U.S. Securities and Exchange Commission
Washington, D.C. 20549
----------
FORM 10Q
[x] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
----------
Commission File No. 0-24023
TEJAS BANCSHARES, INC.
State of Organization IRS Employer Identification
Texas No. 75-1950688
905 S. Fillmore, Suite 701
Amarillo, Texas 79101
Registrant's telephone number: 806-373-7900
----------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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. (1) Yes |X|
No |_| (2) Yes |X| No |_|
As of March 31, 1999, 13,398,784 shares of the Registrant's common stock were
outstanding.
<PAGE>
TEJAS BANCSHARES, INC.
INDEX
Page
----
Part I. Financial Information
Item 1: Financial Statements
Condensed Consolidated Balance Sheets
at March 31, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations and
Comprehensive Income for the three-month periods ended
March 31, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
three-month periods ended March 31, 1999 and 1998 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial Condition
And Results of Operations 6
Part II. Other Information 16
Signatures 17
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
March 31, 1999 and December 31, 1998
ASSETS
March 31, December 31,
1999 1998*
------------- -------------
Cash and due from banks $ 18,454,760 $ 23,813,175
Federal funds sold 32,000,000 26,300,000
Securities available-for-sale 7,080,635 7,303,042
Loans 191,712,693 187,176,359
Less allowance for loan losses (3,973,935) (3,625,435)
------------- -------------
Loans, net 187,738,758 183,550,924
------------- -------------
Bank premises and equipment, net 2,708,355 2,512,233
Accrued interest receivable 2,580,468 2,349,083
Net deferred tax asset 1,416,837 1,300,013
Other assets 104,214 159,389
------------- -------------
TOTAL ASSETS $ 252,084,027 $ 247,287,859
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand - noninterest bearing $ 53,473,277 $ 61,431,129
Demand - interest bearing 81,833,507 68,559,436
Time and savings 73,181,959 75,148,549
------------- -------------
Total deposits 208,488,743 205,139,114
------------- -------------
Accrued interest payable 708,347 684,462
Federal income taxes payable 524,123 66,994
Other liabilities 343,810 232,825
------------- -------------
Total liabilities 210,065,023 206,123,395
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 13,398,784 13,397,934
Paid-in capital 26,462,127 26,460,427
Retained earnings 2,485,022 1,650,455
Accumulated other comprehensive income 15,671 24,648
Deferred directors' compensation (342,600) (369,000)
------------- -------------
Total stockholders' equity 42,019,004 41,164,464
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 252,084,027 $ 247,287,859
============= =============
* Condensed from audited financial statements.
These condensed financial statements should be read only in
connection with the accompanying notes to the condensed financial statements.
1
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three-month periods ended March 31, 1999 and 1998
Three-month periods ended
March 31,
--------------------------
1999 1998
----------- -----------
INTEREST INCOME AND FEES
Interest and fees on loans $ 3,911,959 $ 2,797,406
Interest and dividends on
investment securities 100,335 79,228
Interest on federal funds sold 344,226 101,469
----------- -----------
Total interest income 4,356,520 2,978,103
INTEREST EXPENSE ON DEPOSITS 1,308,353 864,070
----------- -----------
Net interest income 3,048,167 2,114,033
PROVISION FOR LOAN LOSSES 330,000 225,000
----------- -----------
Net interest income after provision
for loan losses 2,718,167 1,889,033
OTHER OPERATING INCOME
Service charges 247,358 66,901
Other 116,795 35,160
----------- -----------
Total other operating income 364,153 102,061
OTHER OPERATING EXPENSES
Salaries and employee benefits 930,794 583,187
Depreciation 96,057 40,617
Advertising 80,771 98,823
Occupancy expense 104,663 78,462
Federal Deposit Insurance Corporation
premiums, net 5,346 3,420
Professional fees 42,790 30,496
Supplies, stationery and office expenses 85,002 219,962
Taxes other than on income and salaries 22,500 47,499
Data processing 203,841 31,199
Postage 43,512 18,331
Other 202,548 108,396
----------- -----------
Total other operating expenses 1,817,824 1,260,392
----------- -----------
Earnings before income taxes 1,264,496 730,702
INCOME TAXES 429,929 118,756
----------- -----------
NET EARNINGS 834,567 611,946
OTHER COMPREHENSIVE INCOME
Change in unrealized gains
on securities, net of tax (8,977) (3,033)
----------- -----------
COMPREHENSIVE INCOME $ 825,590 $ 608,913
=========== ===========
NET EARNINGS PER SHARE-Basic $ 0.06 $ 0.05
=========== ===========
NET EARNINGS PER SHARE-Diluted $ 0.06 $ 0.05
=========== ===========
These condensed financial statements should be read only in
connection with the accompanying notes to the condensed financial statements.
2
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
Three-month periods ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
Three-month periods
ended March 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 834,567 $ 611,946
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Depreciation 96,057 40,617
Deferred income taxes (112,200) --
Amortization of deferred director's compensation 26,400 --
Provision for loan losses 330,000 225,000
Amortization of premium or (accretion) of
discount relating to investment securities, net 6,533 (1,871)
Changes in:
Accrued interest receivable (231,385) (1,127,932)
Other assets 55,175 (171,763)
Accrued interest payable 23,885 201,431
Federal income taxes payable 457,129 (221,244)
Other liabilities 110,985 123,690
------------ ------------
Net cash provided (used) by operating activities 1,597,146 (320,126)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs on
securities available-for-sale 1,309,664 867,161
Purchases of securities available-for-sale (1,107,391) (1,141,800)
Change in loans to customers (4,517,834) (17,094,916)
Expenditures for bank premises and equipment (292,179) (1,153,473)
------------ ------------
Net cash used by investing activities (4,607,740) (18,523,028)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 3,349,629 29,943,650
Proceeds from the exercise of stock options 2,550 --
------------ ------------
Net cash provided by financing activities 3,352,179 29,943,650
------------ ------------
Net increase in cash and cash equivalents 341,585 11,100,496
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,113,175 20,126,298
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50,454,760 $ 31,226,794
============ ============
</TABLE>
These condensed financial statements should be read only in
connection with the accompanying notes to the condensed financial statements.
3
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (Unaudited)
(1) General
See the Summary of Significant Accounting Policies included in the
consolidated financial statements in the Company's report on Form 10K.
The unaudited condensed consolidated financial statements included herein
were prepared from the books of the Company in accordance with generally
accepted accounting principles and reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management,
necessary to a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally
conform to the presentation reflected in the Company's Annual Report to
Stockholders. The current interim period reported herein is included in the
fiscal year subject to independent audit at the end of that year and is not
necessarily an indication of the expected results for the fiscal year.
(2) Net Earnings Per Share
The following is a reconciliation of the numerators and the denominators of
the basic and diluted earnings per share computations for net income for
the three-month periods ended March 31.
<TABLE>
<CAPTION>
1999 1998
------------------------------------- --------------------------------------
Income Shares Per share Income Shares Per share
numerator denominator amount numerator denominator amount
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $ 834,567 13,398,182 $ 0.06 $ 611,946 13,333,334 $ 0.05
Effect of dilutive
stock options -- 220,050 -- --
---------- ---------- ---------- ----------
Diluted EPS $ 834,567 13,618,232 $ 0.06 $ 611,946 13,333,334 $ 0.05
========== ========== ========== ==========
</TABLE>
(3) Incentive Stock Plan
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 shareholder 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. On March 15,
1999 the Company granted 50,000 in shares under incentive stock options to
certain employees and officers at the option price of $6.00, which is the
fair market value of the common stock of the Company as determined by a
majority of the disinterested directors of the Company.
This information is an integral part of the accompanying
condensed consolidated financial statements.
4
<PAGE>
(4) New Banking Center
During the first quarter of 1999, the Company began construction of a
banking center at 45th and Coulter in Amarillo. At March 31, 1999, the
Company had a commitment of $1,270,000 for the construction. The land for
the site was being leased from a partnership in which two partners were
members of the Company's board of directors. On April 20, 1999, the Company
purchased the land from the partnership, the two board of directors sold
the land at their cost.
This information is an integral part of the accompanying
condensed consolidated financial statements.
5
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three-Month Periods Ended March 31, 1999 as Compared to
the Three-Month Periods Ended March 31, 1998:
Earnings
Tejas Bancshares, Inc. and subsidiary (the Company) incurred net earnings for
the three-month period ended March 31, 1999 of $834,567 as compared to earnings
of $611,946 for the three-month period ended March 31, 1998. The increase in
earnings for 1999 was primarily the result of improved net interest income as a
result of growth in earning assets. The return on average assets for the
three-month period ended March 31, 1999 and 1998 was 1.36% and 1.62%,
respectively, and return on average equity was 8.10% and 6.51%, respectively.
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 three-month periods ended March 31, 1999 and 1998 net interest income
was $3,048,167, and $2,114,033, respectively. The increase in net interest
income from 1998 to 1999 of $934,134 (44.19%) is primarily due to an increase in
average interest-earning assets of approximately $87,153,800, net of an increase
in average interest-bearing liabilities of approximately $66,786,500.
The following table sets forth the average consolidated balance sheets of the
Company and subsidiary for the three-month periods ended March 31, 1999 and 1998
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:
6
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -----------------------------------
Average Total Average Average Total Average
Balance(1) Interest Rate Balance(1) Interest Rate
------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans
Commercial and agricultural $108,007,689 2,287,204 8.59% $ 65,887,954 1,445,591 8.90%
Real estate - mortgage 70,079,445 1,328,939 7.69% 37,508,101 806,822 8.72%
Installment loans to individuals 12,695,833 295,816 9.45% 24,015,413 544,993 9.20%
------------ ---------- ---- ------------ ---------- ----
Total loans 190,782,967 3,911,959 8.32% 127,411,468 2,797,406 8.90%
Securities taxable 7,191,684 100,335 5.66% 5,132,669 79,228 6.26%
Federal funds sold and other
interest-earning assets 29,270,000 344,226 4.77% 7,546,666 101,469 5.45%
------------ ---------- ---- ------------ ---------- ----
Total interest-earning assets 227,244,651 4,356,520 7.77% 140,090,803 2,978,103 8.62%
NONINTEREST-EARNING ASSETS
Cash and due from banks 18,599,022 13,004,123
Other assets 6,639,188 3,211,978
Less: allowance for loan losses (3,769,122) (2,837,004)
------------ ------------
Total $248,713,739 $153,469,900
============ ============
INTEREST-BEARING
LIABILITIES
Interest-bearing demand $ 33,030,921 130,982 1.61% $ 19,012,907 115,574 2.47%
Money market deposits 44,338,545 313,597 2.87% 20,854,809 172,639 3.36%
Other savings deposits 4,678,243 23,155 2.01% 2,286,977 15,513 2.75%
Time deposits 69,745,328 840,619 4.89% 42,851,881 560,344 5.30%
------------ ---------- ---- ------------ ---------- ----
Total interest-bearing
liabilities 151,793,037 1,308,353 3.50% 85,006,574 864,070 4.12%
NONINTEREST-BEARING
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Demand deposits 53,872,746 29,791,555
Other 1,263,189 538,626
Stockholders' equity 41,784,767 38,133,145
------------ ------------
Total $248,713,739 $153,469,900
============ ============
Net interest income $3,048,167 $2,114,033
Net yield on earning assets 5.44% 6.12%
==== ====
</TABLE>
(1) For purposes of these computations, nonaccruing loans are included in the
daily average loan amounts outstanding.
7
<PAGE>
Other Operating Income and Expenses
Other operating income for the three-month periods for 1999 increased by
$262,092 (257%) because of increased activity on deposit accounts. Other
operating expenses increased during the three-month periods for 1999 by $557,432
(44%). The increase was attributable to the overall growth of the Company,
including a significant increase in employees from 1998 to 1999 and increases in
costs to conduct banking operations, primarily data processing, depreciation and
occupancy.
Securities Portfolio
The objective of the Company in its management of the investment portfolio is to
maintain a portfolio of high quality, relatively liquid investments with
competitive returns. During the three-month period of 1999, the weighted average
yield on taxable securities was 5.66% as compared to 6.26% during 1998. The
Company primarily invests in U.S. Treasury securities and other U.S. government
agency obligations and mortgage-backed securities.
The amortized cost and estimated fair values of the major classifications of
available-for-sale securities at March 31, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
------------------------ ------------------------
Amortized Amortized
Cost Market Cost Market
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Treasury securities $2,211,979 $2,213,389 $2,210,407 $2,213,750
Government agencies 1,840,974 1,848,058 1,855,726 1,877,014
Mortgage backed securities 1,788,263 1,803,513 1,981,078 1,993,793
State and political obligations -- -- 2,810 2,810
Other securities 1,215,675 1,215,675 1,215,675 1,215,675
---------- ---------- ---------- ----------
Total securities $7,056,891 $7,080,635 $7,265,696 $7,303,042
========== ========== ========== ==========
</TABLE>
Loan Portfolio
At March 31, 1999 and December 31, 1998 net loans accounted for 74.5% and 74.2%,
respectively, of total assets.
The amount of loans outstanding at March 31, 1999 and December 31, 1998 are
shown in the following table according to type of loans:
8
<PAGE>
March 31, December 31,
1999 1998
------------ ------------
Commercial $ 66,281,635 $ 65,560,035
Agriculture 35,832,187 50,051,845
Real estate
Commercial 53,700,377 39,643,202
1-4 single family 23,160,312 20,542,212
Installment loans to individuals 12,438,524 11,274,763
Student Loans 299,658 104,302
------------ ------------
Total $191,712,693 $187,176,359
============ ============
Provision and Allowance for Loan Losses
The following table summarizes the loan loss experience for the three-month
periods ended March 31, 1999 and 1998:
1999 1998
----------- -----------
Balance of allowance for loan
losses at the beginning of period $ 3,625,435 $ 2,748,418
Provision charged to operations 330,000 225,000
Charge-offs (4,760) (4,189)
Recoveries 23,260 14,733
----------- -----------
Balance at end of period $ 3,973,935 $ 2,983,962
=========== ===========
The Bank had no significant nonaccrual, past due or restructured loans at March
31, 1999.
Additions to the allowance for loan losses, which are recorded as the provision
for loan losses on the Company's statements of operations, 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 March 31, 1999 and December 31, 1998, the allowance for loan losses was
$3,973,935 and $3,625,435, respectively, which represented 2.07% and 1.94% of
outstanding loans at those respective dates.
During the three-month periods ended March 31, 1999 and 1998, the Company
recorded provisions for loan losses of $330,000 and $225,000, respectively. The
provisions were made in
9
<PAGE>
connection with the growth of the loan portfolio. The increase in loans is
attributable to the change in ownership and an aggressive posture taken by
management to grow the Company. During 1997, the Company hired nine new,
experienced loan officers who have been successful in originating many loans.
Because the Company has a very limited loan loss history, the rapid growth in
the loan portfolio and the inherent uncertainties in lending, management
believes that a conservative approach to providing loan losses is prudent. 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. Management
expects that appropriate, additional future provisions will be made as the loan
portfolio grows.
Capital
The Company and The First National Bank of Amarillo (the Bank) are subject to
various regulatory capital requirements administered by banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Company's and
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I Capital (as defined) to
average assets (as defined). Management believes, as of March 31,1999, that the
Company and Bank meet all capital adequacy requirements to which they are
subject.
The Company and the Bank exceeded their regulatory capital ratio at March 31,
1999, as set forth 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>
To Risk Weighted Assets:
Total Capital:
Tejas Bancshares, Inc. $ 44,592,000 21.68% $ 16,456,000 > or = 8.0% N/A
The Bank 43,808,000 21.30% 16,456,000 > or = 8.0% 20,570,000 > or = 10.0%
Tier I Capital:
Tejas Bancshares, Inc. $ 42,003,000 20.42% $ 8,228,000 > or = 4.0% N/A
The Bank 41,219,000 20.04% 8,228,000 > or = 4.0% 12,342,000 > or = 6.0%
To Average Assets
Tier I Capital:
Tejas Bancshares, Inc. $ 42,003,000 16.84% $ 9,978,000 > or = 4.0% N/A
The Bank 41,219,000 16.52% 9,978,000 > or = 4.0% 12,473,000 > or = 5.0%
</TABLE>
10
<PAGE>
Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of funds
in order to meet its day-to-day cash flow requirements while maximizing profits.
Liquidity represents the ability of a Company to convert assets into cash or
cash equivalents without significant loss and to raise additional funds by
increasing liabilities. Liquidity management is made more complicated because
different balance sheet components are subject to varying degrees of management
control. For example, the timing of maturities of the investment portfolio is
very predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to nearly the same degree of control.
The Company has maintained a level of liquidity that is adequate to provide the
necessary cash requirements. The Company's funds-sold position, its primary
source of liquidity, averaged $29,270,000 during the three-month period ended
March 31, 1999. Additionally, the Company has $13,000,000 in funds purchased
lines available from correspondent banks. Management also has lined out
potential purchasers of loans as a tool to maintain liquidity. The Company has
numerous loan participations with other parties, primarily financial
institutions. Loan participations are a common commercial banking arrangements
whereby the Company sells, on a nonrecourse basis, a portion of a loan to
another party or parties. These arrangements spread the risk between or among
the parties and provide liquidity to the Company while reducing risk. Although
no formal agreements or commitments exist, management believes that additional
loan participations in the range of $75 million to $80 million could readily be
sold for liquidity purposes, if necessary. Management regularly reviews the
liquidity position of the Company and has implemented internal policies which
establish guidelines for sources of asset-based liquidity. Management believes
that the continued growth in the deposit base will enable the Company to meet
its long-term liquidity needs.
11
<PAGE>
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $205,665,783 and $114,798,129 during the three-month
periods for 1999 and 1998, respectively. Average interest-bearing deposits were
$151,793,037 in 1999 as compared to $85,006,574 in 1998.
The average daily amount of deposits and rates paid on savings deposits are
summarized for the three-months ended March 31, 1999 and 1998 as indicated in
the following table:
1999 1998
--------------------- ---------------------
Amount Rate Amount Rate
-------------- ------ -------------- ------
Deposits
Noninterest-bearing demand $ 53,872,746 0.00% $ 29,791,555 0.00%
Interest-bearing demand 33,030,921 1.61% 19,012,907 2.47%
Money market deposits 44,338,545 2.87% 20,854,809 3.36%
Other savings deposits 4,678,243 2.01% 2,286,977 2.75%
Time deposits 69,745,328 4.89% 42,851,881 5.30%
------------ ------------
Total $205,665,783 $114,798,129
============ ============
12
<PAGE>
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 systems failures. (For example, the year 2002 would be
02 in a two digit format, but might be read by the system 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 which forms
the framework for guiding this financial institution 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 made in order to determine the
impact of the Y2K problem. 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
this financial institution. An inventory of all systems was performed which 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 phase was completed in mid 1998.
Remediation and Testing :
The Bank relies heavily on a major service provider for its mission-critical
applications and operations. Status reports of this providers' efforts with
regard to attaining Y2K readiness, including any remediation required, have been
provided to management on a regular basis. Its own internal test summaries and
readiness statements have been obtained.
In addition, mission-critical applications within the operating system were
tested on site in February 1999. Integrated tests were performed on a duplicated
client "Test Bank" provided by the servicer. An independent review of the
testing results was also performed with satisfactory results.
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 with one exception: the POD (Item Processing) system. It
will be installed and tested for Y2K readiness in May 1999 through onsite
testing by Alltel.
13
<PAGE>
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 successfully recognize and
interpret dates correctly and to make appropriate calculations. This risk is
being mitigated through testing and remediation (as previously discussed);
however, there is also another type of risk which is 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 in order
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 in excess of $250,000. The level of risk - Low, Medium, High-
was determined based on the results of a questionnaire and internal guidelines.
The latest general assessment was completed as of 3/15/99 and covered 68.7% of
the portfolio, of which only 3.5% were deemed to exhibit a level of risk above
the Low risk category.
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, the deposit-base has been determined to exhibit low
risk factors.
The risk assessment program is on-going, and the results of the quarterly
analyses of loans and deposit customers are reported to the board of directors.
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 re-programmed or
replaced. However, upon the completion of testing 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 the design and implementation of contingency
plans.
Additionally, adequate resources required to manage the Y2K project have been
allocated by the company. 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. Such 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, this
financial institution has exercised diligent efforts to conform to all milestone
dates as defined by the Federal Financial Institution Examination Council's
guidance papers. However, the Company cannot guarantee that no century date
change problems will arise, due to its reliance on service provider systems.
14
<PAGE>
The development of a Year 2000 Business Resumption Contingency Plan to minimize
the potential problems and risk to the organization is being given considerable
attention. Completion date for all phases of the project is anticipated to be
June 30, 1999, although monitoring efforts and flexibility will continue
throughout the year.
15
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for March 31, 1999
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended
March 31, 1999.
16
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TEJAS BANCSHARES, INC.
DATE: May 10, 1999 BY: /s/ Donald E. Powell
------------ -----------------------------------------
Donald E. Powell, Chief Executive Officer
DATE: May 10, 1999 BY: /s/ Jack Hall
------------ -----------------------------------------
Jack Hall, Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FORM 10-Q OF TEJAS BANCSHARES, INC. AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,454
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 32,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,081
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 191,713
<ALLOWANCE> 3,974
<TOTAL-ASSETS> 252,084
<DEPOSITS> 208,489
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,576
<LONG-TERM> 0
0
0
<COMMON> 13,399
<OTHER-SE> 28,620
<TOTAL-LIABILITIES-AND-EQUITY> 252,084
<INTEREST-LOAN> 3,912
<INTEREST-INVEST> 100
<INTEREST-OTHER> 344
<INTEREST-TOTAL> 4,356
<INTEREST-DEPOSIT> 1,308
<INTEREST-EXPENSE> 1,308
<INTEREST-INCOME-NET> 3,048
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,818
<INCOME-PRETAX> 1,264
<INCOME-PRE-EXTRAORDINARY> 1,264
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 835
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
<YIELD-ACTUAL> 5.44
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,625
<CHARGE-OFFS> 5
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 3,974
<ALLOWANCE-DOMESTIC> 3,974
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,974
</TABLE>
