
establish two de novo full-service branches in Amarillo and an additional
full-service branch in Dalhart, Texas. The Dalhart branch, 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.
To support this physical expansion and growth in market presence, the Bank
hired approximately 85 additional employees between June 30, 1997, and December
31, 1998, bringing the current number of full-time equivalent employees to 94.
Additional information regarding the increase in non-interest expense of the
Company associated with the larger employee base is provided at "MANAGEMENT'S
4
<PAGE>
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 Texas 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.
After 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 Panhandle residents. The intrastate offering to bona fide
residents of Texas was concluded on August 31, 1997, when the offering was
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
and a larger lending limit, and to maintain a capital base at a level that the
Bank's management deemed sufficient for satisfactory capital ratios.
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) appointing an experienced and knowledgeable Board of
Directors of the Company and the Bank; (2) hiring an experienced management team
and seasoned Bank employees; (3) formulating and implementing 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, since the banking business is highly personalized, particularly in the
markets served by the Bank, it attributes much of its recent success to the
efforts of its enhanced staff who provide personalized banking services to the
Bank's customers and the aggressive advertising of its highly personalized
service to its target market. One of the Bank's goals is to be the premier
financial institution in the Panhandle, recognized for customer service, and the
delivery of personalized service has become one of the Bank's most recognizable
features since the Acquisition. In addition, the Bank enjoys a unique position
as one of the few locally owned and operated national banks in Amarillo.
Accordingly, management attributes a portion of its recent success to the Bank's
ability to capitalize on customers' disruption, dissatisfaction, and turnover
from the acquisition by out-of-state holding companies of many community banks
in and around the Panhandle, including Amarillo.
To some degree, banks and other financial institutions compete on the basis
of rates and services. Although the Bank seeks to remain competitive with its
interest rates on loans and offers on deposits, it believes that its recent
success has been and will continue to be dependent on its emphasis on community
banking, customer service, and personal relationships.
Competition
The banking business in the Bank's trade area, which includes Amarillo,
Dalhart, and Fritch, and surrounding areas of the Panhandle, has become
increasingly competitive over the past several years, and
5
<PAGE>
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 in their market area.
Non-bank competitors for 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. The Bank encounters
competition for loans 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 business activities in which banks and non-bank financial
institutions may engage. When others engage in these activities, 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 banks and other financial institutions with which the Company and the
Bank compete have capital resources and legal loan limits substantially above
those maintained by the Company and the Bank. These institutions can perform
certain functions for their customers, including trust, securities brokerage,
and international banking services, which the Company and the Bank presently do
not offer directly. Although the Company may offer these services through
correspondent banks, its inability to provide these 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 in its primary market areas. The
Company's products and services in 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 its officers,
directors, and existing shareholders to solicit and refer potential customers,
and expects this to continue for the foreseeable future.
Trust Department
In connection with its personalized banking services to professionals and
owner-operated businesses, the Bank will form a full-service trust department in
mid-1999.
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 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 in the Bank's service
area. These 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 in the
Bank's service area, which includes the Texas Panhandle. The Bank has, however,
made a small number of loans outside its service area and in surrounding states.
6
<PAGE>
This practice is limited to borrowers (both individuals and businesses) who have
either specific ties to the Bank's service area or businesses in the Bank's
service area.
The Bank conducts its lending activities pursuant to the loan policy
adopted by its Board of Directors. See "BUSINESS -- Loan Policies and
Underwriting Practices" for a discussion of the Bank's loan policy.
Substantially all loans in the Bank's portfolio have been originated by the
Bank. A few loans in the Bank's portfolio, however, were purchased from a
competing bank. These 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. These purchased loans conform with the Bank's
underwriting standards. This practice was unique to the Bank's startup 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, agricultural loans, real estate loans, and loans
to individuals, each 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 many related
factors including collateral, type of loan, loan maturity, terms and conditions,
and various loan-to-value ratios related 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 for loans secured by real estate. These
appraisals or evaluations are obtained before the 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 without personal
guaranties at December 31, 1998, is insignificant compared to the overall value
of its loan portfolio. Terms are granted commensurate with the useful life of
the collateral offered.
Agricultural Loans. Agricultural loans include loans to cattle feeding
operations, cattle producers, farmers and ranchers, and other
agriculture-related borrowers. These loans are subject to the credit analysis,
financial statement, and collateral requirements mentioned above under
commercial loans.
Real Estate Loans. Real estate loans are divided into three categories:
residential mortgage lending, construction loans, and commercial real estate
loans, each 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,
7
<PAGE>
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, one-to-four family residences. Substantially all of the Bank's
one-to-four family residential mortgage originations are secured by properties
in and around Amarillo. The outstanding principal amount of loans secured by
properties outside the Bank's service area is not significant compared 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 percent for loans
secured by raw land to 95 percent for improved property.
The Bank reviews information concerning the income, financial condition,
employment, and credit history when evaluating an applicant's creditworthiness.
Construction Loans. The Bank's emphasis in 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 its market area and typically have variable
interest rates during the construction period. Construction loans with fixed
interest rates were not significant at December 31, 1998. Construction loans to
individuals are generally made in connection with permanent financing on the
property. In determining whether to originate commercial real estate loans, the
Bank considers such factors as the borrower's financial condition and debt
service coverage.
Commercial Real Estate Loans. Commercial real estate loans provide
permanent financing for commercial and retail structures, office buildings,
warehouses, churches, and multiple-family buildings. Most of these loans are
collateralized by owner-occupied properties. Commercial real estate lending
entails a thorough analysis of the borrower's financial condition, industry, and
debt service coverage, and current and projected economic 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 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 borrowers on loans that it originates. Loan officers complete a
debt-to-income analysis that must meet established standards of the 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 Bank's
underwriting standards 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 the applicant's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed amount of the loan. See "BUSINESS -- Loan Policies and
Underwriting Practices."
8
<PAGE>
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 includes 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
includes 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, approximately 32.1 percent of the portfolio at December
31, 1998. However, the amount of risk associated with these loans is mitigated
in part because of the type of loans involved. At December 31, 1998, the vast
majority of the Bank's reals estate loans were collateralized by properties in
and around Amarillo, many of which are owner-occupied. Historically, the losses
suffered on owner-occupied properties have been small. Because of the volume of
real estate loans in the Bank's portfolio which are collateralized by
owner-occupied properties, and the appraisal and other real estate lending
policies that indicate the value of the collateral for these loans, management
does not consider the potential impact of these loans on the loan loss reserve
to be excessive, even though real estate loans are 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 a softening of the real estate
market may reduce demand for this product.
Installment Loans. Risk of nonperformance on these loans includes the risk
that the borrower's cash flow will be insufficient to service the debt and the
risk that the collateral will be insufficient 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
believes this trend may have an adverse effect on the Bank's net charge-offs.
Most of the Bank's loans to individuals are collateralized, which management
believes will limit its exposure in this area if current bankruptcy trends
continue.
9
<PAGE>
Loan Policies and Underwriting Practices
General. The Bank's credit officers strive to accommodate all credit needs
of creditworthy borrowers. Attempts are made, within the parameters of the
Bank's loan policy, as discussed below, to make and structure loans designed to
generate future business for the Bank. The Bank operates within the parameters
of its loan policy and underwriting standards. These policies and standards,
however, may not apply to all potential borrowers or circumstances, and,
accordingly, deviations from the loan policy or underwriting standards, related
to either collateralization requirements and/or loan-to-value ratio guidelines,
are made only in extreme situations. These deviations, which are infrequent and
involve loans representing an insignificant amount relative to the value of the
Bank's overall loan portfolio, are addressed individually during the
underwriting process and must be approved before funding by the Bank's Loan
Committee. Although the Bank does not formally track these deviations from
policy as a whole (except for real estate loans), known deviations are addressed
herein.
The following summarizes the Bank's loan policy and underwriting practices.
Loan Policy. The Bank maintains a comprehensive loan policy that
establishes guidelines for all categories of lending. In addition, the loan
policy states each credit officer's lending authority 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 before funding.
The Bank's Loan Committee administers its loan policy in accordance with
directives from 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 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 residing in specified
counties in Texas and, to a lesser extent, in portions of the neighboring states
of Oklahoma, Kansas, Colorado, and New Mexico.
Other principles of the Bank's loan policy are described below:
o 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 a loan with no personal liability of the principal of
a borrowing entity when the collateral is the only source of repayment.
Although the Bank prefers to obtain guarantees of payment from each
principal of a closely held corporation, this is not considered
non-recourse lending if there is an additional source of repayment other
than the collateral.
o If an applicant or a loan application reflects a potential credit weakness,
adequate additional support, such as co-signers or enforceable guarantees,
is sought. However, these are seldom considered the primary source of
repayment and are, therefore, not heavily relied on by the Bank.
o 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, not as an absolute measure of market
value.
10
<PAGE>
o 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 or cattle, or inventory
turnover).
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
much legislation that governs banks, bank holding companies, and the banking
industry. Descriptions of and references to the statutes and regulations below
are brief summaries and 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.
The BHC Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve to acquire more than 5 percent of the voting
stock or substantially all the assets of any bank or bank holding company. The
Company currently has no formal agreement or commitments about any such
transaction. However, the Company evaluates opportunities to invest in or
acquire other banks or bank holding companies as they arise and may engage in
these transactions in the future. In addition, the BHC Act restricts the Bank's
extension of credit 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 5 percent 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's regulations state
specific activities that are permissible under that exception. The Company does
not currently have any agreements or commitments to engage in any nonbanking
activities.
In approving acquisitions by bank holding companies of banks and companies
engaged in banking-related activities, the Federal Reserve considers whether 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 any possible adverse effects
such 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 if their actions 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
11
<PAGE>
commercial paper) issued by bank holding companies. That authority includes the
power to impose interest ceilings and reserve requirements on the 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 may also acquire shares of a company which furnishes
or performs services for a bank holding company and acquire shares of the kinds
and in the amounts eligible for investment by national banking associations. The
Board of Directors of the Company at this time has no plans for these
investments.
Federal banking law allows a bank holding company to acquire or establish
banks in any state of the United States. In addition, Texas banking laws permit
a bank holding company which owns stock of a bank outside Texas (an
"Out-of-State Bank Holding Company") to acquire a bank or a bank holding company
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 at least five years. In any event, however,
a bank holding company may not own or control banks in Texas whose deposits
would exceed 20 percent of the total deposits of all federally insured deposits
in Texas. The Board of Directors of the Company at this time has no plans to
acquire or establish banks outside Texas.
The Bank
The Bank is subject to various requirements and restrictions under federal
and state laws, and to regulation, supervision, and regular examination by the
Comptroller. The Bank is subject to the Comptroller's power to enforce
compliance with applicable banking statutes and regulations. These requirements
and restrictions include requirements to maintain reserves against deposits,
restrictions on the nature and amount of loans and the interest charged thereon,
and restrictions relating to investments and other activities of the Bank.
Dividends. The Bank may generally pay dividends on its stock as long as
their payment complies with applicable law and regulations. 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, it can pay no dividend, 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 it from declaring a dividend on its shares of its stock until 10
percent of its net profits are transferred to the surplus each time dividends
are declared, unless the transfer would increase the bank's surplus to an amount
greater than its 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 to retire any preferred stock. Additionally, under 12 U.S.
C. ss. 1818, the Comptroller has the right to prohibit the payment of dividends
by a national bank if the payment is deemed to be an unsafe and unsound banking
practice.
12
<PAGE>
Transactions with Affiliates. 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 the transactions are substantially the same
or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with or involving other non-affiliated entities. In the
absence of 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 10 percent of the Bank's
capital and surplus per affiliate and an aggregate of 20 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 may not purchase 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 executive officers, directors, and principal
shareholders. Among other things, the 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.
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, the 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 the Bank's failure to comply with these laws and regulations, whose scope
and requirements have expanded significantly in recent years.
Branch Banking. Pursuant to the Texas Finance Code, all Texas banks may
branch statewide. Accordingly, a bank located anywhere in Texas may, subject to
regulatory approval, establish branch facilities near any of the Bank's
facilities and within its market areas. If other banks establish branch
facilities near the Bank or any of its facilities, it is uncertain whether these
facilities would have a materially adverse effect on the Bank's business.
In addition, Congress adopted the Reigle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Reigle Act"). It provides for nationwide
interstate banking and branching. During 1995, the Texas legislature opted out
of the branching provisions under the Reigle Act, which prohibited banks from
other states from branching across the Texas border. Similarly, Texas banks were
generally prohibited from opening branches outside 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 that 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 in Texas. Currently, several
out-of-state bank holding companies operate in markets served by the Bank. The
Bank considers its principal market area to be the Texas Panhandle, and
management currently has no plans to establish a branch network beyond Texas.
Accordingly, the Texas legislature's decision to opt out of the
13
<PAGE>
branching provisions of the Reigle Act has not had a material effect on the
competitive position of the Bank or the Company.
Because 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 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.
Since the Bank's primary service area is in Texas, these recent
developments are not expected to have any material effect on the Bank's business
or its competitive position in its primary markets.
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 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 policies influence significantly the overall growth of bank
loans, investments, deposits, and interest rates charged on loans or paid on
time and savings deposits. Any future monetary policies and their effect on the
Bank's future business and earnings, 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, 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 percent) 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 percent of qualifying
total capital.
14
<PAGE>
Every national bank must 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 must
achieve and maintain a minimum Core Capital Ratio of at least 4 percent and a
minimum Risk-Based Capital Ratio of 8 percent.
As of December 31, 1998, the Bank's Core Capital Ratio was 20.2 percent,
and its Risk-Based Capital Ratio was 21.5 percent. In addition, national banks
generally must achieve and maintain a Leverage Ratio of at least 4 percent. As
of December 31, 1998, the Bank's Leverage Ratio was 16.7 percent.
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 and failed or 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 for the 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 the
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 the addition or
employment becomes effective. During this 30-day period, the applicable federal
banking regulatory agency may disapprove of the addition or employment of the
director or officer. The Bank is not presently subject to those requirements.
FIRREA also expands and increases civil and criminal penalties available to
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 financial institution's
affairs and who caused or are likely to cause more than minimum financial loss
to or a significant adverse effect on the institution, by knowingly or
recklessly violating a law or regulation, breaching a fiduciary duty, or
engaging in unsafe or unsound practices. These practices can include an
institution's failure to timely file required reports or to submit accurate
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 the ordering agency determines 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 many reforms addressing the safety and
soundness of the deposit insurance system,
15
<PAGE>
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 for troubled institutions.
FDICIA requires every national bank with total assets over $500,000,000 to
have an annual independent audit of its financial statements by a certified
public accountant to verify that the financial statements are presented in
accordance with generally accepted accounting principles and comply with other
disclosure requirements 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.
Under regulations adopted by the Comptroller, a bank is "well capitalized"
if it has a total Risk-Based Capital Ratio of 10 percent or more, a Core Capital
Ratio of 6 percent or more, and a Leverage Ratio of 5 percent or more, and the
bank is not subject to an order or capital directive to meet and maintain a
certain capital level. A bank is "adequately capitalized" if it has a total
Risk-Based Capital Ratio of 8 percent or more, a Core Capital Ratio of 4 percent
or more, and a Leverage Ratio of 4 percent 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 percent or more). A bank is "undercapitalized" if it has a
total Risk-Based Capital Ratio of less than 8 percent, a Core Capital Ratio of
less than 4 percent, or a Leverage Ratio of less than 4 percent. A bank is
"significantly undercapitalized" if it has a Risk-Based Capital Ratio of less
than 6 percent, a Core Capital Ratio of less than 3 percent, and a Leverage
Ratio of less than 3 percent. A bank is "critically undercapitalized" if it has
a Leverage Ratio of 2 percent or less. In addition, the Comptroller may
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, 1998.
In addition, if a national bank is undercapitalized, it must 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 Comptroller's acceptance of a
capital restoration plan for the bank.
Furthermore, if a national bank is undercapitalized, the Comptroller may
take certain actions to correct its capital position; if a bank is significantly
undercapitalized or critically undercapitalized, the Comptroller would be
required to take one or more prompt corrective actions. These actions would
require among other things: (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 critically undercapitalized, FDICIA requires it to be placed
into conservatorship or receivership within 90 days, unless the Comptroller and
the FDIC concur that other action would better achieve the FDICIA's purposes for
prompt corrective action.
16
<PAGE>
A bank's capital classification affects the frequency of its examinations,
impacts its ability to engage in certain activities, and affects the deposit
insurance premiums it pays. Under FDICIA, the Comptroller must conduct a
full-scope, on-site examination of every national bank at least once every 12
months. An exception to this rule is made, however, for national banks (i) with
assets of less than $100,000,000, (ii) categorized as "well capitalized," (iii)
found to be well managed with an outstanding composite rating, and (iv) not
subject to a change in control during the last 12 months; these banks will be
examined by the Comptroller once every 18 months.
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 cannot accept those deposits. The FDIC may, on a case-by-case basis,
permit banks that are adequately capitalized to accept brokered deposits if it
determines that the deposits would not constitute an unsafe or unsound practice
for the bank.
In addition, under FDICIA, the FDIC can 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 for 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 has three subcategories, resulting in nine assessment risk
classifications. The three subcategories about capital are "well capitalized,"
"adequately capitalized," and "less than adequately capitalized" (includes
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" banks). The three subcategories for 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 of the FDIC (the "BIF").
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 these standards to submit a compliance plan. The agencies are also
currently proposing standards for asset quality and earnings. The Company cannot
predict what effect these guidelines will have on the Bank.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by BIF,
the Bank paid deposit insurance premiums to the BIF of approximately $25,800 for
the year ended December 31, 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 Act, enacted into law on
September 29, 1994, provides for nationwide interstate banking but does permit
each state to choose whether it will permit interstate
17
<PAGE>
branching. During its 1995 term, the Texas legislature passed legislation
prohibiting interstate branching 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 under the caption "SUPERVISION AND
REGULATION -- Branch Banking."
Interstate banking (e.g., out-of-state holding companies acquiring Texas
financial institutions), however, cannot be prohibited by states, but it is
subject to certain state law limitations on the ages of the banks to be acquired
and on the total amount of deposits within a state that a bank holding company
may control.
Management of the Company and the Bank cannot predict any other legislation
or regulations and their effects.
THE FOREGOING SUMMARIZES 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 investigations 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
those properties after their acquisition and could be held liable to a
governmental entity or to third parties for property damage, personal injury,
and investigation and clean-up costs in connection with the contamination. The
costs of investigation, remediation, or removal of those substances may be
substantial, and the presence of the substances, or the failure to properly
remediate the property, may adversely affect the owner's ability to sell or rent
the property or to borrow using the 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 the substances at the disposal
or treatment facility, whether or not the person owns or operates the facility.
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 of the property.
In its business, the Company may acquire properties through foreclosure,
and hazardous or toxic waste could be found on them. The Company could then be
held responsible for cleaning up or removing the waste, and the cost could
exceed the value of the 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 December 31, 1998, the Bank
had 82 full-time and 16 part-time employees. Employees receive benefits,
18
<PAGE>
such as life and health insurance plans. The Bank's employees are not
represented by any collective bargaining group. The Bank considers its relations
with its employees to be good.
Dependence on Key Personnel
The Company's and the Bank's growth and development since the Acquisition
on May 23, 1997, have largely depended 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.
ITEM 2. PROPERTIES.
The Company's executive and administrative offices are located at 905 South
Fillmore, 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 full-service branch offices in Amarillo (two 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. The Bank leases approximately 7,700 square feet of office space from
an unaffiliated third party. This location offers a walk-in lobby but has no
drive-in lanes.
On February 2, 1998, and February 17, 1998, the Bank opened two de novo,
full-service branches in commercial areas of Amarillo. One branch is near the
intersection of U.S. Interstate 40 and Washington Street and is highly visible
to passing traffic. The other branch is near the intersection of 34th Avenue and
Bell Street, also a highly visible location. The Bank constructed and owns each
branch building and leases the ground space from unaffiliated third parties. The
leases expire in February 2010 and August 2027. Each stand-alone branch facility
is approximately 2,500 square feet and has five drive-through lanes and one
walk-up automated teller machine.
Effective November 1, 1998, the Bank leased ground space for a new branch
site to be located at the intersection of 45th Avenue and Coulter. The lease is
from a partnership in which Donald E. Powell and Jay O'Brien, director, are
partners. Monthly lease payments are $3,757, and the lease extends through
October 2013.
19
<PAGE>
Dalhart, Texas
On October 15, 1997, the Bank opened a de novo, full-service branch at 1723
Tennessee in Dalhart. This branch, which offers four drive-through lanes and one
drive-up automated teller machine, is located in a strip shopping center in the
business district and is surrounded by other commercial businesses. This
facility, which occupies approximately 5,500 square feet, is leased from an
unaffiliated third party. The initial term of the lease will expire in October
2002 but may be renewed through October 2012.
Fritch, Texas
The Fritch branch of the Bank is located downtown at 102 West Broadway
(Highway 136). It consists of a one-story brick building (approximately 3,230
square feet) with three drive-through lanes and one drive-up automated teller
machine; it is owned by the Bank.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are sometimes involved in various legal
proceedings in the normal course of their business. None of these matters,
either singularly or in the aggregate, would have, in the management's opinion,
a material adverse effect upon the financial statements of the Company or the
Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's Common
Stock, and, as the Transfer Agent for the Company's Common Stock, the Bank
believes the Common Stock is seldom traded and is not necessarily aware of the
price for which it is bought or sold. There can be no assurance that an active
public trading market for the Company's Common Stock will be created.
None of the Company's shares of Common Stock (i) is subject to outstanding
options or warrants to purchase nor are any securities convertible into the
Company's Common Stock, except for options to purchase 508,000 shares of Common
Stock which have been awarded at December 31, 1998, to key employees of the Bank
under the Company's 1998 Incentive Stock Plan, or (ii) is being or proposed to
be publicly offered by the Company.
The Company paid no cash dividends on its Common Stock in 1997 or 1998. The
Company intends to retain all earnings to finance its operations and does not
expect to pay cash dividends in the foreseeable future. Any decision by the
Board of Directors to declare dividends in the future will depend on the
Company's earnings, capital requirements, financial condition, and other
relevant factors.
20
<PAGE>
The Company's ability to pay dividends is also restricted by Texas law.
Generally, Texas law prohibits corporations from paying dividends if, after
giving effect to the distribution, the corporation would be insolvent, or the
distribution exceeds the surplus of the corporation.
The Company is also subject to the dividend restrictions applicable to
national banks because its principal source of income is the dividends the Bank
pays to the Company. Under the National Bank Act, dividends may be paid only out
of retained earnings as defined in the statute. The Comptroller's approval 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 Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
The following table gives consolidated selected financial data about 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 per-share data. These data are qualified by, and should
be read in conjunction with, the separate financial statements, reports, and
other financial information elsewhere in this document. Certain consolidated
financial data as of and for 1998, 1997, and 1996 are based on and derived from
audited financial statements elsewhere in this document. Share data have been
adjusted to reflect the 77.4372-for-1 stock dividend on July 2, 1997.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 14,922 $ 4,020 $ 1,146 $ 1,133 $ 994
Interest expense 4,706 1,260 515 494 408
Net interest income 10,216 2,760 631 639 586
Provision for loan losses 975 2,700 97 (80) (70)
Noninterest income 1,149 162 118 136 101
Noninterest expense 6,344 2,242 606 546 581
Earnings (loss) before income taxes 4,046 (2,021) 46 309 176
Income taxes (benefit) 742 (39) 7 103 53
Net earnings (loss) 3,304 (1,981) 39 206 123
Per Share Data
Net earnings (loss) 0.25 (0.41) 0.20 1.05 0.63
Book value at end of period 3.07 2.84 2.91 2.85 2.40
Average common shares outstanding 13,344,130 4,824,792 712,035 712,035 712,035
Balance Sheet Data (End of Period)
Total assets 247,288 144,741 18,212 18,502 17,903
Investment securities 7,303 5,085 10,303 13,308 13,207
Loans outstanding 183,551 117,102 1,464 1,859 1,418
Allowance for loan losses (3,625) (2,748) (45) (22) (38)
Total deposits 205,139 106,255 16,067 16,381 16,112
Stockholders' equity 41,164 37,853 2,068 2,031 1,709
21
<PAGE>
Selected Performance Ratios
Return on average assets 1.65% (3.57)% 0.21% 1.11% 0.68%
Return on average equity 8.37% (15.13)% 1.90% 10.86% 7.40%
Net interest margin 5.59% 5.43% 3.70% 3.77% 3.47%
Asset Quality Ratios
Nonperforming loans to gross loans 0.00% 0.00% 4.78% 0.00% 0.00%
Nonperforming assets to stockholders' 0.00% 0.00% 3.38% 0.00% 0.00%
equity
Net charge-offs to average loans 0.06% 0.00% 4.30% (4.37)% (3.67)%
Allowance to end-of-period loans 1.94% 2.29% 3.07% 1.21% 2.65%
Allowance to end-of-period
nonperforming loans N/A N/A 64.53% N/A N/A
Liquidity and Capital Ratios
(End of Period)
Loans to deposits 89.48% 110.21% 9.11% 11.35% 8.80%
Equity to assets 16.65% 26.15% 11.36% 10.98% 9.55%
Leverage capital ratio 16.65% 26.15% 11.36% 10.98% 9.55%
</TABLE>
The Bank's growth in loans and deposits during 1998 and 1997 is primarily
attributable the relocation of its main office from Fritch to Amarillo, a more
economically vibrant market. Deposit and loan growth can be attributable to the
new management team, which has emphasized growth from the Bank's existing client
base, capitalized on opportunities in its target market (e.g., customers of
competing financial institutions), and delivered personalized banking services
to its customers. In addition, the Bank's loan growth is attributable to its
aggressive commercial lending program and its entry into agricultural and real
estate lending and strong emphasis on the commercial loan market. See "Item 1.
BUSINESS -- Change in Management and Competitive Focus" for additional
information regarding the various factors contributing to the Bank's recent
growth.
Growth in total assets during 1998 and 1997 is primarily attributable to
the increase in the Bank's loan portfolio, which was supported by a significant
capital infusion after the Company's stock offering in 1997.
The increase in 1998 interest income was attributable to the larger loan
portfolio, and the increase in noninterest income was accompanied by increases
in interest and noninterest expenses. A lower provision for loan losses was
necessary to maintain an adequate allowance for loan losses. See "Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Provision and Allowance for Loan Losses" for additional information
about the provision for loan losses.
ITEM 7. 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 and comprehensive
income. This section should be read in conjunction with the Company's
consolidated financial statements and accompanying notes and other detailed
financial information included herein.
22
<PAGE>
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 is the Company's major activity. Activities of the
Company are limited and are stated in Note 14 to the Consolidated Financial
Statements included with this Annual Report on Form 10-K. Accordingly, unless
specifically noted herein, the Company's activities as described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are virtually indistinguishable from those of the Bank.
As more fully discussed in Item 1 "BUSINESS--General" to this Annual Report
on Form 10-K, composition of the management team 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
generally limited loans to selected commercial and consumer installment loans,
which comprised less than 10 percent 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 1998 and 1997 represented approximately 77
percent and 62 percent, respectively, of average total assets, as compared to
approximately 9 percent at December 31, 1996.
The new management team's philosophy in growing the loan portfolio was to
hire experienced loan officers (nine 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 customers to pursue to operate in a safe and sound
manner in accordance with the Bank's loan policy. Thus management believes that
the Bank's loan portfolio growth has been achieved without relaxing credit
underwriting policies. The Bank's loan policy, including underwriting standards,
is discussed at length in Item 1 "BUSINESS--Loan Policies and Underwriting
Practices" to this Annual Report on Form 10-K.
Deposit growth was significant during 1998 and 1997 and was primarily
fueled by the additional customers gained through the process mentioned above
and by the Bank's ability to attract deposits because of the reputation of its
management team and the name recognition of "The First National Bank of
Amarillo" in its market. The Bank does not offer above-market rates on its
deposits and has no "brokered" deposits.
For the Years Ended December 31, 1998, 1997, and 1996
Results of Operations
The Company experienced net earnings of $3,304,303 for the year ended
December 31, 1998; a net loss of $1,981,415 for the year ended December 31,
1997; and net earnings of $38,847 for the year ended December 31, 1996. Earnings
for 1998, 1997, and 1996 were significantly influenced by activity in the
allowance for loan losses, as discussed below. The return on average assets for
1998, 1997, and
23
<PAGE>
1996 was 1.65 percent, (3.57) percent, and 0.21 percent, respectively, and
return on average equity was 8.37 percent, (15.13) percent, and 1.90 percent,
respectively.
The improvement in return on average assets and average equity from 1997 to
1998 is primarily attributable to higher net interest income and non-interest
income, and a lower provision for loan losses, both of which were offset by
higher non-interest expense. 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 "Provision and
Allowance for Loan Losses" to this Section on page 29. The provision for loan
losses in 1996 was approximately $97,000 in comparison to the 1998 and 1997
provisions of $975,000 and $2,700,000, respectively. The larger provisions in
1998 and 1997 were made in connection with the substantial growth in the loan
portfolio of approximately $182 million over the two-year period. With the
aforementioned growth in loans in 1998 and 1997, management believed that the
allowance for loan losses should grow also. Accordingly, management made a
subjective determination of the allowance based on banking experience and
knowledge, comparison to peers, and an intentional effort to be conservative.
Management expects that appropriate, additional 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.
During the years ended December 31, 1998, 1997, and 1996, net interest
income was $10,215,928, $2,759,399, and $630,340, respectively. The increase in
net interest income during 1998 and 1997 of $7,456,529 (271.3 percent) and
$2,129,059 (337.8 percent), respectively, is primarily due to an increase in
average interest-earning assets of approximately $131,946,000 and $33,651,000,
respectively, net of an increase in average interest-bearing liabilities of
approximately $87,949,000 and $16,715,000, respectively.
The following table gives the average consolidated balance sheets of the
Company and its 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:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ---------------------------------------
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(1)
Commercial and agricultural $ 87,548,987 $ 7,587,292 8.67% $ 17,995,796 $ 1,402,875 7.80%
Real estate - mortgage 51,373,294 4,385,126 8.54% 9,802,883 967,649 9.87%
Installment loans to individuals 14,517,960 1,338,075 9.22% 6,571,260 653,917 9.95%
------------- ------------- ------------- -------------
Total loans 153,440,241 13,310,493 8.67% 34,369,939 3,024,441 8.80%
Securities
Taxable 5,822,355 351,933 6.04% 8,284,534 547,719 6.61%
Nontaxable(2) -- -- 0.00% -- -- 0.00%
<CAPTION>
1996
---------------------------------------
Average Average Average
Balance(1) Interest Rate
---------- -------- -------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans(1)
Commercial and agricultural $ 800,393 $ 65,589 8.19%
Real estate - mortgage 210,570 22,646 10.75%
Installment loans to individuals 637,431 65,102 10.21%
------------- -------------
Total loans 1,648,394 153,337 9.30%
Securities
Taxable 13,008,396 856,281 6.58%
Nontaxable(2) 100,000 13,333 13.33%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ---------------------------------------
Average Average Average Average Average Average
Balance(1) Interest Rate Balance(1) Interest Rate
---------- -------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold and other
interest-earning assets 23,487,671 1,259,919 5.36% 8,149,589 447,378 5.49%
------------- ------------- ---- ------------- ------------- ----
Total interest-earning assets 182,750,267 14,922,345 8.17% 50,804,062 4,019,538 7.91%
NONINTEREST- EARNING ASSETS
Cash and due from banks 15,562,646 4,718,760
Other assets 5,154,451 714,565
Less: allowance for loan losses (3,161,808) (706,649)
------------- -------------
Total $ 200,305,556 $ 55,530,738
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 26,914,760 $ 607,289 2.26% $ 7,244,335 $ 192,816 2.66%
Money market deposits 29,615,881 957,149 3.23% 5,005,414 160,530 3.21%
Other savings deposits 3,590,907 91,491 2.55% 1,282,500 35,507 2.77%
Time deposits 58,168,553 3,050,488 5.24% 16,808,512 871,286 5.18%
Total interest-bearing
liabilities 118,290,101 4,706,417 3.98% 30,340,761 1,260,139 4.15%
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits $ 41,673,022 $ 11,894,019
Other 860,854 195,956
Stockholders' equity 39,481,579 13,100,002
------------- -------------
Total $ 200,305,556 $ 55,530,738
============= =============
Net interest income $ 10,215,928 $ 2,759,399
============= =============
Net yield on earning assets 5.59% 5.43%
==== ====
Tax equivalent adjustment(2) -- $ --
<CAPTION>
1996
---------------------------------------
Average Average Average
Balance(1) Interest Rate
---------- -------- -------
<S> <C> <C> <C>
Federal funds sold and other
interest-earning assets 2,396,721 127,364 5.31%
------------- ------------- ----
Total interest-earning assets 17,153,511 1,150,315 6.71%
NONINTEREST- EARNING ASSETS
Cash and due from banks 1,208,987
Other assets 369,056
Less: allowance for loan losses (43,663)
-------------
Total $ 18,687,891
=============
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 4,857,209 $ 132,199 2.72%
Money market deposits 978,617 29,250 2.99%
Other savings deposits 1,101,010 30,085 2.73%
Time deposits 6,689,379 323,908 4.84%
Total interest-bearing
liabilities 13,626,215 515,442 3.78%
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits $ 2,903,235
Other 109,523
Stockholders' equity 2,048,918
-------------
Total $ 18,687,891
=============
Net interest income $ 634,873
=============
Net yield on earning assets 3.70%
====
Tax equivalent adjustment(2) $ 4,533
</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.
The following table summarizes the changes in interest earned and interest
paid resulting from changes in volume and changes in rates:
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
-------------------------------------------- -----------------------------------------
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans
Commercial and agricultural $ 5,422,071 $ 762,345 $ 6,184,416 $ 1,409,085 $ (71,799) $ 1,337,286
Real estate - mortgage 4,103,443 (685,966) 3,417,477 1,031,620 (86,617) 945,003
Installment loans to individuals 790,789 (106,630) 684,159 606,033 (17,218) 588,815
------------ ------------ ------------ ------------ --------- ------------
Total $ 10,316,303 $ (30,251) $ 10,286,052 3,046,738 (175,634) 2,871,104
Securities
Taxable (162,783) (33,003) (195,786) (310,949) 2,387 (308,562)
Nontaxable -- -- -- (13,333) -- (13,333)
Federal funds sold and
other interest-earning assets 841,997 (29,456) 812,541 305,712 14,302 320,014
------------ ------------ ------------ ------------ --------- ------------
Total interest-earning assets 10,995,517 (92,710) 10,902,807 3,028,168 (158,945) 2,869,223
INTEREST-PAID ON
Deposits
Interest-bearing demand 523,551 (109,079) 414,472 64,971 (4,354) 60,617
Money market deposits 789,288 7,331 796,619 120,357 10,923 131,280
Other savings deposits 63,911 (7,927) 55,983 4,959 463 5,422
Time deposits 2,143,938 35,265 2,179,203 489,981 57,397 547,378
------------ ------------ ------------ ------------ --------- ------------
Total interest-bearing liabilities 3,520,688 (74,410) 3,446,278 680,268 64,429 744,697
------------ ------------ ------------ ------------ --------- ------------
Net interest income $ 7,474,829 $ (18,300) $ 7,456,529 $ 2,347,900 $(223,374) $ 2,124,526
============ ============ ============ ============ ========= ============
</TABLE>
25
<PAGE>
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 1998 and 1997 increased
by $987,867 (611.6 percent) and $43,605 (37 percent), respectively, because of
increased activity on deposit accounts.
Other Operating Expenses. During 1998 and 1997, other operating expenses
increased by $4,102,364 (183 percent) and $1,636,055 (270.2 percent),
respectively. The increase in operating expenses was primarily attributable to
the Company's overall growth, including an increase of 40 and 45, respectively,
full-time equivalent employees in 1998 and 1997 as compared to 1996 (which
accounted for approximately $1,933,000 and $690,000, respectively, of the
increase in operating expenses), increases in costs to conduct banking
operations (which accounted for approximately $2,170,000 and $670,000,
respectively, 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 1997).
Securities Portfolio
The Company's objective in its management of the investment portfolio is to
maintain high quality, relatively liquid investments with competitive returns.
During 1998, the weighted average yield on taxable securities was 6.04 percent
as compared to 6.61 percent during 1997 and 6.58 percent 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
---------------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other U.S.
government agencies and
corporations $4,090,764 $2,427,674 $ 306,340 $ -- $ -- $6,940,511
Mortgage-backed securities 1,993,793 2,546,770 1,600,986 -- -- 1,327,785
States and political subdivisions 2,810 36,585 -- -- -- 77,453
Other securities 1,215,675 73,875 49,875 -- -- --
---------- ---------- ---------- -------- -------- ----------
Total $7,303,042 $5,084,904 $1,957,201 $ -- $ -- $8,345,749
========== ========== ========== ======== ======== ==========
</TABLE>
The following table shows the stated maturities of securities at December
31, 1998, and their weighted average yields (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.
26
<PAGE>
<TABLE>
<CAPTION>
Maturing After One Maturing After Five
Maturing Year But Within Five But Within Ten Maturing
Within One Year Years 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 $2,213,750 4.88% $1,823,438 6.11% $ 162,187 6.31% $1,886,182 7.08%
corporation and MBS
State and political
subdivisions -- 0.00% -- 0.00% -- 0.00% 2,810 5.31%
Other securities (1) -- 0.00% -- 0.00% -- 0.00% 1,215,675 6.00%
---------- ---------- ---------- ----------
Total $2,213,750 4.88% $1,822,438 6.11% $ 162,187 6.31% $3,104,667 6.14%
========== ========== ========== ==========
</TABLE>
(1) Securities do not have maturity dates and are included in over ten years
column.
Loan Portfolio
During 1998, total loans increased by approximately $67,180,000 from
$119,995,205 at December 31, 1997, to $187,176,359 at December 31, 1998. From
1993 through 1996, total loans were about $1.5 to $1.9 million. At December 31,
1998, 1997, and 1996, net loans accounted for 74.2 percent, 80.9 percent, and
7.8 percent, respectively, of total assets. The growth in the loan portfolio
during 1998 and 1997 was primarily attributable to the previously discussed
change of ownership of the Company and the Bank, the change in management after
the Acquisition, and, as a result of the management change, the Bank's renewed
emphasis on lending and its recognition of the importance of loans in its
overall asset mix.
Prior management of the Bank generally limited loans to selected commercial
and consumer installment loans, which portfolio of loans comprised less than 10
percent 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 an exceptional basis. During 1997, however,
the Bank relocated to the larger and more economically viable Amarillo market,
and new management changed the Bank's lending philosophy to more closely
resemble a traditional commercial banking business. 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 new customer relationships for the
Bank. As a result, at December 31, 1998, and 1997, loans represented
approximately 77 percent and 62 percent, respectively, of total average assets,
as compared to less than 10 percent 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 1998 and 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 percent of total
loans) and installment loans (representing approximately 53 percent of total
loans). With the change in philosophy as described above, agribusiness and real
estate lending activity increased from 0 percent to 11 percent of the loan
portfolio, respectively, at December 31, 1996, to approximately 13 percent and
29 percent of total loans, respectively, at December 31, 1997, and approximately
27 percent and 35 percent of total loans, respectively, at
27
<PAGE>
December 31, 1998. The mix of commercial loans remained relatively stable as a
percentage of the loan portfolio from December 31, 1996, to December 31, 1997.
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loans:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------------
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial $ 65,560,035 $ 45,901,834 $ 553,641 $ 480,177 $ 298,018
Agricultural 50,051,845 15,381,803 -- 575,000 --
Real Estate
Commercial 39,643,202 16,282,655 54,321 124,772 105,373
1-4 Family 20,542,212 18,069,332 114,156 139,453 352,634
Installment loans
to individuals 11,407,138 24,359,581 822,872 611,210 711,905
Student loans 104,302 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total $187,308,734 $119,995,205 $ 1,544,990 $ 1,930,612 $ 1,467,930
============ ============ ============ ============ ============
</TABLE>
The following table shows the maturity analysis of loans outstanding as of
December 31, 1998. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates:
Maturing After
Maturing One Year But Maturing
Within Within Five After
One Year Years Five Years
----------- ------------- ----------
Total loans
Individuals $ 3,346,603 $ 7,385,258 $ 779,580
Commercial 43,032,533 17,422,442 5,821,417
Real Estate 11,865,204 14,380,587 33,939,622
Agricultural 37,040,268 7,957,273 4,337,948
----------- ----------- -----------
Total $95,284,608 $47,145,560 $44,878,567
=========== =========== ===========
Loans maturing after one year with:
Predetermined interest rates $19,373,019 $24,175,669 $29,886,268
Floating or adjustable rates 75,911,589 22,969,891 14,992,299
----------- ----------- -----------
Total $95,284,608 $47,145,560 $44,878,567
=========== =========== ===========
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 it should be renewed or whether the borrower should be requested to pay
off the loan at maturity. The Bank cannot reasonably estimate the dollar amount
of loans maturing during 1999 which may ultimately be renewed.
28
<PAGE>
Provision and Allowance for Loan Losses
The following table summarizes the Bank's loan loss experience for the last
five years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE OF ALLOWANCE FOR LOAN
LOSSES AT THE BEGINNING OF YEAR $ 2,748,418 $ 45,200 $ 22,574 $ 36,605 $ 55,381
CHARGE-OFFS
Commercial 101,981 -- 3,826 1,000 --
Real estate construction -- -- -- -- 24
Real estate mortgage -- -- -- -- --
Installment 12,238 5,144 -- 6,816 2,688
Agricultural -- -- 79,001 -- --
----------- ----------- ----------- ----------- -----------
Total loan charge-offs 114,219 5,144 82,827 7,816 2,712
----------- ----------- ----------- ----------- -----------
RECOVERIES
Commercial 13,500 7,906 396 71,062 25,507
Real estate construction -- -- -- -- 28,000
Real estate mortgage -- -- -- -- --
Installment 2,736 456 8,054 1,686 1,429
----------- ----------- ----------- ----------- -----------
Total loan recoveries 16,236 8,362 8,450 72,748 54,936
----------- ----------- ----------- ----------- -----------
NET RECOVERIES (CHARGE-OFFS) (97,983) 3,218 (74,377) 64,932 55,224
PROVISION CHARGED (CREDITED)
TO OPERATIONS 975,000 2,700,000 97,003 (79,963) (70,000)
----------- ----------- ----------- ----------- -----------
BALANCE AT END OF YEAR $ 3,625,435 $ 2,748,418 $ 45,200 $ 22,574 $ 37,605
=========== =========== =========== =========== ===========
RATIO OF NET CHARGE-OFFS DURING
THE PERIOD TO AVERAGE LOANS-
OUTSTANDING DURING THE PERIOD 0.06% 0.00% 4.30% 4.37% 3.49%
=========== =========== =========== =========== ===========
</TABLE>
Risk elements include accruing loans past due 90 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 debtor's financial
difficulties, potential problem loans, and loan concentrations.
The following table summarizes the Bank's nonaccrual, past-due, and
restructured loans for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
LOANS ACCOUNTED FOR ON A
NON ACCRUAL BASIS
Commercial $ -- $ -- $ -- $ -- $ --
Real estate construction -- -- -- -- --
Real estate mortgage -- -- -- -- --
Installment -- -- -- -- --
Agricultural -- -- -- -- --
------- --------- ------- --------- ---------
Total $ -- $ -- $ -- $ -- $ --
======= ========= ======= ========= =========
29
<PAGE>
ACCRUING LOANS WHICH ARE PAST DUE
90 DAYS OR MORE
Commercial $ -- $ -- $ -- $ -- $ --
Real estate construction -- -- -- -- --
Real estate mortgage 14,952 -- 63,864 -- --
Installment -- -- 6,178 -- --
Agricultural -- -- -- -- --
------- --------- ------- --------- ---------
Total $14,952 $ -- $70,042 $ -- $ --
======= ========= ======= ========= =========
</TABLE>
At December 31, 1998, 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 contacts.
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 are reasonable, but which may not be valid. Thus, there can be no
assurance that future charge-offs 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 1998, 1997, and 1996 had a
significant impact on earnings.
Additions to the allowance for loan losses, recorded as the provision for
loan losses on the Company's consolidated statements of operations and
comprehensive income, 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, 1998, 1997, and 1996, allowances for loan losses were
$3,625,435, $2,748,418, and $45,200, respectively, which represented 1.94
percent, 2.29 percent, and 3.09 percent of outstanding loans at those respective
dates. This compares to peer group percentages of the allowance for loan losses
to outstanding loans of 1.35 percent, 1.47 percent, and 1.74 percent for 1998,
1997, and 1996, respectively.
During 1998 and 1997, the Company recorded provisions for loan losses of
$975,000 and $2,700,000, respectively. The provisions were made in connection
with the respective increases of $67,313,529 and $118,450,215 and in the loan
portfolio from $1,544,996 (1996), to $119,995,204 (1997), to $187,308,734
(1998). The increase in loans is primarily attributable to the change in
ownership and management's aggressive posture to grow the Company. During 1997,
the Company hired nine experienced loan officers who successfully originated
many loans.
Determination of the Company's amount of the provision for loan losses
during 1998 and 1997 was unique. Prior management of the Company generally
limited its lending activity to commercial
30
<PAGE>
and consumer installment loans, and the loan portfolio constituted less than 10
percent 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, with 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 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 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
1998 and 1997, and, although the Company had no significant impaired, potential
problem, or nonperforming loans at December 31, 1998, management recognized 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, conditions can
change in the foreseeable future, and 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 in 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 risk element
and drawing from collective banking experiences and knowledge of the Company's
market, by evaluating overall economic conditions, by comparing its loan
portfolio to those of peer banks, and by intentionally trying to be conservative
during the Bank's significant growth phase. Management thus determined that
allowances at December 31, 1998, of $3,625,435 (representing 1.94 percent of
outstanding loans) and of $2,748,418 at December 31, 1997 (representing 2.29
percent of outstanding loans), were appropriate.
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 examination of the Bank regarding a $175,000 loan
participation, and the Company recorded a provision of approximately $19,000 for
that participation. After 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.
The allowance for loan losses is not specifically allocated among the
various categories of loans in the portfolio, and management cannot predict the
amount of charge-offs by loan category in 1999.
At December 31, 1998, 1997, or 1996, there were no significant impaired
loans or loans delinquent over 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
31
<PAGE>
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. When 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 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.
Potential Problem Loans. A potential problem loan is one in which
management has serious doubts about the borrower's future performance under the
loan contract. These loans are current as to principal and interest, and,
accordingly, they are not included in nonperforming assets categories. At
December 31, 1998, 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 determining the adequacy of the allowance for loan losses.
Deposits and Other Interest-Bearing Liabilities
Deposits. Average total deposits were $159,963,123, $42,234,780, and
$16,529,450 during 1998, 1997, and 1996, respectively. Average interest-bearing
deposits were $188,290,101 in 1988 as compared to $30,340,761 in 1997 and
$13,626,215 in 1996.
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, 1998 December 31, 1997 December 31, 1996
------------------------ ----------------------- ------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
DEPOSITS
Noninterest-bearing demand $ 41,673,022 0.00% $ 11,894,019 0.00% $ 2,903,235 0.00%
Interest-bearing demand 26,914,760 2.26% 7,244,335 2.66% 4,857,209 2.27%
Money market deposits 29,615,881 3.23% 5,005,414 3.21% 978,617 2.99%
Other savings deposits 3,590,907 2.55% 1,282,500 2.77% 1,101,010 2.73%
Time deposits 58,168,553 5.24% 16,808,512 5.18% 6,689,379 4.48%
------------ ------------ ------------
Total $159,963,123 $ 42,234,780 $ 16,529,450
============ ============ ============
</TABLE>
Maturities of time certificates of deposits of $100,000 or more outstanding
as of December 31, 1998, are summarized as follows:
3 months or less $22,340,473
Over 3 months through 12 months 19,406,613
Over 12 months 607,377
-----------
$42,354,463
===========
There were no deposits by foreign depositors at December 31, 1998, 1997, or
1996.
32
<PAGE>
Significant Financial Ratios
The following table shows consolidated operating and capital ratios for
1998, 1997, and 1996.
1998 1997 1996
------ -------- ------
Return on average assets 1.65% (3.57)% 0.21%
Return on average equity 8.37% (15.13)% 1.90%
Average equity to average asset ratio 19.71% 23.59 % 10.96%
Dividend payout ratio to net earnings 0.00% 0.00 % 0.00%
The increase in return on average assets and average equity from 1997 to
1998 is primarily attributable to higher net interest income and a lower loan
loss provision. 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."
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 due to the
substantial growth in the loan portfolio of approximately $115 million
(representing an increase of 8,154 percent over the prior year). Thus,
management believes that the allowance for loan losses should grow also.
Accordingly, management made a subjective determination of the allowance based
on banking experience and knowledge, comparison to other banks, 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, 1998, 1997, or 1996.
Capital
The cornerstone of the Company's capital structure is its common stock,
which represents 100 percent of total capitalization at December 31, 1998. The
Company's equity base was strengthened significantly during 1997 through the
issuance of common stock in an intrastate offering to bona fide Texas residents
on August 31, 1997. The Company raised approximately $40 million in new capital
in this offering. The cash raised from the stock offering was used primarily to
increase the Bank's capital base to support its physical expansion and
significant growth in its loan portfolio in 1998 and late 1997. Additional
information regarding the Bank's physical expansion is given 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.
Dependence on this additional capital to support the significant loan
growth was partially offset by the significant increase in the deposit base at
the Bank during 1998 and late 1997, which provided an additional source of
funding loan growth. From December 31, 1997, through December 31, 1998, average
total deposits at the Bank increased by $117,728,343 from $42,234,780
33
<PAGE>
to $159,963,123, or an increase of approximately 279 percent. From December 31,
1996, through December 31, 1997, average total deposits at the Bank increased by
$25,705,330, from $16,529,450 to $42,234,780, an increase of approximately 155.5
percent. Additional information regarding the 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 from the stock offering has been used to support the
significant loan growth at the Bank following the Acquisition.
The Company and the Bank are subject to various regulatory capital
requirements of 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 the 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 the Bank's capital amounts
and classifications 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 the Bank to maintain minimum amounts and ratios (shown
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, 1998, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
The Company and the Bank exceeded their regulatory capital ratios, as shown
in the following table.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $43,652,000 21.80% $15,986,000 >=8.0% N/A
The Bank 42,864,000 21.50% 15,986,000 >=8.0% $19,983,000 >=10.0%
Tier I Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $41,140,000 20.60% $ 7,993,000 >=4.0% N/A
The Bank 40,352,000 20.20% 7,993,000 >=4.0% $11,990,000 >=6 .0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $41,140,000 17.00% $ 7,251,000 >=4.0% N/A
The Bank 40,352,000 16.70% 7,251,000 >=4.0% $12,085,000 >=5 .0%
</TABLE>
The Company currently has no material commitments for capital expenditures
and no present intention to pay dividends on its common stock. Given the
Company's strong capital ratios shown 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.
34
<PAGE>
Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of
funds to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity is a Company's ability to convert assets into cash or cash equivalents
without significant loss and to raise additional funds by increasing
liabilities. Liquidity management is 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 when investment decisions are made. However,
net deposit inflows and outflows are far less predictable and cannot be
controlled.
The Company has maintained a level of liquidity that is adequate for its
cash requirements. The Company's funds-sold position, its primary source of
liquidity, averaged $23,487,671 during the year ended December 31, 1998.
Management also has lined up potential purchasers of loans as a tool to maintain
liquidity. The Company has numerous loan participations with other entities,
primarily financial institutions. Loan participations are common commercial
banking arrangements whereby the Company sells, on a nonrecourse basis, a
portion of a loan to other entities. These arrangements spread the risk among
the entities and provide liquidity to the Company while reducing its risk.
Although no formal agreements or commitments exist, management believes that
additional loan participations of $75 to $80 million could readily be sold for
liquidity purposes, if necessary. Management regularly reviews the Company's
liquidity 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 earnings 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. The Company's general
policy is to reasonably match the rate sensitivity of its assets and liabilities
to prudently manage interest-rate risk. To accomplish this, the Company monitors
its interest-rate sensitivity, or risk, and matches 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 liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The difference at any
given time is called 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 has a negative gap if the amount of interest-bearing
liabilities maturing or repricing in a specified time period exceeds the amount
of interest-earning assets maturing or repricing in the same period. If more
interest-earning assets than interest-bearing liabilities mature or reprice in a
specified period, then the institution has a positive gap. Accordingly, in a
rising interest-rate environment in an institution with a negative gap, the cost
35
<PAGE>
of its rate-sensitive liabilities would theoretically rise faster 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 faster 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.
The following table presents rate-sensitive assets and rate-sensitive
liabilities as of December 31, 1998, which mature or reprice in 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, 1998
(Dollars in thousands)
3 Months 3 Months 1 Year
or Less to 1 Year to 3 Years
------------ ------------ -------------
Assets Subject to Interest Rate
Adjustment
Loans
Combined - fixed rate
projected payments, floating
rate by repricing interval $117,265,313 $ 15,650,819 $ 7,767,501
Investments
Combined - fixed rate by
maturity, floating rate by
repricing interval, and
projected payments 1,742,282 2,343,655 1,822,438
Federal Funds Sold 26,300,000 -- --
------------ ------------ ------------
Total $145,307,595 $ 17,994,474 $ 9,589,939
============ ============ ============
Cumulative $145,307,595 $163,302,069 $172,892,008
Liabilities Subject to Interest
RateAdjustment
NOW Accounts $ 25,411,305 -- --
Super NOW Accounts 8,182,216 -- --
Money Market Accounts 34,965,916 -- --
Savings Accounts 4,595,045 -- --
CDs Greater than $100,000 22,340,473 19,406,613 607,377
CDs Less than $100,000 11,257,215 16,351,930 1,128,864
------------ ------------ ------------
Total $106,752,170 35,758,543 $ 1,736,241
============ ============ ============
Cumulative $106,752,170 $142,510,713 $144,246,954
<TABLE>
<CAPTION>
3 Years 5 Years Over
to 5 Years to 15 Years 15 Years Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets Subject to Interest Rate
Adjustment
Loans
Combined - fixed rate
projected payments, floating
rate by repricing interval $ 15,803,897 $ 27,028,488 $ 3,797,717 $187,308,735
Investments
Combined - fixed rate by
maturity, floating rate by
repricing interval, and
projected payments -- 62,537 1,332,130 7,303,042
Federal Funds Sold -- -- -- 26,300,000
------------ ------------ ------------ ------------
Total $ 15,803,897 $ 27,091,025 $ 5,124,847 $220,911,777
============ ============ ============ ============
Cumulative $188,695,905 $215,786,930 $220,911,777
Liabilities Subject to Interest Rate
Adjustment
NOW Accounts -- -- -- $ 25,411,305
Super NOW Accounts -- -- -- 8,182,216
Money Market Accounts -- -- -- 34,965,916
Savings Accounts -- -- -- 4,595,045
CDs Greater than $100,000 -- -- -- 42,354,463
CDs Less than $100,000 -- -- -- 28,738,009
------------ ------------ ------------ ------------
Total $ -- $ -- $ -- $144,246,954
============ ============ ============ ============
Cumulative $144,246,954 $144,246,954 $144,246,954
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
3 Months 3 Months 1 Year 3 Years 5 Years Over
or Less to 1 Year to 3 Years to 5 Years to 15 Years 15 Years Total
------------ ------------- ------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Position of Assets
(Liabilities) $ 38,555,425 $(17,764,069) $ 7,853,698 $ 15,803,897 $ 27,091,025 $ 5,124,847 $ 76,664,823
Cumulative Gap $ 38,555,425 $ 20,791,356 $ 28,645,054 $ 44,448,951 $ 71,539,976 $ 76,664,823
Rate Sensitive Assets
as % of Rate
Sensitive Liabilities
(Cumulative) 136.12% 114.59% 119.86% 130.81% 149.60% 153.15%
============ ============ ============ ============ ============ ============ ============
</TABLE>
As shown by the table, at December 31, 1998, 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 affect the Company's net interest margin, and a falling
interest-rate environment would negatively affect the Company's net interest
margin.
A static gap report consists of an inventory of the dollar amounts of
assets and liabilities that could mature or reprice in 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 indicates the Company's gap position at a particular time, those
measurements are not intended to and do not forecast the effect of changes in
market interest rates on the Company's gap position and may differ from actual
results after December 31, 1998.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and the Bank are primarily monetary. Therefore,
interest rates have a more significant effect on the Company's performance than
do the changes in the general rate of inflation and changes 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.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which
addresses the accounting for derivative transactions and hedging activities. The
Company will adopt the new standard beginning with its 2000 fiscal year, when
adoption is first required. Management is currently evaluating the reporting
requirements under this new standard and has not yet determined its impact on
the Company's financial results.
Year 2000 Disclosure
In compliance with the Year 2000 Readiness Disclosure Act, the following
information is provided as required for this section.
Defining the Problem. Many computer systems use a two-digit format to
indicate the year in a date field, rather than four digits. As a result of this
abbreviated format, systems may not appropriately interpret a year, and this
could cause miscalculations, computer errors, and even
37
<PAGE>
systems failures. (For example, the year 2002 would be 02 in a two-digit format,
but the system might read it as 1902.)
Once the issue was defined, a Y2K Committee was appointed by the Board of
Directors to develop a strategy and project plan. This committee consists of
four members with different functional backgrounds: Operations, Finance,
Lending, and Compliance. The Y2K Committee has developed a program for guiding
the Bank toward full Y2K compliance through a multi-phase plan (some phases run
concurrently): Awareness, Assessment, Remediation, Testing, and Implementation.
Impact on the Company. An overall assessment of the Y2K problem was
initiated to determine its impact. Included in this phase were the
identification and prioritization of the Bank's mission-critical systems,
software, and support equipment, as well as a review of all customers who
provide business services to the Bank. An inventory of all systems laid the
groundwork for the project. Furthermore, all essential vendors and suppliers
were contacted to ascertain their Y2K compliance efforts, and no material impact
was identified. The assessment is 100 percent complete.
Remediation and Testing. The Bank relies heavily on a major service
provider for its mission-critical applications and operations. Status reports of
this provider's Y2K readiness, including any remediation required, are given to
management regularly.
This system was tested on site in February 1999. Integrated tests were
conducted on a duplicated client "Test Bank." No significant problems were
noted. (The Company is considering using an independent consultant to verify the
test results but has not committed to this matter.) In addition, all internal
platform systems have been or will be completely tested before March 31, 1999.
Other third-party service providers, such as credit reporting agencies,
document processing systems, credit card merchant systems, and government
reporting systems, have been tested internally or certified as Y2K compliant
depending on the provider profile.
Risk Assessment (Safety and Soundness Issues). The most significant risk to
the Company is the potential failure of its core operating system. The system
must be able to recognize and interpret dates correctly and to make appropriate
calculations. This risk is being mitigated through testing and remediation (as
previously discussed); however, another type of risk is also being addressed by
the Company: customer risk.
The negative impact of large customers who have not dealt with the
implications of the Y2K problem on their business operations could pose serious
risks to the Company. Therefore, the Company has developed a Risk Assessment
Program to determine the Y2K readiness of its significant customers, both
borrowers and depositors.
In September 1998, management began surveying all borrowers with
outstanding aggregate loans over $250,000. The level of risk--low, medium,
high--was determined through a questionnaire and internal guidelines. This
assessment covered 68 percent of the portfolio, of which only 6.5 percent was
deemed to exhibit a level above the low-risk category.
38
<PAGE>
Additionally, a similar review is conducted quarterly of all large
depositors to ensure Y2K readiness and to avoid any unforeseen liquidity
problems for these customers. As of this date, most of the deposit base has been
determined to exhibit low-risk factors.
The risk assessment program is ongoing, and the results of the quarterly
analyses of loans and deposit customers are reported to the Board of Directors
quarterly. Efforts and actions to offset any defined or potential risks have
been prescribed in the program.
Implementation and Contingency Planning. Management has ascertained that no
applications will need to be reprogrammed or replaced. However, when the
designed implemented testing is completed in the first quarter of 1999, and
based on those results, a contingency program will be completed. The program
will also incorporate a business resumption plan for end-users of all system
data, not only the mission-critical system. For example, the preparation of loan
documents will be manual, if the system is unreliable, until the Bank's system
is renovated or another loan processor is obtained. Disruptions in processing
will be given utmost attention in designing and implementing contingency plans.
Additionally, the Company has allocated adequate resources to manage the
Y2K project. Expenses attributable to Y2K readiness have been less than $7,500
to date, none of which were incurred to repair or replace software, equipment,
or systems. The estimated costs related to Y2K compliance have been budgeted at
$25,000 to $30,000, mainly covering test costs and customer communications
during 1999. These costs will be charged to expense as incurred.
Management and directors of the Company believe an effective program is in
place to address the Y2K problem. As required by the regulatory agencies, the
Bank has made diligent efforts to conform to all milestone dates defined in the
Federal Financial Institution Examination Council's guidance papers. However,
the Company cannot guarantee there will be no impact from Y2K issues on its
operations, because of its reliance on service provider systems and the
potential impact on its customers. The development of contingency plans to
minimize the risk to the Bank will be given considerable attention in the next
six months. Completion date for all phases of the project is expected to be June
30, 1999, or shortly thereafter.
Forward-Looking Statements
Forward-looking statements are not historical facts, and involve risks and
uncertainties that could cause the Company's results to differ materially from
those in the forward-looking statements. These risks include the possible loss
of key personnel, the need for additional capital if the Company experiences
faster than anticipated growth, changes in economic conditions, interest rate
risk, factors which could affect the Company's ability to compete in its trade
areas, changes in regulations and governmental policies, and the risks described
in the Company's Securities and Exchange Commission filings.
39
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Interest-Rate Risk Sensitivity" which is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please refer to the financial statements, the report thereon, the notes
thereto, and supplementary data commencing at page F-1 of this Form 10-K, which
financial statements, report, notes, and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS OF THE REGISTRANT
Information concerning the directors of the Company is shown in the 1999
definitive Proxy Statement incorporated herein by this reference.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is shown in
the 1999 definitive Proxy Statement incorporated herein by this reference.
(C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information on compliance with Section 16(a) of the Exchange Act is
included in the Company's 1999 definitive Proxy Statement incorporated
herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information on executive compensation is shown in the Company's 1999
definitive Proxy statement incorporated herein by this reference.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners and
directors and officers is shown in the Company's 1999 definitive Proxy
Statement incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning relationships and related transactions of the
directors and officers of the Company is shown in the Company's 1999
definitive Proxy Statement incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS REPORT
(1) Exhibits
Number Description
-------- -----------
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
----------
* Incorporated by reference from the Company's Registration Statement on
Form 10 dated April 10, 1998.
(2) Financial Statements
Page
----
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-13
(3) Financial Statement Schedules
(B) REPORTS ON FORM 8-K
None.
41
<PAGE>
TEJAS BANCSHARES, INC.
SIGNATURES
Pursuant to Section 13 or 15(d) of the Securities Act of 1934, Tejas
Bancshares, Inc., has caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized on March 18, 1999.
TEJAS BANCSHARES, INC.
By /s/ Donald E. Powell
-----------------------------------------
Donald E. Powell
Chairman of the Board, President, and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Tejas Bancshares, Inc., and
in the capacities and on the date indicated.
Signature Title Date
/s/ Donald E. Powell Principal Executive Officer March 18, 1999
- ------------------------ and Director
Donald E. Powell
Principal Financial Officer March 18, 1999
/s/ Jack Hall and Principal Accounting
- ------------------------ Officer
Jack Hall
/s/ William H. Attebury Director March 18, 1999
- ------------------------
William H. Attebury
/s/ Danny H. Conklin Director March 18, 1999
- ------------------------
Danny H. Conklin
/s/ Wales H. Madden, Jr. Director March 18, 1999
- ------------------------
Wales H. Madden, Jr.
/s/Jay O'Brien Director March 18, 1999
- ------------------------
Jay O'Brien
42
<PAGE>
TEJAS BANCSHARES, INC.
AND SUBSIDIARY
Amarillo, Texas
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT.................................................F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets.........................................F-4
Consolidated Statements of Operations and Comprehensive Income......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-13
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, 1998 and 1997, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
Clifton Gunderson P.L.L.C.
Amarillo, Texas
February 5, 1999
F-3
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
ASSETS
1998 1997
------------- -------------
Cash and due from banks $ 23,813,175 $ 16,726,298
Federal funds sold 26,300,000 3,400,000
Securities available-for-sale 7,303,042 5,084,904
Loans 187,176,359 119,850,682
Less allowance for loan losses (3,625,435) (2,748,418)
------------- -------------
Loans, net 183,550,924 117,102,264
------------- -------------
Bank premises and equipment
Land 39,000 39,000
Buildings 1,863,462 602,026
Furniture, fixtures and equipment 1,202,052 496,030
------------- -------------
Total, at cost 3,104,514 1,137,056
Less accumulated depreciation 592,281 274,800
------------- -------------
Net property and equipment 2,512,233 862,256
------------- -------------
Accrued interest receivable 2,349,083 1,160,948
Net deferred tax asset 1,300,013 324,709
Other assets 159,389 78,708
------------- -------------
TOTAL ASSETS $ 247,287,859 $ 44,740,087
============= =============
F-4
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES
Deposits
Demand - noninterest bearing $ 61,431,129 $ 37,270,616
Demand - interest bearing 68,559,436 28,483,519
Time and savings 75,148,549 40,500,523
------------- -------------
Total deposits 205,139,114 106,254,658
Accrued interest payable 684,462 222,676
Federal income taxes payable 66,994 324,709
Other liabilities 232,825 84,802
------------- -------------
Total liabilities 206,123,395 106,886,845
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value 20,000,000 shares
authorized, 13,397,934 and 13,333,334 issued
in 1998 and 1997, respectively 13,397,934 13,333,334
Paid-in capital 26,460,427 26,137,427
Retained earnings (deficit) 1,650,455 (1,653,848)
Accumulated other comprehensive income 24,648 36,329
Deferred directors' compensation (369,000) --
------------- -------------
Total stockholders' equity 41,164,464 37,853,242
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 247,287,859 $ 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-5
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 13,310,493 $ 3,024,441 $ 153,337
Interest and dividends on investment securities 351,933 547,719 865,081
Interest on federal funds sold 1,259,919 447,378 127,364
------------ ------------ ------------
Total interest income 14,922,345 4,019,538 1,145,782
INTEREST EXPENSE ON DEPOSITS 4,706,417 1,260,139 515,442
------------ ------------ ------------
Net interest income 10,215,928 2,759,399 630,340
PROVISION FOR LOAN LOSSES 975,000 2,700,000 97,003
------------ ------------ ------------
Net interest income after provision
for loan losses 9,240,928 59,399 533,337
------------ ------------ ------------
OTHER OPERATING INCOME
Service charges 714,912 83,543 71,970
Other 434,465 77,967 45,935
------------ ------------ ------------
Total other operating income 1,149,377 161,510 117,905
------------ ------------ ------------
OTHER OPERATING EXPENSES
Salaries and employee benefits 2,960,405 1,027,236 337,423
Depreciation 310,416 119,853 18,639
Advertising 381,132 53,134 13,374
Occupancy expense 361,323 178,588 29,565
Federal Deposit Insurance Corporation
premiums, net 25,883 1,830 2,000
Professional fees 188,722 94,558 19,239
Supplies, stationery and office expenses 628,913 411,766 19,744
Taxes other than on income and salaries 187,488 6,106 4,925
Data processing 431,025 80,805 69,751
Postage 122,732 36,925 21,278
Other 745,962 230,836 69,644
------------ ------------ ------------
Total other operating expenses 6,344,001 2,241,637 605,582
------------ ------------ ------------
Earnings (loss) before income taxes 4,046,304 (2,020,728) 45,660
INCOME TAXES (BENEFIT) 741,999 (39,313) 6,813
------------ ------------ ------------
NET EARNINGS (LOSS) 3,304,303 (1,981,415) 38,847
OTHER COMPREHENSIVE INCOME
Changes in unrealized gains (losses) on
securities, net of tax of $(6,017),
$12,669 and $(1,354) (11,681) 24,593 (2,629)
Less: reclassification adjustment -- -- --
------------ ------------ ------------
COMPREHENSIVE INCOME $ 3,292,622 $ (1,956,822) $ 36,218
============ ============ ============
NET EARNINGS (LOSS) PER SHARE - Basic $ 0.25 $ (0.41) $ .05
============ ============ ============
NET EARNINGS (LOSS) PER SHARE - Diluted $ 0.24 $ 0.41) $ .05
============ ============ ============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Retained other
Common Paid-in earnings comprehensive
Stock Capital (deficit) income
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $ 100,000 $ 1,514,807 $ 564,342 $ 14,365
COMPREHENSIVE INCOME
Net earnings -- -- 38,847 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(1,354) -- -- -- (2,629)
Add: reclassification adjustment -- -- -- --
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME
Balance at December 31, 1996 100,000 1,514,807 603,189 11,736
COMPREHENSIVE INCOME
Net loss -- -- (1,981,415) --
Other comprehensive income, net of tax :
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $12,669 -- -- -- 24,593
Add: reclassification adjustment -- -- -- --
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME
Purchase of treasury stock (6,695 shares) -- -- -- --
Goodwill arising from acquisition of the Company -- 65,625 -- --
Retirement of treasury stock (7,500) shares) (75,000) (1,580,433) (82,029) --
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 -- (19,353) --
Common stock issued (13,333,334 shares), net of issue costs
of $159,558 13,333,334 26,507,110 -- --
Purchase and retirement of common stock (196,093 shares) (196,093) (392,182) -- --
------------ ------------ ------------ ------------
Balance at December 31, 1997 13,333,334 26,137,427 (1,653,848) 36,329
COMPREHENSIVE INCOME
Net earnings -- -- 3,304,303 --
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(6,017) -- -- -- (11,681)
Add: reclassification adjustment -- -- -- --
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME
Directors' stock compensation plan (64,600 shares) 64,600 323,000 -- --
Amortization of directors' stock compensation plan -- -- -- --
------------ ------------ ------------ ------------
Balance at December 31, 1998 $ 13,397,934 $ 26,460,427 $ 1,650,455 $ 24,648
============ ============ ============ ============
<CAPTION>
Deferred
Treasury directors'
stock compensation Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (162,045) $ -- $ 2,031,469
COMPREHENSIVE INCOME
Net earnings -- -- 38,847
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(1,354) -- -- (2,629)
Add: reclassification adjustment -- -- --
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME 36,281
------------
Balance at December 31, 1996 (162,045) -- 2,067,687
COMPREHENSIVE INCOME
Net loss -- -- (1,981,415)
Other comprehensive income, net of tax:
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $12,669 -- -- 24,593
Add: reclassification adjustment -- -- --
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME (1,956,822)
------------
Purchase of treasury stock (6,695 shares) (1,575,417) -- (1,575,417)
Goodwill arising from acquisition of the Company -- -- 65,625
Retirement of treasury stock (7,500) shares) 1,737,462 -- --
Reduction in par value from $10 to $1 per share -- -- --
Stock split effected in the form of a dividend of 77.4372-for-1 -- -- --
Common stock issued (13,333,334 shares), net of issue costs
of $159,558 -- -- 39,840,444
Purchase and retirement of common stock (196,093 shares) -- -- (588,275)
------------ ------------ ------------
Balance at December 31, 1997 -- -- 37,853,242
COMPREHENSIVE INCOME
Net earnings -- -- 3,304,303
Other comprehensive income, net of tax :
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(6,017) -- -- (11,681)
Add: reclassification adjustment -- -- --
------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME 3,292,622
------------
Directors' stock compensation plan (64,600 shares) -- (387,600) --
Amortization of directors' stock compensation plan -- 18,600 18,600
------------ ------------ ------------
Balance at December 31, 1998 $ -- $ (369,000) $ 41,164,464
============ ============ ============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net earnings (loss) $ 3,304,303 $ (1,981,415) $ 38,847
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation 310,416 119,853 18,639
Deferred income taxes (969,287) (369,400) 6,813
Amortization of deferred directors' compensation 18,600 -- --
Provision for loan losses 975,000 2,700,000 97,003
Gain on sale of land -- -- (6,937)
Change in:
Accrued interest receivable (1,188,135) (1,007,377) 53,011
Other assets (80,681) (43,663) 22,939
Accrued interest payable 461,786 195,349 (6,901)
Federal income taxes payable (257,715) 324,709 --
Other liabilities 148,023 67,463 (12,124)
Other 6,870 13,594 (3,854)
------------- ------------- -------------
Net cash provided by operating activities 2,729,180 19,113 207,436
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs
on securities held-to-maturity -- 1,900,277 4,619,770
Proceeds from maturities and pay-downs
on securities available-for-sale 2,816,304 3,365,437 1,277,418
Purchases of securities held-to-maturity -- -- (2,892,048)
Purchases of securities available-for-sale (5,059,010) (24,000) --
Change in loans to customers (67,423,660) (118,383,550) 320,278
Expenditures for bank premises and equipment (1,960,393) (800,325) (9,146)
Proceeds from sale of land -- -- 31,766
------------- ------------- -------------
Net cash provided (used) by investing activities (71,626,759) (113,942,161) 3,348,038
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 98,884,456 90,187,370 (313,429)
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 98,884,456 127,864,122 (313,429)
------------- ------------- -------------
Net increase in cash and cash equivalents 29,986,877 13,941,074 3,242,045
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 20,126,298 6,185,224 2,943,179
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 50,113,175 $ 20,126,298 $ 6,185,224
============= ============= =============
</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, 1998, 1997 and 1996
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, agricultural and real estate loans.
During 1997, the corporate structure of the Company changed significantly as
follows:
o 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 Company 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.
o 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).
o 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 1998 and
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 on 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.
F-9
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1998, 1997 and 1996
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.
Comprehensive Income
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.
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, 1998
or 1997. 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
reported in other comprehensive income. Realized gains (losses) on securities
available-for-sale are included in other operating income and, when applicable,
are reported as a reclassification adjustment, net of tax, in other
comprehensive income. 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 a new cost basis for the security.
F-10
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1998, 1997 and 1996
Investment Securities (CONTINUED)
Premiums and discounts are amortized or accreted 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.
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. 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.
Advertising Costs
The Company expenses advertising costs as incurred.
F-11
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1998, 1997 and 1996
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
Earnings per share have been computed in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128). Basic earnings per
share are computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if the
Company's stock options were exercised. Such dilutive potential common shares
are calculated using the treasury stock method. All prior-period earnings per
share data presented have been restated in accordance with SFAS 128. All shares
and per share data, except par value per share, have been retroactively adjusted
to reflect a 77.4372-for-1 stock split effected as a stock dividend by the
Company in July 1997.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which addresses
the accounting for derivative transactions and hedging activities. The Company
will adopt the new standard beginning with its 2000 fiscal year, the year in
which adoption is first required. Management is currently evaluating the
reporting requirements under this new standard and has not yet determined the
impact of this standard on financial results of the Company.
This information is an integral part of the accompanying consolidated financial
statements.
F-12
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998, 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 $2,210,407 $ 3,343 $ -- $2,213,750
Government agency securities 1,855,726 22,617 (1,329) 1,877,014
Mortgage-backed securities 1,981,078 16,153 (3,438) 1,993,793
State and political obligations 2,810 -- -- 2,810
Other securities 1,215,675 -- -- 1,215,675
---------- ---------- ---------- ----------
Total available-for-sale $7,265,696 $ 42,113 $ (4,767) $7,303,042
========== ========== ========== ==========
</TABLE>
Maturities of investment securities classified as available-for-sale were as
follows at December 31, 1998 (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.
Amortized Estimated
cost fair value
--------- ----------
Available-for-sale:
Due one year or less $2,210,407 $2,213,750
Due from one to five years 1,807,063 1,822,438
Due from five to ten years 155,844 162,187
Due after ten years 1,873,897 1,886,182
Other 1,218,485 1,218,485
---------- ----------
Total available-for-sale $7,625,696 $7,303,042
========== ==========
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
unrealized unrealized Estimated
Amortized holding holding fair value
cost gains losses
--------- ---------- ---------- ----------
<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>
F-13
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1 - INVESTMENT SECURITIES (CONTINUED)
Investment securities with a carrying value of approximately $4,909,000 and
$1,996,000 at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits as required or permitted by law.
NOTE 2 - LOANS
The major classifications of loans are as follows:
1998 1997
------------- -------------
Real estate - primarily mortgage $ 60,185,414 $ 34,351,987
Agricultural 50,051,845 15,381,803
Commercial 65,560,035 45,901,834
Installment loans to individuals 11,407,138 24,359,581
Student loans 104,302 --
Unearned income (132,375) (144,523)
------------- -------------
Total loans $ 187,176,359 $ 119,850,682
============= =============
The Bank grants consumer, commercial, agricultural, 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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 2,748,418 $ 45,200 $ 22,574
Provision charged to expense 975,000 2,700,000 97,003
Loans charged off (114,219) (5,144) (82,827)
Recoveries on loans previously charged off 16,236 8,362 8,450
----------- ----------- -----------
Balance at end of year $ 3,625,435 $ 2,748,418 $ 45,200
=========== =========== ===========
</TABLE>
At December 31, 1998 and 1997, there were no material amounts of impaired loans.
F-14
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 3 - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more was
approximately $42,355,000 and $25,606,000 at December 31, 1998 and 1997,
respectively. The related interest expense on these deposits was approximately
$1,805,000 and $298,000 for 1998 and 1997, respectively. Other interest-bearing
deposits of $100,000 or more totaled approximately $56,422,000 and $37,687,000
at December 31, 1998 and 1997, respectively.
At December 31, 1998, 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):
1998 1997 1996
----------- ----------- -----------
Current - federal $ 1,711,286 $ 330,087 $ --
Deferred (969,287) (369,400) 6,813
----------- ----------- -----------
Total income tax expense (benefit) $ 741,999 $ (39,313) $ 6,813
=========== =========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
1998 1997
----------- -----------
Deferred tax assets:
Allowance for loan losses $ 1,173,870 $ 842,379
Bank premises and equipment basis and
depreciation differences 87,962 90,776
Allowance for investment security losses 30,052 31,981
Other 20,826 22,313
Valuation allowance -- (644,015)
----------- -----------
1,312,710 343,424
----------- -----------
Deferred tax liabilities:
Available-for-sale securities (12,697) (18,715)
----------- -----------
Net deferred tax asset $ 1,300,013 $ 324,709
=========== ===========
Because of the Company's limited history to generate substantial taxable income,
a valuation allowance was established in 1997 to limit the recognition of net
deferred tax assets to approximate the amount of taxes that was expected to be
paid in 1998. During 1998, the Company generated sufficient taxable income that
management believes that it is more likely than not that the Company will
realize the recorded deferred tax assets. Accordingly, no valuation allowance
has been established at December 31, 1998.
F-15
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 4 - INCOME TAXES (CONTINUED)
Total income taxes for the years ended December 31, 1998, 1997 and 1996 are
allocated $741,999, $(39,313), and $6,813, respectively, to income tax from
operations and $(6,017), $12,669 and $(1,354), respectively, as a component of
other comprehensive income 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 1998, 1997 and 1996 to earnings (loss) before
income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 1,375,743 $ (687,048) $ 15,524
Effect of valuation allowance (644,015) 644,015 --
Tax-exempt income -- (1,126) (5,001)
Other, net 10,271 4,846 (3,710)
----------- ----------- -----------
Total income tax expense (benefit) $ 741,999 $ (39,313) $ 6,813
=========== =========== ===========
</TABLE>
NOTE 5 - STOCK OPTIONS AND STOCK COMPENSATION PLAN
Stock Options
On May 19, 1998, the Company's stockholders approved the Tejas Bancshares, Inc.
1998 Incentive Stock Plan (the Plan). The Plan's objectives are to attract,
retain and provide incentive to employees, officers and directors and to
increase overall stockholders' value. The number of shares reserved for issuance
under the Plan is 1,333,333. The Plan provides for the grant of both incentive
stock options and non-qualified stock options as well as the grant of restricted
stock, stock appreciation rights, dividend equivalent rights, stock awards and
other stock-based awards.
The exercise price of the options granted approximated or exceeded the market
value of the common stock at the date of grant. The options generally vest
ratably over eight years from the date of grant and terminate 10 years from the
date of grant.
The following table summarizes the status of the Plan as of December 31, 1998:
Weighted-average
Options exercise price
------- ----------------
Outstanding at beginning of year -- $ --
Granted 514,600 3.03
Exercised -- --
Expired or canceled 6,600 3.00
------- -----
Outstanding at end of year 508,000 $3.03
======= -----
Exerciseable at end of year -- --
Available for grant at end of year 825,333
F-16
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 5 - STOCK OPTIONS AND STOCK COMPENSATION PLAN (CONTINUED)
The following table summarizes information about options outstanding under the
Plan at December 31, 1998:
Options Outstanding
---------------------------------------------------------
Weighted-average
Number remaining
outstanding contractual life Exercise price
----------- ----------------- --------------
503,000 9.14 $ 3.00
5,000 9.82 6.00
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for the Plan and recognizes no
compensation costs in net earnings from the grant of options as options are
granted at exercise prices equal to the current stock price. Had compensation
cost been determined under the terms of SFAS 123, Accounting for Stock-Based
Compensation, the Company's pro forma 1998 net earnings and earnings per share
would have been as follows:
Net earnings
As reported $3,304,303
Pro forma 3,181,303
Earnings per share
Basic
As reported $ 0.25
Pro forma 0.24
Diluted
As reported $ 0.24
Pro forma 0.23
In accordance with SFAS 123, the fair value of options at date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Risk-free interest rate 5.14%
Expected life (years) 9.14
Expected volatility 32.00%
Expected dividend yield --
In accordance with SFAS 123, the weighted average fair value of options granted
during 1998 was $4.28.
Directors' Stock Compensation Plan
During October 1998, the Company's board of directors approved a nonemployee
directors' compensation plan for the directors of the Bank. The Plan provides
that directors will each receive 3,800 shares of common stock as compensation
for serving approximately three years. Restricted shares are issued to the
directors and are released after the end of each year of service. Shares related
to missed meetings or for termination prior to the end of the three-year period
are forfeited back to the Company. A committee of the board determined the fair
value of the shares at the date of issue to be $6/share. Each director is
effectively granted 100 shares of stock per meeting. During 1998, a total of
64,600 shares were issued under the Plan. Amortization of compensation cost in
1998 amounted to $18,600.
F-17
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 6 - 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 years ended December 31, 1998 and 1997:
1998 1997
------------ ------------
Balances at beginning of period $ 10,550,806 $ --
Advances 11,679,984 12,507,324
Repayment (10,091,787) (1,956,518)
------------ ------------
Balances at end of year $ 12,139,003 $ 10,550,806
============ ============
Loans to related parties during 1996 were not significant.
The Company also has deposit activities with related parties in the normal
course of business which amounted to $4,249,597 and $3,735,935 at December 31,
1998 and 1997, respectively. Deposit activities with related parties for 1996
were not significant.
During 1998, the Company entered into a lease agreement with a partnership for
certain land to be used for a branch site. Two partners are members of the
Company's Board of Directors. Lease expense recognized during 1998 for the
agreement was approximately $6,600.
Other transactions are described in the Summary of Significant Accounting
Policies.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash disbursed for interest for the years ended December 31, 1998, 1997 and 1996
was $4,244,631 $1,064,790, and $522,343, respectively. Cash disbursed for income
taxes was $1,969,000 for the year ended December 31, 1998 and was not
significant for the years ended December 31, 1997 and 1996.
During the year ended December 31, 1998, noncash investing activities included
the recognition as a component of comprehensive income the net unrealized
holding loss on available-for-sale securities of $(11,681), net of deferred
taxes of $(6,017).
During the year ended December 31, 1997, noncash investing activities included
the recognition as a component of comprehensive income 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 as a component of comprehensive income the net unrealized
holding loss on available-for-sale securities of $(2,629), net of deferred taxes
of $(1,354).
Other noncash transactions during 1998 included the issuance of 64,600 shares of
common stock under a directors' stock compensation plan. 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.
F-18
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 8 - 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:
1999 $ 190,521
2000 202,458
2001 205,346
2002 194,960
2003 182,358
Later years 1,081,850
----------
Total $2,057,493
==========
Total rental expense for the years ended December 31, 1998 and 1997 was
approximately $161,000 and $59,700, respectively. Rental expense for the year
ended December 31, 1996 was not significant.
NOTE 9 - 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 termination clauses and
may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness 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, 1998 and 1997 were
approximately $69,553,000 and $54,063,000, respectively. Management does not
anticipate any losses as a result of these transactions.
Like most entities, the Company may be exposed to risks associated with Year
2000 dating problems. This problem affects computer software and hardware;
transactions with customers, vendors and other entities; and equipment dependent
on microchips. The Company has begun, but not yet completed, the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of Year 2000 dating problems on third parties with
which the Company does business. If remediation efforts of the Company or third
parties with which it does business are not successful, it is possible the Year
2000 dating problem could negatively impact the Company's financial position and
results of operations.
F-19
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 10 - EARNINGS PER SHARE
During 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share. All prior earnings per share
data presented have been restated in accordance with SFAS 128.
The following is a reconciliation of the numerators and the denominators of the
basic and diluted earnings per share computations for net income:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ------------------------------------ ----------------------------------
Income Shares Per share Income Shares Per share Income Shares Per share
numerator denominator amount numerator denominator amount numerator denominator amount
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $ 3,304,303 13,344,130 $0.25 $(1,981,415) 4,824,792 $(0.41) $ 38,847 712,035 $0.05
Effect of dilutive
stock options -- 166,000 -- -- -- --
----------- ---------- ----------- ----------- ----- ----------- ----------- -----
Diluted EPS $ 3,304,303 13,510,130 $0.24 $(1,981,415) 4,824,792 $ (0.41) $ 38,847 712,035 $0.05
=========== ========== =========== =========== =========== ===========
</TABLE>
NOTE 11 - 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:
Commitments to Extend Credit
Generally, the Bank enters into commitments to extend credit at adjustable
interest terms. Accordingly, the commitment amount is a reasonable estimate of
fair value.
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 approximate fair value) of
approximately $7,303,000 and $5,085,000 at December 31, 1998 and 1997,
respectively.
F-20
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 11 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
(CONTINUED)
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 $183,550,924 and $117,102,264 at December
31, 1998 and 1997, 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, 1998 and 1997, the
carrying value of deposits was $205,139,114 and $106,254,658. 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 12 - RETIREMENT PLAN
Effective January 1, 1999, the Company adopted a 401(k) plan that will cover
substantially all eligible employees. The Company may elect to make
contributions to the plan.
NOTE 13 - 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.
F-21
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 13 - REGULATORY MATTERS (CONTINUED)
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, 1998 that
the Company and Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 1998, 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.
The Company's and Bank's actual capital amounts and ratios are presented in the
following table:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $43,652,000 21.80% $ 15,986,000 >=8.0% N/A
The Bank 42,864,000 21.50% 15,986,000 >=8.0% $ 19,983.00 >=10.0%
Tier I Capital (to Risk Weighted Assets):
Tejas Bancshares, Inc. $41,140,000 20.60% $ 7,993,000 >=4.0% N/A
The Bank 40,352,000 20.20% 7,993,000 >=4.0% $ 11,990,000 >= 6.0%
Tier I Captal (to Average Assets):
Tejas Bancshares, Inc. $41,140,000 17.00% $ 7,251,000 >=4.0% N/A
The Bank 40,352,000 16.70% 7,251,000 >=4.0% $ 12,085,000 >= 5.0%
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 29.21% $ 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 Captal (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%
</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, 1998 and 1997, the Bank maintained average cash and due
from bank balances of approximately $3,872,000 and $4,720,000, respectively, in
order to satisfy such requirements.
F-22
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
The condensed balance sheets, statements of operations and comprehensive income,
and cash flows for Tejas Bancshares, Inc. (parent only) follow:
Condensed Balance Sheets
1998 1997
---- ----
ASSETS
Cash on deposit with Bank $ 713,621 $ 884,154
Investment in Bank 40,377,011 36,969,088
Current tax receivable 73,832 --
----------- -----------
TOTAL ASSETS $41,164,464 $37,853,242
=========== ===========
STOCKHOLDERS' EQUITY $41,164,464 $37,853,242
=========== ===========
Condensed Statements of Operations and Comprehensive Income
1998 1997 1996
----------- ----------- -----------
INCOME
Dividend received from Bank $ -- $ 632,938 $ --
Other -- -- 6,937
----------- ----------- -----------
-- 632,938 6,937
----------- ----------- -----------
EXPENSES
Other 143,322 82,417 11,727
EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF BANK 3,447,625 (2,531,936) 43,637
----------- ----------- -----------
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME $ 3,304,303 $(1,981,415) $ 38,847
=========== =========== ===========
F-23
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 3,304,303 $ (1,981,415) $ 38,847
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating activities:
Equity in undistributed loss (income) of Bank (3,447,625) 2,531,936 (43,637)
Amortization of deferred directors' compensation 18,600 -- --
Change in current tax receivable (73,832) -- --
Other 28,021 -- --
Gain on sale of real estate -- -- (6,937)
------------ ------------ ------------
Net cash provided (used) by operating activities (170,533) 550,521 (11,727)
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 (170,533) 827,273 20,037
CASH, BEGINNING OF YEAR 884,154 56,881 36,844
------------ ------------ ------------
CASH, END OF YEAR $ 713,621 $ 884,154 $ 56,881
============ ============ ============
</TABLE>
This information is an integral part of the accompanying
consolidated financial statements.
F-24
<PAGE>
EXHIBIT LIST
Number Description
------ -----------
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
- ----------
* Incorporated by reference from the Company's Registration Statement on Form
10 dated April 10, 1998.
F-25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANICAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998, FORM 10-K OF TEJAS BANCSHARES, INC., ANDIS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 23813
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7303
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 187176
<ALLOWANCE> 3625
<TOTAL-ASSETS> 247288
<DEPOSITS> 205139
<SHORT-TERM> 0
<LIABILITIES-OTHER> 984
<LONG-TERM> 0
0
0
<COMMON> 13398
<OTHER-SE> 27766
<TOTAL-LIABILITIES-AND-EQUITY> 247288
<INTEREST-LOAN> 13310
<INTEREST-INVEST> 352
<INTEREST-OTHER> 1260
<INTEREST-TOTAL> 14922
<INTEREST-DEPOSIT> 4706
<INTEREST-EXPENSE> 4706
<INTEREST-INCOME-NET> 10216
<LOAN-LOSSES> 925
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6344
<INCOME-PRETAX> 4046
<INCOME-PRE-EXTRAORDINARY> 4046
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3304
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.26
<YIELD-ACTUAL> 5.59
<LOANS-NON> 0
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2748
<CHARGE-OFFS> 114
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 3625
<ALLOWANCE-DOMESTIC> 3625
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3625
</TABLE>
