U.S. Securities and Exchange Commission
Washington, D.C. 20549
----------
FORM 10-Q/A
[x] QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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 October 31, 1998, 13,333,334 shares of the Registrant's common stock were
outstanding.
<PAGE>
TEJAS BANCSHARES, INC.
INDEX
Page
----
Part I.
Item 1: Financial Information:
Condensed Consolidated Balance Sheets
at September 30, 1998 and December 31, 1997 1
Condensed Consolidated Statements of Operations and Comprehensive
Income for the three-month and six-month periods ended
September 30, 1998 and 1997 2
Condensed Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1998 and 1997 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
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1998 1997*
------------- -------------
<S> <C> <C>
Cash and due from banks $ 12,450,624 $ 16,726,298
Federal funds sold 28,500,000 3,400,000
Securities available-for-sale 7,488,093 5,084,904
Loans 175,199,079 119,850,682
Less allowance for loan losses (3,419,929) (2,748,418)
------------- -------------
Loans, net 171,779,150 117,102,264
------------- -------------
Bank premises and equipment, net 2,407,564 862,256
Accrued interest receivable 2,349,839 1,160,948
Net deferred tax asset 1,074,672 324,709
Other assets 115,767 78,708
------------- -------------
TOTAL ASSETS $ 226,165,709 $ 144,740,087
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand - noninterest bearing $ 48,322,240 $ 37,270,616
Demand - interest bearing 63,865,410 28,483,519
Time and savings 72,617,594 40,500,523
------------- -------------
Total deposits 184,805,244 106,254,658
------------- -------------
Accrued interest payable 502,243 222,676
Federal income taxes payable 159,914 324,709
Other liabilities 478,907 84,802
------------- -------------
Total liabilities 185,946,308 106,886,845
------------- -------------
STOCKHOLDERS' EQUITY
Common stock 13,333,334 13,333,334
Paid-in capital 26,137,427 26,137,427
Retained earnings (deficit) 708,699 (1,653,848)
Accumulated other comprehensive income - net unrealized
holding gain on available-for-sale securities, net of tax 39,941 36,329
------------- -------------
Total stockholders' equity 40,219,401 37,853,242
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 226,165,709 $ 144,740,087
============= =============
</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 SUBSIDIARY
Condensed Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
Three-month and nine-month periods ended
September 30, 1998 and 1997
<TABLE>
<CAPTION>
Three-month periods ended Nine-month periods ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME AND FEES
Interest and fees on loans $ 3,601,035 $ 697,780 $ 9,586,573 $ 909,652
Interest and dividends on
investment securities 85,044 120,413 247,990 449,713
Interest on federal funds sold 372,521 169,559 827,147 328,125
----------- ----------- ----------- -----------
Total interest income 4,058,600 987,752 10,661,710 1,687,490
INTEREST EXPENSE ON DEPOSITS 1,337,268 305,266 3,347,132 644,951
----------- ----------- ----------- -----------
Net interest income 2,721,332 682,486 7,314,578 1,042,539
PROVISION FOR LOAN LOSSES 225,000 2,000,000 675,000 2,000,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 2,496,332 (1,317,514) 6,639,578 (957,461)
OTHER OPERATING INCOME
Service charges 254,403 21,181 534,896 50,857
Other 69,650 9,878 217,491 27,484
----------- ----------- ----------- -----------
Total other operating income 324,053 31,059 752,387 78,341
OTHER OPERATING EXPENSES
Salaries and employee benefits 719,376 357,560 2,173,191 605,158
Depreciation 81,030 77,326 201,140 84,558
Advertising 70,658 29,458 274,120 35,780
Occupancy expense 97,720 75,160 267,065 90,238
Federal Deposit Insurance Corporation
premiums, net 3,952 500 21,246 1,006
Professional fees 56,534 9,920 170,091 43,040
Supplies, stationery and office expenses 106,911 145,765 515,266 155,832
Taxes other than on income and salaries 47,500 1,207 142,500 4,790
Data processing 64,344 20,446 269,831 57,980
Postage 31,464 14,036 84,528 26,000
Other 237,814 75,346 460,058 107,039
----------- ----------- ----------- -----------
Total other operating expenses 1,517,303 806,724 4,579,036 1,211,421
----------- ----------- ----------- -----------
Earnings (loss) before income taxes 1,303,082 (2,093,179) 2,812,929 (2,090,541)
INCOME TAXES (BENEFIT) 211,783 (22,330) 450,382 (11,266)
----------- ----------- ----------- -----------
NET EARNINGS (LOSS) 1,091,299 (2,070,849) 2,362,547 (2,079,275)
OTHER COMPREHENSIVE INCOME
Change in unrealized gains/
(losses) on securities, net of tax 8,118 2,746 3,612 34,890
----------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 1,099,417 $(2,068,103) $ 2,366,159 $(2,044,385)
=========== =========== =========== ===========
NET EARNINGS (LOSS) PER SHARE $ 0.08 $ (0.45) $ 0.18 $ (1.06)
=========== =========== =========== ===========
</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 SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
Nine-month periods ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine-month periods
ended September 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 2,362,547 $ (2,079,275)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operating activities:
Depreciation 201,140 84,558
Deferred income taxes (751,824) (16,643)
Provision for loan losses 675,000 2,000,000
Amortization of premium or (accretion) of
discount relating to investment securities, net 491 (3,435)
Changes in:
Accrued interest receivable (1,188,891) (691,807)
Other assets (37,059) 4,502
Accrued interest payable 279,567 46,987
Federal income taxes payable (164,795) --
Other liabilities 394,105 57,343
------------ ------------
Net cash provided (used) by operating activities 1,770,281 (597,770)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and pay-downs on
securities held to maturity -- 1,900,277
Proceeds from maturities and pay-downs on
securities available-for-sale 2,160,803 1,934,767
Purchases of securities available-for-sale (4,559,010) (24,000)
Change in loans to customers (55,351,886) (75,534,836)
Expenditures for bank premises and equipment (1,746,448) (153,811)
------------ ------------
Net cash used by investing activities (59,496,541) (71,877,603)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 78,550,586 44,445,251
Proceeds from sale of common stock, net of
issue cost of $159,558 -- 39,840,444
Proceeds from loan from stockholder -- 1,000,000
Repayment of loan from stockholder -- (1,000,000)
Purchase of treasury stock -- (2,163,692)
------------ ------------
Net cash provided by financing activities 78,550,586 82,122,003
------------ ------------
Net increase in cash and cash equivalents 20,824,326 9,646,630
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,126,298 6,185,224
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 40,950,624 $ 15,831,854
============ ============
</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 10.
The unaudited condensed consolidated financial statements included herein
were prepared from the books of the Company in accordance with generally
accepted accounting principles and reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management,
necessary to a fair statement of the results of operations and financial
position for the interim periods. Such financial statements generally
conform to the presentation reflected in the Company's Annual Report to
Stockholders. The current interim period reported herein is included in the
fiscal year subject to independent audit at the end of that year and is not
necessarily an indication of the expected results for the fiscal year.
Effective January 1, 1998, the Company adopted the provisions of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income." Under this
standard, comprehensive income is now reported for all periods.
Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized gains
and losses on securities available for sale, net of tax.
(2) Net Earnings (Loss) Per Share
Net earnings (loss) per share are computed based on the weighted average
number of shares outstanding. For the three-month periods ended September
30, 1998 and 1997, the weighted average shares outstanding were 13,333,334
and 4,627,427, respectively. For the nine-month periods ended September 30,
1998 and 1997, the weighted average shares outstanding were 13,333,334 and
1,957,445, respectively.
(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 June
1998 the Company finalized the granting of 509,600 (effective February 18,
1998) in shares under incentive stock options to certain employees and
officers at the option price of $3.00, 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) 401(k) Plan
During October 1998, the board of directors approved a 401(k) profit
sharing plan for employees of the First National Bank of Amarillo. The plan
will be effective January 1, 1999 and all employees working a minimum of
1,000 hours will be eligible. The bank may also elect to make other
contributions to the plan. As of the filing of this Form 10-Q, the plan had
not been finalized.
(5) Director's Compensation Plan
During October 1998, the board of directors approved a non-employee
director's compensation plan for the directors of the Bank. The plan
provides that directors will each receive 3,800 shares of common stock as
compensation for serving approximately three years. Restricted shares are
issued to the directors and are released after the end of each year of
service. Shares related to missed meetings or for termination prior to the
end of the three period are forfeited back to the Company. A committee of
the board determined the fair value of the shares at the date of issue to
be $6/share. Each director is effectively granted 100 shares of stock per
meeting.
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 and Nine-Month Periods Ended September 30,
1998 as Compared to the Three-Month and Nine-Month Periods Ended September 30,
1997:
Earnings
Tejas Bancshares, Inc. and subsidiary (the Company) incurred net earnings for
the three-month period ended September 30, 1998 of $1,091,299 as compared to the
loss of $2,070,849 for the three-month period ended September 30, 1997. The
Company's net earnings were $2,362,547 for the nine-month period ended September
30, 1998 as compared to a loss of $2,079,275 for the nine-month period ended
September 30, 1997. Earnings for 1998 were significantly improved by substantial
growth in loans and deposits and the equity capital addition in the third
quarter of 1997. Operations for 1997 were significantly effected by a $2,000,000
provision made in the third quarter as further discussed below. The return on
average assets for the nine-month period ended 1998 and 1997 was 1.69% and
(8.09)%, respectively, and return on average equity was 8.10% and (49.11)%,
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, 1998 and 1997 net interest
income was $7,314,578, and $1,042,539, respectively. The increase in net
interest income from 1997 to 1998 of $6,272,039 (601.61%) is primarily due to an
increase in average interest-earning assets of approximately $139,949,285, net
of an increase in average interest-bearing liabilities of approximately
$88,146,644. In addition, the net yield on earning assets improved from 4.50% in
1997 to 5.72% in 1998.
The following table sets forth the average consolidated balance sheets of the
Company and subsidiary for the nine-month periods ended September 30, 1998 and
1997 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>
1998 1997
------------------------------------- --------------------------------------
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 $ 81,717,752 $ 5,395,432 8.83% $ 4,707,071 $ 281,841 8.01%
Real estate - mortgage 48,372,569 3,133,637 8.66% 5,260,940 354,859 9.02%
Installment loans to individuals 15,328,985 1,057,504 9.22% 3,841,620 272,952 9.50%
------------ ------------ ---- ------------ ------------ ----
Total loans 145,419,306 9,586,573 8.81% 13,809,631 909,652 8.81%
Securities taxable 5,357,365 247,990 6.19% 9,129,477 449,713 6.59%
Federal funds sold and other
interest-earning assets 20,163,370 827,147 5.48% 8,051,648 328,125 5.45%
------------ ------------ ---- ------------ ------------ ----
Total interest-earning assets 170,940,041 10,661,710 8.34% 30,990,756 1,687,490 7.28%
NONINTEREST-EARNING ASSETS
Cash and due from banks 14,875,268 3,188,848
Other assets 4,645,417 429,904
Less: allowance for loan losses (3,059,862) (249,756)
------------ ------------
Total $187,400,864 $ 34,359,752
============ ============
INTEREST-BEARING
LIABILITIES
Interest-bearing demand $ 25,103,657 $ 458,896 2.44% $ 5,912,038 $ 117,648 2.66%
Money market deposits 27,063,382 689,119 3.40% 2,203,138 49,047 2.98%
Other savings deposits 3,268,050 67,050 2.74% 1,124,146 23,378 2.78%
Time deposits 53,904,552 2,132,067 5.29% 11,953,675 454,878 5.09%
------------ ------------ ---- ------------ ------------ ----
Total interest-bearing
liabilities 109,339,641 3,347,132 4.09% 21,192,997 644,951 4.07%
NONINTEREST-BEARING
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Demand deposits 38,309,537 7,000,422
Other 766,285 505,124
Stockholders' equity 38,985,401 5,661,209
------------ ------------
Total $187,400,864 $ 34,359,752
============ ============
Net interest income $ 7,314,578 $ 1,042,539
Net yield on earning assets 5.72% 4.50%
==== ====
</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 nine-month periods for 1998 increased
by $292,994 (943%) and $674,046 (860%), respectively, because of increased
activity on deposit accounts. Other operating expenses increased during the
three- and nine-month periods for 1998 by $710,579 (88%) and $3,367,615 (278%),
respectively. The increase was attributable to the overall growth of the
Company, including a significant increase in employees from 1997 to 1998,
increases in costs to conduct banking operations and significant start-up
expenses related to the opening and operations of two branches. Additionally,
during the nine-month period for 1998, the Company granted a $150,000 bonus to
its Chief Executive Officer and made a provision of approximately $130,000
related to the termination of a contract with a data service provider.
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 nine-month period of 1998, the weighted average
yield on taxable securities was 6.19% as compared to 6.59% during 1997. 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, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- -----------------------
Amortized Amortized
Cost Market Cost Market
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Treasury securities $2,466,190 $2,466,234 $ 498,199 $ 499,339
Government agencies 1,631,094 1,656,320 1,921,817 1,928,335
Mortgage backed securities 2,108,272 2,143,519 2,499,384 2,546,770
State and political obligations 6,345 6,345 36,585 36,585
Other securities 1,215,675 1,215,675 73,875 73,875
---------- ---------- ---------- ----------
Total securities $7,427,576 $7,488,093 $5,029,860 $5,084,904
========== ========== ========== ==========
</TABLE>
Loan Portfolio
At September 30, 1998, December 31, 1997, and September 30, 1997 net loans
accounted for 76.0%, 80.9% and 76.1%, respectively, of total assets.
The amount of loans outstanding at September 30, 1998 and December 31, 1997 are
shown in the following table according to type of loans:
8
<PAGE>
September 30, December 31,
1998 1997
------------ ------------
Commercial $ 55,070,164 $ 45,901,834
Agriculture 49,729,865 15,381,803
Real estate
Commercial 31,195,815 16,282,655
1-4 single family 28,343,236 18,069,332
Installment loans to individuals 10,859,999 24,215,058
------------ ------------
Total $175,199,079 $119,850,682
============ ============
Provision and Allowance for Loan Losses
The following table summarizes the loan loss experience for the nine-month
periods ended September 30, 1998 and 1997:
1998 1997
------------ ------------
Balance of allowance for loan
losses at the beginning of period $ 2,748,418 $ 45,200
Provision charged to operations 675,000 2,000,000
Charge-offs (19,528) (4,883)
Recoveries 16,039 5,561
------------ ------------
Balance at end of period $ 3,419,929 $ 2,045,878
============ ============
The Bank had no significant nonaccrual, past due or restructured loans at
September 30, 1998.
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 September 30, 1998 and December 31, 1997, the allowance for loan losses was
$3,419,929 and $2,748,418, respectively, which represented 1.95% and 2.29% of
outstanding loans at those respective dates.
During the three-month and nine-month periods ended September 30, 1998, the
Company recorded provisions for loan losses of $225,000 and $675,000,
respectively. The provisions were made in connection with the growth of the loan
portfolio of $55,348,397 (46.2%) over the nine-month period. During the three-
and nine-month periods of 1997, the Company recorded a $2,000,000
9
<PAGE>
provision for loan losses. The provisions were made in connection with growth of
the loan portfolio of $62,619,118 (435.5%) for the three-month period. 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 September 30, 1998, 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 September
30, 1998, 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. $ 42,523,000 22.80% $ 14,918,000 >|= 8.0% N/A
The Bank 41,719,000 22.37% 14,918,000 >|= 8.0% 18,648,000 >|= 10.0%
Tier I Capital:
Tejas Bancshares, Inc. $ 40,179,000 21.55% $ 7,459,000 >|= 4.0% N/A
The Bank 39,375,000 21.12% 7,459,000 >|= 4.0% 11,189,000 >|= 6.0%
To Average Assets
Tier I Capital:
Tejas Bancshares, Inc. $ 40,179,000 18.12% $ 8,870,000 >|= 4.0% N/A
The Bank 39,375,000 17.76% 8,870,000 >|= 4.0% 11,087,000 >|= 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 $20,163,370 during the nine-month period ended
September 30, 1998. Additionally, the Company arranged for $5,000,000 in funds
purchased lines during the nine-month period. 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 $147,649,178 and $28,193,419 during the nine-month
periods for 1998 and 1997, respectively. Average interest-bearing deposits were
$109,339,641 in 1998 as compared to $21,192,997 in 1997.
The average daily amount of deposits and rates paid on savings deposits are
summarized for the nine months ended September 30, 1998 and 1997 as indicated in
the following table:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Amount Rate Amount Rate
----------- ------ ----------- ------
<S> <C> <C> <C> <C>
Deposits
Noninterest-bearing demand $38,309,537 0.00% $ 7,000,422 0.00%
Interest-bearing demand 25,103,657 2.44% 5,912,038 2.66%
Money market deposits 27,063,382 3.40% 2,203,138 2.98%
Other savings deposits 3,268,050 2.74% 1,124,146 2.78%
Time deposits 53,904,552 5.29% 11,953,675 5.09%
----------- -----------
Total $147,649,178 $28,193,419
============ ===========
</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 initiated 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 is 100% complete.
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, are
provided to management on a regular basis.
This mission-critical operating system will be tested on-site in February 1999.
(The Company is considering the use of an independent consultant to verify the
test results, but has not committed to this matter.) Integrated tests will be
conducted on a duplicated client "Test Bank". In addition, all internal platform
systems have been or will be completely tested prior to March 31, 1999.
Other third party service providers such as credit reporting agencies, document
processing systems, credit card merchant systems, and government reporting
systems have been tested internally or certified as Y2K compliant depending on
the provider profile.
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.
This assessment covered 68% of the portfolio, of which only 6.5% 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, most of 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
quarterly. Efforts and actions to offset any defined or potential risks have
been prescribed in the program.
Implementation and Contingency Planning:
Management has ascertained that no applications will need to be 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 made 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 there will be no impact
from Year 2000 issues on its operations, due to its reliance on service provider
systems, and the potential impact on its customers. The development of
contingency plans to minimize the risk to the organization will be
14
<PAGE>
given considerable attention in the next six months. Completion date for all
phases of the project is anticipated to be June 30, 1999, or shortly thereafter.
15
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARY
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Director's Compensation Plan
27 Financial Data Schedule for September 30, 1998
(b) Reports on Form 8-K
No Form 8-K was filed with the SEC during the quarter ended September
30, 1998.
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: February 8, 1999 BY: /s/ Donald E. Powell
---------------------------------------
Donald E. Powell, Chief
Executive Officer
DATE: February 8, 1999 BY: /s/ Jack Hall
---------------------------------------
Jack Hall, Chief Financial Officer
17
EXHIBIT 10
Directors Compensation Plan
<PAGE>
THE FIRST NATIONAL BANK OF AMARILLO
DIRECTORS' STOCK COMPENSATION PLAN (the "Plan")
-----------------------------
1. In lieu of cash compensation for meeting fees for the non-employee
members of the Board of Directors (the "Directors") of The First National Bank
of Amarillo (the "Bank"), effective November 1, 1998, and for the period ending
December 31, 2001, the Bank will deliver to the Directors three certificates
representing a total of 3,800 shares of common stock, $1 par value per share
(the "Shares"), of Tejas Bancshares, Inc. ("Tejas").
2. Each Director must endorse the certificates in blank (or execute and
deliver Assignments Separate from Stock Certificate) and return them to the Bank
to be held for future delivery in accordance with the terms of the Plan.
3. As soon as practicable after January 2, 2000, the Bank will deliver one
certificate representing 1,400 Shares to each Director, and after each January
2, 2001, and 2002, the Bank will deliver one certificate representing 1,200
Shares to each Director. The absence of a Director from any regularly scheduled
meetings during the 14 months preceding December 31, 1999, or the 12 months
preceding December 31, 2000, or 2001, shall reduce the number of Shares to be
delivered to him or her by a number calculated by multiplying the number of
absences by 100 Shares and subtracting that number of Shares from the Shares
otherwise deliverable to the Director for the applicable period.
4. If a Director terminates as a Director at any time before December 31,
2001, for any reason, including retirement, permanent disability, or death, or
the consummation of a "corporate transaction" occurs in which the Bank and/or
Tejas is not the surviving entity, the Director or his or her designated
beneficiary or his or her estate shall be entitled only to that number of Shares
not already delivered to him or her under the Plan calculated by multiplying the
number of meetings the Director did attend by 100 during the then-current
period, i.e., the 14-month period ending December 31, 1999, or the 12
month-period ending December 31, 2000, or 2001. On termination or on
consummation of a "corporate transaction," a certificate representing the number
of Shares calculated pursuant to this paragraph will be delivered to the
Director or his or her designated beneficiary or his or her estate, free and
clear of any restrictions under the Plan except as stated in paragraph 9, as
soon as practicable thereafter. Except as provided in this paragraph,
termination as a Director or consummation of a "corporate transaction"
immediately terminates any right to receive any other Shares not already
delivered or deliverable to him or her under the Plan and any rights to vote
those Shares or to receive dividends thereon, and the undelivered Shares will be
assigned to the Bank or its designee. "Corporate transaction" means a
transaction in which the Bank and/or Tejas is wholly or partially liquidated, or
participates in a merger, consolidation, or reorganization.
5. A leave of absence for any reason authorized by the Tejas Board shall
not constitute a termination from the Bank's Board of Directors for purposes of
the Plan.
1
<PAGE>
6. The Director's rights to the Shares cannot be assigned, sold, pledged,
or transferred, but they may be transferred by will or by the laws of descent
and distribution.
7. Except as provided in paragraph 4, dividends, if any, will be payable on
the Shares regardless of whether the certificates have been delivered to the
Directors.
8. Except as provided in paragraph 4, each Director will be entitled to
exercise voting rights for the Shares regardless of whether the certificates
have been delivered to the Director.
9. The Shares will not be registered under the Securities Act of 1933 (the
"Act") in reliance upon an exemption of Section 4(2) thereof and will be
"restricted securities" as defined in Rule 144 promulgated under the Act. An
appropriate legend will be placed upon all certificates to be delivered under
the Plan.
10. The Plan shall be administered by the Board of Directors of Tejas (the
"Tejas Board"). The Tejas Board may construe and interpret the Plan, reconcile
inconsistencies thereunder, and supply omissions therefrom. Any decision or
action taken by the Tejas Board in exercising those powers or otherwise, arising
out of or in connection with the construction, administration, interpretation,
and effect of the Plan and its rules and regulations, shall be conclusive and
binding upon each director and his or her successor.
2
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
SEPTEMBER 30, 1998 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,451
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,488
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 175,199
<ALLOWANCE> 3,420
<TOTAL-ASSETS> 226,166
<DEPOSITS> 184,805
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,141
<LONG-TERM> 0
0
0
<COMMON> 13,333
<OTHER-SE> 26,886
<TOTAL-LIABILITIES-AND-EQUITY> 226,166
<INTEREST-LOAN> 9,587
<INTEREST-INVEST> 248
<INTEREST-OTHER> 827
<INTEREST-TOTAL> 10,662
<INTEREST-DEPOSIT> 3,347
<INTEREST-EXPENSE> 3,347
<INTEREST-INCOME-NET> 7,315
<LOAN-LOSSES> 675
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,579
<INCOME-PRETAX> 2,813
<INCOME-PRE-EXTRAORDINARY> 2,813
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,363
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 5.72
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,748
<CHARGE-OFFS> 18
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 3,420
<ALLOWANCE-DOMESTIC> 3,420
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,420
</TABLE>
