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 September 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 September 30, 1999, 13,412,767 shares of the Registrant's common stock
were outstanding.
<PAGE>
TEJAS BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1: Financial Statements:
Condensed Consolidated Balance Sheets
at September 30, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the three-month and nine-month periods ended
September 30, 1999 and 1998 2
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 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
</TABLE>
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998
ASSETS
September 30, December 31,
1999 1998*
------------- -------------
Cash and due from banks $ 17,974,701 $ 23,813,175
Federal funds sold 27,190,000 26,300,000
Securities available-for-sale 6,819,545 7,303,042
Loans 228,608,775 187,176,359
Less allowance for loan losses (4,190,626) (3,625,435)
------------- -------------
Loans, net 224,418,149 183,550,924
------------- -------------
Bank premises and equipment, net 3,595,930 2,512,233
Accrued interest receivable 2,855,796 2,349,083
Net deferred tax asset 1,530,975 1,300,013
Other assets 63,077 159,389
------------- -------------
TOTAL ASSETS $ 284,448,173 $ 247,287,859
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand - noninterest bearing $ 61,227,958 $ 61,431,129
Demand - interest bearing 84,878,800 68,559,436
Time and savings 92,707,438 75,148,549
------------- -------------
Total deposits 238,814,196 205,139,114
------------- -------------
Accrued interest payable 636,315 684,462
Federal income taxes payable 286,733 66,994
Other liabilities 563,409 232,825
------------- -------------
Total liabilities 240,300,653 206,123,395
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 13,412,767 13,397,934
Paid-in capital 26,506,893 26,460,427
Retained earnings 4,553,948 1,650,455
Accumulated other comprehensive income (288) 24,648
Deferred directors' compensation (325,800) (369,000)
------------- -------------
Total stockholders' equity 44,147,520 41,164,464
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 284,448,173 $ 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 statement.
1
<PAGE>
<TABLE>
<CAPTION>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three-month and nine-month periods ended September 30, 1999 and 1998
Three-month periods ended Nine-month periods ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME AND FEES
Interest and fees on loans $ 4,573,436 $ 3,601,035 $ 12,521,704 $ 9,586,573
Interest and dividends on
investment securities 95,018 85,044 292,651 247,990
Interest on federal funds sold 291,798 372,521 983,269 827,147
------------ ------------ ------------ ------------
Total interest income 4,960,252 4,058,600 13,797,624 10,661,710
INTEREST EXPENSE ON DEPOSITS 1,520,222 1,337,268 4,117,881 3,347,132
------------ ------------ ------------ ------------
Net interest income 3,440,030 2,721,332 9,679,743 7,314,578
PROVISION FOR LOAN LOSSES 330,000 225,000 990,000 675,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 3,110,030 2,496,332 8,689,743 6,639,578
OTHER OPERATING INCOME
Service charges 361,392 254,403 883,599 534,896
Other 136,656 69,650 414,536 217,491
------------ ------------ ------------ ------------
Total other operating income 498,048 324,053 1,298,135 752,387
OTHER OPERATING EXPENSES
Salaries and employee benefits 921,838 719,376 2,816,491 2,173,191
Depreciation 113,262 81,030 308,602 201,140
Advertising 94,265 70,658 239,385 274,120
Occupancy expense 116,545 97,720 324,031 267,065
Federal Deposit Insurance Corporation
premiums, net 5,744 3,952 16,762 21,246
Professional fees 40,433 56,534 130,283 170,091
Supplies, stationary and office expenses 95,562 106,911 279,426 515,266
Taxes other than on income and salaries 27,383 47,500 72,971 142,500
Data processing 205,530 64,344 636,833 269,831
Postage 40,368 31,464 127,470 84,528
Other 204,859 237,814 636,508 460,058
------------ ------------ ------------ ------------
Total other operating expenses 1,865,789 1,517,303 5,588,762 4,579,036
------------ ------------ ------------ ------------
Earnings before income taxes 1,742,289 1,303,082 4,399,116 2,812,929
INCOME TAXES 592,302 211,783 1,495,623 450,382
------------ ------------ ------------ ------------
NET EARNINGS 1,149,987 1,091,299 2,903,493 2,362,547
OTHER COMPREHENSIVE INCOME
Change in unrealized gains (losses)
on securities, net of tax (4,917) 8,118 (24,936) 3,612
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 1,145,070 $ 1,099,417 $ 2,878,557 $ 2,366,159
============ ============ ============ ============
NET EARNINGS PER SHARE-Basic $ 0.09 $ 0.08 $ 0.22 $ 0.18
============ ============ ============ ============
NET EARNINGS PER SHARE-Diluted $ 0.08 $ 0.08 $ 0.21 $ 0.18
============ ============ ============ ============
</TABLE>
These condensed financial statements should be read only in
connection with the accompanying notes to the condensed financial statement.
2
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine-month periods ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Nine-month periods
ended September 30,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 2,903,493 $ 2,362,547
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 308,602 201,140
Deferred income taxes (218,117) (751,824)
Amortization of deferred directors' compensation 43,200 --
Provision for loan losses 990,000 675,000
Amortization of premium or (accretion) of
discount relating to investment securities, net 15,971 491
Changes in:
Accrued interest receivable (506,713) (1,188,891)
Other assets 96,312 (37,059)
Accrued interest payable (48,147) 279,567
Federal income taxes payable 219,739 (164,795)
Other liabilities 330,584 394,105
------------ ------------
Net cash provided by operating activities 4,134,924 1,770,281
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs on
securities available-for-sale 2,639,886 2,160,803
Purchases of securities available-for-sale (2,210,141) (4,559,010)
Change in loans to customers (41,857,225) (55,351,886)
Expenditures for bank premises and equipment (1,392,299) (1,746,448)
------------ ------------
Net cash used by investing activities (42,819,779) (59,496,541)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 33,675,082 78,550,586
Proceeds from the exercise of stock options 61,299 --
------------ ------------
Net cash provided by financing activities 33,736,381 78,550,586
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,948,474) 20,824,326
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,113,175 20,126,298
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 45,164,701 $ 40,950,624
============ ============
</TABLE>
These condensed financial statements should be read only in
connection with the accompanying notes to the condensed financial statement.
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 nine-months ended
September 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 nine-month periods ended September 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>
Nine-months ended September 30:
Basic EPS $2,903,493 13,404,009 $ 0.22 $2,362,547 13,333,334 $ 0.18
Effect of dilutive
stock options -- 215,125 -- --
------------- -------------- -------------- -------------
Diluted EPS $2,903,493 13,619,134 $ 0.21 $2,362,547 13,333,334 $ 0.18
============= ============== ============== =============
Three-months ended September 30:
Basic EPS $1,149,987 13,408,794 $ 0.09 $1,091,299 13,333,334 $ 0.08
Effect of dilutive
stock options -- 215,125 -- --
------------- -------------- -------------- -------------
Diluted EPS $1,149,987 13,623,919 $ 0.08 $1,091,299 13,333,334 $ 0.08
============= ============== ============== =============
</TABLE>
4
<PAGE>
(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. 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 September 30, 1999, the
Company had a commitment of $1,110,000 for the construction.
This information is an integral part of the accompnaying
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 Nine-Month Periods Ended September 30,
1999 as compared to the Three-Month and Nine-Month Periods Ended September 30,
1998:
Earnings
Tejas Bancshares, Inc. and subsidiaries (the Company) generated net earnings for
the three-month period ended September 30, 1999 of $1,149,987 as compared to
earnings of $1,091,299 for the three-month period ended September 30, 1998. The
Company's net earnings were $2,903,493 for the nine-month period ended September
30, 1999 as compared to earnings of $2,362,547 for the nine-month period ended
September 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 nine-month periods ended September 30, 1999 and
1998 was 1.51% and 1.69%, respectively, and return on average equity was 9.08%
and 8.10%, 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 nine-month periods ended September 30, 1999 and 1998 net interest
income was $9,679,743, and $7,314,578, respectively. The increase in net
interest income from 1998 to 1999 of $2,365,165 (32.33%) is primarily due to an
increase in average interest-earning assets of approximately $63,667,000, net of
an increase in average interest-bearing liabilities of approximately
$46,955,000.
The following table sets forth the average consolidated balance sheets of the
Company and subsidiaries for the nine-month periods ended September 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 $ 109,025,302 $ 6,700,137 8.22% $ 81,717,752 $ 5,395,432 8.83%
Real estate - mortgage 76,791,822 4,811,502 8.38% 48,372,569 3,133,637 8.66%
Installment loans to individuals 14,761,101 1,010,065 9.15% 15,328,985 1,057,504 9.22%
------------- ----------- ---- ------------ ----------- ----
Total loans 200,578,225 12,521,704 8.35% 145,419,306 9,586,573 8.81%
Securities taxable 7,026,540 292,651 5.57% 5,357,365 247,990 6.19%
Federal funds sold and other
interest-earning assets 27,001,952 983,269 4.87% 20,163,370 827,147 5.48%
------------- ----------- ---- ------------ ----------- ----
Total interest-earning assets 234,606,717 13,797,624 7.86% 170,940,041 10,661,710 8.34%
NONINTEREST-EARNING ASSETS
Cash and due from banks 18,389,898 14,875,268
Other assets 7,330,652 4,645,417
Less: allowance for loan losses (3,863,047) (3,059,862)
============= ============
Total $ 256,464,220 $187,400,864
============= ============
INTEREST-BEARING
LIABILITIES
Interest-bearing demand $ 33,457,954 $ 417,367 1.67% $ 25,103,657 $ 458,896 2.44%
Money market deposits 47,965,621 1,110,735 3.10% 27,063,382 689,119 3.40%
Other savings deposits 5,027,053 77,217 2.05% 3,268,050 67,050 2.74%
Time deposits 69,844,128 2,512,562 4.81% 53,904,552 2,132,067 5.29%
------------- ----------- ---- ------------ ----------- ----
Total interest-bearing
liabilities 156,294,756 4,117,881 3.52% 109,339,641 3,347,132 4.09%
NONINTEREST-BEARING
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Demand deposits 56,149,757 38,309,537
Other 1,247,141 766,285
Stockholders' equity 42,772,566 38,985,401
============= ============
Total $ 256,464,220 $187,400,864
============= ============
Net interest income $ 9,679,743 $ 7,314,578
Net yield on earning assets 5.52% 5.72%
==== ====
</TABLE>
7
<PAGE>
Other Operating Income and Expenses
Other operating income for the three and nine-month periods for 1999 and 1998
increased by $173,995 (53.69%) and $545,748 (72.54%), respectively, because of
increased activity on deposit accounts. Other operating expenses increased
during the three and nine-month periods for 1999 and 1998 by $348,486 (22.97%)
and $1,009,726 (22.05%), respectively. The increase was attributable to the
overall growth of the Company, including an increase in employees from 1998 to
1999 and increases in costs to conduct banking operations, primarily data
processing, depreciation, occupancy and the start-up of the trust department.
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 nine-months of 1999, the weighted average
yield on taxable securities was 5.57% as compared to 6.19% 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 September 30, 1999 and December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- --------------------------
Amortized Amortized
Cost Market Cost Market
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Treasury securities $2,206,469 $2,203,781 $2,210,407 $2,213,750
Government agencies 1,832,277 1,826,187 1,855,726 1,877,014
Mortgage backed securities 1,565,561 1,573,902 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 $6,819,982 $6,819,545 $7,265,696 $7,303,042
========== ========== ========== ==========
</TABLE>
Loan Portfolio
At September 30, 1999 and December 31, 1998, net loans accounted for 78.9% and
74.2%, respectively, of total assets.
The amount of loans outstanding at September 30, 1999 and December 31, 1998 are
shown in the following table according to type of loans:
8
<PAGE>
September 30, December 31,
1999 1998
------------ ------------
Commercial $ 63,167,652 $ 65,560,035
Agriculture 42,887,949 50,051,845
Real estate
Commercial 76,579,094 39,643,202
1-4 single family 23,162,395 20,542,212
Installment loans to individuals 21,944,397 11,274,763
Student Loans 867,288 104,302
------------ ------------
Total $228,608,775 $187,176,359
============ ============
Provision and Allowance for Loan Losses
The following table summarizes the loan loss experience for the nine-month
periods ended September 30, 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 990,000 675,000
Charge-offs (656,968) (19,528)
Recoveries 232,159 16,039
----------- -----------
Balance at end of period $ 4,190,626 $ 3,419,929
=========== ===========
The Bank had no significant nonaccrual, past due or restructured loans at
September 30, 1999. 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 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 September 30, 1999 and December 31, 1998, the allowance for loan losses was
$4,190,626 and $3,625,435, respectively, which represented 1.83% and 1.94% of
outstanding loans at those respective dates.
9
<PAGE>
During the nine-month period ended September 30, 1999, the Company recorded
provisions for loan losses of $990,000. 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 September 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 ratios at September
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> <C>
To Risk Weighted Assets:
Total Capital:
Tejas Bancshares, Inc. $ 47,154,387 19.70% $ 19,147,383 >|= 8.0% N/A
The Bank 46,345,976 19.36% 19,147,383 >|= 8.0% 23,934,228 >|= 10.0%
Tier I Capital:
Tejas Bancshares, Inc. $ 44,147,808 18.45% $ 9,573,691 >|= 4.0% N/A
The Bank 43,339,397 18.11% 9,573,691 >|= 4.0% 14,360,537 >|= 6.0%
To Quarterly Average Assets
Tier I Capital:
Tejas Bancshares, Inc. $ 44,147,808 16.51% $ 10,695,564 >|= 4.0% N/A
The Bank 43,339,397 16.21% 10,695,564 >|= 4.0% 13,369,455 >|= 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 $27,001,952 during the nine-month period ended
September 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 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 $212,444,513 and $147,649,178 during the first
nine-months of 1999 and 1998, respectively. Average interest-bearing deposits
were $156,294,756 in 1999 as compared to $109,339,641 in 1998.
The average daily amount of deposits and rates paid on savings deposits are
summarized for the nine-months ended September 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 $ 56,149,757 0.00% $ 38,309,537 0.00%
Interest-bearing demand 33,457,954 1.67% 25,103,657 2.44%
Money market deposits 47,965,621 3.10% 27,063,382 3.40%
Other savings deposits 5,027,053 2.05% 3,268,050 2.74%
Time deposits 69,844,128 4.81% 53,904,552 5.29%
------------------ ------------------
Total $212,444,513 $ 147,649,178
================== ==================
</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, similar reviews are conducted 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 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 June 30,
1999. 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 continue in the fourth quarter, as well as training of all
pertinent staff.
The Company has allocated adequate resources to manage the Y2K project. 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 SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule for September 30, 1999
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended
September 30, 1999.
15
<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: November 10, 1999 BY: /s/ Donald E. Powell
--------------------------------
Donald E. Powell, Chief Executive Officer
DATE: November 10, 1999 BY: /s/ Jack Hall
--------------------------------
Jack Hall, Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,975
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 27,190
<TRADING-ASSETS> 0
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<LOANS> 228,609
<ALLOWANCE> 4,191
<TOTAL-ASSETS> 284,448
<DEPOSITS> 238,814
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<LIABILITIES-OTHER> 1,486
<LONG-TERM> 0
0
0
<COMMON> 13,413
<OTHER-SE> 30,735
<TOTAL-LIABILITIES-AND-EQUITY> 284,448
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<INTEREST-DEPOSIT> 4,118
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<EPS-BASIC> 0.22
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