-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DHPfLXF5Q1JDWPYjAAOo6zZKrWh9FAe1j6Jdx/P+wgft7J+ju9z0OUigN3Sihxr3 yaUCR9JrwvVe2aTInxU4zA== 0000930661-98-002320.txt : 19981113 0000930661-98-002320.hdr.sgml : 19981113 ACCESSION NUMBER: 0000930661-98-002320 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HENDERSON CITIZENS BANCSHARES INC CENTRAL INDEX KEY: 0000878355 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 752371232 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-42286 FILM NUMBER: 98744584 BUSINESS ADDRESS: STREET 1: 201 WEST MAIN ST STREET 2: PO BOX 1009 CITY: HENDERSON STATE: TX ZIP: 75653 BUSINESS PHONE: 9036578521 MAIL ADDRESS: STREET 1: 201 WEST MAIN ST STREET 2: P O BOX 1009 CITY: HENDERSON STATE: TX ZIP: 75653 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: September 30, 1998 Commission file number: 33-42286 HENDERSON CITIZENS BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 6712 75-2371232 - -------------------------- --------------------------- --------------------- (State or other (Primary Standard (IRS Employer jurisdiction of Industrial Classification Identification No.) incorporation Code Number) or organization) 201 WEST MAIN STREET, P.O. BOX 1009 HENDERSON, TEXAS 75653 (903) 657-8521 (Address, including ZIP code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None 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. X Yes No ----------- ------ At September 30, 1998, 2,016,874 shares of Common Stock, $5.00 par value, were outstanding. 1 Part I. FINANCIAL INFORMATION Item 1. Financial Statements HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) September 30, 1998 and December 31, 1997 (dollars in thousands, except share amounts)
1998 1997 Assets -------------- -------------- ------ Cash and due from banks $ 7,381 8,886 Interest-bearing deposits with other financial institutions 7,885 8,212 Federal funds sold 6,245 5,040 Securities: Held-to-maturity, approximate market value of $66,125 in 1998 and $69,598 in 1997 64,955 69,233 Available-for-sale 133,258 148,740 -------------- -------------- 198,213 217,973 Loans, net 120,040 106,061 Premises and equipment, net 5,549 5,209 Accrued interest receivable 3,165 3,311 Other assets 3,414 3,801 -------------- -------------- $ 351,892 358,493 ============== ============== Liabilities and Stockholders' Equity ------------------------------------ Deposits: Demand - noninterest-bearing 37,557 32,860 Interest-bearing transaction accounts 70,743 79,810 Money market and savings 43,811 46,206 Certificates of deposit and other time deposits 161,948 163,231 -------------- -------------- Total deposits 314,059 322,107 Accrued interest payable 1,083 1,105 Notes payable 444 844 Other liabilities 909 1,708 -------------- -------------- 316,495 325,764 Stockholders' equity: Preferred stock, $5 par value; 2,000,000 shares authorized none issued or outstanding -- -- Common stock, $5 par value; 10,000,000 shares authorized, 2,160,000 issued 10,800 10,800 Surplus 5,400 5,400 Retained earnings 20,663 18,875 Accumulated other comprehensive income 554 (335) -------------- -------------- 37,417 34,740 Less treasury stock, 143,126 shares in 1998 and 142,506 shares in 1997, at cost (2,020) (2,011) -------------- -------------- Total stockholders' equity 35,397 32,729 Commitments and contingencies -------------- -------------- $ 351,892 358,493 ============== ============== See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements. 2 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) (dollars in thousands, except per share amounts)
Three months Nine months ended September 30, ended September 30, -------------------------------- ------------------------------- 1998 1997 1998 1997 ------------- -------------- ------------- ------------- Interest income: Loans $ 2,470 2,163 7,128 6,387 Securities Taxable - available-for-sale 2,032 2,204 6,359 6,734 Taxable - held-to-maturity 409 623 1,407 1,949 Tax-exempt 436 468 1,179 1,367 Federal funds sold 60 33 251 119 Interest-bearing deposits with other financial 109 55 420 213 institutions ------------- -------------- ------------- ------------- Total interest income 5,516 5,546 16,744 16,769 ------------- -------------- ------------- ------------- Interest expense: Deposits: Transaction accounts 449 453 1,414 1,443 Money market and savings 309 316 951 955 Certificates of deposit and other time deposits 2,069 2,073 6,259 6,265 Other 10 14 25 40 ------------- -------------- ------------- ------------- Total interest expense 2,837 2,856 8,649 8,703 ------------- -------------- ------------- ------------- Net interest income 2,679 2,690 8,095 8,066 Provision for loan losses 165 83 458 253 ------------- -------------- ------------- ------------- Net interest income after provision for loan losses 2,514 2,607 7,637 7,813 ------------- -------------- ------------- ------------- Other income: Gains (losses) on securities transactions, net 216 27 282 (37) Income from fiduciary activities 197 156 602 444 Service charges, commissions, and fees 802 509 2,209 1,401 Other 134 91 421 249 ------------- -------------- ------------- ------------- Total other income 1,349 783 3,514 2,057 ------------- -------------- ------------- ------------- Other expenses: Salaries and employee benefits 1,448 1,339 4,374 4,005 Occupancy and equipment 362 266 1,000 752 Regulatory assessments 38 33 102 93 Other 745 648 2,175 1,883 ------------- -------------- ------------- ------------- Total other expenses 2,593 2,286 7,651 6,733 ------------- -------------- ------------- ------------- Income before income taxes 1,270 1,104 3,500 3,137 Income tax expense 262 252 744 714 ------------- -------------- ------------- ------------- Net income $ 1,008 852 2,756 2,423 ============= ============== ============= ============= Basic net income per common share $ .50 0.40 1.37 1.14 ============= ============== ============= ============= Average number of shares outstanding 2,017,198 2,115,871 2,017,390 2,122,551 ============= ============== ============= =============
See accompanying notes to consolidated financial statements. 3 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (unaudited) Nine months ended September 30, 1998 and 1997 (dollars in thousands, except share and per share amounts)
Accumulated Other Comprehensive Income ------------------- Net Unrealized Gains (Losses) on Securities Total Preferred Common Retained Available Treasury Stockholders' Stock Stock Surplus Earnings For Sale Stock Equity ----------- -------- --------- -------- ------------------- ---------- ------------- Balances at December 31, 1996 $ -- 10,800 5,400 16,825 (703) (334) 31,988 Net income -- -- -- 2,423 -- -- 2,423 Net change in unrealized losses on securities available for sale -- -- -- -- 261 -- 261 Cash dividends ($.48 per share) -- -- -- (1,017) -- -- (1,017) Purchase of 14,620 shares of treasury stock -- -- -- -- -- (177) (177) ----------- -------- --------- -------- ---------------- ---------- ------------- Balances at September 30, 1997 $ -- 10,800 5,400 18,231 (442) (511) 33,478 =========== ======== ========= ======== ================ ========== ============= Balances at December 31, 1997 $ -- 10,800 5,400 18,875 (335) (2,011) 32,729 Net income -- -- -- 2,756 -- -- 2,756 Net change in unrealized gains on securities available for sale -- -- -- -- 889 -- 889 Cash dividends ($.48 per share) -- -- -- (968) -- -- (968) Purchase of 620 shares of treasury stock -- -- -- -- -- (9) (9) ----------- -------- --------- -------- ---------------- ---------- ------------- Balances at September 30, 1998 $ -- 10,800 5,400 20,663 554 (2,020) 35,397 =========== ======== ========= ======== ================ ========== =============
See accompanying notes to consolidated financial statements. 4 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (unaudited) Nine months ended September 30, 1998 and 1997 (dollars in thousands)
1998 1997 -------------- -------------- Operating activities: Net income $ 2,756 2,423 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premium on securities 327 273 Net (gains) losses on securities transactions, net (282) 37 Provision for loan losses 458 253 Depreciation and amortization 783 453 Decrease in accrued interest receivable 146 115 Increase in other assets (98) (543) Increase (decrease) in accrued interest payable (22) 188 Decrease in other liabilities (762) (712) -------------- -------------- Net cash provided by operating activities 3,306 2,487 -------------- -------------- Investing activities: Proceeds from maturities and paydowns of held-to-maturity securities 19,458 16,425 Purchases of held-to-maturity securities (15,390) (6,126) Proceeds from sales of available-for-sale securities 31,323 20,823 Proceeds from maturities and paydowns of available-for-sale securities 36,511 8,368 Purchases of available-for-sale securities ( 50,839) (24,692) Net increase in loans (14,437) (3,840) Purchases of bank premises and equipment (811) (1,693) -------------- -------------- Net cash provided by investing activities 5,815 9,265 -------------- -------------- Financing activities: Net decrease in deposits (8,048) (11,272) Payment on notes payable (400) (667) Cash dividends paid (1,291) (1,017) Purchase of treasury stock (9) (177) -------------- -------------- Net cash used in financing activities (9,748) (13,133) -------------- -------------- Decrease in cash and cash equivalents (627) (1,381) Cash and cash equivalents at beginning of period 22,138 17,455 -------------- -------------- Cash and cash equivalents at end of period $ 21,511 16,074 ============== ============== Supplemental disclosures of cash flow activities: Income taxes paid, net of refunds $ 970 865 ============== ============== Interest paid $ 8,671 8,515 ============== ==============
See accompanying notes to consolidated financial statements. 5 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1998 (1) BASIS OF PRESENTATION --------------------- The accompanying consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring accruals, which management considers necessary for a fair presentation of the financial position, results of operations, and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. The consolidated financial statements and footnotes included herein should be read in conjunction with the Company's annual consolidated financial statements as of December 31, 1997 and 1996, and for each of the years in the three year period ended December 31, 1997 included in the Company's Form 10-K. (2) SECURITIES ---------- The amortized cost (carrying value) and approximate market values of securities held-to-maturity at September 30, 1998, are summarized as follows (in thousands of dollars):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- -------------- -------------- U.S. Treasury $ 7,020 20 -- 7,040 U.S. Government agencies 3,083 20 -- 3,103 State and municipal 40,563 1,001 (20) 41,544 Mortgage-backed securities and collateralized mortgage obligations 14,289 151 (2) 14,438 ------------- ------------- -------------- -------------- $ 64,955 1,192 (22) 66,125 ------------- ------------- -------------- --------------
The amortized cost and approximate market values (carrying value) of securities available- for-sale at September 30, 1998, are summarized as follows (in thousands of dollars):
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- -------------- -------------- U.S. Treasury $ 49,673 825 -- 50,498 U.S. Government agencies 17,465 80 (1) 17,544 Mortgage-backed securities and collateralized mortgage obligations 64,913 279 (343) 64,849 Other 367 -- -- 367 ------------- ------------- -------------- -------------- $ 132,418 1,184 (344) 133,258 ------------- ------------- -------------- --------------
6 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1998 (3) LOANS AND ALLOWANCE FOR LOAN LOSSES ----------------------------------- The composition of the Company's loan portfolio is as follows (in thousands of dollars):
September 30, December 31, 1998 1997 ------------------ ----------------- Commercial and industrial $ 30,848 28,195 Real estate mortgage 60,717 49,979 Installment and other 30,473 29,832 ------------------ ----------------- Total 122,038 108,006 Less: Allowance for loan losses (1,535) (1,249) Unearned discount (463) (696) ------------------ ----------------- Loans, net $ 120,040 106,061 ================== =================
Changes in the allowance for loan losses for the nine months ended September 30, 1998 and 1997 are summarized as follows (in thousands of dollars):
1998 1997 ------------------ ----------------- Balance, January 1 $ 1,249 1,146 Provision charged to operating expense 458 253 Loans charged off (328) (261) Recoveries on loans 156 88 ------------------ ----------------- Balance, September 30 $ 1,535 1,226 ================== =================
(4) TOTAL COMPREHENSIVE INCOME -------------------------- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS 130 requires that an entity include in total comprehensive income certain amounts that were previously recorded directly in stockholders' equity. For the nine-month periods ended September 30, 1998 and 1997, other comprehensive income amounts included in total comprehensive income consisted only of net unrealized gains (losses) on securities available for sale, net of income taxes. Total comprehensive income for the nine-month periods ended September 30, 1998 and 1997, were $3,645,000 and $2,684,000, respectively and for the three-month periods ended September 30, 1998 and 1997, were $1,493,000 and 1,234,000, respectively. 7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 The following discussion and analysis of the financial condition and results of operations of the Company and its primary bank subsidiary, Citizens National Bank, Henderson, Texas, should be read in conjunction with the consolidated financial statements and the notes thereto, and other financial and statistical information appearing elsewhere in this report. Results of Operations - --------------------- Net income for the first nine months of 1998 increased to $2,756,000 compared to $2,423,000 for the same period in 1997. The increase was primarily caused by an increase in non-interest income. During the first nine months of 1998, net interest income increased slightly due to increased loan demand although loan and deposit interest rates generally remained unchanged. The Company made a provision of $458,000 to the allowance for loan losses during the first nine months of 1998. A provision of $253,000 was made for loan losses during the same period in 1997. The Company experienced a gain on securities transactions totaling approximately $282,000 in the first nine months of 1998 compared to losses of $37,000 in the first nine months of 1997. Other income, excluding gains on securities transactions, for the first nine months of 1998 was $3,232,000 compared to $2,094,000 for the same period in 1997 due primarily to an increase in insufficient funds fee income as a result of the initiation of a new deposit program in March 1998 and the establishment of a trust office in Corsicana, Texas in March 1997. Total other expenses for the first nine months of 1998 were $7,651,000 compared to $6,733,000 for the same period in 1997. Income tax expense for the first nine months of 1998 and 1997 was $744,000 and $714,000, respectively. PROPOSED ACQUISITION - -------------------- In May 1998, the Company agreed to acquire certain assets and assume certain liabilities of Jefferson National Bank, Jefferson, Texas, for a purchase price of $6,150,200. The acquisition of Jefferson National Bank will result in an increase in total assets of the Company of approximately $32,977,000, total loans of approximately $7,779,000, and total deposits of approximately $29,599,000, and will be accounted for using the purchase method of accounting. It is anticipated that the proposed acquisition will be completed, subject to regulatory approvals, during the fourth quarter of 1998, although no assurance can be given that the acquisition will be completed or that such timetable will be met. The acquisition is expected to be funded through internal sources. MERGER OF FIRST STATE BANK WASKOM - --------------------------------- The sole banking office of First State Bank, Waskom, Texas, previously a wholly owned subsidiary but separate bank charter, is now being operated as a full- service branch of Citizens National Bank since completion of the merger on July 23, 1998. It is not anticipated that the merger will result in any diminution of products and services currently available to customers of First State Bank or Citizens National Bank. It is anticipated, however, that the merger will generate certain operational efficiencies by operating under one bank charter rather than two separate charters regulated by different regulatory authorities. NET INTEREST INCOME - ------------------- For the nine months ended September 30, 1998, net interest income was $8,095,000 compared to $8,066,000 for the first nine months of 1997. The slight increase is primarily the result of continued loan growth. Loan and deposit interest rates generally remained unchanged. Net interest income for the three-month period ended September 30, 1998 was relatively unchanged at $2,679,000 compared to $2,690,000 in 1997. PROVISION FOR LOAN LOSSES - ------------------------- During the first nine months of 1998, the Company increased its allowance for loan losses through a provision of $458,000. The Company increased its allowance for loan losses during the same period of 1997 by $253,000. The increase is primarily due to an estimate for potential overdraft charge-offs that may result from the insufficient funds fee program initiated in March 1998. 8 The Company experienced net charge-offs of $172,000 in the first nine months of 1998 compared to net charge-offs of $173,000 in the same period in 1997. For the three-month period ended September 30, 1998, the Company increased its allowance through a provision of $165,000. The Company increased its allowance for loan losses during the same period in 1997 by $83,000. See additional information related to the Company's loan operations in the Allowance for Loan Loss section below. OTHER INCOME AND EXPENSES - ------------------------- Non-interest income, excluding securities gains/losses, was $3,232,000 for the first nine months of 1998 as compared to $2,094,000 in the first nine months of 1997. This increase is due to increases in service charges primarily through the initiation of an insufficient funds fee program in March 1998, as well as an increase in trust revenues due to the establishment of a trust office in Corsicana, Texas in March 1997. The Company experienced net gains on securities transactions for the first nine months of 1998 of $282,000 compared to net losses on securities transactions for the first nine months of 1997 of $37,000. Other expenses for the nine-month period ended September 30, 1998 were $7,651,000 compared to $6,733,000 during the same period in 1997. The increase in other expenses is due to increases in general salaries and benefits, and occupancy and equipment due to remodeling of the main bank facility in Henderson, Texas. For the three months ended September 30, 1998, non-interest income, excluding securities losses was $1,133,000 compared to $756,000 for the same period in 1997, with the majority of the increase due to insufficient funds fee income. The Company experienced net gains on securities transactions in the three months ended September 30, 1998 of approximately $216,000 compared to net gains on securities transactions of $27,000 for the three months ended September 30, 1997. INCOME TAXES - ------------ Income tax expense for the first nine months of 1998 was $744,000, compared to $714,000 in the same period in 1997. The effective tax rate for the first nine months of 1998 and 1997, respectively, was 21.3% and 22.8%. This effective rate is less than the statutory rate primarily because of tax-free income provided from state and municipal bonds, leases and obligations. As these tax-free investments, leases, and obligations mature and are replaced, the effective income tax rate is expected to increase. Income tax expense for the three-month periods ended September 30, 1998 and September 30, 1997 were $262,000 and $252,000 respectively. FINANCIAL CONDITION - ------------------- The Company's total assets at September 30, 1998 of $351,892,000 decreased from the total assets at December 31, 1997 of $358,493,000. Total deposits were $314,059,000 at September 30, 1998, compared to the December 31, 1997 total of $322,107,000. These slight decreases are primarily seasonal fluctuations. The Company's loan portfolio grew 13.2% to $120,040,000 at September 30, 1998, up from $106,061,000 at December 31, 1997, due to a significant increase in real estate loans. The increase in real estate loans was primarily due to the availability of home equity loans combined with the addition of a loan production office in Corsicana, Texas. Equity capital of the Company, excluding unrealized gains or losses on securities available for sale, as a percentage of total assets was 9.9% at September 30, 1998, compared to 9.2% at December 31, 1997. The risk-based Tier I and Tier II capital ratios and the leverage ratio of Citizens National Bank amounted to 23.2%, 24.3%, and 9.7%, respectively at September 30, 1998 compared to 23.7%, 24.7%, and 9.1%, respectively, at December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At September 30, 1998, the Company's cash and cash equivalents of $21,511,000 decreased slightly from the December 31, 1997 amount of $22,138,000. The Company's stockholders' equity at September 30, 1998, of $35,397,000 remains at a level considered to be adequate by management. Profits in excess of dividends paid to shareholders are reflected in the increase in undivided profits from 1997. 9 ALLOWANCE FOR LOAN LOSSES - ------------------------- The allowance for loan losses at September 30, 1998 and December 31, 1997 was 1.26% and 1.16% of outstanding loans, respectively. By its nature, the process through which management determines the appropriate level of the allowance requires considerable judgment. The determination of the necessary allowance, and correspondingly the provision for loan losses, involves assumptions about projections of national and local economic conditions, the composition of the loan portfolio, and prior loss experience, in addition to other considerations. As a result, no assurance can be given that future losses will not vary from the current estimates. However, management believes that the allowance at September 30, 1998 is adequate to cover losses inherent in its loan portfolio. A migration analysis and an internal classification system for loans also helps identify potential problems, if any, that are not identified otherwise. From these analyses, management determines which loans are potential candidates for nonaccrual status, including impaired loan status, or charge-off. Management continually reviews loans and classifies them consistent with the Comptroller's guidelines to help ensure that an adequate allowance is maintained. The allocation of the allowance for loan losses is based upon the inherent risks in the various components of the loan portfolio. Amounts allocated to each component are determined based on management's evaluations of concentrations of credit risks, current and anticipated economic conditions, historical analyses, and classification and estimated loss exposure assigned to specific credits. These reserve allocations are subject to change as various economic conditions dictate. The following table is an analysis of the Allowance for Loan Losses. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
For the Nine Months Ended September 30, 1998 1997 --------------- -------------- Balance at beginning of period $ 1,249 1,146 Charge-offs: Commercial, financial, and agricultural 25 57 Real estate-mortgage -- 1 Installment loans to individuals 303 203 --------------- -------------- 328 261 Recoveries: Commercial, financial, and agricultural 54 41 Installment loans to individuals 102 47 --------------- -------------- 156 88 --------------- -------------- Net charge-offs (172) (173) --------------- -------------- Additions charged to operations 458 253 --------------- -------------- Balance at end of period $ 1,535 1,226 =============== ============== Ratio of net charge-offs during the period to average loans outstanding during the period .14% .16% =============== ==============
NON ACCRUAL, PAST DUE AND RESTRUCTURED LOANS - -------------------------------------------- The Company's policy is to discontinue the accrual of interest income on loans whenever it is determined that reasonable doubt exists with respect to timely collectibility of interest and principal. Loans are placed on nonaccrual status if either material deterioration occurs in the financial position of the borrower, payment in full of interest or principal is not anticipated, payment in full of interest or principal is past due 90 days or more unless well secured, payment in full of interest or principal on a loan is past due 180 days or more, regardless of collateral, or the loan in whole or in part is classified as doubtful. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, interest is no longer accrued or included in interest income and previously accrued income is reversed. 10 The following is a summary of the Company's problem loans as of September 30, 1998 and 1997.
At September 30, 1998 1997 -------------- -------------- (dollars in thousands) Nonaccrual loans $ 149 88 Restructured loans -- -- Other impaired loans -- -- Other real estate -- 150 -------------- -------------- Total non-performing loans 149 238 ============== ============== Loans past due 90+ days and still accruing 182 44 ============== ============== Other potential problem loans -- -- ============== ============== Income that would have been recorded in accordance with original terms 7 6 Less income actually recorded -- -- -------------- -------------- Loss of income $ 7 6 ============== ==============
CONCENTRATION OF CREDIT RISK - ---------------------------- The Company grants real estate, commercial, and industrial loans to customers primarily in Henderson, Texas, and surrounding areas of east Texas. Although the Company has a diversified loan portfolio, a substantial portion (approximately 49.8% at September 30, 1998) of its loans are secured by real estate and its ability to fully collect its loans is dependent upon the real estate market in this region. The Company typically requires collateral sufficient in value to cover the principal amount of the loan. Such collateral is evidenced by mortgages on property held and readily accessible to the Company. See additional information related to the composition of the Company's loan portfolio included in note 3 to the consolidated financial statements. NEW EMPLOYEE BENEFIT PLANS - -------------------------- In June 1998, the Company established a non-qualified deferred compensation plan and performance and retention plan for certain select management employees of the Company. Contributions by the Company are at the discretion of the Board of Directors and generally provide vesting over five years. As of September 30, 1998, no awards have been granted. SECURITIES - ---------- The Investment Committee, under the guidance of the Company's Investment Policy, assesses the short and long-term needs of the Company after consideration of loan demand, interest rate factors, and prevailing market conditions. Recommendations for purchases and other transactions are then made considering safety, liquidity, and maximization of return to the Company. Management determines the proper classification of securities at the time of purchase. Securities that management does not intend to hold to maturity or that might be sold under certain circumstances are classified as available for sale. If management has the intent and the Company has the ability at the time of purchase to hold the securities until maturity, the securities will be classified as held to maturity. The management strategy for securities is to maintain a very high quality portfolio with generally short duration. The quality of the portfolio is maintained with 79% of the total comprised of U.S. Treasury, federal agency securities, and agency issued mortgage securities. Treasury holdings are currently positioned in a ladder structure. Three-year treasury bonds are purchased quarterly, held for two years, then sold with one year left to maturity to take advantage of the slope in the yield curve. The collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS) held by the company are backed by agency collateral which consists of loans issued by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Corporation (FNMA), and the Government National Mortgage Association (GNMA) with a blend of fixed and floating rate coupons. 11 Credit risk is minimized through agency backing, however, there are other risks associated with MBS and CMOs. These other risks include prepayment, extension, and interest rate risk. MBS are securities which represent an undivided interest in a pool of mortgage loans. CMOs are structured obligations that are derived from a pool of mortgage loans or agency mortgage backed securities. CMOs in general have widely varying degrees of risk, which results from the prepayment risk on the underlying mortgage loans and its effect on the cash flows of the security. Prepayment risk is the risk of borrowers paying off their loans sooner than expected in a falling rate environment by either refinancing or curtailment. Extension risk is the risk that the underlying pool of loans will not exhibit the expected prepayment speeds thus resulting in a longer average life and slower cash flows than anticipated at purchase. Interest rate risk is based on the sensitivity of yields on assets that change in a different time period or in a different proportion from that of current market interest rates. Changes in average life due to prepayments and changes in interest rates in general will cause the market value of MBS and CMOs to fluctuate. The Company's MBS portfolio consists of fixed rate balloon maturity pools with short stated final maturities and adjustable rate mortgage (ARM) pools with coupons that reset annually and have longer maturities. Investments in CMOs consist mainly of Planned Amortization Classes (PAC), Targeted Amortization Classes (TAC), and sequential classes. Floating rate securities make up 75% of the CMO portfolio. Support and liquidity classes with longer average lives and floating rate coupons are a relatively small portion of the portfolio. To maximize after-tax income, investments in tax-exempt municipal securities are utilized but with somewhat longer maturities. CORPORATE OBJECTIVES - -------------------- It is the philosophy of the Company to continue to remain independent in ownership, to foster its image as the community leader in banking, to increase its market share through selected acquisitions and aggressive marketing, to maintain a sound earning-asset portfolio, and to assess liquidity needs while maximizing its profitability and return to its shareholders. NEW ACCOUNTING PRONOUNCEMENTS - ----------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement establishes accounting and reporting standards for derivative instruments, including certain derivatives embedded in other contracts, and for hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. The Statement will be effective for the Company in the fiscal year ending in 2000. Due to the level of use of derivatives of the Company, the effect of implementation of this new pronouncement is not expected to have a significant effect on the financial position or results of operations of the Company. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98- 5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that the costs of start-up activities, including organizational costs, be expensed as incurred. SOP 98-5, effective for fiscal years beginning after December 15, 1998, requires initial application to be recorded as of the beginning of the fiscal year in which the SOP is first adopted and is reported as the cumulative effect of a change in accounting principle. Although certain capitalized costs will be effected, the effect of implementation of this new pronouncement is not expected to have a significant effect on the financial condition or results of operations of the Company. YEAR 2000 - --------- The Company recognizes that the arrival of the Year 2000 poses a unique challenge to the ability of all systems to recognize the date change from December 31, 1999 to January 1, 2000 and, like other companies, has assessed and is repairing its computer applications and business processes to provide for their continued functionality. Efforts to address and resolve this issue are continuing, including a process of inventory, scoping and analysis, modification, testing and certification, and implementation. An assessment of the readiness of external entities with which the Company interfaces, such as vendors, customers, payment systems, and others, is also ongoing. Currently, the Company is in the process of developing a contingency plan should its current Year 2000 plans not be successful and anticipates completion of this plan in the fourth quarter of 1998. 12 A major portion of the costs associated with correcting Year 2000 deficiencies will be met from existing resources through a reprioritization of technology development initiatives, with the remainder representing incremental costs. The Company estimates that it will incur costs for testing of computer applications and purchases of certain new hardware and software. Certain of these hardware improvements would have been made regardless of the Year 2000 issues based on the Company's history of technology upgrades. It is anticipated that the Company will be Year 2000 compliant by early 1999. The Company does not expect that the related overall costs of Year 2000 issues will have a significant effect on the financial condition or results of operations of the Company. Words or phrases when used in this Form 10-Q or other filings with the Securities and Exchange Commission, such as "does not expect" and "anticipates", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. 13 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in the information related to the market risk of the Company since December 31, 1997. 14 Part II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HENDERSON CITIZENS BANCSHARES, INC. Date: November 9, 1998 By: /s/ Milton S. McGee, Jr. ---------------- ------------------------------ Milton S. McGee, Jr., CPA President Date: November 9, 1998 By: /s/ Rebecca G. Tanner ---------------- ---------------------------- Rebecca G. Tanner, CPA Chief Accounting Officer 16 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 7,381 7,885 6,245 0 133,258 64,955 66,125 121,575 1,535 351,892 314,059 0 2,436 0 0 0 10,800 26,617 351,892 7,128 9,616 0 16,744 8,624 8,649 8,095 458 282 7,651 3,500 3,500 0 0 2,756 1.37 1.37 0 149 182 0 0 1,249 328 156 1,535 1,535 0 0
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