UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 for the fiscal year ended December 31, 1999.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the transition period from ________ to ________.
Commission File number 0-24023
TEJAS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1950688
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
905 South Fillmore, Suite 701, Amarillo, Texas 79101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (806) 373-7900
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
Common Stock, $1.00 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Aggregate market value of registrant's voting stock held by nonaffiliates (which
excludes the registrant's Board of Directors) as of January 27, 2000, was
$42,065,992.80. This amount is based on the book value per share of the
registrant's voting stock. There is no established public trading market for the
registrant's voting stock and there exists no accurate method to determine its
current market price.
On January 27, 2000, the Company had 13,413,917 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Documents Part of Form 10-K
Definitive Proxy Statement related to 2000 Part III
annual meeting of shareholders
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PART I
ITEM 1. BUSINESS.
General
Tejas Bancshares, Inc.
Tejas Bancshares, Inc. (the "Company"), was incorporated as a Texas
corporation on June 22, 1983, as a bank holding company, as defined in the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). On December 31, 1983,
the Company became a bank holding company by acquiring all issued and
outstanding capital stock of Fritch State Bank, a Texas banking association. As
described herein, during 1997, Fritch State Bank relocated its main office to
Amarillo, Texas, and converted its charter from a Texas banking association to a
national banking association under the title "The First National Bank of
Amarillo" (the "Bank"). Effective April 1999, the Company established a new
middle tier holding company named Tejas Force, Inc. ("Force"). The new company
has no significant operations.
The Company owns all issued and outstanding capital stock of Force which
owns all issued and outstanding capital stock of the Bank.
As of December 31, 1999, the Company had, on a consolidated basis, total
assets of approximately $299,000,000; total deposits of approximately
$252,000,000; total loans of approximately $258,000,000 (net of unearned
discount and allowance for loan losses); and total stockholders' equity of
approximately $45,000,000.
The Company does not, as an entity, engage in separate business activities
of a material nature apart from its activities for the Bank. The Company's
primary activities are to assist in the management and coordination of the
Bank's financial resources and to provide capital, business development,
long-range planning, and public relations services for the Bank. The Bank
operates under the day-to-day management of its own officers, and the Bank's
Board of Directors formulates its own policies for banking and business matters.
The Company's primary source of revenue is dividends from the Bank. Any
future dividend payments by the Bank will be determined by the Bank based on its
financial condition, and any dividends may be declared and paid only in
compliance with applicable law and regulatory guidelines.
As a bank holding company, the Company is subject to regulation by the
Board of Governors of the Federal Reserve System (the "Federal Reserve") in
accordance with the requirements in the BHC Act and by the rules and regulations
promulgated thereunder by the Federal Reserve.
The First National Bank of Amarillo
The Bank is a national banking association with its main office in
Amarillo, Texas. The Bank opened for business on April 10, 1965, as a Texas
banking association and converted to a national banking association effective
June 30, 1997. As a national banking association, the Bank
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is subject to regulation by the Comptroller of the Currency (the "Comptroller")
in accordance with the requirements in the National Bank Act and the rules and
regulations promulgated thereunder by the Comptroller. As of December 31, 1999,
the Bank had total assets of approximately $299,000,000; total deposits of
approximately $253,000,000; total loans of approximately $258,000,000 (net of
unearned discount and allowance for loan losses); and total stockholders' equity
of approximately $45,000,000.
The Bank provides a full range of banking services to business, industry,
public and governmental organizations, and individuals in Amarillo, Dalhart, and
Fritch, Texas. The Bank serves its customers with a variety of commercial
banking services. For businesses, the Bank offers checking facilities,
certificates of deposit, short-term loans for working capital purposes, term
loans for fixed assets and expansion needs, and other commercial loans for its
business customers. When the borrowing needs of a customer exceed the Bank's
lending limit, the Bank participates with other banks and, in certain cases,
with Donald E. Powell and William H. Attebury, in making the loan. Similarly,
the Bank provides other services for its customers through its correspondent and
other relationships with other financial institutions. In addition, since
mid-1999, the Bank has offered trust services.
The individual services provided by the Bank include checking accounts,
savings accounts, certificates of deposit, Money Market Deposit accounts, NOW
accounts, IRA and qualified retirement plans, safe deposit facilities, and
personal loan programs, including home improvement loans, short-term mortgage
loans, and installment loans for the purchase of automobiles and other consumer
goods. The Bank also provides cashier's checks, travelers' checks, money orders,
wire transfers, and bank-by-mail services.
Change in Control of the Company and the Bank
Effective May 23, 1997, Donald E. Powell, the Company's and the Bank's
Chairman of the Board, President, and Chief Executive Officer, acquired control
of all outstanding stock of the Company (the "Acquisition"). Mr. Powell's
acquisition of control of the Company was accomplished pursuant to a stock
purchase agreement by and among Mr. Powell, the Company, and all shareholders of
the Company (the "Stock Purchase Agreement").
The Stock Purchase Agreement stated that the Company would repurchase
approximately 73 percent of its outstanding common stock from existing
shareholders and that Mr. Powell would acquire the remaining shares from one or
more shareholders. The aggregate purchase price for the shares to be received by
all shareholders of the Company was $2,163,697.45, and was determined through
arms'-length negotiations among the shareholders of the Company, the Company,
and Mr. Powell. The Stock Purchase Agreement contemplated that certain
non-performing loan assets on the books of the Bank would be transferred out of
the Bank for the benefit of the Company's then current shareholders. Immediately
before the closing of the Acquisition, some non-performing loan assets had not
been transferred to the shareholders and remained on the Bank's books.
Accordingly, the aggregate purchase price for the Company's stock was adjusted
downward, and Mr. Powell and the Company on behalf of its shareholders entered
into an agreement pursuant to which any net recoveries on the non-performing
assets received after the effective date of the Acquisition would be
subsequently transferred to the Company's shareholders on a pro rata basis
according to each shareholder's respective ownership interest in the Company on
the closing date of the Acquisition.
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The aggregate value of the non-performing loan assets was approximately $79,000
as of May 23, 1997, the effective date of the Acquisition.
Immediately before consummating the transaction, the Company had 9,195
shares of common stock, par value $10.00 per share, issued and outstanding and
owned by 21 shareholders. Pursuant to the Stock Purchase Agreement, the Company
repurchased 6,695 shares of the common stock for $1,575,416.47, which shares
were subsequently canceled, thereby reducing the number of outstanding shares of
the Company to 2,500. Simultaneously, Mr. Powell acquired the remaining 2,500
shares of the Company's outstanding shares of common stock for $588,280.98 from
a single shareholder. As a result of these simultaneous transactions, Mr. Powell
owned 2,500 shares, which were all the issued and outstanding shares of the
Company.
The purchase price for the 6,695 shares repurchased by the Company,
$1,575,416.47 in the aggregate, was funded from (i) the proceeds of a $1,000,000
loan to the Company by Mr. Powell, and (ii) a dividend paid to the Company by
the Bank. Mr. Powell's loan to the Company was to be repaid over a ten-year
period and was secured by a pledge of all capital stock of the Bank owned by the
Company. The loan was prepaid in full on September 2, 1997.
Before acquiring a controlling interest in the Company and an indirect
controlling interest in the Bank, Mr. Powell applied for and received regulatory
approval of the Acquisition from the Federal Reserve Bank of Dallas and the
Texas Department of Banking.
After Mr. Powell's acquisition of all outstanding stock of the Company, and
in anticipation of an intrastate public offering of the Company's common stock,
its Articles of Incorporation were amended to (i) increase the authorized shares
of common stock of the Company from 10,000 to 20,000,000 shares; (ii) reduce the
par value of the common stock of the Company from $10.00 to $1.00 per share;
(iii) eliminate the preemptive rights of the shareholders of the Company; and
(iv) generally update the indemnification provisions in the Company's
organizational documents. Since Mr. Powell was the Company's sole shareholder
following the Acquisition, these amendments were approved by unanimous written
consent following their adoption by the Company's Board of Directors.
In addition, on July 2, 1997, the Company effected a 77.4372-for-1 stock
dividend to all shareholders of record on June 30, 1997 (the "Stock Dividend").
As a result of the Stock Dividend, Mr. Powell's 2,500 shares were converted into
196,093 shares of the Company's common stock, representing all current
outstanding shares. The purpose and effect of the Stock Dividend was to preserve
Mr. Powell's investment in the Company ($588,280.98) in relation to the price of
the shares offered to the public at $3.00 per share. Mr. Powell's original
$588,280.98 investment in the Company is the economic equivalent of having
purchased 196,093 shares (excluding a fractional share interest) at $3.00 per
share (196,093 shares x $3.00 = $588,279). The conversion of Mr. Powell's 2,500
shares into 196,093 shares was accomplished by declaring a dividend of 77.4372
shares for each share of Common Stock outstanding (2,500 shares outstanding +
(77.4372 x 2,500 shares) = 196,093). Following the Stock Dividend, Mr. Powell's
cost basis in the stock equaled $3.00 per share, which is equivalent to the
price of the Common Stock offered in the public offering.
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Change in Management and Competitive Focus.
Before the Acquisition, Mr. Powell served as the Chairman of the Board,
President, and Chief Executive Officer of Boatmen's First National Bank of
Amarillo, Amarillo, Texas. Boatmen's First National Bank of Amarillo, formerly
known as The First National Bank of Amarillo before it was acquired by Boatmen's
Bancshares, Inc., St. Louis, Missouri, in 1994, had an established correspondent
banking relationship with the Bank. Accordingly, because of this relationship,
Mr. Powell had developed contacts with former management of the Bank and the
Company. In late August 1996, NationsBank Corporation, Charlotte, North Carolina
("NationsBank"), and Boatmen's Bancshares, Inc.("Boatmen's"), announced that
they had entered into a definitive agreement pursuant to which NationsBank would
acquire Boatmen's. As a result thereof, NationsBank indirectly acquired
Boatmen's First National Bank of Amarillo. NationsBank's acquisition of
Boatmen's was completed in late January 1997.
Although Mr. Powell retained his position as an executive officer and
Chairman of the Board of Boatmen's First National Bank of Amarillo after the
NationsBank transaction in January 1997, he voluntarily resigned from Boatmen's
effective February 5, 1997, to pursue other lifelong pursuits, including the
operation of a truly "community-owned" financial institution. An initial step in
fulfilling this pursuit resulted in the Acquisition of the Company and indirect
acquisition of control of the Bank.
Immediately after the Acquisition, Mr. Powell became the President and
Chief Executive Officer of the Company. The Company's former President and Chief
Executive Officer continued to be employed by the Bank following the Acquisition
and currently serves as the manager of one of the Bank's branches. In addition,
immediately following the Acquisition, Mr. Powell, as the sole shareholder of
the Company, reconstituted the Company's Board of Directors with five persons,
each of whom, including Mr. Powell, previously served as a member of the Board
of Directors of Boatmen's First National Bank of Amarillo, Mr. Powell's former
employer. Information regarding the current executive officer and directors of
the Company is given in Part III to this Annual Report on Form 10-K. In
addition, following the Acquisition, the executive officers and members of the
Board of Directors of the Bank were reconstituted in similar fashion.
In addition to the management changes noted above, following the
Acquisition, management of the Bank took steps to (1) relocate the main office
of the Bank from Fritch, Texas, to Amarillo, Texas, retaining the Fritch
location as a full-service branch of the Bank; (2) convert the Bank from a Texas
banking association to a national banking association chartered by the
Comptroller, and (3) change the name of the Bank from "Fritch State Bank" to
"The First National Bank of Amarillo." These transactions, the net result of
which was to reintroduce "The First National Bank of Amarillo" to Amarillo, were
completed on or about June 30, 1997. In addition, the Bank sought approval to
establish two de novo full-service branches in Amarillo and an additional
full-service branch in Dalhart, Texas. The Dalhart branch, previously operated
by the Bank as a loan production office, opened on October 15, 1997. The two
Amarillo branch locations opened on January 29, 1998, and February 12, 1998. The
Bank is currently in the process of constructing a third Amarillo branch. The
branch opened on December 4, 1999, in a temporary facility.
To support this physical expansion and growth in market presence, the Bank
hired approximately 93 additional employees between June 30, 1997, and December
31, 1999, bringing
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the current number of full-time equivalent employees to 102. Additional
information regarding the increase in non-interest expense of the Company
associated with the larger employee base is provided at "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION -- Other Operating
Income and Expense." Many of these persons previously worked for Mr. Powell at
The First National Bank of Amarillo or Boatmen's First National Bank of Amarillo
following the acquisition by Boatmen's in 1994 and have significant banking
experience in the Amarillo banking market.
In addition to increasing its physical presence in the Texas Panhandle, the
Bank sought to increase its loan portfolio by enhancing existing customer
relations, aggressively advertising the "return" of The First National Bank of
Amarillo, and offering an expanded array of loan products, including
agricultural loans. See "BUSINESS - Lending Activities" for additional
information regarding the Bank's loan products.
After the Acquisition and in anticipation of this significant growth and
physical expansion of the Company and the Bank, the Company took steps to raise
approximately $40 million in additional capital in a community offering
principally to Panhandle residents. The intrastate offering to bona fide
residents of Texas was concluded on August 31, 1997, when the offering was
completely subscribed. Approximately $37.4 million of this newly raised capital
was contributed by the Company to the Bank to support loan and deposit growth
and a larger lending limit, and to maintain a capital base at a level that the
Bank's management deemed sufficient for satisfactory capital ratios.
A number of key factors which have been primarily attributable to the
significant growth of the Company and the Bank following the Acquisition include
(1) appointing an experienced and knowledgeable Board of Directors of the
Company and the Bank; (2) hiring an experienced management team and seasoned
Bank employees; (3) formulating and implementing an aggressive business plan to
be an active lending institution and to penetrate key markets in the Texas
Panhandle using, at least initially, existing customer contacts and contacts
known to the new management team; and (4) a strong local economy. In addition,
since the banking business is highly personalized, particularly in the markets
served by the Bank, it attributes much of its success to the efforts of its
enhanced staff who provide personalized banking services to the Bank's customers
and the aggressive advertising of its highly personalized service to its target
market. One of the Bank's goals is to be the premier financial institution in
the Panhandle, recognized for customer service, and the delivery of personalized
service has become one of the Bank's most recognizable features since the
Acquisition. In addition, the Bank enjoys a unique position as one of the few
locally owned and operated national banks in Amarillo. Accordingly, management
attributes a portion of its success to the Bank's ability to capitalize on
customers' disruption, dissatisfaction, and turnover from the acquisition by
out-of-state holding companies of many community banks in and around the
Panhandle, including Amarillo.
To some degree, banks and other financial institutions compete on the basis
of rates and services. Although the Bank seeks to remain competitive with its
interest rates on loans and offers on deposits, it believes that its success has
been and will continue to be dependent on its emphasis on community banking,
customer service, and personal relationships.
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Competition
The banking business in the Bank's trade area, which includes Amarillo,
Dalhart, and Fritch, and surrounding areas of the Panhandle, has become
increasingly competitive over the past several years, and the level of
competition facing the Company and the Bank may increase further. The Company
and the Bank experience competition in both lending and attracting funds from
other banks and non-bank financial institutions in their market area. Non-bank
competitors for deposits and deposit-type accounts include savings and loan
associations, credit unions, securities firms, money market funds, life
insurance companies, and the mutual funds industry. The Bank encounters
competition for loans from other banks, savings and loan associations, finance
companies, insurance companies, small loan and credit card companies, credit
unions, pension trusts, and securities firms.
Recent legislation, court decisions, and administrative actions have
expanded the business activities in which banks and non-bank financial
institutions may engage. When others engage in these activities, the level of
competition for the Company and the Bank is expected to increase. Some
competitors are not subject to the same degree of regulation and supervision as
the Company and the Bank.
Many banks and other financial institutions with which the Company and the
Bank compete have capital resources and legal loan limits substantially above
those maintained by the Company and the Bank. These institutions can perform
certain functions for their customers, including trust, securities brokerage,
and international banking services, which the Company and the Bank presently do
not offer directly. Although the Company may offer these services through
correspondent banks, its inability to provide these services directly may be a
competitive disadvantage.
The Company considers its principal competition in the commercial banking
business to be the other full-service banks in its primary market areas. The
Company's products and services in its target market are most similar to those
of area banks and, to some extent, savings associations.
The Bank seeks to provide a high level of personalized banking service to
professionals and owner-operated businesses, emphasizing quick and flexible
responses to customer demands. The Bank relies heavily on its officers,
directors, and existing shareholders to solicit and refer potential customers,
and expects this to continue for the foreseeable future.
Trust Department
In connection with its personalized banking services to professionals and
owner-operated businesses, the Bank formed a full-service Trust Department in
mid-1999. The Trust Department provides the following services:
Trust Administration. The Trust Department consults with its customers
regarding various trust options that fit their needs. As Trustee, the Bank will,
among other things, administer trusts per their terms, invest trust assets, keep
records, make tax and fiduciary decisions, distribute income and/or principal to
beneficiaries.
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Investment Management. The Bank designs and implements an investment
portfolio using multiple assets, styles and managers to meet its customers'
personal risk tolerance, return needs, and time horizon.
Custodial Services. As Custodian, the Bank holds customers' assets in
safekeeping and executes trade settlements.
Financial and Tax Planning. The Bank uses its expertise and extensive
experience in addressing financial and tax planning issues.
Estate Administration. The Bank supervises the settlement of estates per
the terms of its customers' wills as well as help in resolving in any unexpected
issues. The Bank may also act as agent for any designated executor and assist
him or her with the estate settlement.
Farm and Ranch Asset Management. The Bank handles all matters to properly
manage farm and ranch assets, including, among others, property leasing,
property insurance, crop insurance, income collection and bill paying.
Oil and Gas Asset Management. The Bank handles all matters to manage oil
and gas assets including, among others, leasing, production and income
collection, operating expenses and tax reporting.
Employee Benefits. The Bank manages investments for 401(k) plans, pension
and profit sharing plans, IRAs, and individual securities.
Lending Activities
One of the Bank's main objectives is to seek attractive lending
opportunities in its service area. Accordingly, in addition to offering a broad
range of deposit services and products typically available from most banks and
savings associations, the Bank offers a full range of retail and commercial
credit services designed to meet the borrowing needs of small- and medium-sized
businesses and customers in the Bank's service area. These products include
commercial loans (such as lines of credit, term loans, refinancings, etc.),
personal lines of credit, direct-installment consumer loans, residential
mortgage loans, construction loans, and letters of credit. Substantially all of
the Bank's loans are made to borrowers in the Bank's service area, which
includes the Texas Panhandle. The Bank has, however, made a small number of
loans outside its service area and in surrounding states. This practice is
generally limited to borrowers (both individuals and businesses) who have either
specific ties to the Bank's service area or businesses in the Bank's service
area.
The Bank conducts its lending activities pursuant to the loan policy
adopted by its Board of Directors. See "BUSINESS -- Loan Policies and
Underwriting Practices" for a discussion of the Bank's loan policy.
Substantially all loans in the Bank's portfolio have been originated by the
Bank. A few loans in the Bank's portfolio, however, were purchased from a
competing bank. These purchased loans had been originated by members of the
Bank's lending staff during their prior tenure at the competing bank and were
seasoned loans of known customers. These purchased loans conform with the Bank's
underwriting standards. This practice was unique to the Bank's startup during
the latter half of 1997. The Bank may, from time to time, purchase loans from
other banks
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and participations from correspondent banks, which loans will conform to the
Bank's underwriting standards. The Bank has no foreign loans or highly leveraged
transaction loans in its portfolio.
Loan Portfolio
For purposes of this discussion, the Bank's loans are divided into four
categories: commercial loans, agricultural loans, real estate loans, and loans
to individuals, each discussed below.
Commercial Loans. The Bank's commercial loans are diversified to meet most
business needs. The commercial loans offered by the Bank include (i) commercial
real estate loans (discussed herein), (ii) short-term working capital and other
commercial loans, and (iii) construction loans (discussed herein). Credit
analysis of a commercial loan application involves a review of many related
factors including collateral, type of loan, loan maturity, terms and conditions,
and various loan-to-value ratios related to the Bank's loan policy. The Bank
requires commercial borrowers to submit financial statements at least annually.
Any exceptions to this requirement are extremely rare. In addition, the Bank
requires appraisals or evaluations for loans secured by real estate. These
appraisals or evaluations are obtained before the funds are advanced. The Bank
also requires personal guaranties on all non-individual/consumer loans, except
when cash collateral or financial strength of the borrower mitigates this
requirement. The total number of loans in the Bank's portfolio without personal
guaranties at December 31, 1999, is insignificant compared to the overall value
of its loan portfolio. Terms are granted commensurate with the useful life of
the collateral offered.
Agricultural Loans. Agricultural loans include loans to cattle feeding
operations, cattle producers, farmers and ranchers, and other
agriculture-related borrowers. These loans are subject to the credit analysis,
financial statement, and collateral requirements mentioned above under
commercial loans.
Real Estate Loans. Real estate loans are divided into three categories:
residential mortgage lending, construction loans, and commercial real estate
loans, each discussed in greater detail below.
Residential Mortgage Loans. The Bank's renewed interest in providing
residential mortgage loans was fueled by the following factors: (i) the
commitment of the Bank's new management team to engage in more traditional lines
of banking by providing this product, (ii) a strong real estate market, and
(iii) low interest rates. Residential loan originations are generated by the
Bank's in-house originations staff, marketing efforts, present customers,
walk-in customers, and referrals from real estate agents, mortgage brokers, and
builders. The Bank focuses its lending efforts primarily on the origination of
loans secured by first mortgages on owner-occupied, one-to-four family
residences. Substantially all of the Bank's one-to-four family residential
mortgage originations are secured by properties in and around Amarillo. The
outstanding principal amount of loans secured by properties outside the Bank's
service area is not significant compared to the value of the Bank's entire loan
portfolio. The Bank does not purchase residential mortgage loans but may sell
loans it originates on the secondary market.
Residential mortgage products include conventional, fixed-rate loans with
terms that vary from a 15-year balloon to a 30-year fully amortized loan. The
Bank requires loans secured by first
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mortgages on real estate to have loan-to-value ratios within specified limits,
ranging from 60 percent for loans secured by raw land to 95 percent for improved
property.
The Bank reviews information concerning the income, financial condition,
employment, and credit history when evaluating an applicant's creditworthiness.
Construction Loans. The Bank's emphasis in construction loans is directed
toward properties that will be owner-occupied. The Bank may finance construction
loans for projects built on speculation, but these typically have substantial
secondary sources of repayment. The Bank's construction loans are secured by
property located primarily in its market area and typically have variable
interest rates during the construction period. Construction loans with fixed
interest rates were not significant at December 31, 1999. Construction loans to
individuals are generally made in connection with permanent financing on the
property. In determining whether to originate commercial real estate loans, the
Bank considers such factors as the borrower's financial condition and debt
service coverage.
Commercial Real Estate Loans. Commercial real estate loans provide
permanent financing for commercial and retail structures, office buildings,
warehouses, churches, and multiple-family buildings. Most of these loans are
collateralized by owner-occupied properties. Commercial real estate lending
entails a thorough analysis of the borrower's financial condition, industry, and
debt service coverage, and current and projected economic conditions. Commercial
real estate loans are made at both fixed and adjustable interest rates for terms
up to 15 years.
Loans to Individuals. The Bank is a significant major consumer lender in
its service area. Loans to individuals include personal and consumer loans,
which may be secured or unsecured depending on the credit quality and purpose of
the loan. The Bank requires loan applications and/or personal financial
statements from its borrowers on loans that it originates. Loan officers
complete a debt-to-income analysis that must meet established standards of the
Bank's lending policy. Consumer loan terms vary according to the type and value
of collateral, length of contract, and creditworthiness of the borrower. The
Bank's underwriting standards for consumer loans include an application, a
determination of the applicant's payment history on other debts, with greatest
weight being given to payment history with the Bank, and an assessment of the
borrower's ability to meet existing obligations and payments on the proposed
loan. Although the applicant's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the collateral,
if any, to the proposed amount of the loan. See "BUSINESS -- Loan Policies and
Underwriting Practices."
Additional information regarding the various components of the Bank's loan
portfolio is provided under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Loan Portfolio."
Risk Elements
The risk elements in the Company's loan portfolio are similar to those in
other comparable commercial banks. Risk elements related to specific loan
categories are as follows:
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Commercial Loans. Commercial loans include a variety of loans to commercial
entities, including loans to finance accounts receivable, inventories, and other
business activities. Risk of nonperformance on these loans includes the risk
that the borrower's cash flow will be insufficient to service the debt and the
risk that collateral will not be sufficient to offset any loss. Certain loans to
qualified borrowers may be unsecured. Risk of nonperformance on these loans
includes the risk that the borrower's cash flow will be insufficient to service
the debt and the risk that there is no or inadequate collateral to offset any
loss.
Agricultural Loans. Agricultural loans, in addition to risks similar to
other commercial loans as described above, may be susceptible to commodity
market risk and weather.
Real Estate Loans. Real estate loans represent the Bank's greatest
concentration of loans, approximately 40.4 percent of the portfolio at December
31, 1999. However, the amount of risk associated with these loans is mitigated
in part because of the type of loans involved. At December 31, 1999, the vast
majority of the Bank's reals estate loans were collateralized by properties in
and around Amarillo, many of which are owner-occupied. Historically, the losses
suffered on owner-occupied properties have been small. Because of the volume of
real estate loans in the Bank's portfolio which are collateralized by
owner-occupied properties, and the appraisal and other real estate lending
policies that indicate the value of the collateral for these loans, management
does not consider the potential impact of these loans on the loan loss reserve
to be excessive, even though real estate loans are a significant percentage of
total loans outstanding. Management also pursues an aggressive policy of
reappraisal on any real estate loan that becomes troubled, and potential
exposures are recognized and reserved for as soon as they are identified.
Real estate properties are particularly sensitive to general economic
conditions and experience devaluation when economic factors decline.
Accordingly, an increase in interest rates or a softening of the real estate
market may reduce demand for this product.
Installment Loans. Risk of nonperformance on these loans includes the risk
that the borrower's cash flow will be insufficient to service the debt and the
risk that the collateral will be insufficient to offset any loss. Currently, the
economy in the Bank's service area appears stable. Management is, however,
cognizant of the nationwide increase in the personal bankruptcy rate and
believes this trend may have an adverse effect on the Bank's net charge-offs.
Most of the Bank's loans to individuals are collateralized, which management
believes will limit its exposure in this area if current bankruptcy trends
continue.
Loan Policies and Underwriting Practices
General. The Bank's credit officers strive to accommodate all credit needs
of creditworthy borrowers. Attempts are made, within the parameters of the
Bank's loan policy, as discussed below, to make and structure loans designed to
generate future business for the Bank. The Bank operates within the parameters
of its loan policy and underwriting standards. These policies and standards,
however, may not apply to all potential borrowers or circumstances, and,
accordingly, deviations from the loan policy or underwriting standards, related
to either collateralization requirements and/or loan-to-value ratio guidelines,
are made only in extreme situations. These deviations, which are infrequent and
involve loans representing an insignificant amount relative to the value of the
Bank's overall loan portfolio, are addressed individually during the
underwriting process and must be
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approved before funding by the Bank's Loan Committee. Although the Bank does not
formally track these deviations from policy as a whole (except for real estate
loans), known deviations are addressed herein.
The following summarizes the Bank's loan policy and underwriting practices.
Loan Policy. The Bank maintains a comprehensive loan policy that
establishes guidelines for all categories of lending. In addition, the loan
policy states each credit officer's lending authority to make secured and
unsecured loans in specific dollar amounts.
The Bank's Loan Committee administers its loan policy in accordance with
directives from the Bank's Board of Directors. The Loan Committee is comprised
of four Senior Credit Officers. The Committee reviews policy and procedures at
least annually, or more frequently as needed, and submits recommendations to the
Bank's Chief Executive Officer for review and approval. Ultimate approval of the
loan policy rests with the Bank's Board of Directors.
The Bank's primary lending area includes customers residing in specified
counties in Texas and, to a lesser extent, in portions of the neighboring states
of Oklahoma, Kansas, Colorado, and New Mexico.
Other principles of the Bank's loan policy are described below:
o The Bank will not engage in non-recourse lending unless the loan is
specifically approved in advance by the Loan Committee. Non-recourse
lending is defined as a loan with no personal liability of the principal of
a borrowing entity when the collateral is the only source of repayment.
Although the Bank prefers to obtain guarantees of payment from each
principal of a closely held corporation, this is not considered
non-recourse lending if there is an additional source of repayment other
than the collateral.
o If an applicant or a loan application reflects a potential credit weakness,
adequate additional support, such as co-signers or enforceable guarantees,
is sought. However, these are seldom considered the primary source of
repayment and are, therefore, not heavily relied on by the Bank.
o Credit officers are responsible for ascertaining the real market value of
any collateral taken on a loan. Appraisal reports or comparable sales
reports are used as guidelines only, not as an absolute measure of market
value.
o The Bank satisfies itself as to the repayment source of the borrower,
whether it is cash flow or liquidation of collateral associated with a
normal business cycle (e.g., sale of crops or cattle, or inventory
turnover).
Supervision and Regulation
Banking is a complex, highly regulated industry. The primary goals of the
bank regulatory scheme are to maintain a safe and sound banking system and to
facilitate the conduct of monetary policy. In furtherance of those goals,
Congress has created several largely autonomous regulatory
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agencies and enacted much legislation that governs banks, bank holding
companies, and the banking industry. Descriptions of and references to the
statutes and regulations below are brief summaries and do not purport to be
complete. The descriptions are qualified in their entirety by reference to the
specific statutes and regulations discussed.
The Company
As a bank holding company under the BHC Act, the Company is registered with
and is subject to regulation by the Federal Reserve. Among other things,
applicable statutes and regulations require the Company to file annual and other
reports with and furnish information to the Federal Reserve, which may make
inspections of the Company.
The BHC Act provides that a bank holding company must obtain the prior
approval of the Federal Reserve to acquire more than 5 percent of the voting
stock or substantially all the assets of any bank or bank holding company. The
Company currently has no formal agreement or commitments about any such
transaction. However, the Company evaluates opportunities to invest in or
acquire other banks or bank holding companies as they arise and may engage in
these transactions in the future. In addition, the BHC Act restricts the Bank's
extension of credit to the Company. The BHC Act also provides that, with certain
exceptions, a bank holding company may not (i) engage in any activities other
than those of banking or managing or controlling banks and other authorized
subsidiaries or (ii) own or control more than 5 percent of the voting shares of
any company that is not a bank, including any foreign company. A bank holding
company is permitted, however, to acquire shares of any company, the activities
of which the Federal Reserve, after due notice and opportunity for hearing, has
determined to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve's regulations state
specific activities that are permissible under that exception. The Company does
not currently have any agreements or commitments to engage in any nonbanking
activities.
In approving acquisitions by bank holding companies of banks and companies
engaged in banking-related activities, the Federal Reserve considers whether any
such activity by an affiliate of the holding company can reasonably be expected
to produce benefits to the public, such as greater convenience, increased
competition, or gains in efficiency, that outweigh any possible adverse effects
such as undue consideration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices. The Federal Reserve has
cease-and-desist powers over parent holding companies and nonbanking
subsidiaries if their actions constitute a serious threat to the safety,
soundness, or stability of a subsidiary bank. Federal regulatory agencies also
have authority to regulate debt obligations (other than commercial paper) issued
by bank holding companies. That authority includes the power to impose interest
ceilings and reserve requirements on the debt obligations. A bank holding
company and its subsidiaries are also prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services.
A bank holding company may also acquire shares of a company which furnishes
or performs services for a bank holding company and acquire shares of the kinds
and in the amounts eligible for investment by national banking associations. The
Board of Directors of the Company at this time has no plans for these
investments.
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Federal banking law allows a bank holding company to acquire or establish
banks in any state of the United States. In addition, Texas banking laws permit
a bank holding company which owns stock of a bank outside Texas (an
"Out-of-State Bank Holding Company") to acquire a bank or a bank holding company
in Texas. Such acquisition may occur only if the Texas bank to be directly or
indirectly controlled by the Out-of-State Bank Holding Company has existed and
continuously operated as a bank for at least five years. In any event, however,
a bank holding company may not own or control banks in Texas whose deposits
would exceed 20 percent of the total deposits of all federally insured deposits
in Texas. The Board of Directors of the Company at this time has no plans to
acquire or establish banks outside Texas.
The Bank
The Bank is subject to various requirements and restrictions under federal
and state laws, and to regulation, supervision, and regular examination by the
Comptroller. The Bank is subject to the Comptroller's power to enforce
compliance with applicable banking statutes and regulations. These requirements
and restrictions include requirements to maintain reserves against deposits,
restrictions on the nature and amount of loans and the interest charged thereon,
and restrictions relating to investments and other activities of the Bank. In
1999, President Clinton signed the Gramm-Leach-Bliley Act which makes
substantial changes in the permitted relationships between banks, securities
firms, insurance companies and their holding companies. The statute is too new
to be able to fully evaluate its effects on the Company and the Bank. However,
the Company believes most of the direct effects of the statute will be minimal
because it primarily affects the operations of much larger institutions. In
addition, Texas law still prohibits banks domiciled in towns with a population
greater than 5,000 from engaging in the insurance business.
Dividends. The Bank may generally pay dividends on its stock as long as
their payment complies with applicable law and regulations. A national bank may
not pay dividends from its stated capital. Additionally, if losses have been
sustained at any time by a national bank equal to or exceeding its undivided
profits then on hand, it can pay no dividend, and all dividends must be paid out
of net profits then on hand, after deducting expenses, including losses and
provisions for loan losses. The payment of dividends out of net profits of a
national bank is further limited by a provision of the National Bank Act that
prohibits it from declaring a dividend on its shares of its stock until 10
percent of its net profits are transferred to the surplus each time dividends
are declared, unless the transfer would increase the bank's surplus to an amount
greater than its capital. In addition, the prior approval of the Comptroller is
required if the total of all dividends declared by a national bank in any
calendar year exceeds the total of its net profits for that year combined with
its net profits for the two preceding years, less any required transfers to
surplus or to funds to retire any preferred stock. Additionally, under 12 U.S.
C. ss. 1818, the Comptroller has the right to prohibit the payment of dividends
by a national bank if the payment is deemed to be an unsafe and unsound banking
practice.
Transactions with Affiliates. The Federal Reserve Act, as amended by the
Competitive Equality Banking Act of 1987, prohibits the Bank from engaging in
specified transactions (including, for example, loans) with certain affiliates
unless the terms and conditions of the transactions are substantially the same
or at least as favorable to the Bank as those prevailing at the time for
comparable transactions with or involving other non-affiliated entities. In the
absence of comparable transactions, any transaction between a bank and its
affiliates must be on terms and
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under circumstances, including credit standards, that in good faith would be
offered or would apply to non-affiliated companies. In addition, certain
transactions, referred to as "covered transactions," between the Bank and its
affiliates may not exceed 10 percent of the Bank's capital and surplus per
affiliate and an aggregate of 20 percent of its capital and surplus for covered
transactions with all affiliates. Certain transactions with affiliates, such as
loans, also must be secured by collateral of specific types and amounts.
Finally, the Bank may not purchase low-quality assets from an affiliate. The
Company is an affiliate of the Bank.
Loans to Insiders. Federal law also constrains the types and amounts of
loans that any bank may make to its executive officers, directors, and principal
shareholders. Among other things, the loans must be approved by the Bank's Board
of Directors in advance and must be on terms and conditions as favorable to the
Bank as those available to unrelated persons.
Regulation of Lending Activities. Loans made by the Bank are also subject
to numerous federal and state laws and regulations, including truth-in-lending
statutes, the Federal Consumer Credit Protection Act, the Texas Consumer Credit
Code, the Texas Consumer Protection Code, the Equal Credit Opportunity Act, the
Real Estate Settlement Procedures Act, and adjustable rate mortgage disclosure
requirements. Remedies to the borrower and penalties to the Bank are provided
for the Bank's failure to comply with these laws and regulations, whose scope
and requirements have expanded significantly in recent years.
Branch Banking. Pursuant to the Texas Finance Code, all Texas banks may
branch statewide. Accordingly, a bank located anywhere in Texas may, subject to
regulatory approval, establish branch facilities near any of the Bank's
facilities and within its market areas. If other banks establish branch
facilities near the Bank or any of its facilities, it is uncertain whether these
facilities would have a materially adverse effect on the Bank's business.
In addition, as a result of the successful NationsBank litigation involving
branch banking across the borders of Texas and subsequent action by the Texas
Legislature in 1999, out-of-state banks may branch into Texas, and Texas banks
may branch into other states.
Since the Bank's primary service area is in Texas, these developments are
not expected to have any material effect on the Bank's business or its
competitive position in its primary markets.
Governmental Monetary Policies. The commercial banking business is affected
not only by general economic conditions but also by the monetary policies of the
Federal Reserve. Changes in the discount rate on member bank borrowings, control
of borrowings, control of borrowings at the "discount window," open market
operations, the imposition of and changes in reserve requirements against member
banks, deposits and assets of foreign branches, the imposition of and changes in
reserve requirements against certain borrowings by banks and their affiliates,
and the limits on interest rates which member banks may pay on time and savings
deposits are some of the instruments of monetary policy available to the Federal
Reserve. Those policies influence significantly the overall growth of bank
loans, investments, deposits, and interest rates charged on loans or paid on
time and savings deposits. Any future monetary policies and their effect on the
Bank's business and earnings, therefore, cannot be predicted accurately.
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Capital Adequacy. In 1983, Congress enacted the International Lending
Supervision Act, which, among other things, directed the Comptroller to
establish minimum levels of capital for national banks and to require national
banks to achieve and maintain adequate capital. Pursuant to this authority, the
Comptroller has promulgated capital-adequacy regulations to which all national
banks, such as the Bank, are subject.
The Comptroller's capital-adequacy regulations are based upon a risk-based
capital determination, whereby a bank's capital adequacy is determined in light
of the risk, both on- and off-balance sheet, in the bank's assets. Different
categories of assets are assigned risk weightings and, based thereon, are
counted at a percentage (from 0 to 100 percent) of their book value. The
regulations divide capital between Tier 1 capital, or core capital, and Tier 2
capital, or supplemental capital. Tier I capital consists primarily of common
stock, noncumulative perpetual preferred stock, related surplus, and minority
interests in consolidated subsidiaries. Goodwill and certain other intangibles
are excluded from Tier 1 capital. Tier 2 capital consists of varying percentages
of the allowance for loan and lease losses, all other types of preferred stock
not included in Tier 1 capital, hybrid capital instruments, and
term-subordinated debt. Investments in and loans to unconsolidated banking and
finance subsidiaries that constitute capital of those subsidiaries are excluded
from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total
capital. The Tier 1 component must comprise at least 50 percent of qualifying
total capital.
Every national bank must maintain a certain ratio of Tier 1 capital to
risk-weighted assets (a "Core Capital Ratio") and a ratio of Tier 1 plus Tier 2
capital to risk-weighted assets (a "Risk-Based Capital Ratio"). All banks must
achieve and maintain a minimum Core Capital Ratio of at least 4 percent and a
minimum Risk-Based Capital Ratio of 8 percent.
As of December 31, 1999, the Bank's Core Capital Ratio was 17.21 percent,
and its Risk- Based Capital Ratio was 18.47 percent. In addition, national banks
generally must achieve and maintain a Leverage Ratio of at least 4 percent. As
of December 31, 1999, the Bank's Leverage Ratio was 16.71 percent.
FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act
("FIRREA"), enacted in 1989, includes various provisions that affect or may
affect the Bank. Among other things, FIRREA generally permits bank holding
companies to acquire healthy thrifts and failed or failing thrifts. FIRREA also
removed certain cross-marketing prohibitions previously applicable to thrift and
bank subsidiaries of a common holding company. Furthermore, a multi-bank holding
company may now be required to indemnify the federal deposit insurance fund
against losses it incurs for the company's affiliated banks, which in effect
makes a bank holding company's equity investments in healthy bank subsidiaries
available to the Federal Deposit Insurance Company (the "FDIC") to assist the
company's failing or failed bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that has been
chartered less than two years, has undergone a change in control within the last
two years, is not in compliance with the minimum capital requirements of its
primary federal banking regulator, or is otherwise in a troubled condition must
notify its primary federal banking regulator of the proposed addition of any
person to the board of directors or the employment of any person as a senior
executive officer of the institution at least 30 days before the addition or
employment becomes effective. During this 30-day
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period, the applicable federal banking regulatory agency may disapprove of the
addition or employment of the director or officer. The Bank is not presently
subject to those requirements.
FIRREA also expands and increases civil and criminal penalties available to
the appropriate regulatory agency against certain "institution-affiliated
parties" primarily including (i) management, employees, and agents of a
financial institution, as well as (ii) independent contractors such as attorneys
and accountants and others who participate in the financial institution's
affairs and who caused or are likely to cause more than minimum financial loss
to or a significant adverse effect on the institution, by knowingly or
recklessly violating a law or regulation, breaching a fiduciary duty, or
engaging in unsafe or unsound practices. These practices can include an
institution's failure to timely file required reports or to submit accurate
reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue
cease-and-desist orders that may, among other things, require affirmative action
to correct any harm resulting from a violation or practice, including
restitution, reimbursement, indemnifications, or guarantees against loss. A
financial institution may also be ordered to restrict its growth, dispose of
certain assets, or take other action the ordering agency determines to be
appropriate. As a result, the Comptroller now has greater enforcement power than
it has had since deregulation of the banking industry in 1978.
The FDIC Improvement Act. The FDIC Improvement Act of 1991, enacted on
December 19, 1991 ("FDICIA"), makes many reforms addressing the safety and
soundness of the deposit insurance system, supervision of domestic and foreign
depository institutions, and improvement of accounting standards. This statute
also limits deposit insurance coverage, implements changes in consumer
protection laws, and calls for least-cost resolution and prompt regulatory
action for troubled institutions.
FDICIA requires every national bank with total assets over $500,000,000 to
have an annual independent audit of its financial statements by a certified
public accountant to verify that the financial statements are presented in
accordance with generally accepted accounting principles and comply with other
disclosure requirements prescribed by the Comptroller.
FDICIA also places certain restrictions on activities of banks depending on
their level of capital. FDICIA divides banks into five different categories,
depending on their level of capital.
Under regulations adopted by the Comptroller, a bank is "well capitalized"
if it has a total Risk-Based Capital Ratio of 10 percent or more, a Core Capital
Ratio of 6 percent or more, and a Leverage Ratio of 5 percent or more, and the
bank is not subject to an order or capital directive to meet and maintain a
certain capital level. A bank is "adequately capitalized" if it has a total
Risk- Based Capital Ratio of 8 percent or more, a Core Capital Ratio of 4
percent or more, and a Leverage Ratio of 4 percent or more (unless it receives
the highest composite rating at its most recent examination and is not
experiencing or anticipating significant growth, in which instance it must
maintain a Leverage Ratio of 3 percent or more). A bank is "undercapitalized" if
it has a total Risk-Based Capital Ratio of less than 8 percent, a Core Capital
Ratio of less than 4 percent, or a Leverage Ratio of less than 4 percent. A bank
is "significantly undercapitalized" if it has a Risk-Based Capital Ratio of less
than 6 percent, a Core Capital Ratio of less than 3 percent, and a Leverage
Ratio of less than 3 percent. A bank is "critically undercapitalized" if it has
a Leverage Ratio of 2 percent or less. In addition, the Comptroller may
downgrade a bank's classification (but not to "critically undercapitalized")
based on other considerations even if the Bank meets the capital guidelines.
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According to these guidelines, the Bank was classified as "well capitalized" as
of December 31, 1999.
In addition, if a national bank is undercapitalized, it must submit a
capital restoration plan to the Comptroller. Pursuant to FDICIA, an
undercapitalized national bank is prohibited from increasing its assets,
engaging in a new line of business, acquiring any interest in any company or
insured depository institution, or opening or acquiring a new branch office,
except under certain circumstances, including the Comptroller's acceptance of a
capital restoration plan for the bank.
Furthermore, if a national bank is undercapitalized, the Comptroller may
take certain actions to correct its capital position; if a bank is significantly
undercapitalized or critically undercapitalized, the Comptroller would be
required to take one or more prompt corrective actions. These actions would
require among other things: (i) sales of new securities to bolster capital, (ii)
improvements in management, (iii) limits on interest rates paid, (iv)
prohibitions on transactions with affiliates, (v) termination of certain risky
activities, and (vi) restrictions on compensation paid to executive officers. If
a national bank is critically undercapitalized, FDICIA requires it to be placed
into conservatorship or receivership within 90 days, unless the Comptroller and
the FDIC concur that other action would better achieve the FDICIA's purposes for
prompt corrective action.
A bank's capital classification affects the frequency of its examinations,
impacts its ability to engage in certain activities, and affects the deposit
insurance premiums it pays. Under FDICIA, the Comptroller must conduct a
full-scope, on-site examination of every national bank at least once every 12
months. An exception to this rule is made, however, for national banks (i) with
assets of less than $100,000,000, (ii) categorized as "well capitalized," (iii)
found to be well managed with an outstanding composite rating, and (iv) not
subject to a change in control during the last 12 months; these banks will be
examined by the Comptroller once every 18 months.
Under FDICIA, banks may be restricted in their ability to accept brokered
deposits, depending on their capital classification. "Well-capitalized" banks
are permitted to accept brokered deposits, but all banks that are not well
capitalized cannot accept those deposits. The FDIC may, on a case-by-case basis,
permit banks that are adequately capitalized to accept brokered deposits if it
determines that the deposits would not constitute an unsafe or unsound practice
for the bank.
In addition, under FDICIA, the FDIC can assess insurance premiums on a
bank's deposits at a variable rate depending on the probability that the deposit
insurance fund will incur a loss for the bank. (Under prior law, the deposit
insurance assessment was a flat rate, regardless of the likelihood of loss.) In
this regard, the FDIC has issued regulations for a transitional risk-based
deposit assessment that determines the deposit insurance assessment rates on the
basis of the bank's capital classification and supervisory evaluations. Each of
these categories has three subcategories, resulting in nine assessment risk
classifications. The three subcategories about capital are "well capitalized,"
"adequately capitalized," and "less than adequately capitalized" (includes
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized" banks). The three subcategories for supervisory concerns are
"healthy," "supervisory concern," and "substantial supervisory concern." A bank
is deemed "healthy" if it is financially sound with only a few minor weaknesses.
A bank is deemed subject to "supervisory concern" if it has weaknesses that, if
not corrected, could result in significant deterioration of the bank and
increased risk to the Bank
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Insurance Fund. A bank is deemed subject to "substantial supervisory concern" if
it poses a substantial probability of loss to the Bank Insurance Fund of the
FDIC (the "BIF").
The federal banking agencies have established guidelines, effective August
9, 1995, which prescribe standards for depository institutions relating to
internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
management compensation. The agencies may require an institution which fails to
meet these standards to submit a compliance plan. The agencies are also
currently proposing standards for asset quality and earnings. The Company cannot
predict what effect these guidelines will have on the Bank.
Deposit Insurance. The Bank's deposits are insured up to $100,000 per
insured account by the BIF. As an institution whose deposits are insured by BIF,
the Bank paid deposit insurance premiums to the BIF of approximately $22,800 for
the year ended December 31, 1999. The Bank's deposit insurance assessments may
increase depending upon the risk category and subcategory, if any, to which the
Bank is assigned by the FDIC. Any increase in insurance assessments could have
an adverse effect on the Bank's earnings.
Interstate Banking Legislation. During its 1999 session, the Texas
legislature enacted legislation codifying the NationsBank litigation to allow
interstate branch banking. See "SUPERVISION AND REGULATION -- Branch Banking."
Interstate banking (e.g., out-of-state holding companies acquiring Texas
financial institutions), however, cannot be prohibited by states, but it is
subject to certain state law limitations on the ages of the banks to be acquired
and on the total amount of deposits within a state that a bank holding company
may control.
Management of the Company and the Bank cannot predict any other legislation
or regulations and their effects.
THE FOREGOING SUMMARIZES SOME OF THE RELEVANT LAWS, RULES, AND REGULATIONS
GOVERNING NATIONAL BANKS AND BANK HOLDING COMPANIES, BUT DOES NOT PURPORT TO BE
A COMPLETE SUMMARY OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS GOVERNING
BANKS AND BANK HOLDING COMPANIES.
Environmental Factors
To date, the Company has not been required to perform any investigations or
clean-up activities, nor has it been subject to any environmental claims. There
can be no assurance, however, that this will remain the case in the future. In
the ordinary course of its business, the Company from time to time forecloses on
properties securing loans. There is a risk that the Company could be required to
investigate and clean up hazardous or toxic substances or chemical releases at
those properties after their acquisition and could be held liable to a
governmental entity or to third parties for property damage, personal injury,
and investigation and clean-up costs in connection with the contamination. The
costs of investigation, remediation, or removal of those substances may be
substantial, and the presence of the substances, or the failure to properly
remediate the property, may adversely affect the owner's ability to sell or rent
the property or to borrow using the property as
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collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances also may be liable for the costs of removal or remediation of
the substances at the disposal or treatment facility, whether or not the person
owns or operates the facility. In addition, the owner or former owners of a
contaminated site may be subject to common-law claims by third parties based on
damages and costs resulting from environmental contamination of the property.
In its business, the Company may acquire properties through foreclosure,
and hazardous or toxic waste could be found on them. The Company could then be
held responsible for cleaning up or removing the waste, and the cost could
exceed the value of the properties.
Employees
The Company is a bank holding company and primarily conducts its operations
through its subsidiary, the Bank. The Company has no paid employees. Certain
Bank employees and directors conduct the Company's business but are not
specifically compensated as Company employees. As of December 31, 1999, the Bank
had 91 full-time and 14 part-time employees. Employees receive benefits, such as
life and health insurance plans. The Bank's employees are not represented by any
collective bargaining group. The Bank considers its relations with its employees
to be good.
Dependence on Key Personnel
The Company's and the Bank's growth and development since the Acquisition
on May 23, 1997, have largely depended upon the services of Donald E. Powell,
Chairman of the Board, President, and Chief Executive Officer. The loss of Mr.
Powell's services for any reason could have a material adverse effect on the
Company and the Bank.
ITEM 2. PROPERTIES.
The Company's executive and administrative offices are located at 905 South
Fillmore, Amarillo, Texas. The Company has executed two leases with an
unaffiliated third party for this location, one for approximately 5,600 square
feet on the seventh floor, which is used for the Company's and the Bank's
executive and administrative offices, and one for approximately 2,100 square
feet on the ground floor, which is used for retail banking transactions. These
leases generally expire in June 2004 and provide for rent escalations tied to
either increases in the lessor's operating expenses or fluctuations in the
consumer price index in the relevant geographic market. The term of these leases
may be renewed through June 2012. In addition to the main office, the Bank
maintains four full-service branch offices in Amarillo (two branches), Dalhart,
and Fritch, Texas, and is building a fifth branch as discussed below.
Amarillo, Texas
As described above, the Bank's main retail office is located on the first
floor of a seven-story office complex at 905 South Fillmore in downtown
Amarillo. The Bank leases approximately 7,700 square feet of office space from
an unaffiliated third party. This location offers a walk-in lobby but has no
drive-in lanes.
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On February 2, 1998, and February 17, 1998, the Bank opened two de novo,
full-service branches in commercial areas of Amarillo. One branch is near the
intersection of U.S. Interstate 40 and Washington Street and is highly visible
to passing traffic. The other branch is near the intersection of 34th Avenue and
Bell Street, also a highly visible location. The Bank constructed and owns each
branch building and leases the ground space from unaffiliated third parties. The
leases expire in February 2010 and August 2027. Each stand-alone branch facility
is approximately 2,500 square feet and has five drive-through lanes and one
walk-up automated teller machine.
Effective November 1, 1998, the Bank leased ground space for a new branch
site to be located at the intersection of 45th Avenue and Coulter. The lease was
from a partnership in which Donald E. Powell and Jay O'Brien, Directors of the
Company, are partners. Monthly lease payments were $3,757, and the lease
extended through October 2013. During 1999, the Bank purchased the land for
$521,000 and began construction on the new branch. The two Directors sold the
land at their cost.
Dalhart, Texas
On October 15, 1997, the Bank opened a de novo, full-service branch at 1723
Tennessee in Dalhart. This branch, which offers four drive-through lanes and one
drive-up automated teller machine, is located in a strip shopping center in the
business district and is surrounded by other commercial businesses. This
facility, which occupies approximately 5,500 square feet, is leased from an
unaffiliated third party. The initial term of the lease will expire in October
2002 but may be renewed through October 2012.
Fritch, Texas
The Fritch branch of the Bank is located downtown at 102 West Broadway
(Highway 136). It consists of a one-story brick building (approximately 3,230
square feet) with three drive-through lanes and one drive-up automated teller
machine; it is owned by the Bank.
ITEM 3. LEGAL PROCEEDINGS.
The Company and the Bank are sometimes involved in various legal
proceedings in the normal course of their business. None of these matters,
either singularly or in the aggregate, would have, in the management's opinion,
a material adverse effect upon the financial statements of the Company or the
Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
There is no established public trading market for the Company's Common
Stock, and, as the Transfer Agent for the Company's Common Stock, the Bank
believes the Common Stock is seldom traded and is not necessarily aware of the
price for which it is bought or sold. There can be no assurance that an active
public trading market for the Company's Common Stock will be created.
None of the Company's shares of Common Stock (i) is subject to outstanding
options or warrants to purchase nor are any securities convertible into the
Company's Common Stock, except for options to purchase 608,317 shares of Common
Stock which were outstanding at December 31, 1999, to key employees of the Bank
under the Company's 1998 Incentive Stock Plan, or (ii) is being or proposed to
be publicly offered by the Company.
The Company paid no cash dividends on its Common Stock in 1997, 1998, or
1999. The Company intends to retain all earnings to finance its operations and
does not expect to pay cash dividends in the foreseeable future. Any decision by
the Board of Directors to declare dividends in the future will depend on the
Company's earnings, capital requirements, financial condition, and other
relevant factors.
The Company's ability to pay dividends is also restricted by Texas law.
Generally, Texas law prohibits corporations from paying dividends if, after
giving effect to the distribution, the corporation would be insolvent, or the
distribution exceeds the surplus of the corporation.
The Company is also subject to the dividend restrictions applicable to
national banks because its principal source of income is the dividends the Bank
pays to the Company. Under the National Bank Act, dividends may be paid only out
of retained earnings as defined in the statute. The Comptroller's approval is
required if the dividends for any year exceed the net profits, as defined, for
that year plus the retained net profits for the preceding two years. In
addition, unless a national bank's capital surplus equals or exceeds the stated
capital for its common stock, no dividends may be declared unless the bank makes
transfers from retained earnings to capital surplus. See "Supervision and
Regulation" under Item 1 of this Annual Report on Form 10-K.
ITEM 6. SELECTED FINANCIAL DATA.
The following table gives consolidated selected financial data about the
results of operations and financial condition of the Company for the periods and
at the dates indicated. Amounts are in thousands, except for weighted average
shares outstanding and per-share data. These data are qualified by, and should
be read in conjunction with, the separate financial statements, reports, and
other financial information elsewhere in this document. Certain consolidated
financial data as of and for 1999, 1998, and 1997 are based on and derived from
audited financial statements elsewhere in this document. Share data have been
adjusted to reflect the 77.4372-for-1 stock dividend on July 2, 1997.
21
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 19,357 $ 14,922 $ 4,020 $ 1,146 $ 1,133
Interest expense 6,002 4,706 1,260 515 494
Net interest income 13,355 10,216 2,760 631 639
Provision for loan losses 1,320 975 2,700 97 (80)
Noninterest income 1,846 1,149 162 118 136
Noninterest expense 7,681 6,344 2,242 606 546
Earnings (loss) before income taxes 6,199 4,046 (2,021) 46 309
Income taxes (benefit) 2,107 742 (39) 7 103
Net earnings (loss) 4,093 3,304 (1,981) 39 206
Per Share Data
Net earnings (loss) 0.31 0.25 (0.41) 0.20 1.05
Book value at end of period 3.38 3.07 2.84 2.91 2.85
Average common shares outstanding 13,406,764 13,344,130 4,824,792 712,035 712,035
Balance Sheet Data (End of Period)
Total assets 299,041 247,288 144,741 18,212 18,502
Investment securities 6,723 7,303 5,085 10,303 13,308
Loans outstanding 262,247 183,551 117,102 1,464 1,859
Allowance for loan losses (4,525) (3,625) (2,748) (45) (22)
Total deposits 251,968 205,139 106,255 16,067 16,381
Stockholders' equity 45,361 41,164 37,853 2,068 2,031
Selected Performance Ratios
Return on average assets 1.53% 1.65% (3.57)% 0.21% 1.11%
Return on average equity 9.45% 8.37% (15.13)% 1.90% 10.86%
Net interest margin 5.47% 5.59% 5.43% 3.70% 3.77%
Asset Quality Ratios
Nonperforming loans to gross loans 0.00% 0.00% 0.00% 4.78% 0.00%
Nonperforming assets to stockholders'
equity 0.00% 0.00% 0.00% 3.38% 0.00%
Net charge-offs to average loans 0.20% 0.06% 0.00% 4.30% (4.37)%
Allowance to end-of-period loans 1.73% 1.94% 2.29% 3.07% 1.21%
Allowance to end-of-period
nonperforming loans N/A N/A N/A 64.53% N/A
Liquidity and Capital Ratios
(End of Period)
Loans (net) to deposits 102.28% 89.48% 110.21% 9.11% 11.35%
Equity to assets 15.17% 16.65% 26.15% 11.36% 10.98%
</TABLE>
The Bank's growth in loans and deposits during 1999, 1998, and 1997 is
primarily attributable the relocation of its main office from Fritch to
Amarillo, a more economically vibrant market. Deposit and loan growth can be
attributable to the new management team, which has emphasized growth from the
Bank's existing client base, capitalized on opportunities in its target market
(e.g., customers of competing financial institutions), and delivered
personalized banking services to its customers. In addition, the Bank's loan
growth is attributable to its aggressive commercial lending program and its
entry into agricultural and real estate lending and strong emphasis on the
commercial loan market. See "Item 1. BUSINESS -- Change in Management and
Competitive Focus" for additional information regarding the various factors
contributing to the Bank's recent growth.
22
<PAGE>
Growth in total assets during 1999, 1998, and 1997 is primarily
attributable to the increase in the Bank's loan portfolio, which was supported
by a significant capital infusion after the Company's stock offering in 1997.
The increase in 1999 and 1998 interest income as compared to 1997 was
attributable to the larger loan portfolio, and the increase in noninterest
income was accompanied by increases in interest and noninterest expenses. Lower
provisions for loan losses were necessary as compared to 1997 to maintain an
adequate allowance for loan losses. See "Item 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Provision and
Allowance for Loan Losses" for additional information about the provision for
loan losses.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Company's
consolidated balance sheets, and statements of operations and comprehensive
income. This section should be read in conjunction with the Company's
consolidated financial statements and accompanying notes and other detailed
financial information included herein.
General
The Company is a one-bank holding company that commenced operations on
December 31, 1983. The Bank originally began operations as Fritch State Bank on
April 10, 1965.
Ownership of the Bank is the Company's major activity. Activities of the
Company are limited and are stated in Note 14 to the Consolidated Financial
Statements included with this Annual Report on Form 10-K. Accordingly, unless
specifically noted herein, the Company's activities as described in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations are virtually indistinguishable from those of the Bank.
As more fully discussed in Item 1 "BUSINESS--General" to this Annual Report
on Form 10-K, composition of the management team of the Company and the Bank
changed significantly in 1997, and the new management team significantly changed
the geographic, product, and service focus of the Bank. Prior management
generally limited loans to selected commercial and consumer installment loans,
which comprised less than 10 percent of average assets. Limited real estate
lending was performed, and agricultural loans were made only on a exception
basis. During 1997, however, the new management team changed the lending
philosophy of the Bank to a more traditional commercial banking activity.
Accordingly, average loans during 1999, 1998 and 1997 represented approximately
79 percent, 77 percent and 62 percent, respectively, of average total assets, as
compared to approximately 9 percent at December 31, 1996.
The new management team's philosophy in growing the loan portfolio was to
hire experienced loan officers (nine were hired in 1997), primarily from one
large competing financial institution in the Amarillo market, and for those loan
officers to aggressively grow the Bank's lending customers' base. Although
management aggressively sought new customers, it was, and
23
<PAGE>
continues to be, selective in deciding which customers to pursue to operate in a
safe and sound manner in accordance with the Bank's loan policy. Thus management
believes that the Bank's loan portfolio growth has been achieved without
relaxing credit underwriting policies. The Bank's loan policy, including
underwriting standards, is discussed at length in Item 1 "BUSINESS--Loan
Policies and Underwriting Practices" to this Annual Report on Form 10-K.
Deposit growth was significant during 1999, 1998 and 1997 and was primarily
fueled by the additional customers gained through the process mentioned above
and by the Bank's ability to attract deposits because of the reputation of its
management team and the name recognition of "The First National Bank of
Amarillo" in its market. The Bank does not offer above-market rates on its
deposits and has no "brokered" deposits.
For the Years Ended December 31, 1999, 1998, and 1997
Results of Operations
The Company experienced net earnings of $4,092,725 for the year ended
December 31, 1999; $3,304,303 for the year ended December 31, 1998; and a net
loss of $1,981,415 for the year ended December 31, 1997. Earnings for 1999,
1998, and 1997, were significantly influenced by activity in the allowance for
loan losses, as discussed below. The return on average assets for 1999, 1998,
and 1997, was 1.53 percent, 1.65 percent, and (3.57) percent, respectively, and
return on average equity was 9.45 percent, 8.37 percent, and (15.13) percent,
respectively.
The improvement in return on average equity in 1999 and 1998 as compared to
1997 is primarily attributable to higher net interest income and non-interest
income, and a lower provision for loan losses, both of which were partially
offset by higher non-interest expense. The provision for loan losses in 1999 was
approximately $1,300,000 in comparison to the 1998 and 1997 provisions of
$975,000 and $2,700,000, respectively. The larger provision in 1997 was made in
connection with the substantial growth in the loan portfolio in 1997. Management
believed that the allowance for loan losses should grow also. Accordingly,
management made a subjective determination of the allowance based on banking
experience and knowledge, comparison to peers, and an intentional effort to be
conservative. Management expects that appropriate, additional provisions will be
made as the loan portfolio grows.
Net Interest Income
The largest component of operating income is net interest income, which is
the difference between the income earned on assets and interest paid on
deposits. Net interest income is determined by the rates earned on the Company's
interest-earning assets and the rates paid on its interest-bearing liabilities,
the relative amounts of interest-earning assets and interest-bearing
liabilities, and the degree of mismatch and the maturity and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
During the years ended December 31, 1999, 1998, and 1997, net interest
income was $13,354,688, $10,215,928, and $2,759,399, respectively. The increase
in net interest income during 1999 and 1998 of $3,138,760 (230.7 percent) and
$7,456,529 (271.3 percent), respectively, is primarily due to an increase in
average interest-earning assets of approximately $61,242,000 and
24
<PAGE>
$131,946,000, respectively, net of an increase in average interest-bearing
liabilities of approximately $45,225,000 and $87,949,000, respectively.
The following table gives the average consolidated balance sheets of the
Company and its subsidiary for the past three years along with an analysis of
net interest earnings for each major category of interest-earning assets and
interest-bearing liabilities, the average yield or rate paid on each category,
and net yield on interest-earning assets:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance (1) Interest Rate Balance (1) Interest Rate
------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans(1)
Commercial and agricultural $ 109,270,174 $ 9,074,421 8.30% $ 87,548,987 $ 7,587,292 8.67%
Real estate - mortgage 84,128,116 7,036,885 8.36% 51,373,294 4,385,126 8.54%
Installment loans to individuals 16,859,324 1,521,743 9.03% 14,517,960 1,338,075 9.22%
------------- ------------- -------------- ------------- ------------- --------------
Total loans 210,257,614 17,633,049 8.39% 153,440,241 13,310,493 8.67%
Securities
Taxable 6,965,267 386,961 5.56% 5,822,355 351,933 6.04%
Nontaxable (2) -- -- 0.00% -- -- 0.00%
Federal funds sold and other
interest-earning assets 26,769,378 1,336,396 4.99% 23,487,671 1,259,919 5.36%
------------- ------------- -------------- ------------- ------------- --------------
Total interest-earning assets 243,992,259 19,356,406 7.93% 182,750,267 14,922,345 8.17%
NONINTEREST- EARNING ASSETS
Cash and due from banks 18,887,166 15,562,646
Other assets 7,738,859 5,154,451
Less: allowance for loan losses (3,976,627) (3,161,808)
------------- -------------
Total $ 266,641,657 $ 200,305,556
============= =============
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 33,806,890 $ 588,101 1.74% $ 26,914,760 $ 607,289 2.26%
Money market deposits 49,920,045 1,623,188 3.25% 29,615,881 957,149 3.23%
Other savings deposits 5,131,727 107,743 2.10% 3,590,907 91,491 2.55%
Time deposits 74,547,967 3,676,515 4.93% 58,168,553 3,050,488 5.24%
Federal funds purchased 108,219 6,171 5.70% -- -- 0.00%
------------- ------------- -------------- ------------- ------------- --------------
Total interest-bearing
liabilities 163,514,848 6,001,718 3.67% 118,290,101 4,706,417 3.98%
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits
$ 58,400,657 $ 41,673,022
Other 1,394,128 860,854
Stockholders' equity 43,332,024 39,481,579
------------- -------------
Total $ 266,641,657 $ 200,305,556
============= =============
Net interest income $ 13,354,688 $ 10,215,928
============= =============
Net yield on earning assets 5.47% 5.59%
============== ==============
Tax equivalent adjustment (2) -- --
<CAPTION>
1997
-----------------------------------------------
Average Average
Balance (1) Interest Rate
------------- ------------- --------------
<S> <C> <C> <C>
ASSETS
INTEREST-EARNING ASSETS
Loans(1)
Commercial and agricultural $ 17,995,796 $ 1,402,875 7.80%
Real estate - mortgage 9,802,883 967,649 9.87%
Installment loans to individuals 6,571,260 653,917 9.95%
------------- ------------- --------------
Total loans 34,369,939 3,024,441 8.80%
Securities
Taxable 8,284,534 547,719 6.61%
Nontaxable (2) -- -- 0.00%
Federal funds sold and other
interest-earning assets 8,149,589 447,378 5.49%
------------- ------------- --------------
Total interest-earning assets 50,804,062 4,019,538 7.91%
NONINTEREST- EARNING ASSETS
Cash and due from banks 4,718,760
Other assets 714,565
Less: allowance for loan losses (706,649)
-------------
Total $ 55,530,738
=============
LIABILITIES AND
SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
Interest-bearing demand $ 7,244,335 $ 192,816 2.66%
Money market deposits 5,005,414 160,530 3.21%
Other savings deposits 1,282,500 35,507 2.77%
Time deposits 16,808,512 871,286 5.18%
Federal funds purchased -- -- 0.00%
------------- ------------- --------------
Total interest-bearing
liabilities 30,340,761 1,260,139 4.15%
NONINTEREST-BEARING
LIABILITIES AND
STOCKHOLDERS' EQUITY
Demand deposits
$ 11,894,019
Other 195,956
Stockholders' equity 13,100,002
-------------
Total $ 55,530,738
=============
Net interest income $ 2,759,399
=============
Net yield on earning assets 5.43%
==============
Tax equivalent adjustment (2) $ --
</TABLE>
- ----------
(1) For purposes of these computations, nonaccruing loans are included in
the daily average loan amounts outstanding.
(2) Taxable equivalent adjustment is computed using a 34% tax rate.
25
<PAGE>
The following table summarizes interest earned and paid resulting from changes
in volume and in rates:
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
--------------------- ---------------------
Volume Rate Net Volume Rate Net
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON
Loans
Commercial and agricultural $ 1,815,169 $ (328,040) $ 1,487,129 $ 5,422,071 $ 762,345 $ 6,184,416
Real estate - mortgage 2,741,485 (89,726) 2,651,759 4,103,443 (685,966) 3,417,477
Installment loans to individuals 211,841 (28,173) 183,668 790,789 (106,630) 684,159
------------ ------------ ------------ ------------ ------------ ------------
Total 4,768,495 (445,939) 4,322,556 10,316,303 (30,251) 10,286,052
Securities
Taxable 65,126 (30,098) 35,028 (162,783) (33,003) (195,786)
Nontaxable -- -- -- -- -- --
Federal funds sold and
other interest-earning assets 167,879 (91,402) 76,477 841,997 (29,456) 812,541
------------ ------------ ------------ ------------ ------------ ------------
Total interest-earning assets 5,001,500 (567,439) 4,434,061 10,995,517 (92,710) 10,902,807
INTEREST PAID ON
Deposits
Interest-bearing demand 136,709 (155,897) (19,188) 523,551 (109,079) 414,472
Money market deposits 660,170 5,869 666,039 789,288 7,331 796,619
Other savings deposits 34,359 (18,107) 16,252 63,911 (7,927) 55,984
Time deposits 816,730 (190,703) 626,027 2,143,938 35,265 2,179,203
Federal funds sold 6,171 -- 6,171 -- -- --
------------ ------------ ------------ ------------ ------------
Total interest-bearing liabilities 1,654,139 (358,838) 1,295,301 3,520,688 (74,410) 3,446,278
------------ ------------ ------------ ------------ ------------ ------------
Net interest income $ 3,347,361 $ (208,601) $ 3,138,760 $ 7,474,829 $ (18,300) $ 7,456,529
============ ============ ============ ============ ============ ============
</TABLE>
The change in interest due to volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Other Operating Income and Expense
Other Operating Income. Other operating income for 1999 and 1998 increased
by $696,700 (60.6 percent) and $987,867 (611.6 percent), respectively, because
of increased activity on deposit accounts.
Other Operating Expenses. During 1999 and 1998, other operating expenses
increased by $1,337,408 (21.1 percent) and $4,102,366 (183 percent),
respectively. The increase in operating expenses was primarily attributable to
the Company's overall growth, including increases of 8 and 40 full-time
equivalent employees in 1999 and 1998, respectively, as compared to 1997 (which
accounted for approximately $882,000 and $1,933,000, respectively, of the
increase in operating expenses), and increases in other costs to conduct banking
operations (which accounted for approximately $455,000 and $2,170,000,
respectively, of the increase in operating expenses).
Securities Portfolio
The Company's objective in its management of the investment portfolio is to
maintain high quality, relatively liquid investments with competitive returns.
During 1999, the weighted average yield on taxable securities was 5.56 percent
as compared to 6.04 percent during 1998 and 6.61 percent during 1997. The
Company primarily invests in U.S. Treasury securities and other U.S. government
agency obligations and mortgage-backed securities.
26
<PAGE>
The carrying values of the major classifications of securities were as
follows:
Available for Sale
------------------
1999 1998 1997
---- ---- ----
U.S. Treasury and other U.S. government
agencies and corporations $4,017,304 $4,090,764 $2,427,674
Mortgage-backed securities 1,490,168 1,993,793 2,546,770
States and political subdivisions -- 2,810 36,585
Other securities 1,215,675 1,215,675 73,875
---------- ---------- ----------
Total $6,723,147 $7,303,042 $5,084,904
========== ========== ==========
The following table shows the stated maturities of securities at December
31, 1999, and their weighted average yields (calculated on the basis of the cost
and effective yield weighted for the scheduled maturity of each security).
Mortgage-backed securities (MBS) are reported at their estimated average life.
<TABLE>
<CAPTION>
Maturing After One Maturing After Five
Year But Within Five But Within Ten
Maturing -------------------- -------------- Maturing
Within One Year Years Years Over Ten Years
--------------- ----- ----- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE-FOR-SALE
U. S. Treasury and other U. S $3,439,394 5.09% $ 495,781 5.73% $ 179,062 7.45% $1,393,235 6.31%
government agencies and
corporation and MBS
State and political -- 0.00% -- 0.00% -- 0.00% -- 0.00%
subdivisions
Other securities (1) -- 0.00% -- 0.00% -- 0.00% 1,215,675 6.00%
---------- ---- ---------- ---- ---------- ---- ---------- ----
Total $3,439,394 5.09% $ 495,781 5.73% $ 179,062 7.45% $2,608,910 6.17%
========== ==== ========== ==== ========== ==== ========== ====
</TABLE>
(1) These securities do not have maturity dates and are included in over
ten years column.
Loan Portfolio
During 1999, total loans increased by $75,071,134 from $187,176,359 at
December 31, 1998, to $262,247,493 at December 31, 1999. From 1993 through 1996,
total loans were about $1.5 to $1.9 million. At December 31, 1999, 1998, and
1997, net loans accounted for 86.2 percent, 74.2 percent, and 80.9 percent,
respectively, of total assets. The growth in the loan portfolio during 1997
through 1999 was primarily attributable to the previously discussed change of
ownership of the Company and the Bank, the change in management after the
Acquisition, and, as a result of the management change, the Bank's renewed
emphasis on lending and its recognition of the importance of loans in its
overall asset mix.
Prior management of the Bank generally limited loans to selected commercial
and consumer installment loans, which portfolio of loans comprised less than 10
percent of total average assets. The Bank conducted limited real estate lending,
due primarily to the stagnant economy in the Bank's primary market, and
agricultural loans were made only on an exceptional basis. During 1997, however,
the Bank relocated to the larger and more economically viable Amarillo market,
and new management changed the Bank's lending philosophy to more closely
resemble a traditional commercial banking business. To accomplish its goal of
growing the Bank's loan portfolio, management hired nine experienced loan
officers in 1997, primarily from one competing financial institution in
Amarillo. These loan officers were successful in generating new business from
existing customers of the Bank as well as new customer relationships for the
Bank. As a result, at
27
<PAGE>
December 31, 1999, 1998, and 1997, loans represented approximately 79 percent,
77 percent, and 62 percent, respectively, of total average assets, as compared
to less than 10 percent of total average assets at December 31, 1996. Although
taking an aggressive posture in growing the loan portfolio, management was
careful to build a portfolio consistent with the underwriting parameters in the
Bank's loan policy. Accordingly, management believes that the significant growth
in the Bank's loan portfolio during 1999, 1998, and 1997 has been achieved
without relaxing credit underwriting policies.
Growth in the loan portfolio, as discussed above, also resulted in a
significant change in the portfolio mix. The loan portfolio in 1996 consisted
primarily of commercial loans (representing approximately 36 percent of total
loans) and installment loans (representing approximately 53 percent of total
loans). With the change in philosophy as described above, agribusiness and real
estate lending activity increased from 0 percent to 11 percent of the loan
portfolio, respectively, at December 31, 1996, to approximately 13 percent and
29 percent of total loans, respectively, at December 31, 1997, approximately 27
percent and 35 percent of total loans, respectively, at December 31, 1998, and
approximately 15 percent and 40 percent of total loans, respectively, at
December 31, 1999.
The amounts of loans outstanding at the indicated dates are shown in the
following table according to type of loans:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------------------------------------
Amount Amount Amount Amount Amount
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Commercial $ 94,893,661 $ 65,560,035 $ 45,901,834 $ 553,641 $ 480,177
Agricultural 39,454,848 50,051,845 15,381,803 -- 575,000
Real Estate
Commercial 80,150,036 39,643,202 16,282,655 54,321 124,772
1-4 Family 25,750,839 20,542,212 18,069,332 114,156 139,453
Installment loans
to individuals 20,432,316 11,407,138 24,359,581 822,872 611,210
Student loans 1,606,681 104,302 -- -- --
------------ ------------ ------------ ------------ ------------
Total $262,288,381 $187,308,734 $119,995,205 $ 1,544,990 $ ,930,612
============ ============ ============ ============ ============
</TABLE>
The following table shows the maturity analysis of loans outstanding as of
December 31, 1999. Also provided are the amounts due after one year classified
according to the sensitivity to changes in interest rates:
Maturing After
Maturing One Year But
Within Within Five Maturing After
One Year Years Five Years
Total loans
Individuals $ 10,016,084 $ 11,169,141 $ 853,772
Commercial 61,540,605 18,221,518 15,131,538
Real Estate 29,865,143 21,145,165 54,890,567
Agricultural 33,486,263 5,420,332 548,253
------------ ------------ ------------
Total $134,908,095 $ 55,956,156 $ 71,424,130
============ ============ ============
Loans maturing after one year with:
Predetermined interest rates $ 36,297,502 $ 30,497,945 $ 41,724,044
Floating or adjustable rates 98,610,593 25,458,211 29,700,086
------------ ------------ ------------
Total $134,908,095 $ 55,956,156 $ 71,424,130
============ ============ ============
28
<PAGE>
The Bank has no specific policies regarding "rollover" of short-term loans
in its portfolio. Although some loans are expected to be renewed at maturity,
the Bank evaluates each maturing loan on a case-by-case basis to determine
whether it should be renewed or whether the borrower should be requested to pay
off the loan at maturity. The Bank cannot reasonably estimate the dollar amount
of loans maturing during 2000 which may ultimately be renewed.
Provision and Allowance for Loan Losses
The following table summarizes the Bank's loan loss experience for the last
five years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE OF ALLOWANCE FOR LOAN
LOSSES AT THE BEGINNING OF YEAR $ 3,625,435 $ 2,748,418 $ 45,200 $ 22,574 $ 37,605
CHARGE-OFFS
Commercial 565,704 101,981 -- 3,826 1,000
Real estate construction -- -- -- -- --
Real estate mortgage 56,303 -- -- -- --
Installment 39,504 12,238 5,144 -- 6,816
Agricultural -- -- -- 79,001 --
----------- ----------- ----------- ----------- -----------
Total loan charge-offs 661,511 114,219 5,144 82,827 7,816
----------- ----------- ----------- ----------- -----------
RECOVERIES
Commercial 223,906 13,500 7,906 396 71,062
Real estate construction -- -- -- -- --
Real estate mortgage 6,759 -- -- -- --
Installment 10,089 2,736 456 8,054 1,686
----------- ----------- ----------- ----------- -----------
Total loan recoveries 240,754 16,236 8,362 8,450 72,748
----------- ----------- ----------- ----------- -----------
NET RECOVERIES (CHARGE-OFFS) (420,757) (97,983) 3,218 (74,377) 64,932
PROVISION CHARGED (CREDITED)
TO OPERATIONS 1,320,000 975,000 2,700,000 97,003 (79,963)
----------- ----------- ----------- ----------- -----------
BALANCE AT END OF YEAR $ 4,524,678 $ 3,625,435 $ 2,748,418 $ 45,200 $ 22,574
=========== =========== =========== =========== ===========
RATIO OF NET CHARGE-OFFS DURING
THE PERIOD TO AVERAGE LOANS-
OUTSTANDING DURING THE PERIOD 0.20% 0.06% 0.00% 4.30% 4.37%
=========== =========== =========== =========== ===========
</TABLE>
Risk elements include accruing loans past due 90 days or more, nonaccrual
loans, and loans which have been restructured to provide a reduction or deferral
of interest or principal for reasons related to the debtor's financial
difficulties, potential problem loans, and loan concentrations.
29
<PAGE>
The bank had no nonaccrual loans at year-ends December 31, 1995 to 1999.
The following table summarizes the Bank's past-due, loans for the years ended
December 31:
ACCRUING LOANS WHICH ARE PAST DUE
90 DAYS OR MORE 1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Commercial $ -- $ -- $ -- $ -- $ --
Real estate construction -- -- -- -- --
Real estate mortgage -- 14,952 -- 63,864 --
Installment -- -- -- 6,178 --
Agricultural -- -- -- -- --
------- ------- ------- ------- -------
Total $ -- $14,952 $ -- $70,042 $ --
======= ======= ======= ======= =======
At December 31, 1999, the Bank had no foreign loans outstanding and no loan
concentrations, except for those indicated in the first table under "Loan
Portfolio," exceeding 10 percent of total loans.
Management believes all material restructured loans have been identified
based upon the Bank's loan data system and management's awareness of the loan
files and customer contacts.
The Company has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential problem credits. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes are reasonable, but which may not be valid. Thus, there can be no
assurance that future charge-offs will not exceed the allowance for loan losses
or that additional increases in the loan-loss allowance will not be required.
Activity in the allowance for loan losses for 1999, 1998, and 1997, had a
significant impact on earnings.
Additions to the allowance for loan losses, recorded as the provision for
loan losses on the Company's consolidated statements of operations and
comprehensive income, are made periodically to maintain the allowance at an
appropriate level based on management's analysis of the potential risk in the
loan portfolio. The amount of the provision is a function of the level of loans
outstanding, the level of nonperforming loans, historical loan-loss experience,
the amount of loan losses actually charged off or recovered during a given
period, and current and anticipated economic conditions. The Company believes
that it is conservative in the identification and charge off of problems, and,
in certain instances, the Company has received recoveries on loans that were
previously charged off.
At December 31, 1999, 1998, and 1997, allowances for loan losses were
$4,524,678, $3,625,435, and $2,748,418, respectively, which represented 1.73
percent, 1.94 percent, and 2.29 percent of outstanding loans at those respective
dates. This compares to peer group percentages of the allowance for loan losses
to outstanding loans of 1.35 percent, 1.35 percent, and 1.47 percent for 1999,
1998, and 1997, respectively.
During 1999, 1998 and 1997, the Company recorded provisions for loan losses
of $1,320,000, $975,000 and $2,700,000, respectively. The provisions were made
in connection with the respective increases of $75,071,134 and $67,325,677 in
the loan portfolio to $262,247,493 (1999), from $187,176,359 (1998) and from
$119,850,682 (1997). The increase in loans is primarily attributable to the
change in ownership and management's aggressive posture to grow the Company.
30
<PAGE>
Determination of the Company's amount of the provision for loan losses for
1999, 1998 and 1997 was unique. Prior management of the Company generally
limited its lending activity to commercial and consumer installment loans, and
the loan portfolio constituted less than 10 percent of average total assets of
the Bank. Because of significant growth in the loan portfolio during 1997, new
management believed that the allowance for loan losses should grow also.
Determining an appropriate level of allowance for loan loss and provision for
loan loss was unique because, with management's decision to offer a broader
range of loan products and to deploy more of the Bank's assets in loans, the
Company had no historical loss history to benchmark against. Accordingly,
management made a subjective determination of the proper level of allowance
based on collective banking experiences, knowledge of the market and conditions,
comparison to peers, and an intentional effort to be conservative during this
growth phase. Management believes that appropriate underwriting practices were
adhered to in the origination of new loans and, although the Company had no
significant impaired, potential problem, or nonperforming loans at December 31,
1999, management recognized that losses are often inherent in the lending
process. Accordingly, management believes that loan losses should be provided
for as the loan portfolio grows, even if specific problem loans are not yet
identified. Management is also concerned that, although economic conditions are
currently good, conditions can change, and making conservative provisions was
prudent. Determination of an appropriate allowance is subjective and may be
adjusted in the near term because of changes in economic conditions or review by
regulatory examiners. Management expects that appropriate, additional future
provisions will be made as the loan portfolio grows.
The risk elements in the Company's loan portfolio are similar to those in
the loan portfolios of other comparable commercial banks in the Bank's lending
area and are discussed in detail under the caption "GENERAL--Lending
Activities--Risk Elements." Management made a subjective determination of the
proper level of the allowance for loan losses by considering each risk element
and drawing from collective banking experiences and knowledge of the Company's
market, by evaluating overall economic conditions, by comparing its loan
portfolio to those of peer banks, and by intentionally trying to be conservative
during the Bank's significant growth phase. Management thus determined that
allowances at December 31, 1999, of $4,524,678 (representing 1.73 percent of
outstanding loans) and at December 31, 1998, of $3,625,435 (representing 1.94
percent of outstanding loans) were appropriate.
The allowance for loan losses is not specifically allocated among the
various categories of loans in the portfolio, and management cannot predict the
amount of charge-offs by loan category in 1999.
At December 31, 1999, 1998, or 1997, there were no significant impaired
loans or loans delinquent over 90 days.
Accrual of interest is discontinued on loans when management believes,
after considering economic and business conditions and collection efforts, that
a borrower's financial condition is such that the collection of interest is
doubtful. A delinquent loan is generally placed in nonaccrual status when it
becomes 90 days or more past due. When a loan is placed in nonaccrual status,
all interest which has been accrued on the loan but remains unpaid is reversed
and deducted from earnings as a reduction of reported interest income. No
additional interest is accrued on the loan balance until the collection of both
principal and interest becomes reasonably certain.
31
<PAGE>
Management's policy is to charge off loans when it determines that the
outstanding principal on the loan is uncollectible. Loans charged off do not
necessarily mean that a loan has absolutely no recovery or salvage value;
rather, when management decides to charge off a loan, management has determined
that it is no longer practical or desirable to defer writing off the loan even
though partial recovery may eventually be effected.
Potential Problem Loans. A potential problem loan is one in which
management has serious doubts about the borrower's future performance under the
loan contract. These loans are current as to principal and interest, and,
accordingly, they are not included in nonperforming assets categories. At
December 31, 1999, the Company had no material loans considered by management to
be potential problem loans. The level of potential problem loans is one factor
to be used in determining the adequacy of the allowance for loan losses.
Deposits and Other Interest-Bearing Liabilities
Deposits. Average total deposits were $221,915,505, $159,963,123, and
$42,234,780, during 1999, 1998, and 1997, respectively. Average interest-bearing
deposits were $163,514,848 in 1999, as compared to $118,290,101 in 1998 and
$30,340,761 in 1997.
The average daily amount of deposits and rates paid on savings deposits is
summarized for the periods indicated in the following table.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
DEPOSITS
Noninterest-bearing demand $ 58,400,657 0.00% $ 41,673,022 0.00% $11,894,019 0.00%
Interest-bearing demand 33,806,890 1.74% 26,914,760 2.26% 7,244,335 2.66%
Money market deposits 49,920,045 3.25% 29,615,881 3.23% 5,005,414 3.21%
Other savings deposits 5,131,727 2.10% 3,590,907 2.55% 1,282,500 2.77%
Time deposits 74,547,967 4.93% 58,168,553 5.24% 16,808,512 5.18%
------------ ------------ -----------
Total $221,807,286 $159,963,123 $42,234,780
============ ============ ===========
</TABLE>
Maturities of time certificates of deposits of $100,000 or more outstanding
as of December 31, 1999, are summarized as follows:
3 months or less $30,290,452
Over 3 months through 6 months 6,973,110
Over 6 months through 12 months 14,170,165
Over 12 months 1,100,000
-----------
$52,533,727
===========
There were no deposits by foreign depositors at December 31, 1999, 1998, or
1997.
Significant Financial Ratios
The following table shows consolidated operating and capital ratios for
1999, 1998, and 1997.
1999 1998 1997
------ ------ -------
Return on average assets 1.53% 1.65% (3.57)%
Return on average equity 9.45% 8.37% (15.13)%
Average equity to average asset ratio 16.25% 19.71% 23.59 %
Dividend payout ratio to net earnings 0.00% 0.00% 0.00 %
32
<PAGE>
Return on assets declined slightly in 1999, but return on equity increased,
indicating improved leverage. The increase in return on average assets and
average equity from 1997 to 1998 is primarily attributable to higher net
interest income and a lower loan loss provision.
Borrowed Funds
The Company had no borrowed funds at December 31, 1999, 1998, or 1997.
Capital
The cornerstone of the Company's capital structure is its common stock,
which represents 100 percent of total capitalization at December 31, 1999. The
Company's equity base was strengthened significantly during 1997 through the
issuance of common stock in an intrastate offering to bona fide Texas residents
on August 31, 1997. The Company raised approximately $40 million in new capital
in this offering. The cash raised from the stock offering was used primarily to
increase the Bank's capital base to support its physical expansion and
significant growth in its loan portfolio in 1999, 1998, and late 1997.
Additional information regarding the Bank's physical expansion is given under
the caption "BUSINESS--General--Change in Management and Competitive Focus," and
additional information regarding growth of the Bank's loan portfolio is provided
under the caption "Loan Portfolio" to this MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Dependence on this additional capital to support the significant loan
growth was partially offset by the significant increase in the deposit base at
the Bank during 1999, 1998, and late 1997, which provided an additional source
of funding loan growth. From December 31, 1999, through December 31, 1998,
average total deposits at the Bank increased by $61,952,382, from $159,963,123
to $221,915,505, an increase of approximately 38.7 percent. From December 31,
1997, through December 31, 1998, average total deposits at the Bank increased by
$117,728,343 from $42,234,780 to $159,963,123, or an increase of approximately
279 percent. Additional information regarding the growth in the deposit base is
provided under the caption "Deposits and Other Interest-Bearing Liabilities" to
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. The combination of the Bank's increased deposit base coupled with
the additional capital from the stock offering has been used to support the
significant loan growth at the Bank following the Acquisition.
The Company and the Bank are subject to various regulatory capital
requirements of banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (shown
in the table below) of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I
33
<PAGE>
Capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
The Company and the Bank exceeded their regulatory capital ratios, as shown
in the following table.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $48,625,652 18.79% $20,706,927 8.00%
The Bank 47,809,951 18.47% 20,703,376 8.00% $25,879,220 10.00%
Tier I Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. 45,360,764 17.52% 10,353,463 4.00%
The Bank 44,545,610 17.21% 10,351,688 4.00% 15,527,532 6.00%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. 45,360,764 17.01% 10,665,923 4.00%
The Bank 44,545,610 16.71% 10,665,103 4.00% 13,332,629 5.00%
</TABLE>
The Company currently has no material commitments for capital expenditures
and no present intention to pay dividends on its common stock. Given the
Company's strong capital ratios shown in the preceding table, management
believes the Company's capital structure is adequate to support continued growth
of the Company and the Bank in the near future.
Liquidity Management
Liquidity management involves monitoring the Company's sources and uses of
funds to meet its day-to-day cash-flow requirements while maximizing profits.
Liquidity is the Company's ability to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management is complicated because different balance sheet
components are subject to varying degrees of management control. For example,
the timing of maturities of the investment portfolio is very predictable and
subject to a high degree of control when investment decisions are made. However,
net deposit inflows and outflows are far less predictable and cannot be
controlled.
The Company has maintained a level of liquidity that is adequate for its
cash requirements. The Company's funds-sold position, its primary source of
liquidity, averaged $26,719,378 during the year ended December 31, 1999.
Management also has lined up potential purchasers of loans as a tool to maintain
liquidity. The Company has numerous loan participations with other entities,
primarily financial institutions. Loan participations are common commercial
banking arrangements whereby the Company sells, on a nonrecourse basis, a
portion of a loan to other entities. These arrangements spread the risk among
the entities and provide liquidity to the Company while reducing its risk.
Although no formal agreements or commitments exist, management believes that
additional significant loan participations could readily be sold for liquidity
purposes, if necessary. Management regularly reviews the Company's liquidity and
has implemented internal policies which establish guidelines for sources of
asset-based liquidity. Management believes that the continued growth in the
deposit base will enable the Company to meet its long-term liquidity needs.
34
<PAGE>
Interest-Rate Risk Sensitivity
The largest component of the Company's net earnings is derived from the
spread between yields on interest-earning assets and the cost of
interest-bearing liabilities. In a changing interest-rate environment, this
spread can widen or narrow depending on the relative repricing and maturities of
interest-earning assets and interest-bearing liabilities. The Company's general
policy is to reasonably match the rate sensitivity of its assets and liabilities
to prudently manage interest-rate risk. To accomplish this, the Company monitors
its interest-rate sensitivity, or risk, and matches more closely the cash flows
and effective maturities or repricings of its interest-sensitive assets and
liabilities.
Interest-rate sensitivity is a function of the repricing characteristics of
the Company's portfolio of assets and liabilities. These repricing
characteristics are the time frames at which interest-earning assets and
interest-bearing liabilities are subject to changes in interest rates either at
repricing, replacement, or maturity. Sensitivity is measured as the difference
between the volume of assets and liabilities in the Company's current portfolio
that are subject to repricing in future time periods. The difference at any
given time is called the interest sensitivity "gap" and is usually calculated
separately for various segments of time and on a cumulative basis. Any excess of
assets or liabilities results in an interest sensitivity gap. A positive gap
denotes net asset sensitivity, and a negative gap represents net liability
sensitivity. An institution has a negative gap if the amount of interest-bearing
liabilities maturing or repricing in a specified time period exceeds the amount
of interest-earning assets maturing or repricing in the same period. If more
interest-earning assets than interest-bearing liabilities mature or reprice in a
specified period, then the institution has a positive gap. Accordingly, in a
rising interest-rate environment in an institution with a negative gap, the cost
of its rate-sensitive liabilities would theoretically rise faster than the yield
on its rate-sensitive assets, thereby diminishing future net interest income. In
a falling interest-rate environment, a negative gap would indicate that the cost
of rate-sensitive liabilities would decline faster than the yield on rate-
sensitive assets and improve net interest income. For an institution with a
positive gap, the reverse would be expected.
The Company has sought to increase the sensitivity of its assets to
changing interest rates by emphasizing shorter term and/or adjustable rate
loans. The Company also originates fixed-rate mortgage loans, which are
generally sold in the secondary market. The Company manages the maturity and
repricing characteristics of its liabilities and has sought to keep the interest
sensitivity of its liabilities short by emphasizing shorter term deposits.
The following table presents rate-sensitive assets and rate-sensitive
liabilities as of December 31, 1999, which mature or reprice in the time periods
shown. Except for the effects of prepayments, the table presents principal cash
flows from payments, maturity, or repricing. This table does not necessarily
indicate the impact of general interest rate movements on the Company's net
interest income because the repricing of certain categories of assets and
liabilities is subject to competitive and other pressures beyond the Company's
control. As a result, certain assets and liabilities indicated as maturing or
otherwise repricing within a stated period may, in fact, mature or reprice at
different times and at different volumes.
35
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
(Dollars in thousands)
3 Months 3 Months 1 Year 3 Years 5 Years Over
or Less to 1 Year to 3 Years to 5 Years to 15 Years 15 Years
------- --------- ---------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets Subject to Interest Rate
Adjustment
Loans
Combined - fixed rate projected
payments, floating rate by
repricing interval $150,800,229 $ 37,175,269 $ 15,594,779 $ 17,161,372 $ 32,848,412 $ 8,667,432
Investments
Combined - fixed rate by
maturity, floating rate by
repricing interval, and projected
payments 2,670,935 2,224,695 495,781 -- 50,741 1,280,995
Federal Funds Sold 4,350,000 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total $157,821,164 $ 39,399,964 $ 16,090,560 $ 17,161,372 $ 32,899,153 $ 9,948,427
============ ============ ============ ============ ============ ============
Cumulative 157,821,164 197,221,128 213,311,688 230,473,060 263,372,213 273,320,640
Liabilities Subject to Interest Rate
Adjustment
NOW Accounts 28,581,931 -- -- -- -- --
Super NOW Accounts 7,217,208 -- -- -- -- --
Money Market Accounts 53,691,581 -- -- -- -- --
Savings Accounts 5,451,866 -- -- -- -- --
CDs Greater than $100,000 30,290,452 21,143,275 1,100,000 -- -- --
CDs Less than $100,000 15,583,774 15,802,508 3,076,031 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Total $140,816,812 $ 36,945,783 $ 4,176,031 $ -- $ -- $ --
============ ============ ============ ============ ============ ============
Cumulative 140,816,812 177,762,595 181,938,626 181,938,626 181,938,626 181,938,626
Net Position of Assets (Liabilities)
17,004,352 2,454,181 11,914,529 17,161,372 32,899,153 9,948,427
------------ ------------ ------------ ------------ ------------ ------------
Cumulative Gap $ 17,004,352 $ 19,458,533 $ 31,373,062 $ 48,534,434 $ 81,433,587 $ 91,382,014
Rate Sensitive Assets as % of Rate
Sensitive Liabilities (Cumulative) 112.08% 110.95% 117.24% 126.68% 144.76% 150.23%
============ ============ ============ ============ ============ ============
</TABLE>
Total
-----
Assets Subject to Interest Rate
Adjustment
Loans
Combined - fixed rate projected
payments, floating rate by
repricing interval $262,247,493
Investments
Combined - fixed rate by
maturity, floating rate by
repricing interval, and projected
payments 6,723,147
Federal Funds Sold 4,350,000
------------
Total $273,320,640
============
Liabilities Subject to Interest Rate
Adjustment
NOW Accounts 28,581,931
Super NOW Accounts 7,217,208
Money Market Accounts 53,691,581
Savings Accounts 5,451,866
CDs Greater than $100,000 52,533,727
CDs Less than $100,000 34,462,312
------------
Total $181,938,626
============
Cumulative
Net Position of Assets (Liabilities)
91,382,014
------------
As shown by the table, at December 31, 1999, the maturities of the
Company's interest-bearing assets extend over 15 years, while its
interest-bearing liabilities generally mature in less than one year. Also, the
Company's interest-bearing assets significantly exceed its interest-bearing
liabilities (a positive gap). Accordingly, a rising interest-rate environment
would positively affect the Company's net interest margin, and a falling
interest-rate environment would negatively affect the Company's net interest
margin.
A static gap report consists of an inventory of the dollar amounts of
assets and liabilities that could mature or reprice in a particular period. It
does not consider the probability that potential maturities or repricings of
interest-sensitive accounts will occur, or to what extent. Accordingly, although
the table indicates the Company's gap position at a particular time, those
measurements are not intended to and do not forecast the effect of changes in
market interest rates on the Company's gap position and may differ from actual
results after December 31, 1999.
Impact of Inflation
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company and the Bank are primarily monetary. Therefore,
interest rates have a more significant effect on the Company's performance than
do the changes in the general rate of inflation and changes
36
<PAGE>
in prices. In addition, interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,
which addresses the accounting for derivative transactions and hedging
activities. Subsequently, FASB issued Statement No. 137 which effectively
delayed adoption of No. 133 by one year. The Company will adopt the new standard
beginning with its 2001 fiscal year, when adoption is first required. Management
is currently evaluating the reporting requirements under this new standard and
has not yet determined its impact on the Company's financial results.
Year 2000 Disclosure
In compliance with the Year 2000 Readiness Disclosure Act, the following
information is provided as required for this section.
Defining the Problem. Many computer systems use a two-digit format to
indicate the year in a date field, rather than four digits. As a result of this
abbreviated format, systems may not appropriately interpret a year, and this
could cause miscalculations, computer errors, and even systems failures. (For
example, the year 2002 would be 02 in a two-digit format, but the system might
read it as 1902.)
Once the issue was defined, a Y2K Committee was appointed by the Board of
Directors to develop a strategy and project plan. This committee consists of
four members with different functional backgrounds: Operations, Finance,
Lending, and Compliance. The Y2K Committee has developed a program for guiding
the Bank toward full Y2K compliance through a multi-phase plan (some phases run
concurrently): Awareness, Assessment, Remediation, Testing, and Implementation.
Impact on the Company. An overall assessment of the Y2K problem was
initiated to determine its impact. Included in this phase were the
identification and prioritization of the Bank's mission-critical systems,
software, and support equipment, as well as a review of all customers who
provide business services to the Bank. An inventory of all systems laid the
groundwork for the project. Furthermore, all essential vendors and suppliers
were contacted to ascertain their Y2K compliance efforts, and no material impact
was identified. The assessment is 100 percent complete.
Remediation and Testing. The Bank relies heavily on a major service
provider for its mission-critical applications and operations. Status reports of
this provider's Y2K readiness, including any remediation required, were given to
management regularly.
This system was tested on site in February 1999. Integrated tests were
conducted on a duplicated client "Test Bank." No significant problems were
noted. In addition, all internal platform systems were completely tested before
March 31, 1999.
Other third-party service providers, such as credit reporting agencies,
document processing systems, credit card merchant systems, and government
reporting systems, have been tested internally or certified as Y2K compliant
depending on the provider profile.
37
<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 recognize and interpret dates correctly and to make appropriate
calculations. This risk is being mitigated through testing and remediation (as
previously discussed); however, another type of risk is also being addressed by
the Company: customer risk.
The negative impact of large customers who have not dealt with the
implications of the Y2K problem on their business operations could pose serious
risks to the Company. Therefore, the Company developed a Risk Assessment Program
to determine the Y2K readiness of its significant customers, both borrowers and
depositors, and surveyed all borrowers with outstanding aggregate loans over
$250,000. The level of risk--low, medium, high--was determined through a
questionnaire and internal guidelines.
Additionally, a similar review was conducted quarterly of all large
depositors to ensure Y2K readiness and to avoid any unforeseen liquidity
problems for these customers. As of December 31, 1999, most of the deposit base
has been determined to exhibit low-risk factors.
The risk assessment program is ongoing, and the results of the quarterly
analyses of loans and deposit customers are reported to the Board of Directors
quarterly. Efforts and actions to offset any defined or potential risks have
been prescribed in the program.
Implementation and Contingency Planning. Management ascertained that no
applications needed to be reprogrammed or replaced, and a contingency program
was completed. The program incorporated a business resumption plan for end-users
of all system data, not only the mission- critical system. For example, the
preparation of loan documents will be manual, if the system is unreliable, until
the Bank's system is renovated or another loan processor is obtained.
Disruptions in processing will be given utmost attention in designing and
implementing contingency plans.
Additionally, the Company has allocated adequate resources to manage the
Y2K project. Expenses attributable to Y2K readiness have been less than $25,000
to date, none of which were incurred to repair or replace software, equipment,
or systems. These costs have been charged to expense as incurred.
Management and directors of the Company believe an effective program is in
place to address the Y2K problem. As required by the regulatory agencies, the
Bank has made diligent efforts to conform to all milestone dates defined in the
Federal Financial Institution Examination Council's guidance papers. However,
the Company cannot guarantee there will be no impact from Y2K issues on its
operations, because of its reliance on service-provider systems and the
potential impact on its customers. The development of contingency plans to
minimize the risk to the Bank was given considerable attention during 1999. The
Company does not believe that any significant problems have arisen as a result
of Y2K issues.
Forward-Looking Statements
Forward-looking statements are not historical facts, and involve risks and
uncertainties that could cause the Company's results to differ materially from
those in the forward-looking statements. These risks include the possible loss
of key personnel, the need for additional capital if the Company experiences
faster than anticipated growth, changes in economic conditions, interest-rate
risk, factors which could affect the Company's ability to compete in its trade
areas, changes in regulations and
38
<PAGE>
governmental policies, and the risks described in the Company's Securities and
Exchange Commission filings.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Please refer to "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Interest-Rate Risk Sensitivity" which is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please refer to the financial statements, the report thereon, the notes
thereto, and supplementary data commencing at page F-1 of this Form 10-K, which
financial statements, report, notes, and data are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS OF THE REGISTRANT
Information concerning the directors of the Company is shown in the 2000
definitive Proxy Statement incorporated herein by this reference.
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company is shown in
the 2000 definitive Proxy Statement incorporated herein by this reference.
(C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information on compliance with Section 16(a) of the Exchange Act is
included in the Company's 2000 definitive Proxy Statement incorporated
herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information on executive compensation is shown in the Company's 2000
definitive Proxy statement incorporated herein by this reference.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners and
directors and officers is shown in the Company's 2000 definitive Proxy
Statement incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning relationships and related transactions of the
directors and officers of the Company is shown in the Company's 2000
definitive Proxy Statement incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS REPORT
(1) Exhibit
Number Description
------ -----------
3.1 Restated Articles of Incorporation of Tejas Bancshares, Inc.*
3.2 Amended and Restated Bylaws of Tejas Bancshares, Inc.*
10.1 Tejas Bancshares, Inc., 1998 Incentive Stock Plan **
21.1 Subsidiaries of Tejas Bancshares, Inc.
27.1 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Registration Statement on
Form 10 dated April 10, 1998.
** Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.
(2) Financial Statements
Page
Independent Auditor's Report F-3
Audited Financial Statements
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and
Comprehensive Income F-6
Consolidated Statements of Stockholders' Equity F-7
Consolidated Statements of Cash Flows F-8
Summary of Significant Accounting Policies F-9
Notes to Consolidated Financial Statements F-13
(3) Financial Statement Schedules
(B) REPORTS ON FORM 8-K
None.
40
<PAGE>
TEJAS BANCSHARES, INC.
SIGNATURES
Pursuant to Section 13 or 15(d) of the Securities Act of 1934, Tejas
Bancshares, Inc., has caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized on January 27, 2000.
TEJAS BANCSHARES, INC.
By /s/ Donald E. Powell
-----------------------------------------
Donald E. Powell
Chairman of the Board, President, and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of Tejas Bancshares, Inc., and
in the capacities and on the date indicated.
Signature Title Date
/s/ Donald E. Powell Principal Executive Officer
- ----------------------------- and Director
Donald E. Powell January 28, 2000
/s/ Jack Hall Principal Financial Officer
- ----------------------------- and Principal Accounting
Jack Hall Officer January 28, 2000
/s/ William H. Attebury Director January 28, 2000
- -----------------------------
William H. Attebury
/s/ Danny H. Conklin Director January 28, 2000
- -----------------------------
Danny H. Conklin
/s/ Wales H. Madden, Jr. Director January 28, 2000
- -----------------------------
Wales H. Madden, Jr.
/s/Jay O'Brien Director January 28, 2000
- -----------------------------
Jay O'Brien
41
<PAGE>
TEJAS BANCSHARES, INC.
AND SUBSIDIARIES
Amarillo, Texas
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT.................................................F-3
FINANCIAL STATEMENTS
Consolidated Balance Sheets.............................................F-4
Consolidated Statements of Operations and Comprehensive Income..........F-6
Consolidated Statements of Stockholder's Equity.........................F-7
Consolidated Statements of Cash Flows...................................F-8
Summary of Significant Accounting Policies..............................F-9
Notes to Consolidated Financial Statements.............................F-13
F-2
<PAGE>
Independent Auditor's Report
The Board of Directors
Tejas Bancshares, Inc.
Amarillo, Texas
We have audited the accompanying consolidated balance sheets of Tejas
Bancshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations and comprehensive income,
stockholder's equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tejas Bancshares,
Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Clifton Gunderson P.L.L.C.
Amarillo, Texas
January 25, 2000
F-3
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
ASSETS
1999 1998
---- ----
Cash and due from banks $ 20,711,268 $ 23,813,175
Federal funds sold 4,350,000 26,300,000
Securities available-for-sale 6,723,147 7,303,042
Loans 262,247,493 187,176,359
Less allowance for loan losses (4,524,678) (3,625,435)
------------- -------------
Loans, net 257,722,815 183,550,924
------------- -------------
Bank premises and equipment
Land 560,189 39,000
Buildings 1,863,462 1,863,462
Furniture, fixtures, and equipment 1,598,630 1,202,052
Construction in process 1,357,288 --
------------- -------------
Total, at cost 5,379,569 3,104,514
Less accumulated depreciation 1,026,243 592,281
------------- -------------
Net property and equipment 4,353,326 2,512,233
------------- -------------
Accrued interest receivable 3,234,949 2,349,083
Net deferred tax asset 1,719,300 1,300,013
Other assets 226,591 159,389
------------- -------------
TOTAL ASSETS $ 299,041,396 $ 247,287,859
============= =============
F-4
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1999 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
LIABILITIES
Deposits
Demand - noninterest bearing $ 70,029,027 $ 61,431,129
Demand - interest bearing 89,490,720 68,559,436
Time and savings 92,447,906 75,148,549
------------- -------------
Total deposits 251,967,653 205,139,114
Accrued interest payable 879,291 684,462
Federal income taxes payable 206,181 66,994
Other liabilities 627,507 232,825
------------- -------------
Total liabilities 253,680,632 206,123,395
------------- -------------
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 20,000,000 shares
authorized, 13,418,017 and 13,397,934
issued and outstanding in 1999 and 1998,
respectively 13,418,017 13,397,934
Paid-in capital 26,532,993 26,460,427
Retained earnings 5,743,180 1,650,455
Accumulated other comprehensive income (6,426) 24,648
Deferred directors' compensation (327,000) (369,000)
------------- -------------
Total stockholders' equity 45,360,764 41,164,464
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 299,041,396 $ 247,287,859
============= =============
</TABLE>
These consolidated financial statements should be read only
in connection with the accompanying summary of significant
accounting policies and notes to consolidated financial
statements.
F-5
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 17,633,049 $ 13,310,493 $ 3,024,441
Interest and dividends on investment securities 386,961 351,933 547,719
Interest on federal funds sold 1,336,396 1,259,919 447,378
------------ ------------ -----------
Total interest income 19,356,406 14,922,345 4,019,538
INTEREST EXPENSE ON DEPOSITS 6,001,718 4,706,417 1,260,139
------------ ------------ -----------
Net interest income 13,354,688 10,215,928 2,759,399
PROVISION FOR LOAN LOSSES 1,320,000 975,000 2,700,000
------------ ------------ -----------
Net interest income after provision
for loan losses 12,034,688 9,240,928 59,399
------------ ------------ -----------
OTHER OPERATING INCOME
Service charges 1,281,951 714,912 83,543
Other 564,126 434,465 77,967
------------ ------------ -----------
Total other operating income 1,846,077 1,149,377 161,510
------------ ------------ -----------
OTHER OPERATING EXPENSES
Salaries and employee benefits 3,842,432 2,960,405 1,027,236
Depreciation 433,962 310,416 119,853
Advertising 347,215 381,132 53,134
Occupancy expense 429,827 361,323 178,588
Federal Deposit Insurance Corporation
premiums, net 22,762 25,883 1,830
Professional fees 159,450 188,722 94,558
Supplies, stationery and office expenses 356,693 628,913 411,766
Taxes other than on income and salaries 171,002 187,488 6,106
Data processing 859,077 431,025 80,805
Postage 176,357 122,732 36,925
Other 882,634 745,964 230,836
------------ ------------ -----------
Total other operating expenses 7,681,411 6,344,003 2,241,637
------------ ------------ -----------
Earnings (loss) before income taxes 6,199,354 4,046,302 (2,020,728)
INCOME TAXES (BENEFIT) 2,106,629 741,999 (39,313)
------------ ------------ -----------
NET EARNINGS (LOSS) 4,092,725 3,304,303 (1,981,415)
OTHER COMPREHENSIVE INCOME
Changes in unrealized gains (losses) on
securities, net of tax of $(16,007),
$(6,017), and $12,669 (31,074) (11,681) 24,593
Less: reclassification adjustment -- -- --
------------ ------------ -----------
COMPREHENSIVE INCOME $ 4,061,651 $ 3,292,622 $(1,956,822)
============ ============ ===========
NET EARNINGS (LOSS) PER SHARE - Basic $ 0.31 $ 0.25 $ (0.41)
============ ============ ===========
NET EARNINGS (LOSS) PER SHARE - Diluted $ 0.30 $ 0.24 $ (0.41)
============ ============ ===========
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying summary of significant
accounting policies and notes to consolidated financial
statements.
F-6
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
Accumulated
Retained other
Common Paid-in earnings comprehensive
Stock Capital (deficit) income
----- ------- --------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 100,000 $ 1,514,807 $ 603,189 $ 11,736
COMPREHENSIVE INCOME
Net loss -- -- (1,981,415) --
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $12,669 -- -- -- 24,593
------------ ------------ ----------- --------
TOTAL COMPREHENSIVE INCOME
Purchase of treasury stock (6,695 shares) -- -- -- --
Goodwill arising from acquisition of the Company -- 65,625 -- --
Retirement of treasury stock (7,500) shares) (75,000) (1,580,433) (82,029) --
Reduction in par value from $10 to $1 per share (22,500) 22,500 -- --
Stock split effected in the form of a dividend of 77.4372-for-1 193,593 -- (193,593) --
Common stock issued (13,333,334 shares), net of issue costs
of $159,558 13,333,334 26,507,110 -- --
Purchase and retirement of common stock (196,093 shares) (196,093) (392,182) -- --
------------ ------------ ----------- --------
Balance at December 31, 1997 13,333,334 26,137,427 (1,653,848) 36,329
COMPREHENSIVE INCOME
Net earnings -- -- 3,304,303 --
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(6,017) -- -- -- (11,681)
------------ ------------ ----------- --------
TOTAL COMPREHENSIVE INCOME
Directors' stock compensation plan (64,600 shares) 64,600 323,000 -- --
Amortization of directors' stock compensation plan -- -- -- --
------------ ------------ ----------- --------
Balance at December 31, 1998 13,397,934 26,460,427 1,650,455 24,648
COMPREHENSIVE INCOME
Net earnings -- -- 4,092,725 --
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(16,007) -- -- -- (31,074)
------------ ------------ ----------- --------
TOTAL COMPREHENSIVE INCOME
Exercise of stock options 9,283 18,566 -- --
Directors' stock compensation plan (10,800 shares) 10,800 54,000 -- --
Amortization of directors' stock compensation plan -- -- -- --
------------ ------------ ----------- --------
Balance at December 31, 1999 $ 13,418,017 $ 26,532,993 $ 5,743,180 $ (6,426)
============ ============ =========== ========
<CAPTION>
Deferred
Treasury directors'
stock compensation Total
----- ------------ -----
<S> <C> <C> <C>
Balance at December 31, 1996 $ (162,045) $ -- $ 2,067,687
COMPREHENSIVE INCOME
Net loss -- -- (1,981,415)
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $12,669 -- -- 24,593
----------- --------- ------------
TOTAL COMPREHENSIVE INCOME (1,956,822)
------------
Purchase of treasury stock (6,695 shares) (1,575,417) -- (1,575,417)
Goodwill arising from acquisition of the Company -- -- 65,625
Retirement of treasury stock (7,500) shares) 1,737,462 -- --
Reduction in par value from $10 to $1 per share -- -- --
Stock split effected in the form of a dividend of 77.4372-for-1 -- -- --
Common stock issued (13,333,334 shares), net of issue costs
of $159,558 -- -- 39,840,444
Purchase and retirement of common stock (196,093 shares) -- -- (588,275)
----------- --------- ------------
Balance at December 31, 1997 -- -- 37,853,242
COMPREHENSIVE INCOME
Net earnings -- -- 3,304,303
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(6,017) -- -- (11,681)
----------- --------- ------------
TOTAL COMPREHENSIVE INCOME 3,292,622
------------
Directors' stock compensation plan (64,600 shares) -- (387,600) --
Amortization of directors' stock compensation plan -- 18,600 18,600
----------- --------- ------------
Balance at December 31, 1998 -- (369,000) 41,164,464
COMPREHENSIVE INCOME
Net earnings -- -- 4,092,725
Change in unrealized gain (loss) on available-for-sale
securities, net of deferred income tax of $(16,007) -- -- (31,074)
----------- --------- ------------
TOTAL COMPREHENSIVE INCOME 4,061,651
------------
Exercise of stock options -- -- 27,849
Directors' stock compensation plan (10,800 shares) -- (64,800) --
Amortization of directors' stock compensation plan -- 106,800 106,800
----------- --------- ------------
Balance at December 31, 1999 $ -- $(327,000) $ 45,360,764
=========== ========= ============
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying summary of significant
accounting policies and notes to consolidated financial
statements.
F-7
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ 4,092,725 $ 3,304,303 $ (1,981,415)
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation 433,962 310,416 119,853
Deferred income taxes (403,280) (969,287) (369,400)
Amortization of deferred directors' compensation 106,800 18,600 --
Provision for loan losses 1,320,000 975,000 2,700,000
Change in:
Accrued interest receivable (885,866) (1,188,135) (1,007,377)
Other assets (67,202) (80,681) (43,663)
Accrued interest payable 194,829 461,786 195,349
Federal income taxes payable 139,187 (257,715) 324,709
Other liabilities 394,682 148,023 67,463
Other 19,835 6,870 13,594
------------ ------------ -------------
Net cash provided by operating activities 5,345,672 2,729,180 19,113
------------ ------------ -------------
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 2,723,119 2,816,304 3,365,437
Purchases of securities available-for-sale (2,210,140) (5,059,010) (24,000)
Change in loans to customers (75,491,891) (67,423,660) (118,383,550)
Expenditures for bank premises and equipment (2,275,055) (1,960,393) (800,325)
------------ ------------ -------------
Net cash used by investing activities (77,253,967) (71,626,759) (113,942,161)
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 46,828,539 98,884,456 90,187,370
Proceeds from exercise of stock options 27,849 -- --
Proceeds from sale of common stock, net of
issue costs of $159,558 -- -- 39,840,444
Proceeds from loan from stockholder -- -- 1,000,000
Repayment of loan to stockholder -- -- (1,000,000)
Purchases of treasury stock -- -- (2,163,692)
------------ ------------ -------------
Net cash provided by financing activities 46,856,388 98,884,456 127,864,122
------------ ------------ -------------
Net increase (decrease) in cash and cash (25,051,907) 29,986,877 13,941,074
equivalents
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 50,113,175 20,126,298 6,185,224
------------ ------------ -------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 25,061,268 $ 50,113,175 $ 20,126,298
============ ============ =============
</TABLE>
These consolidated financial statements should be read only in
connection with the accompanying summary of significant
accounting policies and notes to consolidated financial
statements.
F-8
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1999, 1998, and 1997
Nature of Operations
Tejas Bancshares, Inc. (the Company), provides a variety of financial services
to individuals and corporate customers in the community of Amarillo, Texas, and
the surrounding geographical area. The Company's primary deposit products are
demand deposits and time and savings accounts. Its primary lending products are
consumer, commercial, agricultural, and real estate loans. The Company also
provides trust services.
During 1997, the corporate structure of the Company changed significantly as
follows:
o In May 1997, Mr. Donald E. Powell acquired control of all of the
outstanding common stock of the Company. In connection with the
acquisition, the Company repurchased 6,695 shares of its common stock for
approximately $1,575,400, and Mr. Powell acquired the remaining 2,500
shares of its common stock for approximately $588,300 and loaned the
Company $1,000,000 at the prime interest rate (8.5 percent). Goodwill in
connection with the acquisition amounted to approximately $65,600.
o Following completion of the acquisition, the authorized shares of the
Company were increased from 10,000 to 20,000,000, the par value of the
common stock was reduced from $10 to $1, and 7,500 shares of treasury stock
were retired. The Company's wholly owned subsidiary, Fritch State Bank, was
also moved to Amarillo, Texas, and it was converted to a national banking
association named The First National Bank of Amarillo (the Bank).
o In July 1997, the Company's common stock was split 77.4372-for-1 in the
effect of a stock dividend. During August 1997, the Company completed an
offering of its common stock and issued 13,333,334 shares at $3 per share.
After the offering, Mr. Powell's original 196,093 shares were repurchased
for approximately $588,300 and were retired, and his $1,000,000 loan was
repaid.
The Company experienced significant growth in loans and deposits since 1997
primarily because of the Bank's relocation of its main office from Fritch to
Amarillo, a larger and more economically vibrant banking market. In addition,
deposit and loan growth can be attributable to the new management team, which
has emphasized growth from the Bank's existing client base and capitalized on
opportunities from its target market (e.g., customers of competing financial
institutions), and the delivery of personalized banking services to the Bank's
customers. In addition, the Bank's loan growth is attributable to its aggressive
commercial lending program and its reentry into agricultural and real estate
lending and strong emphasis on the commercial loan market.
Effective April 1, 1999, the Company established a new middle-tier holding
company named Tejas Force, Inc. (Force). The effect of the new company on the
consolidated financial statements for the year ended December 31, 1999 was
insignificant.
F-9
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1999, 1998, and 1997
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Comprehensive Income
The Company follows the provisions of Financial Accounting Standard No. 130,
Reporting Comprehensive Income. Under this standard, comprehensive income is now
reported for all periods. Comprehensive income includes both net income and
other comprehensive income. Other comprehensive income includes the change in
unrealized gains and losses on securities available-for-sale, net of tax.
Investment Securities
The Company classifies its investment securities in three categories: trading,
available-for-sale, and held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term. The Company had no
investment securities classified as trading at December 31, 1999 or 1998.
Held-to-maturity securities are those in which the Company has the ability and
intent to hold the security until maturity. All other securities not included in
trading or held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains
and losses, net of the related tax effect, on available-for-sale securities are
reported in other comprehensive income. Realized gains (losses) on securities
available-for-sale are included in other operating income and, when applicable,
are reported as a reclassification adjustment, net of tax, in other
comprehensive income. Transfers of securities between categories are recorded at
fair value at the date of transfer. Unrealized holding gains and losses are
recognized in earnings for transfers into trading securities.
The unrealized holding gains or losses included in the separate component of
equity for securities transferred from available-for-sale to held-to-maturity
are maintained and amortized into earnings
F-10
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1999, 1998, and 1997
Investment Securities (Continued)
over the remaining life of the security as an adjustment to yield in a manner
consistent with the amortization or accretion of premium or discount on the
associated security. A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed other than temporary is
charged to earnings, resulting in the establishment of a new cost basis for the
security.
Premiums and discounts are amortized or accreted over the life of the security
as an adjustment to yield using the effective interest method. Dividend and
interest income are recognized when earned. Realized gains and losses for
securities classified as available-for-sale and held-to-maturity are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses and unearned income. Unearned income on certain installment loans is
taken into income over the term of the loan by the sum-of-the-months digits
method. The effect of not suing the interest method is not material to the
financial position or results of operations of the company. Interest on other
loans is calculated by using the simple interest method on daily balances of the
principal amount outstanding.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the market price or
the fair value of the collateral if the loan is collateral dependent. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest payments received on nonaccrual loans are generally applied to
principal.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of individual credits, prior loan loss experiences and general
economic conditions. The allowance is subjective and may be adjusted in the near
term because of changes in economic conditions or review by regulatory
examiners.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation,
which is computed using the straight-line method over the estimated useful lives
of the assets.
Advertising Costs
The Company expenses advertising costs as incurred.
F-11
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1999, 1998, and 1997
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance-sheet financial instruments consisting primarily of commitments to
extend credit. These financial instruments are recorded in the consolidated
financial statements when they become payable.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers due from
banks and federal funds sold to be cash equivalents. Federal funds sold are
generally purchased and sold for one-day periods.
Net Earnings (Loss) Per Share
Earnings per share have been computed in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128). Basic earnings per
share are computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if the
Company's stock options were exercised. Such dilutive potential common shares
are calculated using the treasury stock method. All shares and per-share data,
except par value per share, have been retroactively adjusted to reflect a
77.4372-for-1 stock split effected as a stock dividend by the Company in July
1997.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, which
addresses the accounting for derivative transactions and hedging activities.
Subsequently, FASB issued Statement No. 137 which delayed the effective date of
Statement No. 133 by one year. The Company will adopt the new standard beginning
with its 2001 fiscal year, when adoption is first required. Management is
currently evaluating the reporting requirements under this new standard and has
not yet determined its impact on financial results of the Company.
This information is an integral part of the accompanying consolidated
financial statements.
F-12
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 1 - INVESTMENT SECURITIES
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, and fair value for available-for-sale securities by major security type
at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost holding gains holding losses fair value
---- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. Treasury securities $2,203,191 $ -- $ (3,880) $2,199,311
Government agency securities 1,826,368 1,910 10,285 1,817,993
Mortgage-backed securities 1,487,649 8,503 (5,984) 1,490,168
Other securities 1,215,675 -- -- 1,215,675
---------- ------- -------- ----------
Total available-for-sale $6,732,883 $10,413 $(20,149) $6,723,147
========== ======= ======== ==========
</TABLE>
The amortized cost, gross unrealized holding gains, gross unrealized holding
losses, and fair value for available-for-sale securities by major security type
at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost holding gains holding losses fair value
---- ------------- -------------- ----------
<S> <C> <C> <C> <C>
Available-for-sale:
U. S. Treasury securities $2,210,407 $ 3,343 $ -- $2,213,750
Government agency securities 1,855,726 22,617 (1,329) 1,877,014
Mortgage-backed securities 1,981,078 16,153 (3,438) 1,993,793
State and political obligations 2,810 -- -- 2,810
Other securities 1,215,675 -- -- 1,215,675
---------- ------- -------- ----------
Total available-for-sale $7,265,696 $42,113 $ (4,767) $7,303,042
========== ======= ========= ==========
</TABLE>
Maturities of investment securities classified as available-for-sale were as
follows at December 31, 1999 (maturities of mortgage-backed securities have been
presented based upon estimated cash flows, assuming no change in the current
interest-rate environment). Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalties.
Amortized Estimated
cost fair value
---------- -----------
Available-for-sale:
Due one year or less $3,449,554 $3,439,394
Due from one to five years 500,000 495,781
Due from five to ten years 174,505 179,062
Due after ten years 1,393,149 1,393,235
Other 1,215,675 1,215,675
---------- ----------
Total available-for-sale $6,732,883 $6,723,147
========== ==========
F-13
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 1 - INVESTMENT SECURITIES (Continued)
Investment securities with a carrying value of approximately $4,700,000 and
$4,909,000 at December 31, 1999, and 1998, respectively, were pledged to secure
public deposits as required or permitted by law.
NOTE 2 - LOANS
The major classifications of loans are as follows:
1999 1998
---- ----
Real estate - primarily mortgage $ 105,900,875 $ 60,185,414
Agricultural 39,454,848 50,051,845
Commercial 94,893,661 65,560,035
Installment loans to individuals 20,432,316 11,407,138
Student loans 1,606,681 104,302
Unearned income (40,888) (132,375)
------------- -------------
Total loans $ 262,247,493 $ 187,176,359
============= =============
The Bank grants consumer, commercial, agricultural, and real estate loans to
customers primarily in Amarillo, Texas, and the surrounding geographical area.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their commitments depends upon the real estate and
agricultural sectors.
The changes in the allowance for loan losses were as follows:
1999 1998 1997
----------- ----------- -----------
Balance at beginning of year $ 3,625,435 $ 2,748,418 $ 45,200
Provision charged to expense 1,320,000 975,000 2,700,000
Loans charged off (661,511) (114,219) (5,144)
Recoveries on loans previously charged off 240,754 16,236 8,362
----------- ----------- -----------
Balance at end of year $ 4,524,678 $ 3,625,435 $ 2,748,418
=========== =========== ===========
At December 31, 1999 and 1998, there were no material amounts of impaired loans.
F-14
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 3 - DEPOSITS
The aggregate amounts of time deposits in denominations of $100,000 or more were
approximately $52,534,000 and $42,355,000 at December 31, 1999 and 1998,
respectively. The related interest expenses on these deposits were approximately
$2,253,000 and $1,805,000 for 1999 and 1998, respectively. Other
interest-bearing deposits of $100,000 or more totaled approximately $74,487,000
and $56,422,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of all certificates of deposits
were substantially all within one year.
NOTE 4 - INCOME TAXES
The following is a summary of the components of income tax expense (benefit):
1999 1998 1997
---- ---- ----
Current - federal $ 2,509,909 $ 1,711,286 $ 330,087
Deferred (403,280) (969,287) (369,400)
----------- ----------- ---------
Total income tax expense (benefit) $ 2,106,629 $ 741,999 $ (39,313)
=========== =========== =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $1,499,283 $ 1,173,870
Bank premises and equipment basis and
depreciation differences 116,638 87,962
Allowance for investment security losses 27,461 30,052
Available-for-sale securities 3,311 --
Other 72,607 20,826
---------- -----------
1,719,300 1,312,710
---------- -----------
Deferred tax liabilities:
Available-for-sale securities -- (12,697)
---------- -----------
Net deferred tax asset $1,719,300 $ 1,300,013
========== ===========
Because of the Company's limited history to generate substantial taxable income,
a valuation allowance was established in 1997 to limit the recognition of net
deferred tax assets to approximate the amount of taxes that was expected to be
paid in 1998. During 1999 and 1998, the Company generated sufficient taxable
income for which management believes the Company will probably realize the
recorded deferred tax assets. Accordingly, no valuation allowance has been
established at December 31, 1999 or 1998.
F-15
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 4 - INCOME TAXES (Continued)
Total income taxes for the years ended December 31, 1999, 1998, and 1997, are
allocated $2,106,629, $741,999, and $(39,313), respectively, to income tax from
operations, and $(16,007), $(6,017), and $12,669, respectively, as components of
other comprehensive income for the tax effect of unrealized holding gains and
losses on available-for-sale securities recognized for financial reporting
purposes.
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent in 1999, 1998, and 1997 to earnings (loss)
before income taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ 2,107,780 $ 1,375,743 $(687,048)
Effect of valuation allowance -- (644,015) 644,015
Tax-exempt income -- -- (1,126)
Other, net (1,151) 10,271 4,846
----------- ----------- ---------
Total income tax expense (benefit) $ 2,106,629 $ 741,999 $ (39,313)
=========== =========== =========
</TABLE>
NOTE 5 - STOCK OPTIONS AND STOCK COMPENSATION PLAN
Stock Options
On May 19, 1998, the Company's stockholders approved the Tejas Bancshares, Inc.,
1998 Incentive Stock Plan (the Plan). The Plan's objectives are to attract,
retain, and provide incentive to employees, officers, and directors and to
increase overall stockholders' value. The number of shares reserved for issuance
under the Plan is 1,333,333. The Plan provides for granting both incentive stock
options and non-qualified stock options as well as restricted stock, stock
appreciation rights, dividend equivalent rights, stock awards, and other
stock-based awards.
The exercise price of the options granted approximated or exceeded the market
value of the common stock at the date of grant. The options generally vest
ratably over eight years from the date of grant and terminate ten years from the
date of grant.
The following table summarizes the Plan for the two-year period ended December
31, 1999:
Weighted-average
Options exercise price
------- --------------
Outstanding at December 31, 1997 -- $ --
Granted 514,600 3.03
Exercised -- --
Expired or canceled (6,600) 3.00
------- -----
Outstanding at December 31, 1998 508,000 3.03
Granted 186,500 5.90
Exercised 9,283 3.00
Expired or canceled 76,900 3.20
------- -----
Outstanding at December 31, 1999 608,317 $3.89
======= =====
Exercisable at end of year
December 31, 1999 45,225 3.00
December 31, 1998 -- --
Available for grant at end of year
December 31, 1999 715,733
December 31, 1998 825,333
F-16
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 5 - STOCK OPTIONS AND STOCK COMPENSATION PLAN (Continued)
The following table summarizes information about options outstanding under the
Plan at December 31, 1999:
Options Outstanding
Weighted-average
Number remaining
outstanding contractual life Exercise price
----------- ---------------- --------------
428,317 8.14 $3.00
180,000 9.33 $6.00
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for the Plan and recognizes no
compensation costs in net earnings from the grant of options, as options are
granted at exercise prices equal to the current stock price. Had compensation
cost been determined under SFAS 123, Accounting for Stock-Based Compensation,
the Company's pro forma 1999 and 1998 net earnings and earnings per share would
have been as follows:
1999 1998
---------- ----------
Net earnings
As reported $4,092,725 $3,304,303
Pro forma 3,928,725 3,181,303
Earnings per share
Basic
As reported $ 0.31 $ 0.25
Pro forma 0.29 0.24
Diluted
As reported $ 0.30 $ 0.24
Pro forma 0.29 0.23
In accordance with SFAS 123, the fair value of options at date of grant was
estimated using the Black-Scholes option pricing model with the following
weighted-average assumptions:
1999 1998
------- -------
Risk-free interest rate 5.65% 5.14%
Expected life (years) 8.49 9.14
Expected volatility 32.00% 32.00%
Expected dividend yield -- --
In accordance with SFAS 123, the weighted average fair value of options granted
during 1999 and 1998 was $3.28 and $4.28, respectively.
Directors' Stock Compensation Plan
During October 1998, the Company's board of directors approved a nonemployee
directors' compensation plan for the directors of the Bank. The Plan provides
that directors will each receive
F-17
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 5 - STOCK OPTIONS AND STOCK COMPENSATION PLAN (Continued)
common stock as compensation for serving. 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 are forfeited to the Company. A committee
of the board determined the fair value at the date of issue. During 1999 and
1998, a total of 10,800 and 64,600 shares, respectively, were issued under the
Plan. Amortization of compensation cost in 1999 and 1998 amounted to $106,800
and $18,600, respectively.
NOTE 6 - TRANSACTIONS WITH RELATED PARTIES
The Company's and the Bank's directors and their associates, including companies
and firms of which they are officers or in which they and/or their families have
an ownership interest, are customers of the Company. The following is a summary
of loan activity with these persons for the years ended December 31, 1999, 1998,
and 1997:
1999 1998 1997
---- ---- ----
Balances at beginning of period $ 12,139,003 $ 10,550,806 $ --
Balances related to directors
elected during 1999 3,100,453 -- --
Advances 11,069,541 11,679,984 12,507,324
Repayment (13,128,622) (10,091,787) (1,956,518)
------------ ------------ ------------
Balances at end of year $ 13,180,375 $ 12,139,003 $ 10,550,806
============ ============ ============
The Company also has deposit activities with related parties in the normal
course of business which amounted to $12,441,002, $4,249,597, and $3,735,935 at
December 31, 1999, 1998, and 1997, respectively.
During 1998, the Company entered into a lease agreement with a partnership for
certain land to be used for a branch site. Two partners are members of the
Company's Board of Directors. Lease expense recognized during 1998 for the
agreement was approximately $6,600. During 1999, the land was purchased for
$521,000. The two Directors sold the land at their cost (unaudited).
Other transactions are described in the Summary of Significant Accounting
Policies.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION
Cash disbursed for interest for the years ended December 31, 1999, 1998, and
1997, was $5,806,889, $4,244,631, and $1,064,790, respectively. Cash disbursed
for income taxes was $2,286,000 for the year ended December 31, 1999, and
$1,969,000 for the year ended December 31, 1998, and was not significant for the
year ended December 31, 1997.
During the year ended December 31, 1999, noncash investing activities consisted
of the recognition as a component of comprehensive income the net unrealized
holding loss on available-for-sale securities of $(31,074) net of deferred taxes
of $(16,007).
F-18
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH-FLOW INFORMATION (Continued)
During the year ended December 31, 1998, noncash investing activities included
the recognition as a component of comprehensive income the net unrealized
holding loss on available-for-sale securities of $(11,681), net of deferred
taxes of $(6,017).
During the year ended December 31, 1997, noncash investing activities included
the recognition as a component of comprehensive income the net unrealized
holding gains on available-for-sale securities of $24,593, net of deferred taxes
of $12,669.
Other noncash transactions during 1999 and 1998 included the issuance of 10,800
and 64,600, respectively, of shares of common stock under a directors' stock
compensation plan. Other noncash transactions during 1997 included the
retirement of treasury stock having a carrying value of approximately
$2,325,700, a stock split effected in the form of a dividend of 77.4372-for-1,
the reduction in par value from $10 to $1 and the transfer of investments of
approximately $6,436,000 from the held-to-maturity category to the
available-for-sale category in connection with the acquisition previously
discussed.
NOTE 8 - LEASE COMMITMENTS
The Company leases certain land and office space under noncancelable operating
leases expiring in various years through 2027. Certain leases contain renewal
options from five to ten years based on existing or escalated terms. Future
minimum lease payments under these leases are as follows:
2000 $ 225,856
2001 228,466
2002 207,564
2003 186,539
2004 128,219
Later years 505,500
----------
Total $1,482,144
==========
Total rental expenses for the years ended December 31, 1999, 1998, and 1997 were
approximately $242,000, $161,000, and $59,700, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition in termination clauses and may require
payment of a fee. Since many commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary upon
extension of credit is based on management's credit evaluation. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment, and income-producing commercial properties. The exposure to credit
loss in the event of nonperformance by the other party to the commitments to
extend credit is represented by the contractual amount. Standby letters of
credit are conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. Unfunded loan commitments and letters of credit at
December 31, 1999, were approximately $101,635,000 and $3,997,000, respectively.
Management does not anticipate any losses as a result of these transactions.
Like most entities, the Company may be exposed to risks associated with Year
2000 dating problems. This problem affects computer software and hardware;
transactions with customers,
F-19
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
vendors and other entities; and equipment dependent on microchips. The Company
recognizes that Year 2000 dating problems pose a risk beyond January 1, 2000, as
errors may not become evident until after that date. The Company has performed
the remediation steps it believes necessary to address Year 2000 dating
problems. It is not possible for any entity to guarantee the results of its own
remediation efforts or to accurately predict the impact of Year 2000 dating
problems on third parties with which the Company does business. If remediation
efforts of the Company or third parties with which it does business are not
successful, it is possible the Year 2000 dating problem could negatively impact
the Company's financial condition and results of operations. The Company does
not believe any significant Year 2000 dating problems have occurred.
At December 31, 1999, the Company had commitments to purchase bank premises and
equipment of $992,000.
NOTE 10 - 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:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------- ----------------------------------- ------------------------------------
Income Shares Per-share Income Shares Per-share Income Shares Per-share
numerator denominator amount numerator denominator amount numerator denominator amount
--------- ----------- ------ --------- ----------- --------- --------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $4,092,725 13,406,764 $ 0.31 $3,304,303 13,344,130 $ 0.25 $(1,981,415) 4,824,792 $ (0.41)
Effect of dilutive
stock options -- 214,159 -- 166,000 -- --
---------- ---------- ---------- ---------- ----------- ---------
Diluted EPS $4,092,725 13,620,923 $ 0.30 $3,304,303 13,510,130 $ 0.24 $(1,981,415) 4,824,792 $ (0.41)
========== ========== ========== ========== =========== =========
</TABLE>
NOTE 11 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments, the results of applying these methods and
assumptions to the financial instruments, and limitations inherent in fair value
estimates:
Commitments to Extend Credit
Generally, the Bank enters into commitments to extend credit at adjustable
interest terms. Accordingly, the commitment amount is a reasonable estimate of
fair value.
Cash, Due from Banks, and Federal Funds Sold
These assets are considered short-term instruments for which the carrying amount
is a reasonable estimate of fair value.
Investment Securities
For investment securities, excluding restricted equity securities, fair value is
equal to the quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities or bid quotations received from securities dealers. The
F-20
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 11 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
carrying value of restricted equity securities approximates fair values.
Securities available-for-sale had a carrying value (which approximates fair
value) of approximately $6,723,000 and $7,303,000 at December 31, 1999 and 1998,
respectively.
Loans
Fair values of loans are estimated by discounting the future cash flows through
the estimated maturity using the current rates at which similar loans would be
made to borrowers with similar credit ratings. The carrying values of loans, net
of the allowance for loan losses, were $257,722,815 and $183,550,924, at
December 31, 1999 and 1998, respectively. The fair values of loans at those
dates were approximately the same as carrying values.
Deposits
The fair value of demand deposits, both interest and noninterest bearing, and
savings accounts is the amount payable on demand at the reporting date. The fair
value of time deposits is estimated using the rates currently offered for
deposits of similar remaining maturities. At December 31, 1999 and 1998, the
carrying values of deposits were $251,967,653 and $205,139,114. The fair values
of deposits at those dates were approximately the same as carrying values.
Limitations
Fair value estimates are made at a specific time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company's entire holdings of a particular financial instrument.
Because no market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
NOTE 12 - RETIREMENT PLAN
Effective January 1, 1999, the Company adopted a 401(k) plan that covers
substantially all eligible employees. The Company matches certain employee
contributions and may also make other contributions to the plan. Contributions
of approximately $63,000 were made for the year ended December 31, 1999.
NOTE 13 - REGULATORY MATTERS
The Company and 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 the Bank must
meet specific capital guidelines that involve quantitative measures of the
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's and the Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
F-21
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 13 - REGULATORY MATTERS (Continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (given
in the table below) of Total and Tier I Capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I Capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999, that
the Company and the Bank meet all capital adequacy requirements to which they
are subject.
As of December 31, 1999, the most recent notification from the Bank's regulator
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as stated in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are presented in
the following table:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999
Total Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $48,625,652 18.79% $20,706,927 >=8.0% N/A
The Bank 47,809,951 18.47% 20,703,376 >=8.0% $25,879,220 >=10.0%
Tier I Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $45,360,764 17.52% $10,353,463 >=4.0% N/A
The Bank 44,545,610 17.21% 10,351,688 >=4.0% $15,527,532 >=6.0%
Tier I Capital (to Average Assets):
Tejas Bancshares, Inc. $45,360,764 17.01% $10,665,923 >=4.0% N/A
The Bank 44,545,610 16.71% 10,665,103 >=4.0% $13,332,629 >=5.0%
As of December 31, 1998
Total Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $43,652,000 21.80% $15,986,000 >=8.0% N/A
The Bank 42,864,000 21.50% 15,986,000 >=8.0% $19,983,000 >=10.0%
Tier I Capital (to Risk-Weighted Assets):
Tejas Bancshares, Inc. $41,140,000 20.60% $ 7,993,000 >=4.0% N/A
The Bank 40,352,000 20.20% 7,993,000 >=4.0% $11,990,000 >=6.0%
Tier I Captal (to Average Assets):
Tejas Bancshares, Inc. $41,140,000 17.00% $ 7,251,000 >=4.0% N/A
The Bank 40,352,000 16.70% 7,251,000 >=4.0% $12,085,000 >=5.0%
</TABLE>
There are certain regulatory guidelines on the amount of dividends that the Bank
can pay to the Company. These guidelines do not currently have a significant
effect on the amount of dividends paid by the Bank. The Bank also must maintain
certain daily reserve balances as required by the Board of Governors of the
Federal Reserve System. For the years ended December 31, 1999 and 1998, the Bank
maintained average cash and due-from-bank balances of approximately $5,582,000
and $3,872,000, respectively, to satisfy those requirements.
F-22
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION
The condensed balance sheets, statements of operations and comprehensive income,
and cash flows for Tejas Bancshares, Inc. (parent only), follow:
Condensed Balance Sheets
1999 1998
---- ----
ASSETS
Cash on deposit with Bank $ 680,227 $ 713,621
Investment in Bank 44,551,610 40,377,011
Current tax receivable 86,291 73,832
Deferred tax benefit 42,636 --
----------- -----------
TOTAL ASSETS $45,360,764 $41,164,464
=========== ===========
STOCKHOLDERS' EQUITY $45,360,764 $41,164,464
=========== ===========
Condensed Statements of Operations and Comprehensive Income
1999 1998 1997
---- ---- ----
INCOME - dividend received from
Bank $ -- $ -- $ 632,938
EXPENSES - other 106,948 143,322 (82,417)
EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF BANK 4,199,673 3,447,625 2,531,936
---------- ---------- -----------
NET EARNINGS (LOSS) 4,092,725 3,304,303 (1,981,415)
OTHER COMPREHENSIVE
INCOME 31,074 11,681 24,593
---------- ---------- -----------
NET EARNINGS (LOSS) AND
COMPREHENSIVE INCOME $4,061,651 $3,292,622 $(1,956,822)
========== ========== ===========
F-23
<PAGE>
TEJAS BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
NOTE 14 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net earnings (loss) $ 4,092,725 $ 3,304,303 $ (1,981,415)
Adjustments to reconcile net earnings (loss)
to net cash provided (used) by operating
activities:
Equity in undistributed loss (income) of Bank (4,199,673) (3,447,625) 2,531,936
Amortization of deferred directors' compensation
compensation 106,800 18,660 --
Change in current tax receivable (12,459) (73,832) --
Other (42,636) 28,021 --
----------- ----------- ------------
Net cash provided (used) by operating activities (55,243) (170,533) 550,521
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Force (6,000) -- --
----------- ----------- ------------
Net cash used by investing activities (6,000) -- --
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock -- -- (2,163,692)
Proceeds from exercise of stock options 27,849 -- --
Proceeds from sale of common stock,
net of issue costs of $159,558 -- -- 39,840,444
Cash investment in Bank -- -- (37,400,000)
Proceeds from loan to stockholder -- -- 1,000,000
Repayment of loan to stockholder -- -- (1,000,000)
----------- ----------- ------------
Net cash provided by financing activities 27,849 -- 276,752
----------- ----------- ------------
Increase (decrease) in cash (33,394) 170,533 827,273
CASH, BEGINNING OF YEAR 713,621 884,154 56,881
----------- ----------- ------------
CASH, END OF YEAR $ 680,227 $ 713,621 $ 884,154
=========== =========== ============
</TABLE>
F-24
<PAGE>
EXHIBIT LIST
Number Description
3.1 Restated Articles of Incorporation of Tejas Bancshares, Inc.*
3.2 Amended and Restated Bylaws of Tejas Bancshares, Inc.*
10.1 Tejas Bancshares, Inc., 1999 Incentive Stock Plan**
21.1 Subsidiaries of Tejas Bancshares, Inc.
27.1 Financial Data Schedule
- ----------
* Incorporated by reference from the Company's Registration Statement on Form
10 dated April 10, 1998.
** Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998
F-25
EXHIBIT 21.1
SUBSIDIARIES OF TEJAS BANCSHARES, INC.
Tejas Force, Inc.
The First National Bank of Amarillo
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999, FORM 10-K OF TEJAS BANCSHARES, INC., AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THESE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20711
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6723
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 262247
<ALLOWANCE> 4525
<TOTAL-ASSETS> 299041
<DEPOSITS> 251968
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1713
<LONG-TERM> 0
0
0
<COMMON> 13418
<OTHER-SE> 31943
<TOTAL-LIABILITIES-AND-EQUITY> 299041
<INTEREST-LOAN> 17633
<INTEREST-INVEST> 387
<INTEREST-OTHER> 1336
<INTEREST-TOTAL> 19356
<INTEREST-DEPOSIT> 6002
<INTEREST-EXPENSE> 6002
<INTEREST-INCOME-NET> 13354
<LOAN-LOSSES> 1320
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7681
<INCOME-PRETAX> 6199
<INCOME-PRE-EXTRAORDINARY> 6199
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4093
<EPS-BASIC> .31
<EPS-DILUTED> .30
<YIELD-ACTUAL> 5.47
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3625
<CHARGE-OFFS> 662
<RECOVERIES> 241
<ALLOWANCE-CLOSE> 4525
<ALLOWANCE-DOMESTIC> 4525
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4525
</TABLE>
