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 June 30, 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 June 30, 1999, 13,406,767 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 June 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the three-month and six-month periods ended
June 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 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 15
Signatures 16
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
June 30, 1999 and December 31, 1998
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998*
------------- -------------
<S> <C> <C>
Cash and due from banks $ 17,473,265 $ 23,813,175
Federal funds sold 25,000,000 26,300,000
Securities available-for-sale 6,920,618 7,303,042
Loans 203,935,187 187,176,359
Less allowance for loan losses (3,665,302) (3,625,435)
------------- -------------
Loans, net 200,269,885 183,550,924
------------- -------------
Bank premises and equipment, net 3,301,352 2,512,233
Accrued interest receivable 3,136,901 2,349,083
Net deferred tax asset 1,346,691 1,300,013
Income tax receivable 162,319 --
Other assets 90,451 159,389
------------- -------------
TOTAL ASSETS $ 257,701,482 $ 247,287,859
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand - noninterest bearing $ 56,861,501 $ 61,431,129
Demand - interest bearing 83,336,472 68,559,436
Time and savings 73,287,424 75,148,549
------------- -------------
Total deposits 213,485,397 205,139,114
------------- -------------
Accrued interest payable 853,935 684,462
Federal income taxes payable -- 66,994
Other liabilities 384,300 232,825
------------- -------------
Total liabilities 214,723,632 206,123,395
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 13,406,767 13,397,934
Paid-in capital 26,478,093 26,460,427
Retained earnings 3,403,961 1,650,455
Accumulated other comprehensive income 4,629 24,648
Deferred directors' compensation (315,600) (369,000)
------------- -------------
Total stockholders' equity 42,977,850 41,164,464
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 257,701,482 $ 247,287,859
============= =============
</TABLE>
* 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 SUBSIDIARIES
Condensed Consolidated Statements of Operations and
Comprehensive Income (Unaudited)
Three-month and six-month periods ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three-month periods ended Six-month periods ended
June 30, June 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME AND FEES
Interest and fees on loans $ 4,036,309 $ 3,188,132 $ 7,948,268 $ 5,985,538
Interest and dividends on
investment securities 97,298 83,718 197,633 162,946
Interest on federal funds sold 347,245 353,157 691,471 454,626
----------- ----------- ----------- -----------
Total interest income 4,480,852 3,625,007 8,837,372 6,603,110
INTEREST EXPENSE ON DEPOSITS 1,289,306 1,145,794 2,597,659 2,009,864
----------- ----------- ----------- -----------
Net interest income 3,191,546 2,479,213 6,239,713 4,593,246
PROVISION FOR LOAN LOSSES 330,000 225,000 660,000 450,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,861,546 2,254,213 5,579,713 4,143,246
OTHER OPERATING INCOME
Service charges 274,849 213,592 522,207 280,493
Other 161,085 112,681 277,880 147,841
----------- ----------- ----------- -----------
Total other operating income 435,934 326,273 800,087 428,334
OTHER OPERATING EXPENSES
Salaries and employee benefits 963,859 870,628 1,894,653 1,453,815
Depreciation 99,283 79,493 195,340 120,110
Advertising 64,349 104,639 145,120 203,462
Occupancy expense 102,823 90,883 207,486 169,345
Federal Deposit Insurance Corporation
premiums, net 5,672 13,874 11,018 17,294
Professional fees 47,060 83,061 89,850 113,557
Supplies, stationary and office expenses 98,862 188,393 183,864 408,355
Taxes other than on income and salaries 23,088 47,501 45,588 95,000
Data processing 227,462 174,288 431,303 205,487
Postage 43,590 34,733 87,102 53,064
Other 229,101 113,848 431,649 222,244
----------- ----------- ----------- -----------
Total other operating expenses 1,905,149 1,801,341 3,722,973 3,061,733
----------- ----------- ----------- -----------
Earnings before income taxes 1,392,331 779,145 2,656,827 1,509,847
INCOME TAXES 473,392 119,843 903,321 238,599
----------- ----------- ----------- -----------
NET EARNINGS 918,939 659,302 1,753,506 1,271,248
OTHER COMPREHENSIVE INCOME
Change in unrealized gains
on securities, net of tax (11,042) (1,473) (20,019) (4,506)
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 907,897 $ 657,829 $ 1,733,487 $ 1,266,742
=========== =========== =========== ===========
NET EARNINGS PER SHARE-Basic $ 0.07 $ 0.05 $ 0.13 $ 0.10
=========== =========== =========== ===========
NET EARNINGS PER SHARE-Diluted $ 0.07 $ 0.05 $ 0.13 $ 0.10
=========== =========== =========== ===========
</TABLE>
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 SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six-month periods ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Six-month periods
ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,753,506 $ 1,271,248
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 195,340 120,110
Deferred income taxes (36,366) (445,701)
Amortization of deferred director's compensation 53,400 --
Provision for loan losses 660,000 450,000
Amortization of premium or (accretion) of
discount relating to investment securities, net 11,312 (2,501)
Changes in:
Accrued interest receivable (787,818) (1,432,522)
Other assets (93,381) (138,478)
Accrued interest payable 169,473 368,749
Federal income taxes payable (66,994) (324,709)
Other liabilities 151,475 456,586
------------ ------------
Net cash provided by operating activities 2,009,947 322,782
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs on
securities available-for-sale 1,448,172 1,820,333
Purchases of securities available-for-sale (1,107,391) (2,141,800)
Change in loans to customers (17,378,961) (29,666,286)
Expenditures for bank premises and equipment (984,459) (1,596,603)
------------ ------------
Net cash used by investing activities (18,022,639) (31,584,356)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,346,283 61,133,909
Proceeds from the exercise of stock options 26,499 --
------------ ------------
Net cash provided by financing activities 8,372,782 61,133,909
------------ ------------
Net increase (decrease) in cash and cash equivalents (7,639,910) 29,872,335
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,113,175 20,126,298
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,473,265 $ 49,998,633
============ ============
</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 SUBSIDIARIES
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.
Effective April 1, 1999, the Company established a new middle-tier holding
company named Tejas Force, Inc. The effect of the new company on the
consolidated financial statements as of and for the quarter ended June 30,
1999 was insignificant.
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 and six-month periods ended June 30.
<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>
Six-months ended June 30:
Basic EPS $1,753,506 13,401,577 $0.13 $1,271,248 13,333,334 $0.10
Effect of dilutive
stock options -- 216,609 -- --
---------- ------------ ----------- -----------
Diluted EPS $1,753,506 13,618,186 $0.13 $1,271,248 13,333,334 $0.10
========== ============ =========== ==========
Three-months ended June 30:
Basic EPS $ 918,939 13,404,935 $0.07 $ 659,302 13,333,334 $0.05
Effect of dilutive
stock options -- 216,609 -- --
---------- ------------ 0---------- -----------
Diluted EPS $ 918,939 13,621,544 $0.07 $ 659,302 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
This information is an integral part of the accompanying
condensed consolidated financial statements.
4
<PAGE>
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. During the first and second quarters of 1999
the Company granted 50,000 and 123,000, respectively, 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.
(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 June 30, 1999, the
Company had a commitment of $1,270,000 for the construction.
This information is an integral part of the accompanying
condensed consolidated financial statements.
5
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - Three-Month and Six-Month Periods Ended June 30, 1999 as
Compared to the Three-Month and Six-Month Periods Ended June 30, 1998:
Earnings
Tejas Bancshares, Inc. and subsidiaries (the Company) incurred net earnings for
the three-month period ended June 30, 1999 of $918,939 as compared to earnings
of $659,302 for the three-month period ended June 30, 1998. The Company's net
earnings were $1,753,506 for the six-month period ended June 30, 1999 as
compared earnings of $1,271,248 for the six-month period ended June 30, 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 six-month period ended June 30, 1999 and 1998 was 1.41% and
1.48%, respectively, and return on average equity was 8.37% and 6.65%,
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 six-month periods ended June 30, 1999 and 1998 net interest income
was $6,239,713, and $4,593,246, respectively. The increase in net interest
income from 1998 to 1999 of $1,646,467 (35.85%) is primarily due to an increase
in average interest-earning assets of approximately $71,466,000, net of an
increase in average interest-bearing liabilities of approximately $53,757,000.
The following table sets forth the average consolidated balance sheets of the
Company and subsidiaries for the six-month periods ended June 30, 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 $ 106,207,450 4,423,067 8.40% $ 74,429,632 3,261,692 8.84%
Real estate - mortgage 73,543,594 2,898,191 7.95% 44,157,768 1,922,185 8.78%
Installment loans to individuals 13,734,935 627,010 9.21% 17,696,802 801,661 9.14%
------------- ------------ ------- ------------- ----------- -------
Total loans 193,485,979 7,948,268 8.28% 136,284,202 5,985,538 8.86%
Securities taxable 7,105,826 197,633 5.61% 5,173,348 162,946 6.35%
Federal funds sold and other
interest-earning assets 29,248,619 691,471 4.77% 16,917,127 454,626 5.42%
------------- ----------- ------- ------------- ----------- -------
Total interest-earning assets 229,840,424 8,837,372 7.75% 158,374,677 6,603,110 8.41%
NONINTEREST-EARNING ASSETS
Cash and due from banks 17,850,986 13,754,091
Other assets 7,043,791 4,135,154
Less: allowance for loan losses (3,815,715) (2,948,745)
------------- -------------
Total $ 250,919,486 $ 173,315,177
============= =============
INTEREST-BEARING
LIABILITIES
Interest-bearing demand $ 33,492,551 264,392 1.59% $ 23,049,208 280,528 2.45%
Money market deposits 45,875,673 659,767 2.90% 24,498,440 408,991 3.37%
Other savings deposits 4,858,688 48,568 2.02% 2,886,048 39,194 2.74%
Time deposits 68,746,766 1,624,932 4.77% 48,783,393 1,281,151 5.30%
------------- ----------- ------- ------------- ----------- -------
Total interest-bearing
liabilities 152,973,678 2,597,659 3.42% 99,217,089 2,009,864 4.09%
NONINTEREST-BEARING
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Demand deposits 54,387,698 34,882,876
Other 1,308,925 639,250
Stockholders' equity 42,249,185 38,575,962
------------- -------------
Total $ 250,919,486 $ 173,315,177
============= =============
Net interest income $ 6,239,713 $ 4,593,246
Net yield on earning assets 5.47% 5.85%
==== ====
</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 and six-month periods for 1999 and 1998
increased by $109,661 (33.61%) and $371,753 (86.79%), respectively, because of
increased activity on deposit accounts. Other operating expenses increased
during the three and six-month periods for 1999 and 1998 by $103,808 (5.76%) and
$661,240 (21.60%), respectively. 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 first six-month period of 1999, the weighted
average yield on taxable securities was 5.61% as compared to 6.35% 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 June 30, 1999 and December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------------------ ------------------------------
Amortized Amortized
Cost Market Cost Market
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Treasury securities $2,207,849 $2,204,125 $2,210,407 $2,213,750
Government agencies 1,833,420 1,827,980 1,855,726 1,877,014
Mortgage backed securities 1,656,660 1,672,838 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 $6,913,604 $6,920,618 $7,265,696 $7,303,042
========== ========== ========== ==========
</TABLE>
Loan Portfolio
At June 30, 1999, December 31, 1998, and June 30, 1998 net loans accounted for
77.7%, 74.2%, and 70.5%, respectively, of total assets.
The amount of loans outstanding at June 30, 1999 and December 31, 1998 are shown
in the following table according to type of loans:
8
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
Commercial $ 76,815,622 $ 65,560,035
Agriculture 33,819,699 50,051,845
Real estate
Commercial 53,236,038 39,643,202
1-4 single family 24,544,379 20,542,212
Installment loans to individuals 15,174,069 11,274,763
Student Loans 345,380 104,302
---------------- ----------------
Total $203,935,187 $ 187,176,359
================ ================
</TABLE>
Provision and Allowance for Loan Losses
The following table summarizes the loan loss experience for the six-month
periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Balance of allowance for loan
losses at the beginning of period $ 3,625,435 $ 2,748,418
Provision charged to operations 660,000 450,000
Charge-offs (646,722) (17,780)
Recoveries 26,588 14,877
------------------ ------------------
Balance at end of period $ 3,665,302 $ 3,195,515
================== ==================
</TABLE>
The Bank had no nonaccrual or restructured loans at June 30, 1999. Loans past
due 90 days or more were only $91,000 at June 30, 1999. The charge-offs that
occurred during the second quarter were primarily caused by three credits. At
the present time management is not aware of any other loans in which it has
serious doubts as to the ability of such borrower to comply with present loan
repayment terms.
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 June 30, 1999 and December 31, 1998, the allowance for loan losses was
$3,665,302 and $3,625,435, respectively, which represented 1.80% and 1.94% of
outstanding loans at those respective dates.
9
<PAGE>
During the six-month period ended June 30, 1999, the Company recorded provisions
for loan losses of $660,000. The provisions were made in connection with the
analysis discussed above. 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 June 30, 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 June 30,
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>
To Risk Weighted Assets:
Total Capital:
Tejas Bancshares, Inc. $ 45,668,000 21.28% $ 17,167,000 > 8.0% N/A
-
The Bank 44,862,000 20.92% 17,159,000 > 8.0% 21,448,000 > 10.0%
- -
Tier I Capital:
Tejas Bancshares, Inc. $ 42,973,000 20.03% $ 8,584,000 > 4.0% N/A
-
The Bank 42,169,000 19.66% 8,579,000 > 4.0% 12,869,000 > 6.0%
- -
To Quarterly Average Assets
Tier I Capital:
Tejas Bancshares, Inc. $ 42,973,000 17.04% $ 10,085,000 > 4.0% N/A
-
The Bank 42,169,000 16.73% 10,085,000 > 4.0% 12,606,000 > 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 $29,249,000 during the six-month period ended June
30, 1999. Additionally, the Company has $25,000,000 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 $207,361,376 and $134,099,965 during the six-month
periods for 1999 and 1998, respectively. Average interest-bearing deposits were
$152,973,678 in 1999 as compared to $99,217,089 in 1998.
The average daily amount of deposits and rates paid on savings deposits are
summarized for the six-months ended June 30, 1999 and 1998 as indicated in the
following table:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Amount Rate Amount Rate
------------------ -------- ------------------ --------
<S> <C> <C> <C> <C>
Deposits
Noninterest-bearing demand $54,387,698 0.00% $ 34,882,876 0.00%
Interest-bearing demand 33,492,551 1.59% 23,049,208 2.45%
Money market deposits 45,875,673 2.90% 24,498,440 3.37%
Other savings deposits 4,858,688 2.02% 2,886,048 2.74%
Time deposits 68,746,766 4.77% 48,783,393 5.30%
----------------- ------------------
Total $207,361,376 $134,099,965
================== ==================
</TABLE>
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.
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 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. Based on an analysis of the potential business impact of Y2K related
problems, a Business Resumption Contingency Plan was developed prior to 6/30/99.
The program has been approved by the Board of Directors and was reviewed by an
independent third party. The primary goals of the contingency plan are to
stabilize operations, minimize disruptions of service to customers, and resume
business operations as quickly as possible. Validation of the plan and
run-throughs will be completed in the third and fourth quarters, as well as
training of all pertinent staff.
Adequate resources required to manage the Y2K project have been allocated by the
Company. Expenses attributable to Y2K readiness have been minimal; none of these
costs were incurred to repair or replace software, equipment, or systems. The
estimated costs related to Y2K compliance, mainly covering test costs and
customer communications during 1999, are not significant. Such costs have been
or will be expensed 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>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
1. Election of directors
The annual meeting of stockholders of the Company was held on April 6, 1999. At
this meeting, the individuals named below were elected to the Board of Directors
of the Company to serve until the next annual meeting of the stockholders of the
Company:
Number of Shares
For Withhold
Don Powell 8,305,876 194,539
William H. Attebury 8,493,747 6,668
Danny H. Conklin 8,493,747 6,668
Wales H. Madden, Jr. 8,493,747 6,668
Jay O'Brien 8,493,747 6,668
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for June 30, 1999
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended June
30, 1999.
15
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
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: August 10, 1999 BY: /s/ Donald E. Powell
------------------------------ --------------------------------------
Donald E. Powell, Chief Executive Officer
DATE: August 10, 1999 BY:/s/ Jack Hall
------------------------------ ---------------------------------------
Jack Hall, Chief Financial Officer
16
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<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,473
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 25,000
<TRADING-ASSETS> 0
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0
0
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