-----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, Me8kyquOnCYLDQExibHmZzt3Zwm7cwJux/mbt/B1BwNCTWBnhtxaBsu8IuLW7ne5 pzEKKfz3Xu7CPo1UW5hscQ== 0000930661-01-000782.txt : 20010329 0000930661-01-000782.hdr.sgml : 20010329 ACCESSION NUMBER: 0000930661-01-000782 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010328 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-K405 SEC ACT: SEC FILE NUMBER: 033-42286 FILM NUMBER: 1581752 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-K405 1 0001.txt FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _________ to ________ Commission File Number 33-42286 HENDERSON CITIZENS BANCSHARES, INC. (Exact name of registrant as specified in its charter) Texas 75-2371232 (State or other jurisdiction of incorporation (I.R.S. Employer Identification No.) or organization) 201 West Main Street, P. O. Box 1009 Henderson, Texas 75653 (Address of principal executive offices) (Zip Code) (903) 657-8521 (Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: [Title of Each Class] [Name of Each Exchange on Which Registered] None 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 --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) 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 ] The aggregate market value of the voting stock held by nonaffiliates of the registrant, based on the price of the voting stock in the most recent sale transaction, which occurred on November 17, 2000, was $20,157,497.50. For purposes of this computation, all officers, directors, and 5% beneficial owners of the registrant are deemed to be affiliates. Further, the shares of registrant held in trust by Citizens National Bank, Henderson, Texas, are assumed to be held by an affiliate of the registrant. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the registrant. Number of shares outstanding of the registrant's common stock, as of March 1, 2001: 1,995,216. DOCUMENTS INCORPORATED BY REFERENCE None. PART I ITEM 1. BUSINESS The Company - ----------- Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as a Texas corporation on November 13, 1990 and is a second-tier bank holding company, owning one hundred percent (100%) of the issued and outstanding shares of the common stock of Henderson Citizens Delaware Bancshares, Inc. (the "Delaware BHC"), a Delaware corporation, and one hundred percent (100%) of the issued and outstanding shares of the common stock of Waskom Bancshares, Inc, a Texas corporation. The Company organized the Delaware BHC on December 27, 1991. Waskom Bancshares, Inc. is an inactive shell corporation. The Company also indirectly owns one hundred percent (100%) of the issued and outstanding shares of the $5.00 par value per share common stock (the "Citizens Bank Stock") of Citizens National Bank, Henderson, Texas (the "Citizens Bank"). The Company's primary activity is to provide assistance to the Delaware BHC and the Citizens Bank in the management and coordination of their financial resources and to provide capital, business development, long-range planning and public relations to the Delaware BHC and the Citizens Bank. The Delaware BHC and the Citizens Bank operate under the day-to-day management of their own officers, and each entities' individual boards of directors formulates its own policies. A number of directors or officers of the Company are also directors or officers of the Delaware BHC and the Citizens Bank. See "ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." The Company conducts no activity other than the operation of the Delaware BHC and, indirectly, the Citizens Bank. The Company derives its revenues primarily from the operation of the Citizens Bank in the form of dividends paid from the Citizens Bank to the Delaware BHC and by the Delaware BHC to the Company. In addition, the Company may receive tax benefits from any future losses of the Citizens Bank. Neither the Company nor the Delaware BHC engages in any nonbanking activities at this time. If, in the future, the Company proposes to engage in any nonbanking activities through these corporations, it would be restricted to those nonbanking activities permitted under applicable law or regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). As of December 31, 2000, the Company had, on a consolidated basis, total assets of approximately $423,644,000, total deposits of approximately $379,122,000, total loans (net of unearned discount and allowance for loan losses) of approximately $169,882,000, and total stockholders' equity of approximately $39,122,000. The Delaware BHC - ---------------- The Delaware BHC is a wholly owned subsidiary of the Company, organized in 1991 under the laws of the State of Delaware for the purpose of becoming an intermediate bank holding company. The Delaware BHC owns 1,080,000 shares (100%) of the issued and outstanding Citizens Bank Stock. The primary purpose of the Delaware BHC is to limit the Texas franchise tax liability of the Company. The Delaware BHC does not conduct any operations other than providing assistance to the Citizens Bank and will derive its revenues primarily from the operation of the Citizens Bank in the form of dividends. Recent Developments - ------------------- During 2000, the Company purchased 15,884 shares of its common stock from eight shareholders at an average cost of $17.50 per share. These were privately negotiated transactions. The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with these stock repurchases. On March 14, 2000, the Office of the Comptroller of Currency (the "Comptroller") approved the establishment of an additional branch location for the Citizens Bank located at 739 E. Tyler Street, Athens, Texas. On December 5, 2000, the Citizens Bank opened their full service branch location in Athens, Texas. On February 6, 2001, the Company entered into an Agreement and Plan of Reorganization to acquire Rusk County Bancshares, Inc., Henderson, Texas ("RCBI"), and its wholly owned indirect banking subsidiary, Peoples State Bank. Peoples State Bank operates three banking offices in East Texas, one each in Henderson, Longview and Tatum. Following completion of the transaction, it is anticipated that Peoples State Bank will be merged into the Citizens Bank. At December 31, 2000, RCBI reported net income of $599,000 and consolidated assets of $53.5 million. The acquisition of RCBI will be accounted under the purchase method of accounting for business combinations, [and is expected to be accretive to the Company's earnings in the first full year of operations.] Under the terms of the agreement, all outstanding shares of RCBI common stock (including shares acquired upon exercise of stock options) will be converted into $12,550,000 in cash, representing 1.57 times RCBI's book value at December 31, 2000, and 20.95 times 2000 earnings. The agreement has been approved by the board of directors of both companies. The acquisition of RCBI, which is subject to conditions usual and customary for acquisition transactions of this type, including receipt of regulatory approval, approval of the shareholders of RCBI and satisfaction of other terms and conditions, is expected to be completed during the third quarter of 2001, although there can be no assurance that the transaction will be completed. The Citizens Bank - ----------------- General. ------- The Citizens Bank opened for business in 1930 as Citizens National Bank of Henderson, a national banking association chartered by the Comptroller, and was originally located at 101 East Main Street, Henderson, Texas. In 1973, the Citizens Bank moved to its current location at 201 West Main Street. The Citizens Bank operates branch offices in Henderson, Overton, Mount Enterprise, Jefferson, Malakoff, Chandler, Waskom, and Marshall, Texas. On March 24, 1997, the Citizens Bank opened a trust office in Corsicana, Texas. The Citizens Bank opened a loan production office at the Corsicana, Texas location in March of 1998. At December 31, 2000, the Citizens Bank had approximately $423,503,000 in assets, $379,531,000 in deposits, $169,882,000 in loans (net of unearned discount and allowance for loan losses), and $38,841,000 in shareholder's equity. The Citizens Bank is regulated and supervised by the Comptroller. Services. The Citizens Bank is a full service bank offering a variety of -------- services to satisfy the needs of the consumer and commercial customers in the areas it serves. The Citizens Bank offers most types of loans, including commercial, agribusiness, credit card, consumer, mortgage, home equity, and real estate loans. The Citizens Bank also provides a wide range of consumer banking services, including savings and checking accounts, Master Money debit card, various savings programs, individual retirement accounts, safe deposit boxes, and automated teller machines. The Citizens Bank also offers trust services and automated clearinghouse payroll services. In 1992, the Citizens Bank began offering a wide array of investment products, such as annuities, mutual funds and discount brokerage services, to its customers. In 1994, the Citizens Bank began offering a 24 hour automated telephone account inquiry system, which was complemented in late 1995 by a loan-by-phone automated system. In January 1994, the Citizens Bank began a Community Development Corporation ("CDC"), which is a subsidiary of the bank, and offers affordable housing to lower income persons in Rusk County. In May 1996, the CDC was approved to make loans in Marion and Henderson Counties. 2 On August 8, 1999, the Citizens Bank received approval to own an insurance subsidiary, HCB Insurance Agency, Inc., to perform general insurance agency activities in Mt. Enterprise, Texas. On April 5, 2000, HCB Insurance Agency, Inc. purchased The Preston Agency in Henderson, Texas. Saturday drive up banking has been offered at the Malakoff location since its acquisition in 1994. Saturday drive up banking has been offered in Henderson at the Southside branch since November 1995 and Saturday full service banking has been offered since April 1999. At the Chandler branch, Saturday drive up banking has been offered since April 1996. Saturday drive up banking has been offered by the Waskom branch since September 1998 and by the Jefferson branch since February 1998. Saturday drive up banking and Saturday full service banking has been offered at the Marshall branch since it was established in December 1999. Saturday drive up banking and Saturday full service banking has been offered at the Athens branch since its establishment in December 2000. Competition. The Citizens Bank serves a large portion of the East Texas ----------- area with offices in Henderson, Overton, and Mount Enterprise, which includes Rusk County, Jefferson, which includes Marion County, Athens, Malakoff and Chandler, which includes Henderson County, and Waskom and Marshall which includes Harrison County. The activities in which the Citizens Bank engages are competitive. Each engaged activity involves competition with other banks, as well as with nonbanking financial institutions and nonfinancial enterprises. In addition to competing with other commercial banks within and outside their primary service areas, the Citizens Bank competes with other financial institutions engaged in the business of making loans or accepting deposits, such as savings and loan associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, factors, certain governmental agencies, credit card organizations and other enterprises. Additional competition for deposits comes from government and private issuers of debt obligations and other investment alternatives for depositors, such as money market funds and securities brokers. The Citizens Bank also competes with suppliers of equipment in furnishing equipment financing and leasing services. Environmental Compliance. There are several federal and state statutes ------------------------ that govern the rights and obligations of financial institutions with respect to environmental issues. Besides being directly liable under these statutes for its own conduct, a bank may also be held liable under certain circumstances for actions of borrowers or other third parties on property that is collateral for a loan held by the bank. Such potential liability under the environmental statutes may far exceed the original amount of a loan made by the bank secured by the property. Currently, the Citizens Bank is not a party to any pending legal proceedings under any environmental statute, nor is the Company aware of any instances that may give rise to such liability of the Citizens Bank. Employees. At December 31, 2000, the Citizens Bank employed approximately --------- 173 full-time and 42 part-time employees. The Banking Industry in East Texas. The banking industry is affected by ---------------------------------- general economic conditions such as interest rates, inflation, recession, unemployment and other factors beyond the Company's control. During the mid to late 1980's, declining oil prices had an indirect effect on the Company's business, and the deteriorating real estate market cause a significant portion of the increase in the Company's nonperforming assets during that period. During the early 1990's, the East Texas economy entered into a recovery and growth period that continued as we entered the year 2000. During the last ten years the East Texas economy has diversified, decreasing the overall impact of declining oil prices, however, the East Texas economy is still affected by the oil industry. One area of concern continues to be the personal bankruptcy rate occurring nationwide and in East Texas. Management expects this trend to have some effect on the Company's net charge-offs. Management of the Company, however, cannot predict whether current economic conditions will improve, remain the same or decline. 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 sound monetary policy. In furtherance of these goals, Congress has created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies and the banking industry. The following discussion of the regulatory environment under which bank holding companies and banks operate is intended only to provide the reader with a summary of some of the more material regulatory constraints upon the operation of bank holding companies and banks and does not purport to be a complete discussion of all regulatory 3 constraints. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed. Bank Holding Company Regulation. Both the Company and the Delaware BHC are ------------------------------- registered bank holding companies under the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), and are therefore subject to regulation and examination by the Federal Reserve Board. The Federal Reserve Board has broad oversight authority with respect to many aspects of the activities, operations and expansion of bank holding companies. For example, the Federal Reserve Board must grant prior approval of (i) certain acquisitions of banks or thrifts by bank holding companies; (ii) the engagement by bank holding companies or their subsidiaries in certain activities that are deemed to be closely related to banking; and (iii) transactions regarding the transfer of ownership of a bank holding company's stock that constitute a "change in bank control" under the provisions of the Change in Bank Control Act of 1978, as amended. The Bank Holding Company Act provides that a bank holding company must obtain the prior approval of the Federal Reserve Board for the acquisition of more than 5% of the voting stock or substantially all the assets of any bank or bank holding company. The Bank Holding Company 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% of the voting shares of any company that is not a bank. The Federal Reserve Board has deemed certain limited activities to be closely related to banking and therefore permissible in which a bank holding company may engage. In addition, applicable law restricts the extension of credit to any bank holding company by any subsidiary insured depository institution. Traditionally, the activities of bank holding companies have been limited to the business of banking and activities closely related or incidental to banking. The Gramm-Leach-Bliley Financial Services Modernization Act of 1999 (the "Modernization Act"), enacted on November 11, 1999, with an effective date of March 11, 2000, expands the types of activities in which a bank holding company may engage. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to become a "financial holding company." A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are "financial in nature." Among the activities that are deemed "financial in nature" are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, certain merchant banking activities, and activities that the Federal Reserve Board considers to be closely related to banking. A bank holding company may become a financial holding company under the Modernization Act if each of its subsidiary banks is "well capitalized" under the FDICIA prompt corrective action provisions (See "Bank Regulation" below), is well managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding company. A bank holding company that falls out of compliance with such requirements may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the current restrictions of the Bank Holding Company Act. In a similar manner, a bank may establish one or more subsidiaries, which subsidiaries may then engage in activities that are financial in nature. Applicable law and regulation provide, however, that the amount of such investments are generally limited to 45% of the total assets of the bank, and such investments are not aggregated with the bank for determining compliance with capital adequacy guidelines. Further, the transactions between the bank and such a subsidiary are subject to certain limitations. (See generally, the discussion of Transactions with Affiliates described under "Bank Regulation" below.) Under the Modernization Act, the Federal Reserve Board serves as the primary "umbrella" regulator of financial holding companies, with supervisory authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies will generally be regulated according to the type of such financial activity: banking activities by banking regulators, securities activities by securities regulators, and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements regarding private information collected by financial institutions. All implementing regulations under the Modernization Act have not yet been promulgated in final form, and the Company cannot predict the full sweep of the new legislation and has not yet determined whether it will elect to become a financial holding company. 4 In addition, bank holding companies are required to file annual and other reports with, and furnish information regarding its business to, the Federal Reserve Board. The Federal Reserve Board has available to it several administrative remedies including cease-and-desist powers over parent holding companies and nonbanking subsidiaries where the actions of such companies would constitute a serious threat to the safety, soundness or stability of a subsidiary bank. The Federal Reserve Board also has the authority to regulate debt obligations (other than commercial paper) issued by bank holding companies. This authority includes the power to impose interest ceilings and reserve requirements on such 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. Federal banking law provides that the Company and the Delaware BHC are able to acquire or establish banks in any state of the United States, subject to certain aging and deposit concentration limits that may be imposed under applicable state laws. However, the board of directors of the Company and the Delaware BHC do not at this time have any plans to acquire or establish banks whether within the State of Texas or elsewhere. The Comptroller, the Federal Reserve Board and the Federal Deposit Insurance Corporation (the "FDIC") have adopted risk-based capital guidelines, which took effect on December 31, 1990. These guidelines set forth the calculation of banks and bank holding companies' capital to asset ratios by assigning a weight to all assets, including off-balance-sheet assets, and by defining the components that may be included in capital. The guidelines establish a capital ratio that compares an institution's qualifying capital base (the numerator of the risk-based capital) to its risk-weighted assets (the denominator of the ratio). The guidelines create two categories of capital: Tier 1, or core capital, and Tier 2, or supplementary capital. Generally, Tier 1 capital consists primarily of the sum of common stock and perpetual noncumulative preferred stock less goodwill and certain percentages of other intangible assets. Tier 2 capital consists primarily of perpetual preferred stock not qualifying as Tier 1 capital, perpetual debt, mandatory convertible securities, subordinated debt, convertible preferred stock with an original weighted average maturity of at least five years and the allowance for loan and lease losses up to a maximum of 1.25% of risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The Tier 1 component must comprise at least 50% of qualifying total capital. All assets are assigned a weighted risk factor from 0% to 100%. Risk-based capital ratios are calculated using risk-weighted assets, which include both on-and off-balance sheet assets. Banks and bank holding companies are required to maintain a ratio of total capital to risk-weighted assets ("Total Capital Ratio") of at least 8.0%, and a ratio of Tier 1 capital to risk weighted assets ("Tier 1 Capital Ratio") of at least 4.0%. Under these guidelines, the Company had a Total Capital Ratio of 18.59% and a Tier 1 Capital Ratio of 17.45% at December 31, 2000. The Federal Reserve Board risk-based capital standards contemplate that evaluation of capital adequacy will take account of a wide range of other factors, including overall interest rate exposure; liquidity, funding and market risks; the quality and level of earnings; investment, loan portfolio, and other concentrations of credit; certain risks arising from nontraditional activities; the quality of loans and investments; the effectiveness of loan and investment policies; and management's overall ability to monitor and control financial and operating risks including the risks presented by concentrations of credit and nontraditional activities. In addition, banks and bank holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets ("Leverage Capital Ratio") of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum Leverage Capital Ratio of at least 4.0% for all other banks. The Comptroller, the FDIC and the Federal Reserve Board define Tier 1 capital in the same manner for both the leverage ratio and the risk-based capital ratio. Adjusted total assets are comprised of total assets less intangible assets. As of December 31, 2000, the Company's Leverage Capital Ratio was 8.76%. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory level, without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangible assets not deducted from Tier 1 capital, to quarterly 5 average total assets. As of December 31, 2000, the Federal Reserve Board had not advised the Company of any specific minimum Tangible Tier 1 Leverage Ratio applicable to it. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, the Company's ability to pay cash dividends depends upon the cash dividends it receives from the Citizens Bank through the Delaware BHC. The Company's only significant sources of income are (i) dividends paid by the Citizens Bank and (ii) the tax savings, if any, that result from the filing of consolidated income tax returns for the Company, the Delaware BHC and the Citizens Bank. The Company must pay all of its operating expenses from funds received by it from the Citizens Bank. Therefore, shareholders may receive dividends from the Company only to the extent that funds are available after payment of the Company's operating expenses. The Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the bank holding company's capital needs, asset quality and overall financial condition. The ability of the Company to pay dividends is further restricted by the requirement that it maintain an adequate level of capital, on a consolidated basis, in accordance with guidelines of the Federal Reserve Board. Funds available for payment of dividends to its shareholders and other expenses will be provided primarily from dividends to the Company from the Delaware BHC, which will in turn, be received by the Delaware BHC from the Citizens Bank. The ability of the Citizens Bank to pay dividends is restricted by provisions of the National Bank Act. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- Dividends." Bank Regulation. The Citizens Bank is chartered under the National Bank --------------- Act and is subject to regulation, supervision and examination by the Comptroller and to regulation by both the Federal Reserve Board and the FDIC. The majority of the Citizens Bank' operations and activities are subject to regulation and supervision by one or more of the regulatory authorities noted above. For example, activities and operations of the Citizens Bank such as (i) extension of credit and lending activities, (ii) deposit collection activities; (iii) dividend payments; (iv) branch office operations; and (v) interstate expansion are regulated by at least one or more these regulatory agencies. The following is a summary of certain restrictions that are applicable to the operations of the Citizens Bank: Transactions with Affiliates. With respect to the federal legislation applicable to the Citizens Bank, the Federal Reserve Act, as amended by the Competitive Equality Banking Act of 1987, prohibits the Citizens Bank from engaging in specified transactions (including, for example, loans) with certain affiliates unless the terms and conditions of such transactions are substantially the same or at least as favorable to the Citizens Bank as those prevailing at the time for comparable transactions with or involving other nonaffiliated entities. In the absence of such comparable transactions, any transaction between the Citizens Bank and its affiliates must be on terms and under circumstances, including credit standards that in good faith would be offered or would apply to nonaffiliated companies. In addition, certain transactions, referred to as "covered transactions," between the Citizens Bank and its affiliates may not exceed 10% of the Citizens Bank's capital and surplus per affiliate and an aggregate of 20% 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 Citizens Bank is prohibited from purchasing low quality assets from an affiliate. Every company under common control with the Citizens Bank, including the Company and the Delaware BHC, are deemed to be affiliates of the Citizens Bank. Loans to Insiders. Federal law also constrains the types and amounts of loans that the Citizens Bank may make to its executive officers, directors and principal shareholders. Among other requirements, such loans must be approved by the Citizens Bank's board of directors in advance and must be on terms and conditions as favorable to the Citizens Bank as those available to unrelated persons. Regulation of Lending Activities. Loans made by the Citizens Bank are also subject to numerous federal and state laws and regulations, including the Truth- In-Lending Act, 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 Citizens Bank are provided for failure of the Citizens Bank to comply with such laws and regulations. 6 Branch Banking. Pursuant to the Texas Finance Code, all banks located in Texas are authorized to branch statewide, subject to prior regulatory approval. Accordingly, a bank located anywhere in Texas has the ability, subject to regulatory approval, to establish branch facilities near any of the Citizens Bank's facilities and within its market areas. If other banks were to establish branch facilities near the Citizens Bank or any of its facilities, it is uncertain whether such branch facilities would have a materially adverse effect on the business of the Citizens Bank. 7 In addition, in 1994 Congress adopted the Riegle-Neal Interstate Banking and Branching Efficiency Act. That statute provides for nationwide interstate banking and branching, subject to certain aging and deposit concentration limits that may be imposed under applicable state laws. Current Texas law permits interstate branching only through acquisition of a financial institution that is at least 5 years old, and after the acquisition, the resulting institution and its affiliates cannot hold more than 20% of the total deposits in the state. Accordingly, a bank with its main office outside the state of Texas generally cannot branch on a de novo basis into Texas. The new law permits applicable regulatory authorities to approve de novo branching in Texas by institutions located in states that would permit Texas institutions to branch on a de novo basis into those states. Currently, the laws of 13 states provide such reciprocity, but it is possible that, over the next few years, additional states will provide for reciprocity in de novo branching. The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank from using the new interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to insure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities served by the out-of-state bank. Dividends. All dividends paid by the Citizens Bank are paid to the Company, the sole indirect shareholder of the Citizens Bank, through the Delaware BHC. The general dividend policy of the Citizens Bank is to pay dividends at levels consistent with maintaining liquidity and preserving applicable capital ratios and servicing obligations of the Company. The dividend policy of the Citizens Bank is subject to the discretion of the board of directors of the Citizens Bank and will depend upon such factors as future earnings, financial conditions, cash needs, capital adequacy, compliance with applicable statutory and regulatory requirements and general business conditions. The ability of the Citizens Bank to pay dividends is restricted by provisions of the National Bank Act. Under the National Bank Act, the Citizens Bank generally may pay dividends to the extent of net profits. The prior approval of the Comptroller, or his designee, however, is required for any dividend by any national bank if the total of all dividends, including any proposed dividend, declared by the national bank in any calendar year exceeds the total of its net profits (as defined) for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus. The Comptroller also has the authority to prohibit a national bank from engaging in any activity that, in his opinion, constitutes an unsafe or unsound practice in conducting its business. Under certain circumstances relating to the financial condition of a national bank, the Comptroller may determine that the payment of dividends would be an unsafe or unsound practice. In addition, the Comptroller and the Federal Reserve Board have expressed the view that national banks and bank holding companies should refrain from dividend increases or reduce or eliminate dividends under certain circumstances. The ability of the Citizens Bank to pay dividends is also restricted by the requirement that it maintain adequate levels of capital in accordance with guidelines promulgated from time to time by the Comptroller and the FDIC, as applicable. Regulations adopted by the Comptroller and the FDIC require banks to maintain minimum Tier 1 Capital Ratios of 4.0%, Total Capital Ratios of 8.0%, and Leverage Capital Ratios of at least 3.0% for the most highly rated, financially sound banks and at least 4.0% for all other banks. Under the regulations, at December 31, 2000, the Citizens Bank had capital ratios as follows: Tier 1 Total Leverage Capital Ratio Capital Ratio Capital Ratio ------------- ------------- ------------- 16.99% 18.12% 8.69% See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- Dividends." The exact amount of future dividends on the stock of the Citizens Bank will be a function of the profitability of the Citizens Bank in general and applicable tax rates in effect from year to year. The Bank's ability to pay dividends in the future will directly depend on its future profitability, which cannot be accurately estimated or assured. 8 FDICIA. The FDIC Improvement Act of 1991 ("FDICIA") made a number of 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 limited deposit insurance coverage, implemented changes in consumer protection laws and provided for least-cost resolution and prompt regulatory action with regard to troubled institutions. 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 FDIC, a bank is deemed to be "well capitalized" if it has a Total Capital Ratio of 10% or more, a Tier 1Capital Ratio of 6% or more and a Leverage Capital Ratio of 5% or more, and if the bank is not subject to an order or capital directive to meet and maintain a certain capital level. Under such regulations, a bank is deemed to be "adequately capitalized" if it has a Total Capital Ratio of 8% or more, a Tier 1Capital Ratio of 4% or more and a Leverage Capital Ratio of 4% 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 Capital Ratio of 3% or more). Under such regulations, a bank is deemed to be "undercapitalized" if it has a Total Capital Ratio of less than 8%, a Tier 1Capital Ratio of less than 4% or a Leverage Capital Ratio of less than 4%. Under such regulations, a bank is deemed to be "significantly undercapitalized" if it has a Total Capital Ratio of less than 6%, a Tier 1Capital Ratio of less than 3% and a Leverage Capital Ratio of less than 3%. Under such regulations, a bank is deemed to be "critically undercapitalized" if it has a Leverage Capital Ratio of less than or equal to 2%. A bank may be reclassified to be in a capitalization category that is next below that indicated by its actual capital position (but not to "critically undercapitalized") if it receives a less-than-satisfactory examination rating by its examiners with respect to its asset quality, management, earnings or liquidity that has not been corrected, or it is determined that the bank is in an unsafe or unsound condition or engaged in an unsafe or unsound practice. If a national bank is classified as undercapitalized, the bank is required to submit a capital restoration plan to the Comptroller. Pursuant to FDICIA, an undercapitalized 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 acceptance by the FDIC of a capital restoration plan for the bank. Furthermore, if a national bank is classified as undercapitalized, the Comptroller may take certain actions to correct the capital position of the bank. If a bank is classified as "significantly undercapitalized" or "critically undercapitalized," the Comptroller is required to take one or more prompt corrective actions. These actions include, among other things, requiring: sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank is classified as "critically undercapitalized," FDICIA requires the bank to be placed into conservatorship or receivership within 90 days, unless the FDIC determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks. 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 are not permitted to accept such deposits. The Comptroller may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if the Comptroller determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. Deposit Insurance. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine "assessment risk classifications" based on its capital classification and the FDIC's consideration of supervisory evaluations provided by the institution's primary federal regulator. Each insured bank's insurance assessment rate is then determined by the risk category in which the FDIC has classified it. There is currently a 27 basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 2000 to 0% assessment, and banks classified as weakest by the FDIC are subject to an assessment rate of 0.27%. In addition to its insurance assessment, each insured bank is subject in 2000 to a debt service assessment of $0.016 per one hundred dollars of deposits to help recapitalize the Savings Association Insurance Fund of the FDIC. Under these assessment criteria, the Citizens Bank is required to pay annual deposit premiums to the FDIC in 9 the amount of $0.016 per hundred dollars of deposits. The Bank's deposit insurance assessments may increase or decrease depending upon the risk assessment classification to which the Citizens Bank is assigned by the FDIC. Any increase in insurance assessments could have an adverse effect on the Citizens Bank's earnings. FIRREA. The Financial Institution Reform, Recovery and Enforcement Act of ------ 1989 ("FIRREA") was signed into law on August 9, 1989. This legislation includes various provisions that affect or may affect the Company, the Delaware BHC and the Citizens Bank. Among other matters, FIRREA generally permits bank holding companies to acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed certain cross-marketing prohibitions previously applicable to thrift and bank subsidiaries of a common holding company. Furthermore, a multi-bank holding company may be required to indemnify the federal deposit insurance fund against losses it incurs with respect to such company's affiliated banks, which in effect makes a bank holding company's equity investments in healthy bank subsidiaries available to the FDIC to assist such company's failing or failed bank subsidiaries. In addition, pursuant to FIRREA, any depository institution that 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 such addition or employment becomes effective. During such 30-day period, the applicable federal banking regulatory agency may disapprove of the addition of employment of such director or officer. The Citizens Bank are not currently subject to any such requirements. FIRREA also expanded and increased civil and criminal penalties available for use by the appropriate regulatory agency against certain "institution- affiliated parties" (primarily including management, employees and agents of a financial institution, independent contractors such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs) who knowingly or recklessly either violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound practices. Such practices can include the failure of an institution to timely file required reports or the submission of inaccurate reports. Furthermore, FIRREA authorized 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, indemnification or guarantee against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets or take other action as determined by the ordering agency to be appropriate. 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 Board. Changes in the discount rate on member bank borrowings, control of borrowings, 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 placing of 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 Board. Those monetary policies influence to a significant extent the overall growth of bank loans, investments and deposits and the interest rates charged on loans or paid on time and savings deposits. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Citizens Bank, therefore, cannot be predicted accurately. Management of the Company and the Citizens Bank cannot predict what other legislation or economic and monetary policies of the various regulatory authorities might be enacted or adopted or what other regulations might be adopted or the effects thereof. Future legislation and polices and the effects thereof might have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Such legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The foregoing is an attempt to summarize some of the relevant laws, rules and regulations governing 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. 10 ITEM 2. PROPERTIES The Citizens Bank owns its main banking office and eight branch offices, and leases one facility for a trust and loan production office. The main office is a two-story, 33,000-square-foot office building located at 201 West Main Street, Henderson, Texas, and is the location where the majority of the Citizens Bank's business is conducted. It is also the location where the Company's offices are located. There is a six-lane drive-in facility located directly behind the Citizens Bank's main office. An automated teller machine ("ATM") is also located in a separate building at this address. The Citizens Bank has five additional ATMs in Henderson, Texas, located (i) in a convenience store at 321 State Highway 64 West, (ii) in a convenience store at 1414 West Main Street, (iii) in the local hospital at 300 Wilson, (iv) in a convenience store at 2404 Highway 79 South, and (v) in a convenience store at the traffic star, which is located at the intersection of U.S. Highways 79 and 259 and State Highways 64 and 43. The Citizens Bank has eight branch offices and one trust office. The Southside branch office is located at 1610 Highway 79 South, Henderson, Texas. The Southside branch office contains approximately 4,200 square feet and has a three-lane drive-in facility. The Overton branch office is located at 307 South Commerce Street, Overton, Texas. The Overton branch has approximately 1,076 square feet, one drive-in lane and one ATM. The Overton branch also maintains an ATM at Kilgore College in Kilgore, Texas. The Mount Enterprise branch office is located on Highway 84 in Mount Enterprise, Texas. The Mount Enterprise branch facility has approximately 9,000 square feet, a two-lane drive-in facility, and one ATM. The Jefferson branch office is located at 109 East Broadway, Jefferson, Texas. The Jefferson branch office contains approximately 7,000 square feet and three drive-in lanes. An ATM is located behind the Jefferson branch office at 109 East Broadway. The Jefferson branch also maintains an ATM located at a convenience store at 105 South Walcott and in a grocery store at 404 E. Broadway, Jefferson, Texas. The Malakoff branch is located at 115 West Royall Boulevard, Malakoff, Texas. The Malakoff branch facility has approximately 10,000 square feet, a three-lane drive-in facility and one ATM. The Chandler branch office is located at 105 Highway 31 East, Chandler, Texas. The Chandler branch office contains approximately 3,200 square feet, one drive- in lane and an ATM. A speed of service drive-in facility with three drive-in lanes and one drive up ATM is located at 230 Highway 31 East, Chandler, Texas. The Waskom branch is located at 745 Spur 156, Waskom, Texas. The Waskom branch office contains approximately 6,000 square feet with one drive-in lane attached to the building. One remote drive-in lane and one drive up ATM are also located on the same property. The Marshall branch is located at 1708 East End Boulevard North, Marshall, Texas. The Marshall branch office contains approximately 4,000 square feet with four drive-in lanes and one ATM at the branch location. The Marshall branch also has one ATM located in a convenience store at 401 Pinecrest. The Athens branch is located at 739 E. Tyler Street, Athens, Texas. Currently, the Athens branch is located in a leased modular building with two attached drive-in lanes and an ATM until construction is completed on a permanent branch facility at the same location. The Citizens Bank also maintains two ATMs in convenience stores located at 1398 E. Tyler Street and 116 W. Hwy 175 in Athens, Texas. The trust and loan production office is located at 400 W. Collin Street, Corsicana, Texas. This office is in a leased building that has approximately 4,000 square feet. There are no encumbrances on the properties discussed above. ITEM 3. LEGAL PROCEEDINGS To the knowledge of management of the Company, excepting litigation in the ordinary course of business, there are no material legal proceedings that have been brought or threatened against the Company, the Delaware BHC or the Citizens Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS A vote of the shareholders of the Company was not taken during the fourth quarter of 2000. 11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR STOCK There is no established public market for the shares of the $5.00 par value per share common stock of the Company (the "Company Stock"). The following table shows (i) the high and low sales price for each sale of the common stock of the Company indicated for which the management of the Company had knowledge of the prices involved through March 1, 2001, (ii) the number of such transactions for the periods indicated, and (iii) the total number of shares traded in such transactions. THESE PRICES REFLECT ONLY THE TRANSACTIONS WITH RESPECT TO WHICH MANAGEMENT OF THE COMPANY HAS KNOWLEDGE OF THE PURCHASE PRICE. TRADE PRICES ARE REPORTED ON AN INFORMAL BASIS, AND NO INDEPENDENT VERIFICATION OF THE TRADE PRICES HAS BEEN MADE. THEY ARE THE RESULT OF ISOLATED TRANSACTIONS AND ARE NOT NECESSARILY INDICATIVE OF THE ACTUAL OR MARKET VALUE OF SUCH SECURITIES.
Company Stock ------------------------------------------------------------------------------------ NUMBER OF NUMBER OF TRANSACTIONS SHARES 2001 LOW HIGH REPRESENTED REPRESENTED - ---- --------- -------- ----------------- --------------- First Quarter (Through March 1, 2001) 17.50 17.50 - - 2000 - ---- First Quarter 17.50 17.50 6 10,666 Second Quarter 17.50 17.50 4 2,002 Third Quarter 17.50 17.50 5 2,180 Fourth Quarter 17.50 17.50 3 3,258 1999 - ---- First Quarter 14.50 17.50 5 1,063 Second Quarter 17.50 17.50 - - Third Quarter 17.50 17.50 7 3,674 Fourth Quarter 17.50 17.50 1 900
As of March 1, 2001, there were 404 shareholders of record. 12 DIVIDENDS The Company declared quarterly dividends on the Company Stock during 2000 that approximated $340,000 (or $0.17 per share) for the first quarter of 2000, $340,000 (or $0.17 per share) for the second quarter of 2000, $340,000 (or $0.17 per share) for the third quarter of 2000, and $339,000 (or $0.17 per share) for the fourth quarter of 2000. The Company paid four quarterly dividends on the Company stock during 2000. On January 2, 2000, the Company paid a dividend on the Company stock that approximated $342,000. On March 31, 2000, the Company paid a dividend on the Company stock that approximated $340,000 (or $0.17 per share). On June 30, 2000 the Company paid a dividend on the Company stock that approximated $340,000 (or $0.17 per share). On September 30, 2000 the Company paid a dividend on the Company stock that approximated $340,000 (or $0.17 per share). The amount and timing of future dividend payments will be determined by the Board and will depend upon a number of factors, including the extent of funds legally available therefor and the earnings, business prospects, acquisition opportunities, cash needs, financial condition and regulatory and capital requirements of the Company, the Delaware BHC and the Citizens Bank. As a bank holding company, the Company's ability to pay dividends depends upon the dividends it receives from the Delaware BHC. Dividends paid by the Delaware BHC will, in turn, depend on the ability of the Citizens Bank to pay dividends. The ability of the Citizens Bank to pay dividends is restricted by provisions of the National Bank Act. Under the National Bank Act, a bank is generally able to pay dividends to the extent of net profits, except that unless the bank's capital surplus equals its stated capital, no dividend shall be declared until the bank has transferred to capital surplus an amount not less than 10% of the net profits of the bank earned since the last dividend was declared. In addition, the prior approval of the Comptroller is required for any dividend if the total of all dividends, including any proposed dividend, declared by the national bank in any calendar year exceeds the total of its net profits for such year combined with its retained net profits for the preceding two (2) years, less any required transfers to surplus. The Comptroller also has the authority to prohibit a national bank from engaging in any activity that, in his opinion, constitutes an unsafe or unsound practice in conducting its business. Under certain circumstances relating to the financial condition of a national bank, the Comptroller may determine that the payment of dividends would be an unsafe or unsound practice. In addition, the Comptroller and the Federal Reserve Board have expressed the view that national banks and bank holding companies should restrain or refrain from dividend increases or reduce or eliminate dividends under certain circumstances. The ability of the Company, the Delaware BHC, and the Citizens Bank to pay dividends is also restricted by the requirement that they maintain adequate levels of capital (on a consolidated basis, in the case of the Company and the Delaware BHC) in accordance with guidelines promulgated from time to time by the Comptroller, in the case of the Citizens Bank, and the Federal Reserve Board, in the case of the Company and the Delaware BHC. The Comptroller, the Federal Reserve Board and the FDIC have adopted risk-based capital guidelines. Federal Reserve Board guidelines require the Company to maintain a Tier 1 Capital Ratio of at least 4.0%, a Total Capital Ratio of at least 8.0% and a Leverage Capital Ratio of at least 4.0%. The Company's Tier 1 Capital, Total Capital Ratio and Leverage Capital Ratio at December 31, 2000 were 17.45%, 18.59% and 8.76%, respectively, and thus were above the regulatory minimums. See "ITEM 1. BUSINESS -- Supervision and Regulation." As of December 31, 2000, neither the Company nor the Citizens Bank had entered into any agreement with any regulatory authority requiring the Company or the Citizens Bank to maintain higher ratios than regulations normally require. The ability of the Company (as a Texas corporation) to pay dividends is restricted by Texas law, which provides that a corporation may pay dividends only out of unreserved and unrestricted earnings surplus of the corporation and is directly tied to the Citizens Bank' ability to pay dividends. 13 ITEM 6. SELECTED FINANCIAL DATA The following summary of consolidated financial data of the Company is derived from the financial statements of the Company as of and for the five years ended December 31, 2000.
At December 31, ------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 2000/(1)/ 1999 1998/(2)/ 1997 1996 ------------------------------------------------------------------- Balance Sheet Data: Total assets $423,644 393,962 386,919 358,493 356,830 Loans, net of unearned interest 169,882 144,197 129,263 106,061 100,825 Allowance for credit losses on loans 2,355 2,200 1,701 1,249 1,146 Total deposits 379,122 355,423 345,720 322,107 320,673 Shareholders' equity 39,122 35,771 35,911 32,729 31,988 Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------- Income Statement Data: Interest income $ 25,527 23,166 22,234 22,267 20,716 Interest expense 14,015 11,576 11,377 11,546 11,203 ------------------------------------------------------------------- Net interest income 11,512 11,590 10,857 10,721 9,513 Provision for credit losses 290 354 623 330 264 ------------------------------------------------------------------- Net interest income after provision for credit losses 11,222 11,236 10,234 10,391 9,249 Non-interest income 6,267 5,414 4,754 3,290 3,243 Non-interest expense 13,313 12,011 10,614 9,265 8,038 ------------------------------------------------------------------- Income before income taxes 4,176 4,639 4,374 4,416 4,454 Income tax expense 552 730 868 1,026 1,110 ------------------------------------------------------------------- Net income 3,624 3,909 3,506 3,390 3,344 Common Share Data: Net income - basic 1.81 1.94 1.74 1.61 1.55 Book value 19.61 17.79 17.81 16.22 15.02 Dividend pay-out ratio 37.57 35.05 36.85 39.53 41.21 As of or for the Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------- Performance Data: Return on average total assets 0.91% 1.02 0.98 0.98 1.00 Return on average shareholders' equity 9.80% 11.02 10.16 10.56 10.60 Average shareholders' equity to average assets 9.00% 9.21 9.65 9.27 9.44 Total loans to total deposits at year-end 44.81% 40.57 37.39 32.93 31.44
(1) On December 20, 1999, the Citizens Bank opened its full service branch location in Marshall, Texas, and completed its first full year of operations in 2000. (2) On December 11, 1998, the Company acquired all of the outstanding shares of Jefferson National Bank, Jefferson, Texas. The transaction was accounted for using the purchase method of accounting and resulted in an increase in total assets of $31,913,000, and total deposits of $28,564,000. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC. FOR THE THREE YEARS ENDED DECEMBER 31, 2000 The following discussion and analysis of financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements, the notes thereto, and other financial and statistical information appearing elsewhere in this 2000 Annual Report. INTRODUCTION - ------------ Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as a Texas corporation on November 13, 1990 and was organized for the purpose of becoming a second-tier bank holding company through the direct acquisition of one hundred percent (100%) of the issued and outstanding shares of the common stock of Henderson Citizens Delaware Bancshares, Inc. (the "Delaware BHC") and through the indirect acquisition of one hundred percent (100%) of the issued and outstanding shares of the $5.00 par value per share common stock of Citizens National Bank (the "Citizens Bank"). The Delaware BHC was incorporated pursuant to the laws of the State of Delaware on February 21, 1991. The acquisition of the Delaware BHC by the Company and the acquisition of the Citizens Bank by the Delaware BHC were consummated on December 27, 1991. The Company's primary activity is to provide assistance to its subsidiaries in the management and coordination of their financial resources and to provide capital, business development, long-range planning and public relations to its subsidiaries. Delaware BHC and the Citizens Bank operate under the day-to-day management of its own officers and each entity's individual board of directors formulates its own policies. A number of directors or officers of the Company are also directors or officers of its subsidiaries. The Company conducts no other activity than the operation of its subsidiaries. The Company derives its revenues primarily from the operation of its subsidiaries in the form of dividends paid from the Citizens Bank. The Delaware BHC owns 100% of the issued and outstanding shares of the Citizens Bank. The Delaware BHC was organized as a Delaware corporation in 1991 in order to limit the Company's Texas franchise tax liability. The Delaware BHC currently does not conduct any significant activities and has no activities contemplated at this time. The Citizens Bank opened for business in 1930 as Citizens National Bank of Henderson, a national banking association chartered by the Comptroller of the Currency (the "Comptroller") and originally located at 101 East Main Street, Henderson, Texas. In 1973, the Bank moved to its current location at 201 West Main Street. In 1990, the Citizens Bank acquired certain assets and assumed substantially all of the liabilities of General S&L from the Resolution Trust Corporation ("RTC"). With this acquisition, the Citizens Bank opened its Southside Branch at 1610 Highway 79 South in Henderson and a branch at 307 Commerce in Overton, Texas. On December 31, 1991, the Company acquired 100% of the issued and outstanding shares of Enterprise Bancshares, Inc. ("Enterprise"). At the date of the acquisition of Enterprise, Merchants State Bank of Mount Enterprise, Texas ("Merchants Bank") was a wholly owned subsidiary of Enterprise. Immediately following the consummation of the Enterprise acquisition, Merchants Bank was merged with and into Citizens Bank, becoming the third branch of Citizens Bank. The branch is located at 110 Rusk Street (Highway 84) in Mt. Enterprise, Texas. On December 29, 1995 Enterprise was merged with the Delaware BHC. On September 23, 1994, the Citizens Bank purchased certain assets and assumed certain liabilities associated with the Jefferson, Texas branch of Pacific Southwest Bank, F.S.B., Corpus Christi, Texas located at 302 East Broadway, Jefferson, Texas (the "Jefferson Branch"). The Citizens Bank began operations of the Jefferson Branch effective at the close of business on September 23, 1994. The acquisition of the Jefferson Branch resulted in an increase in total assets of the Citizens Bank of approximately $14,500,000 and total deposits of approximately $13,900,000 as of September 23, 1994. On December 8, 1994, the Citizens Bank purchased certain assets and assumed certain liabilities associated with the branches of NationsBank of Texas, National Association, Dallas, Texas ("NationsBank"), located at 105 Highway East, Chandler, Texas, and 115 West Royall Boulevard, Malakoff, Texas (collectively, the "NationsBank Branches"). The Citizens Bank began operations of the NationsBank Branches as branches of the Citizens Bank effective at the close of business on December 8, 1994. The acquisition of the NationsBank Branches resulted in an increase in total assets of the Citizens Bank of approximately $51,300,000 and total deposits of $45,676,000 as of December 8, 1994. 15 On September 17, 1996, the Company completed its acquisition of all of the issued and outstanding stock of Waskom Bancshares, Inc. and its majority-owned subsidiary, the First State Bank in Waskom, Texas (the "Waskom Bank"). The Company acquired approximately 93% of the stock of Waskom Bancshares, Inc. pursuant to the terms of a Stock Purchase Agreement, dated as of May 24, 1996. The Company acquired the remaining shares of Waskom Bancshares, Inc. and the minority interest of the Waskom Bank not owned by Waskom Bancshares, Inc. pursuant to the terms of Stock Purchase Agreements between the Company and each of the holders representing a minority interest in Waskom Bancshares, Inc. and the Waskom Bank. Such stock was acquired for cash, and the purchase price was funded with a combination of notes payable and cash. The stock of the Waskom Bank directly and indirectly acquired by the Company through the acquisition of Waskom Bancshares, Inc. was thereafter contributed to the Delaware BHC. Waskom Bancshares, Inc. is an inactive subsidiary of the Company. The sole banking office of the Waskom Bank is now being operated as a full-service branch of the Citizens Bank since completion of a merger on July 23, 1998. The acquisition of the Waskom Bank resulted in an increase in total assets of the Citizens Bank of approximately $25,256,000 and total deposits of $22,908,000 as of September 17, 1996. On December 11, 1998, the Company acquired all of the outstanding shares of Jefferson National Bank (the "Jefferson Bank") located at 109 E. Broadway, Jefferson, Texas, for a combination of cash and notes payable. The transaction was accounted for using the purchase method of accounting and resulted in an increase in total assets of $31,913,000 and total deposits of $28,564,000. The Citizens Bank merged operations of the Jefferson Bank with the existing Citizens Bank Jefferson branch at the close of business on December 11, 1998. On June 1, 1999, the Comptroller of Currency approved the establishment of two additional branch locations for the Citizens Bank; one located at 400 West Collin Street, Corsicana, Texas, and the second located at 1708 East End Boulevard North, Marshall, Texas. On December 20, 1999, the Citizens Bank opened its full service branch location in Marshall, Texas. On March 14, 2000, the Comptroller of Currency approved the establishment of a branch location for Citizens Bank located at 739 E. Tyler Street, Athens, Texas. On April 5, 2000, HCB Insurance Agency, Inc., a wholly owned subsidiary of Citizens Bank, completed the purchase of the Preston Insurance Agency in Henderson, Texas. On December 5, 2000, the Citizens Bank opened its full service branch location in Athens, Texas. On February 6, 2001, the Company entered into an Agreement and Plan of Reorganization to acquire Rusk County Bancshares, Inc., Henderson, Texas, and its wholly owned indirect banking subsidiary, Peoples State Bank. Peoples State Bank operates three banking offices in East Texas, one each in Henderson, Longview and Tatum. Following completion of the transaction, it is anticipated that Peoples State Bank will be merged into the Citizens Bank. The Company's management continues its strategy to increase market share and enhance long-range profitability by evaluating potential acquisitions. This evaluation process involves maintenance of strong equity capital and consistent earnings, and meeting internal financial objectives of the Company. 16 Results of Operations - --------------------- During the year ended December 31, 2000, the Company's net income decreased to $3,624,000 from $3,909,000 and $3,506,000 for the same periods in 1999 and 1998 respectively. The decrease in net income for 2000 was primarily attributable to a significant increase in short-term interest rates and excess liquidity early in the year in anticipation of Y2K demands. In 1999, the increase in net income resulted from higher net interest income, a lower provision for loan losses, increased other income and reduced tax provision offset by an increase in other expenses. Net interest income was slightly lower, $11,512,000 in 2000 compared to $11,590,000 in 1999 and $10,857,000 in 1998. The provision for loan losses was lower, $290,000 in 2000 compared to $354,000 in 1999 and $623,000 in 1998. Other income increased to $6,267,000 in 2000 compared to $5,414,000 in 1999 and $4,754,000 in 1998. Other expenses increased to $13,313,000 in 2000 compared to $12,011,000 in 1999 and $10,614,000 in 1998. The tax provision was reduced to $552,000 in 2000 compared to $730,000 in 1999 and $868,000 in 1998. Net Interest Income - ------------------- Net interest income is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. In Table I, interest income on each category of interest-earning assets and the interest expense on interest-bearing liabilities are weighted to produce yields and rates for each category of assets and liabilities. The difference between the weighted yields of assets and rates on liabilities is the net interest spread. Net interest margin is net interest income as a percentage of total interest-earning assets. Net interest income was affected by an increase in interest income of $2,361,000 in 2000 over 1999 due to higher average balances combined with higher yields. Interest expense increased by $2,439,000 as related liabilities were impacted by average rates in 2000 that were 67 basis points higher than the previous year. In 1999 compared to 1998, net interest income was affected by an increase in interest income of $932,000 due to higher average balance for interest earning assets offset by slightly lower yields. There was a slight increase in interest expense of $199,000 in 1999 over 1998 due to an increase in average balances offset by a decline of 21 basis points on the average yield. Differences in yields and volumes can be found in Table II. Net interest spreads were approximately 2.8%, 3.1%, and 2.9% for the years 2000, 1999, and 1998, respectively, and net interest margins were 3.5%, 3.7%, and 3.6% during the same three-year period. Interest Income - --------------- Loans. In 2000, interest income on loans increased $1,924,000 over 1999 ----- due to higher average balances combined with a higher average yield. In 1999, interest income on loans increased $1,432,000 over 1998 as an increase in average balances was partially offset by a decrease of 23 basis points on average rates paid. The average loan balance during 2000 increased due to continued strong loan demand, increases in tax-exempt leases and the new loans added due to the branch in Marshall. Securities. Income from investment securities increased $313,000 in 2000 ---------- from 1999 due to higher yields offset by lower average balances. Income from investment securities decreased $233,000 from 1999 compared to 1998, as slightly higher average balances were more than offset by a decrease in yields, primarily in U.S. government securities. The decrease in yields in 1999 compared to 1998 was primarily due to lower rates on reinvestments. See Tables I and II. Other Interest Earning Assets. Other interest-earning assets consist of ----------------------------- interest-bearing deposits with other financial institutions and federal funds sold. Interest income on other interest earning assets decreased $124,000 in 2000 compared to 1999 due mainly to lower average balances. Such amounts decreased in 1999 from 1998 by $267,000 due to lower average balances. 17 Table I - Average Balances and Interest Yields and Spreads (dollars in thousands)
Years Ended December 31 ----------------------------------------------------------------------------------------- 2000 1999 1998 --------- --------- -------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balances Expense Rate Balances Expense Rate Balances Expense Rate ---------- --------- ------- ----------- --------- ------ ----------- --------- -------- Loans, net** $ 157,454 13,061 8.66% 137,997 11,137 8.38% $ 116,520 9,705 8.61% Securities: U.S. governments 80,577 4,567 5.67 72,800 3,999 5.49 84,931 4,976 5.86 State and municipals* 44,328 2,056 7.03 48,461 2,232 6.98 36,256 1,670 7.04 Other*** 78,087 5,090 6.52 87,828 5,169 5.89 84,727 4,987 5.87 Interest-bearing deposits with financial institutions 7,031 453 6.44 8,207 420 5.12 10,119 545 5.39 Federal funds sold 4,869 300 6.16 4,045 209 5.17 6,543 351 5.36 ---------- --------- ------- ----------- --------- ------ ----------- --------- -------- Total interest-earning assets* 372,346 25,527 7.29 359,338 23,166 6.88 339,096 22,234 6.91 Other assets: Cash and due from banks 9,867 11,135 7,561 Premises and equipment, net 7,786 6,458 5,434 Allowance for loan losses (2,307) (1,948) (1,439) Other assets 11,127 10,023 6,814 ------------ ----------- ------------ Total average assets $ 398,819 $ 385,006 $ 357,466 ============ =========== ============ Interest-bearing liabilities: NOW, money market and savings deposits $ 127,539 3,468 2.72% $ 128,315 2,862 2.23% $120,254 3,026 2.52% Time deposits 185,632 10,501 5.66 176,188 8,706 4.94 163,007 8,318 5.10 Other borrowed funds 537 46 8.38 81 8 9.88 536 33 4.48 ---------- --------- ------- ----------- --------- ------ ----------- --------- -------- Total interest-bearing liabilities 313,708 14,015 4.47 304,584 11,576 3.80 283,797 11,377 4.01 Other liabilities and stockholders equity: Demand deposits 46,917 42,622 36,883 Other liabilities 2,286 2,295 2,007 Stockholders' equity 35,908 35,470 34,497 ----------- ----------- ------------ Total average liabilities and stockholders equity $ 398,819 $ 384,971 $ 357,184 =========== =========== =========== Net interest income $11,512 $11,590 $10,857 ========= ========= ========= Net interest spread* 2.82% 3.08% 2.90% ======= ====== ======== Net interest margin* 3.53% 3.66% 3.56% ======= ====== ========
* Interest yields have been presented on a tax equivalent basis using a 34% rate. ** Non-accrual loans have been included in average balances, thereby reducing yields. *** Primarily consists of mortgage backed securities and collateralized mortgage obligations. 18 Table II provides a summary of the changes in interest income and interest expense resulting from changes in volumes and rates of interest-earning assets and interest-bearing liabilities for the periods indicated. The increase (decrease) due to changes in volume reflected in the table below was calculated by applying the preceding year's rate to the current year's change in the average balance. The increase (decrease) due to changes in average rates was calculated by applying the current year's change in the average rates to the current year's average balances. Using this method of calculating increases (decreases), any increase or decrease due to both changes in average balances and rates is reflected in the changes attributable to average rate changes. Table II - Analysis of Changes in Net Interest Income (dollars in thousands)
2000 over 1999 1999 over 1998 ------------------------------------------ ----------------------------------------- Increase Increase Increase Increase (Decrease) (Decrease) Total (Decrease) (Decrease) Total due to due to Increase due to due to Increase Volume Rate (Decrease) Volume Rate (Decrease) ------------- ----------- ----------- ------------- ------------ ------------ Interest-earning assets: Loans, net $ 1,630 294 1,924 1,800 (368) 1,432 Securities: U.S. governments 427 141 568 (666) (311) (977) State and municipals (288) 112 (176) 852 (290) 562 Other* (574) 495 (79) 183 (1) 182 Interest bearing deposits with financial institutions (60) 93 33 (103) (22) (125) Federal funds sold 43 48 91 (134) (8) (142) -------- --------- -------- --------- ------- -------- Total interest income 1,178 1,183 2,361 1,932 (1,000) 932 -------- --------- -------- --------- ------- -------- Interest-bearing liabilities: NOW, money market and savings deposits (17) 623 606 203 (367) (164) Time deposits 467 1,328 1,795 672 (284) 388 Other borrowed funds 45 (7) 38 (20) (5) (25) -------- --------- -------- --------- ------- -------- Total interest expense 495 1,944 2,439 855 (656) 199 -------- --------- -------- --------- ------- -------- Net interest income $ 683 (761) (78) 1,077 (344) 733 ======== ========= ======== ========= ======= ========
* Consists primarily of mortgage-backed securities and collateralized mortgage obligations. Interest Expense - Deposits - --------------------------- Interest-bearing demand deposits consist of NOW, money market, and savings deposits. Interest expense on deposit accounts increased $2,401,000 in 2000 from 1999 primarily due to the sharp increase in short-term interest rates. Interest expense on deposit accounts increased $224,000 in 1999 from 1998 primarily due to an increase in average balances offset somewhat by decreased rates. (See Tables I and II.) Average balances increased in 1999 from 1998 due primarily to the Jefferson Bank acquisition in 1998. 19 Non-interest Income - ------------------- Income from sources other than interest-earning assets excluding securities transactions is derived primarily from fiduciary activities and service charges on customer deposit accounts. Non-interest income, excluding securities transactions, was $6,267,000 in 2000 compared to $5,227,000 in 1999 and $4,462,0000 in 1998. The increase of approximately $1,040,000 during 2000 was the result of continued increases in fiduciary income and insufficient fee income combined with increases in brokerage income. The increase of approximately $765,000 during 1999 was largely the result of increases in insufficient fee income and fiduciary income. Non-interest Expense - -------------------- Total non-interest expense in 2000 was $13,313,000 compared to $12,011,000 in 1999 and $10,614,000 in 1998. These increases are explained in further detail by category below. Personnel Expense. Personnel costs for 2000 were $7,998,000 compared to ----------------- $6,961,000 in 1999, and $6,296,000 in 1998. The increase of $1,037,000 in 2000 over 1999 was due primarily to general increases in salaries and benefits combined with the addition of employees at the two new branches in Marshall and Athens and the insurance agency acquisition. The increase of $665,000 in 1999 over 1998 was due primarily to general increases in salaries and benefits and the addition of employees resulting from the Jefferson Bank acquisition. Occupancy Expense and Equipment Expense. Total occupancy and equipment --------------------------------------- expenses were $1,770,000 in 2000, $1,541,000 in 1999, and $1,264,000 in 1998. The increases in both 2000 and 1999 were due primarily to expenses related to the continuing growth and enhancement of the facilities. Other Expenses. Other expenses were $3,545,000 in 2000 compared to -------------- $3,509,000 in 1999 and $3,054,000 in 1998. The slight increase in 2000 from 1999 is due to the combination of increases offset by decreases in various accounts. Increases were recognized in franchise tax expense of $150,000 due to refunds received in 1999, and, in general, due to the addition of the two new branches and the insurance agency acquisition. Decreases were recorded in professional fees due to lower legal fees in 2000, and goodwill amortization due to goodwill of branches purchased in 1994 that were amortized through 1999. The increase in 1999 from 1998 is due to increases in acquisition expense and goodwill amortization due to the Jefferson Bank acquisition in December 1998. Professional fees also increased in 1999 compared to 1998, and increases in supplies, postage, and communications resulted from direct marketing initiatives. In 1999, other expense was decreased as a result of amended franchise tax returns resulting in refunds of approximately $233,000. Provision for Loan Losses - ------------------------- The provision for loan losses was $290,000, $354,000 and $623,000 in 2000, 1999 and 1998, respectively. See "Management's Discussion and Analysis of the Financial Condition and Results of Operations of the Company -- Allowance for Loan Losses" for more detailed discussion relative to the provision for loan losses. Income Taxes - ------------ The Company's effective tax rate was 13.2% in 2000, 15.7% in 1999, and 19.8% in 1998. These effective rates are less than the statutory rate of 34% 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 tax rate is affected. 20 Financial Condition - ------------------- The Company's balance sheet emphasizes management's philosophy of maximizing returns through investments in securities. As detailed in the following Table III, securities have been the Company's largest asset component for the last five years totaling 48.9%, 48.9%, 53.1%, 60.8%, and 63.9%, of total assets for the years 2000 through 1996, respectively. The decrease in securities since 1996 is the result of increased emphasis on loan growth and decreasing securities rates. Total assets have grown from a December 31, 1996, level of $356,830,000 to $423,644,000 at December 31, 2000. The increase in total assets that resulted from the most recent Jefferson transaction in 1998 was approximately $31,913,000. The increase in total assets that resulted from the Waskom transaction in 1996 was approximately $25,700,000. Table III - Condensed Balance Sheet Information (dollars in thousands)
At December 31, ---------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------- Assets: Cash and due from banks $ 11,385 24,040 9,493 8,886 12,413 Interest-bearing deposits with financial institutions 10,403 5,357 17,174 8,212 3,892 Federal funds sold 4,205 9,285 10,230 5,040 1,150 Securities 206,938 192,255 205,423 217,973 228,155 Loans, net 169,882 144,197 129,263 106,067 100,825 Other 20,831 18,828 15,336 12,315 10,395 --------------- ------------ -------------- ------------- -------------- Total assets $ 423,644 393,962 386,919 358,493 356,830 =============== ============ ============== ============= ============== Liabilities: Demand deposits-non-interest bearing $ 53,111 44,807 42,960 32,860 31,785 Interest-bearing demand and savings deposits 129,213 127,247 132,353 126,016 120,468 Time deposits 196,798 183,369 170,407 163,231 168,420 --------------- ------------ -------------- ------------- -------------- Total deposits 379,122 355,423 345,720 322,107 320,673 Other liabilities 5,400 2,768 5,288 3,657 4,169 --------------- ------------ -------------- ------------- -------------- Total liabilities 384,522 358,191 351,008 325,764 324,842 Stockholders' equity 39,122 35,771 35,911 32,729 31,988 --------------- ------------ -------------- ------------- -------------- Total liabilities and stockholders' equity $ 423,644 393,962 386,919 358,493 356,830 =============== ============ ============== ============= ==============
The Company invests in short-term money market assets to meet its liquidity needs, given day-to-day deposit fluctuations, loan demand, investment needs, and asset growth. Money market assets consist of federal funds sold and interest-bearing time and demand deposits with other financial institutions. The Company also maintains an interest-bearing demand deposit account with the Federal Home Loan Bank to invest its excess liquidity. The rates paid by the Federal Home Loan Bank were comparable to the market rate for federal funds. It has been the policy of the Company to maintain a high degree of liquidity in order to have flexibility in investment decisions while adhering to the conservative philosophy of having cash available for its banking needs. Cash positions and market conditions are monitored closely in order to maximize income without sacrificing liquidity and safety. 21 Operating Activities - -------------------- The Company uses cash in the conduct of its day-to-day operations for such normal purposes as payroll, equipment and facilities acquisition and maintenance, advertising, data processing, customer service activity, and administrative activity. The Company generates cash from operations primarily from service charges and the net interest earned from the investment of customer deposits. Net cash provided by operating activities was $4,823,000 in 2000, $3,548,000 in 1999, and $5,277,000 in 1998. Investing Activities - -------------------- The Company invests available funds primarily in securities and loans to customers. Funds not otherwise used are invested in federal funds sold and interest-bearing demand accounts, primarily with the Federal Home Loan Bank. Financing Activities - -------------------- In addition to cash provided and used by operating and investing activities, the Company receives and disburses cash in connection with customer deposit activities. Additionally, the Company paid cash dividends in each of the years 2000, 1999, and 1998. In 1999, the Company paid off notes payable balances from the Jefferson acquisition of $2,282,000. From time to time, the Company makes purchases of treasury stock. Asset/Liability Management - -------------------------- Asset/liability management involves the acquisition and deployment of funds at an appropriate rate and maturity structure so as to optimize net interest income while satisfying the cash flow requirements of depositors and borrowers. Generally, management maintains an excess of interest-sensitive liabilities over interest-sensitive assets. Table IV provides an analysis of the Company's interest rate sensitivity for its assets and liabilities. Note that the amounts disclosed in Table IV are shown based upon the period the underlying asset or liability is subject to repricing regardless of maturity. Table IV - Rate Sensitivity Analysis (dollars in thousands) Interest Sensitivity/Gap Analysis December 31, 2000
Over 1 - Month 3 - Month 6 - Month 1 - Year 1 - Year Total Earning assets: Loans $ 20,608 6,414 7,672 14,618 122,988 172,300 Securities 27,099 6,515 18,022 16,086 139,216 206,938 Other earning assets 8,805 1,190 297 199 4,117 14,608 -------------- ----------- ----------- ------------ ------------ ------------ 56,512 14,119 25,991 30,903 266,321 393,846 Funding Source- Interest bearing deposits 145,885 37,431 47,318 62,232 33,145 326,011 -------------- ----------- ----------- ------------ ------------ ------------ Repricing/Maturity Gap: Period $ (89,373) $ (23,312) $ (21,327) $ (31,329) $ 233,176 ============== =========== =========== ============ ============ Cumulative (89,373) (112,685) (134,012) (165,341) 67,835 ============== =========== =========== ============ ============ Period/Total Earning Assets (22.69%) (5.92%) (5.42%) (7.95%) 59.20%
22 Quantitative and Qualitative Disclosures About Market Risk - ---------------------------------------------------------- Interest rate risk can be defined as the exposure of the Company's net interest income to adverse movements in interest rates. A sudden and substantial increase in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. Although the Company manages other risks, as in credit and liquidity risk, in the normal course of its business, management considers interest rate risk to be its most significant market risk and could potentially have a material effect on the Company's financial condition and results of operations. The Company has no trading account nor does it engage in any trading activities. A derivative financial instrument includes futures, forwards, interest rate swaps, option contracts, and other financial instruments with similar characteristics. The Company does not currently use derivatives to manage market and interest rate risks. However, the Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expirations dates and may require collateral from the borrower if deemed necessary by the Company. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Commitments to extend credit and standby letters of credit are not recorded as an asset or liability by the Company until the instrument is exercised. The Company's interest rate risk management is the responsibility of the Investment Committee, which reports to the Board of Directors monthly. The Investment Committee establishes policies that monitor and coordinate the Company's sources, uses and pricing of funds. Potential economic losses due to future interest rate changes can be reflected as a loss of future net interest income and/or a loss of current fair market value. Management recognizes certain risks are inherent and that the goal is to measure the effect on net interest income and to adjust the balance sheet to minimize the risk while at the same time maximize income. The Company continues to reduce the volatility of its net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. To accomplish this, management has undertaken steps to increase the percentage of variable rate assets, as a percentage of its total earning assets. The Company's adjustable rate loans are primarily tied to published indices, such as the Wall Street Journal prime rate. Adjustable rate mortgage backed securities are typically tied to the 11th District Cost of Funds index ("COFI"), the London Interbank Offered Rate ("LIBOR"), or the Constant Maturity Treasury ("CMT") index. The Company's exposure to interest rate risk is reviewed on a regular basis. The Company utilizes a simulation model to analyze net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on both an immediate rise or fall in interest rates (rate shock) over a twelve-month period. The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities. The model incorporates assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities as well as projections for anticipated activity levels by product lines offered by the Company. The simulation model also takes into account the Company's historical core deposits. Management considers the Company's market risk to be acceptable at this time. The table below represents in tabular form amortized cost balances of the Company's on-balance sheet financial instruments at the expected maturity dates as well as the fair value of those on-balance sheet financial instruments for the year ended December 31, 2000. The expected maturity categories take into consideration historical prepayment speeds as well as actual amortization of principal and do not take into consideration reinvestment of cash. Principal prepayments are the amounts of principal reduction, over and above normal amortization. The actual maturities of these instruments could vary substantially if future prepayments differ from the Company's historical experience. The Company's assets and liabilities that do not have a stated maturity date, as in cash equivalents and certain deposits, are considered to be long term in nature by the Company and are reported in the "Over 5 years" column. The Company does not consider these financial instruments to be materially sensitive to interest rate fluctuations and historically the balances have remained fairly constant over various economic conditions. The weighted average effective interest rates for the various assets and liabilities presented are actual as of December 31, 2000. 23 The fair value of cash, interest-bearing deposits with financial institutions, federal funds sold, and interest receivable and payable approximate their book values due to their short maturities. The fair value of investment securities are based on third party pricing obtained by the Company's portfolio accounting service provider. Stock of the Federal Reserve Bank and Texas Independent Bank does not have a market and is shown at cost. The fair value of loans are estimated in portfolios with similar financial characteristics and takes into consideration discounted cash flows through the estimated maturity or repricing dates using estimated market discount rates that reflect credit risk. The fair value of demand deposits, NOW, money market, and savings account is the amount payable upon demand. The fair value of time deposits is based upon the discounted value of contractual cash flows, which is estimated using current rates offered for deposits of similar remaining terms. Table V - Market Risk Sensitive Instruments (dollars in thousands) Scheduled maturity of market risk sensitive instruments at December 31, 2000:
Average Over Fair Effective Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield ASSETS Securities Fixed Rate $ 13,063 38,510 26,164 11,904 3,723 59,067 152,431 151,684 6.17% Floating Rate - - - - - 54,875 54,875 54,515 6.73% Equity Securities - - - - - 504 504 504 7.92% --------------------------------------------------------------------------------------- Total Securities $ 13,063 38,510 26,164 11,904 3,723 114,446 207,810 206,703 Loans Fixed Rate 21,401 20,520 26,452 24,523 22,574 32,756 148,226 149,086 8.27% Floating Rate 10,730 341 2,774 1,932 293 8,004 24,074 24,147 9.47% --------------------------------------------------------------------------------------- Total $ 32,131 20,861 29,226 26,455 22,867 40,760 172,300 173,233 LIABILITIES Savings, NOW, and Money Market Deposits $129,213 - - - - - 129,213 129,213 2.72% Certificates of Deposit 163,506 25,329 6,978 668 317 - 196,798 196,843 5.66%
Scheduled maturity of market risk sensitive instruments at December 31, 1999:
Average Over Fair Effective Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield ASSETS Securities Fixed Rate $ 6,839 12,964 25,498 26,995 11,910 67,147 151,353 146,574 6.11% Floating Rate - - - - - 43,345 43,345 42,858 5.78% Equity Securities - - - - - 493 493 493 6.85% -------------------------------------------------------------------------------------- Total Securities $ 6,839 12,964 25,498 26,995 11,910 110,985 195,191 189,925 Loans Fixed Rate $20,916 14,729 23,841 24,715 24,532 22,364 131,097 131,587 8.05% Floating Rate 8,766 690 402 1,470 2,099 2,005 15,432 15,569 9.04% -------------------------------------------------------------------------------------- Total $29,682 15,419 24,243 26,185 26,631 24,369 146,529 147,156 LIABILITIES Savings, NOW, and Money Market Deposits $127,247 - - - - - 127,247 127,247 2.23% Certificates of Deposit 164,447 12,518 3,880 1,764 760 - 183,369 183,582 4.94%
24 Loans - ----- The Company's loan portfolio consists primarily of real estate, commercial and industrial, and consumer loans. Total loans were $172,300,000 at December 31, 2000 compared to $146,529,000 at December 31, 1999 and $131,336,000 at December 31, 1998. As can be seen in Table VI, a strong increase of approximately 35.6% in commercial and industrial loans, a moderate increase of approximately 13.0% in real estate loans occurred while installment loans increased by a moderate 7.3% in 2000. The overall increase in 2000 is the result of strong loan demand, increases in loans from the Marshall branch and an increase in tax-exempt leases. The overall increase in 1999 is the result of strong market demand for home loans and commercial properties. In 1998, the Jefferson Bank acquisition resulted in an increase in total loans of approximately $7,337,000. The additional increase in total loans experienced by the Company in 1998 was due to increased loan demand. In 1997, there was a strong increase of approximately 17.2% in commercial and industrial loans, a moderate increase of approximately 8.5% in real estate loans while installment loans decreased a moderate 9.7%. At December 31, 2000, real estate mortgage loans comprised 51.1% of the loan portfolio, compared to 53.2% and 48.9% at December 31, 1999 and December 31, 1998, respectively. Table VI - Loan Information (dollars in thousands) - Outstanding Balances at:
December 31, ------------------------------------------------------------------------ Types of Loans 2000 1999 1998 1997 1996 - -------------- ------------ ------------ ------------ ------------ ------------ Commercial and industrial $ 51,026 37,639 34,632 27,973 23,863 Real estate - mortgage 88,055 77,935 64,204 50,122 46,211 Installment 33,219 30,955 32,500 29,911 33,111 ------------ ------------ ------------ ------------ ------------ Total $ 172,300 146,529 131,336 108,006 103,185 ============ ============ ============ ============ ============
Approximately 11% of the Company's loans have adjustable interest rates, while most loans are on fixed rates maturing within five years. Table VII presents a maturity analysis of the Company's loan portfolio at December 31, 2000: Table VII - Loan Interest and Maturity Information (dollars in thousands)
At December 31, 2000 ------------------------------------------------------------- Commercial Real and Industrial Estate Installment Totals -------------- ----------- ----------- ------------- Fixed rate loans: Mature within one year $ 5,947 10,503 6,472 22,922 Mature in one to five years 20,605 54,435 25,746 100,786 Mature after five years 15,800 13,674 168 29,642 -------------- ----------- ----------- ------------- Total fixed rate loans 42,352 78,612 32,386 153,350 Floating rate loans: Mature within one year 6,145 4,170 526 10,841 Mature in one to five years 1,725 3,342 273 5,340 Mature after five years 804 1,931 34 2,769 -------------- ----------- ----------- ------------- Total floating rate loans 8,674 9,443 833 18,950 Total loans: Mature within one year 12,092 14,673 6,998 33,763 Mature in one to five years 22,330 57,777 26,019 106,126 Mature after five years 16,604 15,605 202 32,411 -------------- ----------- ----------- ------------- Total loans $ 51,026 88,055 33,219 172,300 ============== =========== =========== =============
25 Allowance for Loan Losses - ------------------------- The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for known loan losses and risks inherent in the loan portfolio. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors, including the performance of the Bank's loan portfolio, the economy, changes in real estate values and interest rates and the view of the regulatory authorities toward loan classifications. The balance in allowance for loan losses at December 31, 2000 was $2,355,000 compared to the December 31, 1999 balance of $2,200,000 and the December 31, 1998 balance of $1,701,000. The increase in 2000 was the result of a provision of $290,000 and recoveries of $442,000 offset by charge-offs of $585,000. The 1999 net increase was the result of a provision of $354,000 and recoveries of $1,035,000 offset by charge-offs of $890,000. In 1999, the Company recorded a smaller provision due to net recoveries of $145,000 compared to net charge-offs of $336,000 in 1998. The allowance for loan losses at December 31, 2000, 1999, and 1998, was 1.37%, 1.50%, and 1.30%, of outstanding loans, respectively. By its nature, the process through which management determines the appropriate level of the allowance requires considerable judgment about the credit quality of the loan portfolio by considering all known relevant internal and external factors affecting loan and lease collectability. The determination of the necessary allowance and, correspondingly, the provision for loan losses involves assumptions about and 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 December 31, 2000 is adequate to cover losses inherent in its loan portfolio. A migration analysis and an internal classification system for loans also help identify potential problems. From these analyses, management determines which loans are potential candidates for nonaccrual status or charge-off. Management continually reviews loans and classifies them consistent with the regulatory guidelines to help ensure that an adequate allowance is maintained. Potential problem loans are classified and separately monitored by management. Loans classified as "special mention" are those that contain a weakness that, if left unattended, could develop into a problem affecting the ultimate collectability of the loan. Loans classified as "substandard" are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are in the process of being charged off. Loan impairment is reported when full payment under the loan terms is not expected. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when analysis of a borrower's operating results and financial condition indicates the borrower's underlying cash flows are not adequate to meet debt service requirements and it is probably that not all principal and interest amounts will be collected according to the original terms of the loan. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectable. The Company uses a combination of a loss migration approach and a specific allocation approach to determine the adequacy of the allowance for loan and lease losses. In general, the migration analysis tracks, on a quarter-by-quarter basis, the percentage of various classified loan pools that ultimately becomes a loss over a twelve month time period. The sum of the loss percentages for each quarter of the analysis is used to estimate the loss that exists in the Company's current population of classified loans. The methodology for determining loss percentages on unclassified loans is based on historical losses on the pool of loans that were considered pass credits twelve months prior to the loss. Adjustments to these general reserve allocations are then made to account for risks in the portfolio associated with: (1) levels of, and trends in, delinquencies and non-accruals; (2) trends in volume and terms of loans; (3) changes in lending policies and procedures; (4) experience, ability and depth of lending management and staff; (5) national and local economic trends and conditions; and (6) concentrations of credit. While portions of the allowance may be allocated for specific credits, the entire allowance is available for any credit that, in management's judgment, should be charged off. Based on historical trends, the Company estimates that approximately $551,000 will be charged off in the year ending December 31, 2001. The breakdown of this 26 estimate is as follows: $134,000 in commercial and industrial, $27,000 in real estate -mortgage, $125,000 in installment, and $265,000 in overdrafts. 27 Table VIII - Analysis of Allowance of Loan Losses (dollars in thousands)
Years Ended December 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ----------- ---------- ---------- ---------- Balance at beginning of period $ 2,200 1,701 1,249 1,146 1,019 Charge-offs: Commercial and industrial 40 335 78 57 20 Real estate mortgage 43 27 26 1 - Installment loans 502 528 455 289 223 ---------- ----------- ---------- ---------- ---------- Total charge-offs 585 890 559 347 243 ---------- ----------- ---------- ---------- ---------- Recoveries: Commercial and industrial 202 796 69 49 28 Real estate mortgage 6 11 - - - Installment loans 234 228 154 71 54 ---------- ----------- ---------- ---------- ---------- Total recoveries 442 1,035 223 120 82 ---------- ----------- ---------- ---------- ---------- Net charge-offs (recoveries) 143 (145) 336 227 161 Additions charged (credited) to operations 290 354 623 330 264 Addition due to acquisition 8 - 165 - 24 ---------- ----------- ---------- ---------- ---------- Balance at end of period $ 2,355 2,200 1,701 1,249 1,146 ========== =========== ========== ========== ========== Average loans outstanding during the period* $ 157,454 137,997 116,520 101,245 88,684 Gross charge-offs as a percent of average loans* 0.37% 0.64 0.48 0.34 0.29 Recoveries as a percent of gross charge-offs 75.56% 116.29 39.89 34.58 33.75 Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period* 0.09% -0.11 0.29 0.22 0.19
* Net of unearned income Table IX - Allocation of Allowance for Loan Losses (dollars in thousands)
As of December 31, ---------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------------- Reserve Reserve Reserve Reserve Reserve Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* ---------------------------------------------------------------------------------------------------------- Commercial And industrial $ 1,025 29.6% $ 691 25.7% $ 677 26.4% $ 619 25.9% $ 359 23.1% Real estate - mortgage 666 51.1 741 53.2 511 48.9 191 46.4 81 44.8 Installment 657 19.3 722 21.1 498 24.7 413 27.7 420 32.1 Unallocated 7 N/A 46 N/A 15 N/A 26 N/A 286 N/A ---------------------------------------------------------------------------------------------------------- $ 2,355 100.0% $ 2,200 100.0% $ 1,701 100.0% $ 1,249 100.0% $ 1,146 100.0% ==========================================================================================================
*Represents the ratio of each loan category to gross loans (including unearned interest) 28 Nonperforming Assets - -------------------- 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/or 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 doubtful. When a loan is placed on nonaccrual status, interest is no longer accrued or included in interest income and previously accrued income is reversed. Nonaccrual loans totaled $241,000 in 2000. The Company did not have any nonaccrual loans as of December 31, 1999 and nonaccrual loans totaled $81,000 in 1998. Restructured loans include those for which there has been a reduction in stated interest rate, extension of maturity, reduction in face amount of debt, or reduction in accrued interest. As of December 31, 2000, the Company had $1,216,000 in restructured loans. The Company did not have any restructured loans in 1999. Loans past due over ninety days and still accruing interest were $18,000 at December 31, 2000, a decrease from the December 31, 1999 amount of $183,000. The following table presents an analysis of nonaccrual, past due, other real estate and restructured loans at December 31, 2000. Table X - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured Loans (dollars in thousands)
At December 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Nonaccrual loans $ 241 - 81 172 147 Restructured loans 1,216 - 69 - - Other impaired loans - - - - - Other real estate 10 150 125 186 151 -------- -------- -------- -------- -------- Total nonperforming assets $ 1,467 150 275 358 298 ======== ======== ======== ======== ======== Allowance for loan loss to nonperforming assets 160.53% 1466.67 618.55 348.88 384.9 Nonperforming assets as a percentage of stockholders' equity 3.7% 0.4 0.8 1.1 .9 Loans past due 90+ days and still accruing $ 18 183 21 20 33 ======== ======== ======== ======== ======== Other potential problem loans $ - - - - - ======== ======== ======== ======== ======== Income that would have been recorded in accordance with original terms $ 11 - 6 5 7 Less income actually recorded - - - - 3 Loss of income $ 11 - 6 5 4 ======== ======== ======== ======== ========
29 Securities - ---------- The Investment Committee, under the guidance of the Company's Investment Policy, assesses the short and long-term investment needs of the Company after consideration of loan demand, interest rate factors, and prevailing market conditions. Recommendations for securities purchases and other transactions are then made considering safety, liquidity, and maximization of return to the Company. Management determines the proper classification of securities (e.g., hold-to-maturity, available-for-sale) 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. For example, management might decide to sell certain of its mortgage-backed securities in response to changes in interest rates that may result in subjecting the Company to unacceptable levels of prepayment risk. Management might also decide to sell certain securities as a result of increases in loan demand. 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. Management's strategy with respect to securities is to maintain a very high quality portfolio with generally short duration. The quality of the portfolio is maintained with approximately 78% of the total as of December 31, 2000, 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, and 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. 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. This may be as a result of a lagging index, such as the Cost of Funds Index or periodic and annual caps on floating rate pools. 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, fixed rate conventional mortgage pools, 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. At December 31, 2000, floating rate securities made up 73% of the CMO portfolio. Support and liquidity classes with longer average lives and floating rate coupons comprise 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. At December 31, 2000, the Company had no structured notes. Securities are the Company's single largest interest-earning asset representing approximately 49%, 49%, and 53% of total assets at December 31, 2000, 1999, and 1998 respectively. The investment portfolio totaled $206.9 million at December 31, 2000, up from $192.2 and $205.4 million at December 31, 1999 and December 31, 1998, respectively. 30 The various types of securities held by the Company are listed below in Table XI: Table XI - Investment Securities Information (dollars in thousands)
Available for Sale Portfolio At December 31, --------------------------------------------------------------- (Carried at Market Value) 2000 1999 1998 ------------------- ------------------- ------------------- U.S. Treasuries $ 18,064 17,916 48,060 U.S. Government Agencies 63,150 48,932 14,287 State and Municipal - - 2,435 Other securities 504 493 467 ------------------- ------------------- ------------------- $ 81,718 67,341 65,249 Mortgage-backed securities and collateralized mortgage obligations 73,975 64,334 65,637 ------------------- ------------------- ------------------- Total Available for Sale $ 155,693 131,675 130,886 =================== =================== =================== Held to Maturity Portfolio At December 31, --------------------------------------------------------------- (Carried at Amortized Cost) 2000 1999 1998 ------------------- ------------------- ------------------- U.S. Treasuries $ - - 7,013 U.S. Government Agencies - - 3,064 State and Municipal 42,563 46,895 47,037 Corporate securities 2,047 2,068 - Other Securities 212 228 352 ------------------- ------------------- ------------------- $ 44,822 49,191 57,466 Mortgage-backed securities and collateralized mortgage obligations 6,423 11,388 17,071 ------------------- ------------------- ------------------- Total Held to Maturity $ 51,245 60,579 74,537 =================== =================== ===================
31 The maturities and weighted yields of each portfolio by type of security and their book and market values are detailed below in Table XII: Table XII - Investment Securities Maturities and Yield Information (dollars in thousands) Available for Sale Portfolio (Carried at Market Value):
As of December 31, 2000 ----------------------- Matures in Matures in Matures in Matures in Amortizing 1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities Total ------------------ ----------------- ----------------- ------------------ ----------------- Amortized Market Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Cost Value --------- ------ ------- -------- -------- -------- --------- -------- -------- -------- --------- -------- US Treasury and government agencies $ 11,995 5.66% $69,219 5.68% - -% $ - -% $ - -% $ 81,483 81,214 Other - - - - 504 7.92 - - - - 504 504 -------- ------ ------- ------- -------- ------ ------- ------ ------- ------ -------- ------- Sub Total 11,995 5.66 69,219 5.68 504 7.92 - - - - 81,987 81,718 Mortgage-backed securities - - - - - - - - 73,975 6.58 74,578 73,975 -------- ------ ------- ------- ------ ------ ------- ------- ------- ------ -------- ------- Total $ 11,995 5.66% $69,219 5.68% $ 504 7.92% $ - -% $73,975 6.58% $156,565 155,693 ======== ====== ======= ======= ====== ====== ======= ======= ======= ====== ======== =======
Held to Maturity Portfolio (Carried at amortized cost)
As of December 31, 2000 ----------------------- Matures in Matures in Matures in Matures in Amortizing 1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities Total ------------------ ----------------- ----------------- ------------------ ----------------- Amortized Market Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Cost Value --------- ------ ------- -------- -------- -------- --------- -------- -------- -------- --------- -------- State and Municipal* $ 579 7.49% $7,351 7.43% $14,055 7.01% $ 20,577 6.95% - - $42,562 42,388 Corporate securities - - 2,047 5.64 - - - - - - 2,047 2,025 Other securities - - - - - - 212 7.31 - - 212 207 -------- ------ ------- ------- ------- ------ -------- ------- ------- ------ -------- ------- Sub Total 579 7.49 9,398 7.04 14,055 7.01 20,789 6.96 - - 44,821 44,620 Mortgage-backed securities - - - - - - - - 6,423 6.34 6,423 6,390 -------- ------ ------- ------- ------- ------ -------- ------- ------- ------ -------- ------- Total $ 579 7.49% $ 9,398 7.04% $14,055 7.01% $ 20,789 6.96% $6,423 6.34% $51,244 51,010 ======== ====== ======= ======= ======= ====== ======== ======= ======= ====== ======== =======
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate. 32 Deposits - -------- Total deposits at December 31, 2000 were $379,122,000, an increase of approximately $23,699,000 from the December 31, 1999 deposit total of $355,423,000. Total deposits increased during 2000 as a result of growth during the first full year at the branch in Marshall. During 1999, total deposits increased as a result of continued growth. Deposits totaled approximately $345,720,000 at December 31, 1998. Total average deposits in 2000 were $360,088,000, an increase of $12,963,000 over the December 31, 1999 total of $347,125,000. Total average deposits in 1999 increased approximately $26,981,000 over 1998. The increase from 1999 to 2000 largely resulted from the deposit growth at the new branch in Marshall. The majority of the increase from 1998 to 1999 was a result of the Jefferson acquisition, which occurred in December 1998. The average balances of the various deposit types for the last three years along with the interest paid and average deposit interest rates follow: Table XIII - Analysis of Depositor Average Balances (dollars in thousands)
Year Ended December 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 --------------------------------- ------------------------------ -------------------------------- Average Interest Average Average Interest Average Average Interest Average Balances Expense Rate Balances Expense Rate Balances Expense Rate Non-interest- Bearing demand $ 46,917 - -% $ 42,622 - -% $ 36,883 - -% Interest-bearing demand 74,438 1,723 2.31 81,786 1,720 2.10 75,420 1,814 2.42 Savings 12,495 258 2.06 12,259 276 2.25 10,270 252 2.45 Money market accounts 40,606 1,495 3.68 34,270 866 2.53 34,564 960 2.78 Time 185,632 10,502 5.66 176,188 8,706 4.94 163,007 8,318 5.10 --------- -------- ------- --------- ------- ------- -------- -------- ------- Total $360,088 13,978 4.46% $347,125 11,568 3.80% $320,144 11,344 4.01% ========= ======== ======= ========= ======= ======= ======== ======== =======
33 Time deposits consist of certificate of deposits and represent the types of deposits most likely to affect the future earnings of the Company because of their interest rate sensitivity. These deposits are generally more costly sources of funds than other types of deposits. At December 31, 2000, 51.6% of total average deposits were time deposits as compared to 50.8%, and 50.9% at December 31, 1999 and 1998, respectively. Included in the table below are time deposits at December 31, 2000, with balances of $100,000 or more. These deposits represent 24.2% of total time deposits, and the majority of such deposits will mature within six months, reflecting the volatile nature of these deposits. The cost of these funds is generally higher than for other time deposits. The following table provides an analysis of the maturity of these deposits: Table XIV - Certificates of Deposit $100,000 or more (dollars in thousands) at December 31, 2000 Maturity from Percent of December 31, 2000 Total ------------------- -------------- Three months or less $ 18,295 38.36% Within months four through six 24,442 51.25% Within months seven through twelve 4,814 10.09% Over one year 143 0.30% ------------------- -------------- Total $ 47,694 100.00% =================== ============== Short-Term Borrowings - --------------------- From time to time, primarily due to decreases in liquidity caused by timing of investment transactions, the Company may borrow on a short-term basis from the Federal Reserve Bank, or purchase federal funds through lines of credit approved at Texas Independent Bank. Due to potential concerns related to Y2K, the Company increased its cash balances and established credit lines at several large correspondents during the latter part of 1999. The Company, however, did not have to utilize these credit lines. During July 2000, the Company elected the "note option" for its treasury tax and loan ("TT&L") deposits instead of the "remittance option". The note option allows the Company to borrow TT&L deposits under an open-ended demand note payable to the Federal Reserve Bank. Interest on the note is payable monthly at 1/4% below the Federal Funds rate (5.72% at December 31, 2000). The note has a maximum limit of $5,000,000 and is secured by certain investment securities. The average balance outstanding under the note during 2000 was $631,000 and the maximum balance outstanding at any month-end was $2,845,000. The balance outstanding at December 31, 2000 was $1,148,000. 34 Capital Resources and Capital Adequacy - -------------------------------------- The Company's shareholders' equity of $39,122,000 at December 31, 2000 remains at a level considered to be adequate by management. Shareholder equity increased from 1999 to 2000 due to a net change in the net unrealized loss on available for sale securities of $1,363,000. Shareholder equity increased from profits in excess of dividends paid to shareholders. The decrease in the net unrealized loss on available for sale securities was caused by general rate decreases in the market occurring in the latter part of 2000. Shareholders' equity was $35,771,000 at December 31, 1999 and $35,911,000 at December 31, 1998. The regulatory agencies that govern banks require banks to meet certain minimum capital guidelines. Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), Federal bank regulatory agencies adopted capital adequacy guidelines which link the adequacy of a bank's capital to the risks inherent in both its on and off balance sheet activities. These guidelines are termed "risk based" capital guidelines and became fully effective on December 31, 1992. As a result, banks are required to have a minimum ratio of Tier 1 capital to total risk-adjusted assets, as defined in the regulations, of not less than 4%, and a ratio of combined Tier 1 and Tier 2 capital to total risk-adjusted assets of not less than 8%. Tier 1 capital consists primarily of the sum of common stock and perpetual noncumulative preferred stock, less goodwill less certain percentages of other intangible assets. Tier 2 capital consists primarily of perpetual preferred stock not qualifying as Tier 1 capital, perpetual debt, mandatory convertible securities, subordinated debt, convertible preferred stock with an original weighted average maturity of at least five years and the allowance for loan and lease losses up to a maximum of 1.25% of risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The federal regulatory agencies may require higher ratios in the event of certain circumstances that they, in their discretion, deem to be of sufficient cause to require higher ratios. At December 31, 2000, Citizens Bank had a Tier 1 and total capital ratio of 17.0% and 18.1% respectively. At December 31, 1999, Citizens Bank had Tier 1 and total capital ratios of 18.39% and 19.57% respectively. At December 31, 1998, Citizens Bank had Tier 1 and total capital ratios of 19.2% and 20.3% respectively. The Federal and state bank regulatory agencies also require that a bank maintain a minimum leverage capital ratio of Tier 1 capital to average total consolidated assets of at least 3% for the most highly-rated, financially sound banks and a minimum leverage ratio of at least 4% to 5% for all other banks. Adjusted total assets are comprised of total assets less the intangible assets that are deducted from Tier 1 capital. As of December 31, 2000, Citizens Bank's leverage ratio was 8.7% compared to 9.0% and 8.8% as of December 31, 1999 and December 31, 1998 respectively. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was signed into law on December 19, 1991. The prompt corrective actions of FDICIA place restrictions on any insured depository institution that does not meet certain requirements including minimum capital ratios. The restrictions are based on an institution's FDICIA defined capital category and become increasingly more severe as in institution's capital category declines. In addition to the prompt corrective action requirements, FDICIA includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits, increased supervision by the federal regulatory agencies, increased reporting requirements for insured institutions, and new regulations concerning internal controls, accounting, and operations. The prompt corrective action regulations define specific capital categories based on an institution's capital ratios. The capital categories, in declining order, are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." To be "well capitalized," an institution is required to have at least a 5% leverage ratio, a 6% Tier 1 risk-based capital ratio, and a 10% total risk-based capital ratio. However, the regulatory agencies may impose higher minimum standards on individual institutions or may downgrade an institution from one category because of safety and soundness concerns. As of December 31, 2000, 1999, and 1998, Citizens Bank met all regulatory requirements to be deemed "well capitalized." On October 10, 1996, the Company completed the repurchase of 29,700 shares of its common stock (representing 1.375% of its then outstanding shares) in a privately negotiated transaction from a single shareholder. Such shares were purchased for $334,125 in the aggregate, or $11.25 per share. The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with the stock repurchase. During 1997 the Company purchased 14,620 shares of its common stock from five shareholders at an average cost of $12.06 per share. These privately negotiated transactions all occurred prior to the tender offer (see below). The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with these stock repurchases. On October 15, 1997, the Company initiated a tender offer to all of its shareholders to purchase an aggregate of 140,000 shares of the Company's common stock (representing approximately 6.6% of such outstanding shares) at a price of $14.50 per share. The tender offer, as extended, expired on November 20, 1997. Fifty-two shareholders of the Company tendered a total of 98,186 shares of common stock in the tender offer representing an aggregate purchase price of $1,423,697. The purchase of shares appropriately tendered and 35 accepted for purchase by the Company was funded entirely from internal resources and no debt was incurred in connection with the transaction. In accordance with applicable law, on the date that the tender offer materials were first mailed to the Company's shareholders, the Company filed with the Securities and Exchange Commission an Issuer Tender Offer Statement on Schedule 13E-4 describing the terms of the tender offer. On December 11, 1998, the Citizens Bank completed its acquisition of all of the issued and outstanding stock of Jefferson National Bank. The Citizens Bank acquired certain assets and assumed certain liabilities for a purchase price of $6,150,200 that was funded with a combination of notes and cash. During 1998, the Company purchased 1,120 shares of its common stock from four shareholders at an average cost of $14.50 per share. These privately negotiated transactions all occurred after expiration of the tender offer (see above). The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with these stock repurchases. During 1999, the Company purchased 5,274 shares of its common stock from ten shareholders at an average cost of $17.33 per share. The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with these stock repurchases. During 2000, the company purchased 15,884 shares of its common stock from eight shareholders at an average cost of $17.50 per share. The purchase price was paid in cash using available cash resources, and the Company did not incur any debt in connection with these stock repurchases. Employees - --------- At December 31, 2000, the Company employed approximately 173 full-time and 42 part-time employees. Management highly values and respects its excellent relationship with its employees. 36 Competition - ----------- The Company services a large portion of the East Texas area with offices in Henderson, Overton, and Mount Enterprise, in Rusk County, Jefferson, in Marion County, Athens, Malakoff and Chandler, in Henderson County, Waskom and Marshall in Harrison County, and Corsicana in Navarro County. The activities in which the Company engages are competitive. Each activity engaged in involves competition with other banks, as well as with non-banking financial institutions and non-financial enterprises. In addition to competing with other commercial banks within and outside its primary service area, the Company competes with other associations, credit unions, industrial loan associations, insurance companies, small loan companies, finance companies, mortgage companies, real estate investment trusts, factors, certain governmental agencies, credit card organizations and other enterprises. Additional competition for deposits comes from government and private issuers of debt obligations and other investment alternatives for depositors, such as money market funds. The Company also competes with suppliers of equipment in furnishing equipment financing and leasing services. Outlook and Corporate Objectives - -------------------------------- Though many factors such as inflation, interest rate risks, credit quality, regulatory environment and local economic conditions affect the earnings of the Company, the outlook for 2001 appears to be good. The Company faces the challenge of maintaining a high quality loan portfolio while trying to increase its market share of loans, reducing its overhead by utilization of economies of scale, coordinating its branch operations, maintaining deposits in a historically low interest rate environment, staying abreast of the latest technological changes, preserving its strong dividend payout, and increasing its non-interest income. The consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services, since such prices are directly affected by inflation. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are important to the maintenance of acceptable performance levels. It is the philosophy of the Company to remain independent in ownership, to foster its image as the community leader in banking, increase market share through selected acquisitions and aggressive marketing, maintain a sound earning-asset portfolio, and assess liquidity needs while maintaining our profitability and the return to our shareholders. Recent Accounting Pronouncements - -------------------------------- The following accounting pronouncements have been issued, but have not yet become effective, and are listed together with the expected impact on the Company SFAS 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 recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Statement will be effective for the company in the fiscal year ending in 2001. Due to the Company's limited use of derivative instruments, 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. SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - This Statement replaces SFAS 125 and resolves various implementation issues while carrying forward most of the provisions of SFAS 125 without change. SFAS 140 revises standards for transfers of financial assets by clarifying criteria and expanding guidance for determining whether the transferor has relinquished control and the transfer is therefore accounted for as a sale. SFAS 140 also adopts new accounting requirements for pledged collateral and requires new disclosures about securitizations and pledge collateral. SFAS 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not expect this standard to have a material effect on the Company's consolidated financial statements. 37 Forward-Looking Information - --------------------------- Statements and financial discussion and analysis by management contained throughout this Annual Report that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Various factors could cause actual results to differ materially from the forward-looking statements, including, without limitation, changes in interest rates and economic conditions, increased competition for deposits and loans adversely affecting rates and terms, changes in availability of funds increasing costs or reducing liquidity, changes in applicable statutes and governmental regulations, and the loss of any member of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensation levels. 38 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This information is included under the heading "Asset and Liability Management and Market Risk" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required to be included pursuant to Item 8 are set forth in Item 14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On April 19, 2000, the Board of Directors of the Company elected to terminate the audit services of the firm of KPMG, LLP ("KPMG") and appoint the firm of Fisk & Robinson, a Professional Corporation ("F&R") to serve as the Company's independent accountants for its fiscal year ending December 31, 2000. On April 28, 2000, the Company notified KPMG of its dismissal, and by letter dated June 15, 2000, which was acknowledged by the Company on February 13, 2001, the Company formally engaged F&R as the Company's independent accountants for its fiscal year ending December 31, 2000. KPMG audited the Company's financial statements for the fiscal years ended December 31, 1998 and 1999. KPMG's reports on the Company's financial statements for each of the fiscal years ended December 31, 1998 and 1999 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During each of the fiscal years ended December 31, 1998 and 1999 and subsequent interim period through April 19, 2000, there were no disagreements with KPMG on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of KPMG, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its reports. During the fiscal years ended December 31, 1998 and 1999, and the interim period from January 1, 2000 through June 15, 2000, the Company did not consult with F&R regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements; or any matter that was either the subject of a disagreement (as defined in paragraph (a) (1) (iv) of Item 304 of Regulation S-K) or a reportable event (as described in paragraph (a) (1) (v) of Item 304 of Regulation S-K). The Company provided KPMG with a copy of the above disclosures in response to Item 304 (a) of Regulation S-K in conjunction with the filing of a Form 8-K dated March 23, 2001. The Company requested that KPMG provide the Company with a letter addressed to the Securities and Exchange Commission stating whether it agreed with the statements made by the Company in response to Item 304 (a) of Regulation S-K, and if not, stating the respects in which it does not agree. On March 23, 2001, KPMG responded in a letter that they were in agreement with the Company's statements included in its Form 8-K dated March 23, 2001. 39 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the executive officers and directors of the Company. Directors serve for one-year terms ending at the next annual meeting of shareholders or until their successors are elected and qualified. Executive officers serve at the pleasure of the Company's Board of Directors. Included in this table are the names, ages, and positions held by each person listed. Further information concerning such persons follows the table.
Name (age) Positions held with the Company ---------- ------------------------------- David Alford (32) Director E. Landon Alford (65) Director and Chairman of the Board R.M. Ballenger (80) Director Kenneth Black (54) Vice President Stayton M. Bonner, Jr. (48) Director David J. Burks (77) Director Billy Crawford (76) Director Sheila Gresham (46) Director James Michael Kangerga (48) Director J. Mark Mann (45) Director Milton S. McGee, Jr. (51) Director, President and Chief Executive Officer Charles H. Richardson (79) Director Nelwyn Richardson (51) Secretary Jeff Scribner (44) Vice President Rebecca G. Tanner (45) Vice President, Treasurer, CFO and CAO Tony Wooster (56) Director William E. Wylie (57) Director
Business Experience - ------------------- David Alford has served as a director of the Company since November 1999. Mr. Alford has served as a director of the Citizens Bank since November 1999 and has served on several committees of the Citizens Bank since 1999. Mr. Alford also serves as a director of H.C.B. Inc., a Texas corporation ("HCB") and an affiliate of the Company. Mr. Alford has been employed with Alford Investments since 1991. E. Landon Alford has served as a director of the Company since November 1990 and as a director of the Citizens Bank since 1958. Mr. Alford became the Chairman of the Board of Directors of both the Company and the Citizens Bank during July 1992. Mr. Alford has served on various Board of Directors' committees at the Citizens Bank since 1958. Mr. Alford is also Chairman of the Board of HCB. Mr. Alford has been Managing Partner of Alford Investments since September 1959. R. M. (Max) Ballenger has served as a director of the Company since November 1990. Mr. Ballenger has served as a director of the Citizens Bank since 1980 and has served on several committees of the Citizens Bank since 1980. Mr. Ballenger also serves as a director of HCB. Mr. Ballenger has been the owner of Max Ballenger Real Estate & Lease Brokerage for over 25 years. Kenneth Black has served as Vice President of the Company since 1999. Mr. Black has served as Senior Vice President of the Citizens Bank since January 1999. Prior to that, Mr. Black had served as Vice President of the Citizens Bank since September 1994. Stayton M. Bonner, Jr. has served as director of the Company since November 1990 and as a director of the Citizens Bank since February 1984. Mr. Bonner has served on various Board of Directors' committees at the Bank since February 1984. Mr. Bonner also serves as a director of HCB. Mr. Bonner has practiced law since September 1977, has served as a consultant for Odyssey Management since June 1986 and has acted as Foundation Manager for the R.F. and Jessie Shaw Foundation, Inc. since January 1988. 40 David J. Burks has served as a director of the Company since November 1990 and as a director of the Citizens Bank since 1980. He has served on several of the Board of Directors' committees at the Citizens Bank since 1980. Mr. Burks also serves as a director of HCB. Mr. Burks served as President of Burks Tires, Inc. from 1971 until his retirement in 1995. Billy Crawford has served as a director of the Company since November 1990 and as a director of the Citizens Bank since February 1974. He has served on several of the Citizens Bank Board of Directors' committees since February 1974. Mr. Crawford also serves as a director of HCB. Mr. Crawford is a retired funeral director. Sheila Gresham has served as a director of the Company and the Citizens Bank, since February 1993. Ms. Gresham is currently serving on various committees of the Board of Directors of the Citizens Bank. Ms. Gresham also serves as a director of HCB. Ms. Gresham has been President of Smith Chevrolet Company from November 1998 to the present. She served as President of Smith Chevrolet-Oldsmobile-Cadillac Company from August 1993 until November 1998. Prior to that, Ms. Gresham served as President of Smith Chevrolet Company from February 1980 until August 1993. James M. Kangerga has served as a director of the Company since November 1990 and as a director of the Citizens Bank since March 1989. He has served on numerous committees of the Citizens Bank Board of Directors since March 1989. Mr. Kangerga also serves as a director of HCB. Mr. Kangerga has been a 50% owner and a real estate broker in Rusk County Investments, Inc. since 1985. He has performed bookkeeping functions for Michael Kangerga and M. Kangerga & Bro. since 1980. J. Mark Mann has served as a director of the Company and the Citizens Bank since January 1992. Mr. Mann has served on various committees of the Board of Directors of the Citizens Bank since his election to the Board of Directors. Mr. Mann also serves as a director of HCB. He has been a partner with the law firm of Wellborn, Houston, Atkison, Mann, Sadler, and Hill since 1981. Milton S. McGee, Jr. has served as President, Chief Executive Officer and a director of the Company since November 1990. In addition, Mr. McGee has served as President, Chief Executive Officer and director of the Citizens Bank since April 1990. He has served on various Committees of the Board of Directors of the Citizens Bank since 1990. Mr. McGee also serves as the sole director of the Delaware BHC and he has served in such position since February 1991. He also has served in the following capacities: Chairman of the Board and Chief Executive Officer of Kilgore Federal Savings & Loan Association from November 1989 to March 1990; President and Chief Executive Officer of NCNB Texas in Henderson, Texas from July 1986 to November 1989; and President and Chief Executive Officer of Republic Bank Brownwood from August 1983 to July 1986. Mr. McGee also serves as a director of HCB. Charles H. Richardson has served as a director of the Company since November 1990 and as a director of the Citizens Bank since 1962. He has served on several committees of the Board of Directors of the Citizens Bank since 1962. Mr. Richardson also serves as a director of HCB. Prior to his retirement over eight years ago, Mr. Richardson was a professor at Kilgore College. Nelwyn Richardson has served as Secretary of the Company since 1990. Ms. Richardson has served as Senior Vice President of the Citizens Bank since 1995 and as Vice President since 1979. She has served on the Investment Committee since 1986. Ms. Richardson is also an officer of HCB. Jeff Scribner has served as Vice President of the Company since 1999. Mr. Scribner has served as Senior Vice President of the Citizens Bank since 1999 and as Vice President since 1995. Prior to that, Mr. Scribner served as Vice President for NationsBank in Dallas for approximately three years. Mr. Scribner has served on the Trust Committee since 1995. 41 Rebecca G. Tanner has served as Chief Accounting Officer of the Company since 1990. Since December 1999, she has also served as Vice President, Treasurer and Chief Financial Officer of the Company. Ms. Tanner has served as Vice President and Controller of the Citizens Bank since September 1991. Ms. Tanner is also an officer of HCB. Tony Wooster has served as a director of the Company and the Citizens Bank since February 1993. He is currently serving on various committees of the Board of Directors of the Citizens Bank. Mr. Wooster also serves as a director of HCB. Mr. Wooster is past President of the Henderson Economic Development Corporation and previously served as the Mayor of the City of Henderson from 1990 through 1992. Prior to 1990, Mr. Wooster was manager of Morris Furniture Company. William E. Wylie has served as a director of the Company since November 1999 and as a director of the Citizens Bank since 1999. Mr. Wylie is an estate and probate attorney in Tyler, Texas. Mr. Wylie has been a member of various Board of Directors' committees at the Citizens Bank since 1999. Mr. Wylie also serves as a director of HCB. Family Relationships - -------------------- Charles Richardson, a director of the Company, HCB, and the Citizens Bank, is the uncle of Stayton M. Bonner, Jr., who is also a director of the Company, HCB, and the Citizens Bank. David Alford, a director of the Company, HCB, and the Citizens Bank, is the son of Landon Alford, who is also a director of the Company, HCB, and the Citizens Bank. There are no other family relationships between the members of the Board of Directors or executive officers of the Company or the Citizens Bank. ITEM 11. EXECUTIVE COMPENSATION Executive officers of the Company receive no compensation from the Company, but are compensated for their services to the Company by the Citizens Bank by virtue of the positions they hold in the Citizens Bank. The total compensation for the periods indicated of Milton S. McGee, Jr., President and Chief Executive Officer of the Company is set forth below. No other executive officer of the Company or the Citizens Bank received a salary and bonus exceeding $100,000 in the aggregate during 2000, 1999 or 1998.
Summary Compensation Table Annual Compensation ------------------------------------------------------------------------------------ Name and Principal All Other Position Year Salary/(1)/ Bonus Compensation/(2)/ ------------ ---- ------------- ------------ ------------------- Milton S. McGee, Jr. 2000 $222,396 $86,600 $32,907 President and Chief Executive 1999 185,820 93,570 27,558 Officer of the Company, the 1998 173,400 91,900 25,162 Citizens Bank, and HCB
/(1)/ Includes directors' fees. /(2)/ Includes life insurance premiums paid on behalf of executive officers of the Company and contributions made by the Citizens Bank to the executive officer's account under the Citizens Bank's profit sharing plan. Certain officers of the Company, HCB and the Citizens Bank receive personal benefits in the form of club memberships, personal vacation and travel expenses. The value of such benefits does not exceed the lesser of $50,000 or 10% of the total compensation reported for any such person. 42 During 1998, the Company established a Performance and Retention Plan (the "PAR Plan") whereby certain employees are provided incentive compensation opportunities at the discretion of the Compensation Committee of the Board of Directors. Such incentive compensation generally provides vesting over five years. The value of potential future payouts, if any, under the PAR Plan are a function of the number of PAR units awarded to the individual and the Company's return on assets or net income after tax at the Citizens Bank during the performance period. A more detailed discussion of the PAR Plan is set forth herein. The following table sets forth awards granted under the PAR Plan to Mr. McGee during 2000, 1999 and 1998. Long-Term Incentive Plans-Awards in Last Fiscal Year
Performance or Other Number of Period Until Estimated future payouts under Shares, Units or Maturation non-stock price-based plans ------------------------------------ Name of Individual Other Rights or Payout Threshold Target Maximum - -------------------------- -------------------------------------------------------------------- Milton S. McGee, Jr. 600 1/1/2005 - 42,000 72,000 Milton S. McGee, Jr. 540 1/1/2004 - 43,200 64,800 Milton S. McGee, Jr. 785 1/1/2003 - 54,950 94,200
Director Compensation - --------------------- All directors of the Company, HCB and the Citizens Bank (except for the Chairman of the Board) were paid a total of $1,200 per month for attending all four Board of Directors' meetings (including committee meetings) and outside directors received an additional $500 in December. The Chairman of the Board received $2,400 per month for attending such meetings. The directors and officers of the Company, the Citizens Bank and HCB are elected for terms of one year. Profit Sharing Plan - ------------------- The Citizens Bank maintains a profit sharing plan pursuant to which each salaried employee of the Citizens Bank who is 18 years old or older is eligible for membership following completion of one year of service. The Board of Directors of the Citizens Bank determines the amount that the Citizens Bank will contribute to the profit sharing plan annually, in accordance with the profitability of the Citizens Bank for the particular year or for previous years. Contributions by the Citizens Bank are allocated to each member of the plan in the same proportion as the member's compensation bears to the total compensation of all members for that particular year. Contributions allocated to the account of a member vest partially on an annual basis beginning in the third year, with full vesting occurring after seven years of service. Members' accounts are fully vested in the event of normal retirement, death or total disability. The profit sharing plan is administered by the Citizens Bank. The Citizens Bank trust department acts as trustee of the plan and invests the Citizens Bank's contributions in specified assets as determined by the Board of Directors of the Citizens Bank. The Citizens Bank expensed approximately $410,000 to the profit sharing plan in 2000, $368,000 in 1999, and $345,000 in 1998. The Citizens Bank's contributions during 2000, 1999 and 1998 to the account of Milton S. McGee, Jr. are as follows. Such amounts are included under the column captioned All Other Compensation in the Summary Compensation Table.
Name of Individual or Number in Group Contributions of the Citizens Bank ------------------ ------------------------------------------------------------ 2000 1999 1998 ---- ---- ---- Milton S. McGee, Jr. $25,335 $22,789 $21,784
43 Change in Control Agreement - --------------------------- On June 12, 1995, the Company entered into a Change in Control Agreement (the "Severance Agreement") with Milton S. McGee, Jr., President of the Company ("McGee") as amended on December 16, 1998. The Severance Agreement is designed to provide certain benefits to McGee in the event there are changes in control of the Citizens Bank or the Company. Specifically, the Severance Agreement provides that upon a Triggering Termination (as defined in the Severance Agreement), McGee shall have the right to receive a cash lump sum payment equal to 299% of his average annual compensation paid by the Citizens Bank and the Company for the five (5) preceding calendar years, provided, however, that such payment is to be reduced to the extent that McGee would be subject to a tax pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), as a result of "parachute payments" (as defined in the Code) made pursuant to the Severance Agreement or a deduction would not be allowed to the Company for all or any part of such payments by reason of Section 280G(a) of the Code. In addition, for a period of two years from the date of a Change in Control (as defined in the Severance Agreement), or eighteen months from the date of the Triggering Termination, if sooner (the "Benefits Period"), McGee shall continue to receive all health, dental, disability, accident and life insurance plans or arrangements made available by the Company or the Bank in which he or his dependents were participating immediately prior to the date of his termination as if he continued to be an employee of the Company and the Bank, to the extent that participation in any one or more of such plans and arrangements is possible under the terms thereof, provided that if McGee obtains employment with another employer during the Benefits Period, such coverage shall be provided only to the extent that the coverage exceeds the coverage of any substantially similar plans provided by his new employer. Under the terms of the Severance Agreement, a Triggering Termination would occur upon the termination of McGee's employment with the Company or the Citizens Bank on or after a Change in Control due to either: (i) his resignation for Good Reason (as defined in the Severance Agreement and described herein) or (ii) his involuntary termination by the Citizens Bank or the Company, provided that such involuntary termination (as defined in the Severance Agreement) was not a Termination for Cause (as defined in the Severance Agreement and defined herein). Under the terms of the Severance Agreement, a Change in Control means and is deemed to have occurred if and when (i) any entity, person or group of persons acting in concert, (other than the current members of the Board of Directors of the Company (the "Board") or any of their descendants) becomes beneficial owner of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company or any successor corporation; (ii) any entity, person or group of persons acting in concert, (other than the Company or the current members of the Board or any of their descendants) becomes beneficial owner of securities of the Citizens Bank representing more than fifty percent (50%) of the combined voting power of the Citizens Bank or any successor; (iii) the effective date of a merger or consolidation of the Company or the Citizens Bank with one or more other corporations or banks as a result of which the holders of the outstanding voting stock of the Company immediately prior to the merger hold less than fifty percent (50%) of the combined voting power of the surviving or resulting corporation or bank; or (iv) the effective date of a transfer of all or substantially all of the property of the Company or the Citizens Bank other than to an entity of which the Company or the Citizens Bank owns at least eighty percent (80%) of the combined voting power. Notwithstanding the foregoing, no Change in Control is deemed to have occurred for purposes of the Severance Agreement as a result of any transaction or series of transactions involving only the Company, the Citizens Bank, any affiliate (within the meaning of Section 23A of the Federal Reserve Act of 1913, as amended), or any of them, or any of their successors. Under the terms of the Severance Agreement, resignation for Good Reason means that McGee resigns from his position(s) with the Company or the Citizens Bank as a result of any of the following: (i) the assignment to McGee without his consent of any duties inconsistent with his positions, duties, responsibilities and status with the Citizens Bank or the Company as in effect immediately before a Change in Control or a detrimental change in his titles or offices as in effect immediately before a Change in Control, or any removal of McGee from or any failure to re-elect McGee to any of such positions, except in connection with the termination of his employment for Cause or as a result of his disability or death; (ii) a reduction of McGee's base salary or overall compensation (which includes benefits payable under any employee benefit plan, program or practice) without the prior written consent of McGee, which is not remedied within ten (10) calendar days after receipt by the Company of written notice from 44 McGee of such reduction; (iii) a determination by McGee made in good faith that as a result of a Change in Control, he has been rendered unable to carry out, or has been hindered in the performance of, any of the authorities, powers, functions, responsibilities or duties attached to his position with the Company or the Citizens Bank immediately prior to the Change in Control, which situation is not remedied within thirty (30) calendar days after receipt by the Company of written notice from McGee of such determination; (iv) the Citizens Bank relocates its principal executive offices or requires McGee to have as his principal location of work any location which is in excess of thirty (30) miles from the current location of the Citizens Bank or to travel away from his office in the course of discharging his responsibilities or duties hereunder more than thirty (30) consecutive calendar days or an aggregate of more than ninety (90) calendar days in any consecutive three hundred sixty-five (365) calendar-day period without, in either case, his prior consent; or (v) failure by the Company to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to McGee, expressly to assume and agree to perform the Severance Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. Under the terms of the Severance Agreement, Termination for Cause means that McGee is involuntarily terminated from employment based upon his commission of any of the following: (i) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company or the Citizens Bank; (ii) intentional wrongful damage to property of the Company or the Citizens Bank; (iii) intentional wrongful disclosure of trade secrets or confidential information of the Company or the Citizens Bank; (iv) willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order; or (v) intentional breach of fiduciary duty owed to the Company or the Citizens Bank involving personal profit, provided, that no act, or failure to act, on the part of McGee is to be deemed "intentional" unless done, or omitted to be done, by McGee not in good faith and without reasonable belief that his action or omission was in the best interest of the Company or the Citizens Bank. Should McGee die prior to full payment of all benefits due under the Severance Agreement, payment of any remaining benefits is to be made to his beneficiaries designated in writing, or, if no designation is made, to his estate. The Company has no obligation to reserve funds to fulfill its obligations under the Severance Agreement, and the Company has not elected to reserve any funds for such purpose. The Severance Agreement terminates on the earlier of (i) McGee's sixty-fifth (65th) birthday, (ii) the fifth anniversary of the first event that constitutes a Change in Control, or (iii) the fifth anniversary of the date of execution of the Severance Agreement, provided, however, that the Severance Agreement will not terminate pursuant to subsection (iii) unless either party to the Severance Agreement notifies the other party prior to such anniversary date of such agreement that the Severance Agreement is to be terminated in accordance with subsection (iii). Upon such notice, the termination date set forth in subsection (iii) is to be determined as if the Severance Agreement had been executed on the immediately preceding anniversary date of execution of the Severance Agreement. Non-Qualified Deferred Compensation Plan - ---------------------------------------- On November 18, 1998, the Citizens Bank adopted the Citizens National Bank Non-Qualified Deferred Compensation Plan (the "Deferred Compensation Plan"), effective January 1, 1999, to permit certain select management employees of the Citizens Bank to defer the payment of a percentage of their compensation and to provide for certain contributions by the Citizens Bank to augment such employees' retirement income in addition to what is provided for under the tax qualified plans of the Bank. The Deferred Compensation Plan is administered by the Citizens Bank. Persons eligible to participate in the Deferred Compensation Plan are determined by the Chairman of the Compensation Committee or the President of the Citizens Bank. Participants may elect to defer up to fifty percent (50%) of compensation. In addition to participant deferral elections, the Citizens Bank may, in the discretion of the Board of Directors, make a matching or non-matching contribution each plan year. A separate account is maintained for each participant in the plan to which participant deferrals and contributions made by Citizens Bank are credited. These accounts are held in an irrevocable grantor trust maintained by the Citizens Bank, however the trust remains subject to the general creditors of the Citizens Bank. 45 Amounts deferred at the election of the participant are immediately fully vested. Contributions made by the Citizens Bank become vested in a participant's account over a five-year period based on the number of years of service the participant completes with the Citizens Bank. All contributions become fully vested upon retirement, disability, and death or upon a change in control of the Citizens Bank or the Company. Payment under the Deferred Compensation Plan is made in either a single cash lump sum or in annual payments over a period of years as selected by the participant. This summary is qualified in its entirety by the text of the Citizens National Bank Non-Qualified Deferred Compensation Plan. 1998 Performance and Retention Plan - ----------------------------------- On November 18, 1998, the Citizens Bank adopted the Citizens National Bank 1998 Performance and Retention Plan (the "PAR Plan"), effective January 1, 1998, for the purpose of providing incentive compensation opportunities to certain key employees for their past and future services to the Citizens Bank and to offer such key employees an inducement to remain as employees. In addition, the PAR Plan is intended to offer an inducement to secure the services of other persons capable of fulfilling key positions by providing incentive compensation opportunities. The PAR Plan grants Performance and Retention Units ("PARs") to key employees of the Citizens Bank as selected by the committee that administers the PAR Plan. The PARs entitle participants to a cash payment equal to the amount by which the final PAR value exceeds the grant PAR value over the course of the performance period. The grant PAR value is determined by the committee at the beginning of the performance period and is set out in the PAR agreement executed by the Citizens Bank and the participant. The final PAR value is determined based upon the performance of financial and non-financial performance goals set by the committee at the beginning of the performance period and is related to the appreciation in the value of the greater of (i) return on assets or (ii) net income after tax at the Citizens Bank (before PAR payment of the Citizens Bank). Upon a participant's termination of employment, other than due to death, disability, retirement, involuntary termination or termination for Good Reason, any outstanding PAR shall terminate and no further vesting shall occur. If a participant is terminated for Cause, payment of the PAR, including any vested portion is immediately forfeited. Payment of PARs shall be made following the close of the applicable performance period. This summary is qualified in its entirety by the text of the Citizens National Bank 1998 Performance and Retention Plan. Employee Severance Protection Plan - ---------------------------------- On November 18, 1998, the Citizens Bank adopted the Citizens National Bank Employee Severance Protection Plan ("Severance Plan"), effective January 1, 1998, for the purpose of retaining the services of the bank's key officers in the event of a threat of a change in control of the Citizens Bank and to ensure their continued dedication and efforts in such event without undue concern for their personal financial and employment security. Persons participating in the bank's PAR Plan also participate in the Severance Plan. If a change in control of the Bank has occurred, and within 90 days before or two years after the change in control the participant's employment with the Bank terminates for any reason (other than (i) for cause, (ii) by reason of disability, (iii) termination by the participant other than for good reason, or (iv) for death), the participant is entitled to certain severance benefits. Severance benefits include (a) not less than 24 nor more than 52 weeks' salary, depending upon years of services, age and level of base compensation, plus an amount equal to the employee's bonus which could have been paid under the Citizen Bank's bonus plan, assuming attainment of all performance targets, (b) six months of continued life insurance, disability plan benefits, medical and dental benefits which were provided to the participant at the time of termination, (c) immediate vesting of all "Performance and Retention Units" under the PAR Plan and full vesting in all other non-qualified benefit plans and compensation plans. In the event it is determined that any payment or distribution of any type by the Citizens Bank to or for the benefit of a participant, whether paid or payable or distributed or distributable pursuant to the terms of the Severance Plan or otherwise would be subject to the excise tax imposed by Section 4999 of the Code, or any interest 46 or penalties with respect to such excise tax, then the participant's payments shall be capped at 2.99 times the participant's average annual compensation during a period as specified in Section 280G of the Code so that the participant will not be liable for assessment of an excise tax on the payment of any termination amounts. This summary is qualified in its entirety by the text of the Citizens National Bank Employee Severance Protection Plan. 47 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Principal Shareholders - ---------------------- At March 1, 2001, the Company had 404 shareholders of record. The following table sets forth information concerning the securities of the Company owned beneficially at such time by each person, group or entity known by the Company to own beneficially more than 5% of the shares of any class of such securities. Name and Address of Number and Percent of Shares Beneficial Owner Owned of Company Stock/(1)/ ---------------- -------------------------- E. Landon Alford 140,228 / 7.02%/(2)/ P. O. Box 67 Henderson, TX 75653 John R. Alford, Jr. 165,040 / 8.27% 8100 Hickory Creek Drive Austin, TX 78735 Stayton M. Bonner, Jr. 154,026 / 7.72%/(3)/ P. O. Box 1833 Henderson, TX 75653 Michael Kangerga 132,978 / 6.66% 102 1/2E. Main Street Henderson, TX 75652 Ella Langdon Alford Trust 161,016 / 8.07% P. O. Box 10 Brixey, MO 65618 Citizens National Bank 132,840 / 6.66%/(4)/ and Stayton M. Bonner, Trustees P. O. Box 1009 Henderson, TX 75653 /(1)/ Unless otherwise indicated, all shares listed are held of record by the individual indicated with sole power to vote and to dispose of such shares. Percentages are based on 1,995,216 shares outstanding. /(2)/ Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford. /(3)/ Includes 18,102 shares owned by Odyssey Partners LTD. for which Mr. Bonner has sole voting authority. Also included are 44,280 shares held in trust for Mr. Bonner as a co-beneficiary and co-trustee of the R.F. Shaw, S.M.B., Jr. Living Trust. Mr. Bonner is also co-trustee with the Citizens Bank on two other trusts of which he is not a beneficiary, which trusts own an aggregate of 88,560 shares. The shares held in all three of these trusts (the "Shaw Trusts") are voted solely by Mr. Bonner. Therefore, the 132,840 shares held in the three Shaw trusts are included in the total shares beneficially owned by Mr. Bonner. /(4)/ The shares are held in three trusts for the benefit of various individuals. Stayton M. Bonner, Jr., a director of the Citizens Bank and the Company, is a beneficiary and co-trustee with the Citizens Bank of one of the trusts, which owns 44,280 shares, or 2.21% of Company Stock. In addition, it appears that Mr. Bonner is also co-trustee with the Citizens Bank (but not a beneficiary) of two such trusts, which own an aggregate of 88,560 shares, or 4.42%, of the Company Stock. The shares held in all three trusts are voted solely by Mr. Bonner. 48 Management - ---------- The following table sets forth the number of shares of the Company Stock beneficially owned (i) by each director of the Company and (ii) by the directors and executive officers of the Company as a group as of March 1, 2001.
Number and Percent of Shares Name Owned of Company Stock/(1)/ ---- ---------------------- E. Landon Alford 140,228 / 7.02%/(2)/ David Alford 8,932 / 0.45% R. M. Ballenger 800 / 0.04% Stayton M. Bonner, Jr. 154,026 / 7.72% David J. Burks 9,775 / 0.49% Billy Crawford 1,000 / 0.05% Sheila Gresham 6,120 / 0.31% James M. Kangerga 9,188 / 0.46% J. Mark Mann 5,710 / 0.29%/(4)/ Milton S. McGee, Jr. 8,486 / 0.43%/(5)/ Charles H. Richardson 24,160 / 1.21%/(6)/ Tony Wooster 1,800 / 0.09%/(7)/ William E. Wylie 12,000 / 0.60%/(8)/ Directors and executive officers of the Company 384,325/ 19.26%/(9)/ as a group (17 Persons)
/(1)/ Unless otherwise indicated, all shares listed are held of record by the individual indicated with the sole power to vote and dispose of such shares. Percentages are based on 1,995,216 shares outstanding. /(2)/ Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford. /(3)/ Includes 18,102 shares owned by Odyssey Partners LTD for which Mr. Bonner has sole voting authority. Also included are 44,280 shares held in trust for Mr. Bonner as a co-beneficiary and co-trustee of the R.F. Shaw, S.M.B., Jr. Living Trust. Mr. Bonner is also co-trustee with the Citizens Bank on two other trusts of which he is not a beneficiary, which trusts own an aggregate of 88,560 shares. The shares held in all three of these trusts (the "Shaw Trusts") are voted solely by Mr. Bonner. Therefore, the 132,840 shares held in the three Shaw trusts are included in the total shares beneficially owned by Mr. Bonner. /(4)/ Shares are held jointly by Mr. Mann and his wife, Debra Mann. /(5)/ Includes 50 shares owned by Mr. McGee's minor son, Derek W. McGee. Includes 6,648 shares held jointly by Mr. McGee and his wife, Sharla McGee. Includes 1,838 shares controlled by Mr. McGee as beneficiary of the estate of his mother, Agatha McGee. /(6)/ Includes 2,160 shares held jointly by Mr. Richardson and his wife, Ruebe Gene Shaw Richardson. /(7)/ Shares are held jointly by Mr. Wooster and his wife, Sue Wooster. /(8)/ Includes 3,800 shares held by Mr. Wylie's wife, Susan J. Wylie. Includes 3,000 shares controlled by Mr. Wylie as trustee of the Laura Wylie Trust Number One. 49 /(9)/ Any discrepancy between the actual total of the percentages and the stated total percentage is due to rounding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Citizens Bank has had, and is expected to have in the future, banking transactions in the ordinary course of business with certain of the Company's and the Citizens Bank's respective directors, executive officers and their "associates." Management of the Company and the Citizens Bank believe that all such transactions have been made on substantially the same terms as those prevailing at the time for comparable transactions, including interest rates and collateral, with other persons and do not involve more than the normal risk of collectability or present other unfavorable features, and that all such loans are believed to be in compliance with the Financial Institutions Regulatory and Interest Rate Control Act of 1978. See Footnote 3, reflected in the consolidated financial statements included in Item 14. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Report. 1. Financial Statements The following financial statements of the Company required to be included in Item 8 are filed under Item 14 at the page indicated: Page Independent Accountants' Reports 53 Consolidated Balance Sheets at December 31, 2000 55 and 1999 Consolidated Statements of Income for the years 56 ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' 57 Equity for the years Ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years 58 ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 60 2. Financial Statement Schedules None 3. Exhibits 2.1 Agreement and Plan of Reorganization, dated February 6, 2001, by and between Henderson Citizens Bancshares, Inc. and Rusk County Bancshares, Inc. Note: In accordance with Item 601 (b) (2) to Regulation S- K, schedules to this agreement have not been filed, but the Registrant agrees to furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. 21.1 Subsidiaries of registrant. (b) Reports on Form 8 - K. The Company filed a Current Report on Form 8-K dated March 23, 2001, announcing the termination of the firm of KPMG, LLP as the Company's independent auditors and appointing the firm of Fisk & Robinson, a 50 Professional Corporation as the Company's independent auditors for the fiscal year ending December 31, 2000. (c) See the Exhibit Index attached hereto. Management Contracts and Compensation Plans -- The following exhibits listed in the Exhibit Index are identified below in response to Item 14(a)-3 on Form 10-K: Exhibit 10.2 Change in Control Agreement dated June 12, 1995 by and between Henderson Citizens Bancshares, Inc. and Milton S. McGee Jr. (incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.3 Amendment One to the Change in Control Agreement Between Henderson Citizens Bancshares, Inc. and Milton S. McGee, Jr. dated December 31, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.5 Citizens National Bank 1998 Performance and Retention Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.6 Citizens National Bank Employee Severance Protection Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 51 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Financial Statements December 31, 2000, 1999, and 1998 (With Independent Accountants' Report Thereon) Independent Accountants' Report ------------------------------- The Board of Directors and Stockholders Henderson Citizens Bancshares, Inc. We have audited the accompanying consolidated balance sheet of Henderson Citizens Bancshares, Inc. (the Company) as of December 31, 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Henderson Citizens Bancshares, Inc. as of December 31, 2000, and the consolidated results of its operations and its consolidated cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ FISK & ROBINSON P.C. Dallas, Texas February 23, 2001 53 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Henderson Citizens Bancshares, Inc. We have audited the accompanying consolidated balance sheet of Henderson Citizens Bancshares, Inc. and Subsidiaries as of December 31, 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the two-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 Henderson Citizens Bancshares, Inc. and Subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP Shreveport, Louisiana March 3, 2000 54 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Balance Sheets December 31, 2000 and 1999 (Dollars in Thousands)
2000 1999 ---- ---- ASSETS - ------ Cash and due from banks $ 11,385 $ 24,041 Interest-bearing deposits with financial institutions 10,403 5,357 Federal funds sold 4,205 9,285 ----------------- ----------------- Total cash and cash equivalents 25,993 38,683 Securities: Available for sale 155,693 131,675 Held to maturity 51,245 60,579 ----------------- ----------------- 206,938 192,254 Loans, net 169,882 144,197 Premises and equipment, net 8,394 7,032 Accrued interest receivable 4,320 3,664 Other assets 8,117 8,132 ----------------- ----------------- $ 423,644 $ 393,962 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Demand - noninterest-bearing $ 53,111 $ 44,807 NOW accounts 70,852 79,371 Money market and savings 58,361 47,876 Certificates of deposit and other time deposits 196,798 183,369 ----------------- ----------------- Total deposits 379,122 355,423 Accrued interest payable 1,803 1,177 Other borrowings 1,148 - Other liabilities 2,449 1,591 ----------------- ----------------- 384,522 358,191 Commitments and contingencies - - 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 Additional paid-in capital 5,400 5,400 Retained earnings 25,894 23,628 Accumulated other comprehensive income (loss) (575) (1,938) Treasury stock, at cost, 164,784 shares in 2000 and 148,900 shares in 1999 (2,397) (2,119) ----------------- ----------------- Total stockholders' equity 39,122 35,771 ----------------- ----------------- $ 423,644 $ 393,962 ================= =================
See accompanying notes to consolidated financial statements. 55 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Statements of Income For the Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands, Except Per Share Amounts)
2000 1999 1998 ----- ---- ---- Interest income: Loans, including fees $ 13,061 $ 11,137 $ 9,705 Securities: Taxable - available for sale 8,997 7,984 8,178 Taxable - held to maturity 670 1,196 1,785 Tax-exempt 2,046 2,220 1,670 Federal funds sold 300 209 351 Interest-bearing deposits with financial institutions 453 420 545 --------------- --------------- --------------- Total interest income 25,527 23,166 22,234 --------------- --------------- --------------- Interest expense: Deposits: NOW accounts 1,715 1,720 1,814 Money market and savings 1,753 1,142 1,212 Certificates of deposit and other time deposits 10,501 8,706 8,318 Other borrowed funds 46 8 33 --------------- --------------- --------------- Total interest expense 14,015 11,576 11,377 --------------- --------------- --------------- Net interest income 11,512 11,590 10,857 Provision for loan losses 290 354 623 --------------- --------------- --------------- Net interest income after provision for loan losses 11,222 11,236 10,234 --------------- --------------- --------------- Noninterest income: Service charges, commissions and fees 2,945 2,785 2,253 Income from fiduciary activities 1,306 1,107 894 Net realized gains on securities transactions - 187 292 Other 2,016 1,335 1,315 --------------- --------------- --------------- Total noninterest income 6,267 5,414 4,754 --------------- --------------- --------------- Noninterest expense: Salaries and employee benefits 7,998 6,961 6,296 Occupancy and equipment expenses 1,770 1,541 1,264 Other 3,545 3,509 3,054 --------------- --------------- --------------- Total noninterest expense 13,313 12,011 10,614 --------------- --------------- --------------- Income before income tax expense 4,176 4,639 4,374 Income tax expense 552 730 868 --------------- --------------- --------------- Net income $ 3,624 $ 3,909 $ 3,506 =============== =============== =============== Basic earnings per common share $ 1.81 $ 1.94 $ 1.74 =============== =============== ===============
See accompanying notes to consolidated financial statements. 56 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands, Except Per Share Amounts)
Accumulated Additional Other Preferred Common Paid-In Retained Comprehensive Treasury Stock Stock Capital Earnings Income (Loss) Stock Total ------ ----- -------- -------- ------------- ----- ----- Balances at January 1, 1998 $ -- $ 10,800 $ 5,400 $ 18,875 $ (335) $(2,011) $ 32,729 Comprehensive income: Net income -- -- -- 3,506 -- -- 3,506 Net change in unrealized gains (losses) on securities available for sale, net of taxes of $507 -- -- -- -- 984 -- 984 -------- Total comprehensive income -- -- -- -- -- -- 4,490 Purchase of 1,120 shares of treasury stock -- -- -- -- -- (16) (16) Cash dividends ($0.64 per share) -- -- -- (1,292) -- -- (1,292) ----- -------- -------- -------- -------- --------- -------- Balances at December 31, 1998 -- 10,800 5,400 21,089 649 (2,027) 35,911 Comprehensive income: Net income -- -- -- 3,909 -- -- 3,909 Net change in unrealized gains (losses) on securities available for sale, net of tax benefit of $1,333 -- -- -- -- (2,587) -- (2,587) -------- Total comprehensive income -- -- -- -- -- -- 1,322 Purchase of 5,274 shares of treasury stock -- -- -- -- -- (92) (92) Cash dividends ($0.68 per share) -- -- -- (1,370) -- -- (1,370) ----- -------- -------- -------- -------- --------- -------- Balances at December 31, 1999 -- 10,800 5,400 23,628 (1,938) (2,119) 35,771 Comprehensive income: Net income -- -- -- 3,624 -- -- 3,624 Net change in unrealized gains (losses) on securities available for sale, net of taxes of $702 -- -- -- -- 1,363 -- 1,363 -------- Total comprehensive income -- -- -- -- -- -- 4,987 Purchase of 15,884 shares of treasury stock -- -- -- -- -- (278) (278) Cash dividends ($0.68 per share) -- -- -- (1,358) -- -- (1,358) ----- -------- -------- -------- -------- --------- -------- Balances at December 31, 2000 $ -- $ 10,800 $ 5,400 $ 25,894 $ (575) $(2,397) $ 39,122 ===== ======== ======== ======== ======== ========= ========
See accompanying notes to consolidated financial statements. 57 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Statements of Cash Flows For the Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands)
2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $ 3,624 $ 3,909 $ 3,506 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes (98) (362) (152) Net amortization (accretion) of premium/discount on securities 42 331 501 Net realized gains on securities transactions -- (187) (292) Provision for loan losses 290 354 623 Depreciation and amortization 1,099 1,075 774 Net change in: Accrued interest receivable (656) 42 (112) Other assets (886) (903) 380 Accrued interest payable 626 (148) 53 Other liabilities 862 (606) 27 Other (80) 43 (31) -------- -------- -------- Net cash provided by operating activities 4,823 3,548 5,277 -------- -------- -------- Cash flows from investing activities: Securities available for sale: Proceeds from sales -- 31,124 31,207 Proceeds from maturities, paydowns and calls 11,297 29,958 53,770 Purchases (33,190) (65,710) (56,841) Securities held to maturity: Proceeds from maturities, paydowns and calls 9,232 22,159 21,721 Purchases -- (8,426) (21,390) Net increase in loans (26,210) (15,691) (16,705) Proceeds from sales of premises and equipment and other real estate 378 411 214 Purchases of bank premises and equipment (2,227) (1,781) (1,046) Net cash received from acquisitions -- -- 5,188 Other -- 235 23 -------- -------- -------- Net cash (used in) provided by investing activities (40,720) (7,721) 16,141 -------- -------- --------
See accompanying notes to consolidated financial statements. 58 HENDERSON CITIZENS BANCSHARES, INC. Consolidated Statements of Cash Flows (Continued) For the Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands)
2000 1999 1998 ---- ---- ---- Cash flows from financing activities: Net change in deposits 23,699 9,703 (4,951) Payments on notes payable -- (2,282) (400) Net proceeds on other borrowings 1,148 -- -- Cash dividends paid (1,362) (1,370) (1,292) Purchase of treasury stock (278) (92) (16) -------- -------- -------- Net cash provided by (used in) financing activities 23,207 5,959 (6,659) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (12,690) 1,786 14,759 Cash and cash equivalents at beginning of year 38,683 36,897 22,138 -------- -------- -------- Cash and cash equivalents at end of year $ 25,993 $ 38,683 $ 36,897 ======== ======== ========
See accompanying notes to consolidated financial statements. 59 HENDERSON CITIZENS BANCSHARES, INC. Notes to Consolidated Financial Statements December 31, 2000, 1999, and 1998 1. Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation - --------------------- The accompanying consolidated financial statements include the accounts of Henderson Citizens Bancshares, Inc. (Bancshares) and its wholly-owned subsidiary, Henderson Citizens Delaware Bancshares, Inc. (Delaware). The financial statements of Delaware include the accounts of its wholly-owned subsidiary, Citizens National Bank (the Bank). Wholly-owned subsidiaries of the Bank include HCB Insurance Agency and Community Development Corporation. Together, the consolidated entities are referred to as the "Company". All significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations - -------------------- The Company is principally engaged in traditional community banking activities provided through its nine full service branches and its trust and loan production office located in east Texas. Community banking activities include the Company's commercial and retail lending, deposit gathering and investment and liquidity management activities. The Company also operates an insurance agency. Use of Estimates - ---------------- To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual future results could differ. The allowance for loan losses, fair values of financial instruments, and status of contingencies are particularly subject to change. Cash Flow Reporting - ------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits with financial institutions that have an original maturity under 90 days, and federal funds sold. Generally, federal funds are sold for one-day periods. Cash paid for interest totaled $13,385,000, $11,724,000 and $11,157,000 in 2000, 1999, and 1998. During the same periods, cash paid for income taxes totaled $805,000, $1,005,000 and $1,280,000. Noncash transactions included reductions in loans through the repossession of real estate and other assets totaling $235,000, $403,000 and $260,000 in 2000, 1999, and 1998. 60 HENDERSON CITIZENS BANCSHARES, INC. Securities - ---------- Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Trading securities are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase. Other securities such as stock in the Federal Reserve Bank and the Federal Home Loan Bank are carried at cost. Interest income includes amortization of purchase premiums and discounts. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not considered temporary. Loans - ----- Loans are reported at the principal balance outstanding net of unearned interest and the allowance for loan losses. Interest income is reported on the level- yield interest method, or, in the case of certain installment loans, in a manner that is not materially different than the level-yield interest method. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. A loan is considered impaired when full payment of principal and interest under the loan terms is not expected. Impairment is evaluated in total for smaller- balance loans of similar nature such as residential mortgage and consumer loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Allowance for Loan Losses - ------------------------- The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. 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 and projections of national and local economic conditions, the composition of the loan portfolio, and prior loss experience, in addition to other considerations. 61 HENDERSON CITIZENS BANCSHARES, INC. The Company utilizes an internal classification system under which potential problem loans are classified and separately monitored by management. Loans classified as "special mention" are those that contain a weakness that, if left unattended, could develop into a problem affecting the ultimate collectibility of the loan. Loans classified as "substandard" are those loans with clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are in the process of being charged-off. The Company uses a combination of a loss migration approach and a specific allocation approach to determine the adequacy of the allowance for loan losses. In general, the migration analysis tracks, on a quarter-by-quarter basis, the percentage of various classified loan pools that ultimately becomes a loss over a twelve-month time period. The sum of the loss percentages for each quarter of the analysis is used to estimate the loss that exists in the Company's current population of classified loans. The methodology for determining loss percentages on unclassified loans is based on historical losses on the pool of loans that were considered pass credits twelve months prior to the loss. Adjustments to these general reserve allocations are then made to account for risks in the portfolio associated with: (1) levels of, and trends in, delinquencies and nonaccruals; (2) trends in composition, volume, and terms of loans; (3) changes in lending policies and procedures; (4) experience, ability and depth of lending management and staff; (5) national and local economic trends and conditions; and (6) concentrations of credit. While portions of allowance may be allocated for specific credits, the entire allowance is available for any credit that, in management's judgment, should be charged-off. Loan impairment is reported when full payment under the loan terms is not expected. Loans are evaluated for impairment when payments are delayed, typically 90 days or more, or when analysis of a borrower's operating results and financial condition indicates the borrower's underlying cash flows may not be adequate to meet debt service requirements and it is probable that not all principal and interest amounts will be collected according to the original terms of the loan. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is considered impaired, generally a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows or at the fair value of collateral if repayment is expected solely from the collateral. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. 62 HENDERSON CITIZENS BANCSHARES, INC. Premises and Equipment - ---------------------- Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the respective assets on a straight-line basis. The useful lives utilized are forty years for buildings and range from five to ten years for furniture, fixtures and equipment. Maintenance and repairs are charged to operating expense, and renewals and betterments are capitalized. Gains or losses on dispositions are included in the statement of income. Goodwill - -------- Net assets acquired in purchase transactions are recorded at their fair value at the date of acquisition. Goodwill, the excess of the purchase price over the fair value of net assets acquired, is amortized on a straight-line basis, generally over a 15-year period. Goodwill, net of accumulated amortization, totaled $3,821,000 and $3,449,000 at December 31, 2000 and 1999 and is included in other assets in the accompanying consolidated balance sheets. Amortization of goodwill totaled $309,000, $364,000 and $197,000 in 2000, 1999, and 1998, and is included in other expenses in the accompanying consolidated income statements. Long-Term Assets - ---------------- Premises and equipment, goodwill and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If considered impaired, the assets are recorded at discounted amounts. Income Taxes - ------------ Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the expected amount to be realized. Basic Earnings Per Common Share - ------------------------------- Basic earnings per common share is calculated based on the weighted average number of shares outstanding during the year. The weighted average common shares outstanding were 2,000,114 in 2000, 2,014,578 in 1999 and 2,017,166 in 1998. There are no potentially dilutive common shares. Therefore, diluted earnings per common share is not presented. 63 HENDERSON CITIZENS BANCSHARES, INC. Fair Value of Financial Instruments - ----------------------------------- Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on-and off-balance sheet financial instruments do not include the value of anticipated future business or the value of assets and liabilities not considered financial instruments. Loss Contingencies - ------------------ Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Dividend Restriction - -------------------- Banking regulations require the maintenance of certain capital and net income levels that may limit the amount of dividends that may be paid. Regulatory capital requirements are more fully disclosed in a separate note. Restrictions on Cash - -------------------- The Company was required to have $1,789,000 and $1,029,000 of cash on hand or on deposit with the Federal Reserve Bank to meet regulatory reserve and clearing requirements at December 31, 2000 and 1999. Deposits with the Federal Reserve Bank do not earn interest. Comprehensive Income - -------------------- Comprehensive income is reported for all periods. Comprehensive income includes both net income and other comprehensive income, which includes the change in unrealized gains and losses on securities available for sale. Industry Segments - ----------------- The Company's management views its banking operations as one segment and makes decisions about resource allocation and performance assessment based on the same financial information presented throughout these consolidated financial statements. The Company does have a separate trust department but such operations are not considered material for purposes of disclosure requirements of SFAS No. 131. Therefore, separate disclosures related to trust operations are not presented in these financial statements. 64 HENDERSON CITIZENS BANCSHARES, INC. New Accounting Pronouncements - ----------------------------- Beginning January 1, 2001, a new accounting standard, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and 138, requires all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard in 2001 is not expected to have a material effect on the Company's financial statements. In September 2000, the Financial Accounting Standards Board issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 140 replaces SFAS 125 and resolves various implementation issues while carrying forward most of the provisions of SFAS 125 without change. SFAS 140 revises standards for transfers of financial assets by clarifying criteria and expanding guidance for determining whether the transferor has relinquished control and the transfer is therefore accounted for as a sale. SFAS 140 also adopts new accounting requirements for pledged collateral and requires new disclosures about securitizations and pledged collateral. SFAS 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. Management does not expect this standard to have a material effect on the Company's consolidated financial statements. Reclassification - ---------------- Certain amounts previously reported have been reclassified to conform to the current format. 65 HENDERSON CITIZENS BANCSHARES, INC. 2. Securities ---------- The amortized cost and estimated fair values of securities available for sale at December 31, 2000 and 1999 was as follows (in thousands of dollars):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------- ------------- ------------ December 31, 2000: U.S. Treasury $ 18,015 $ 66 $ 17 $ 18,064 U.S. government agencies 63,468 116 434 63,150 State and municipal - - - - Mortgage-backed securities and collateralized mortgage obligations 74,578 181 784 73,975 Corporate - - - - Other securities 504 - - 504 ------------ ------------- ------------- ------------ $ 156,565 $ 363 $ 1,235 $ 155,693 ============ ============= ============= ============ December 31, 1999: U.S. Treasury $ 18,049 $ 2 $ 135 $ 17,916 U.S. government agencies 50,432 - 1,500 48,932 State and municipal - - - - Mortgage-backed securities and collateralized mortgage obligations 65,638 101 1,405 64,334 Corporate - - - - Other securities 493 - - 493 ------------ ------------- ------------- ------------ $ 134,612 $ 103 $ 3,040 $ 131,675 ============ ============= ============= ============
66 HENDERSON CITIZENS BANCSHARES, INC. The amortized cost and estimated fair value of securities held to maturity at December 31, 2000 and 1999 was as follows (in thousands of dollars):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------ ------------- ------------- ------------ December 31, 2000: U.S. Treasury $ - $ - $ - $ - U.S. government agencies - - - - State and municipal 42,563 344 519 42,388 Mortgage-backed securities and collateralized mortgage obligations 6,423 - 33 6,390 Corporate 2,047 - 22 2,025 Other securities 212 - 5 207 ------------ ------------- ------------- ------------ $ 51,245 $ 344 $ 579 $ 51,010 ============ ============= ============= ============ December 31, 1999: U.S. Treasury $ - $ - $ - $ - U.S. government agencies - - - - State and municipal 46,895 132 2,197 44,830 Mortgage-backed securities and collateralized mortgage obligations 11,388 2 193 11,197 Corporate 2,068 - 68 2,000 Other securities 228 - 5 223 ------------ ------------- ------------- ------------ $ 60,579 $ 134 $ 2,463 $ 58,250 ============ ============= ============= ============
Mortgage-backed securities are backed by pools of mortgages that are insured or guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA) or the Government National Mortgage Association (GNMA). Other securities include stock holdings in Independent Bankers Financial Corporation, the Federal Reserve Bank and the Federal Home Loan Bank. 67 HENDERSON CITIZENS BANCSHARES, INC. The amortized cost and estimated fair value of securities at December 31, 2000, by contractual maturity, are shown below (in thousands of dollars). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and other securities are shown separately since they are not due at a single maturity date.
Securities Available for Sale ----------------------------- Estimated Amortized Fair Cost Value ---- ----- Due in one year or less $ 12,010 $ 11,995 Due after one year through five years 69,473 69,219 Due after five years through ten years - - Due after ten years 504 504 Mortgage-backed securities and collateralized mortgage obligations 74,578 73,975 ------------- ------------ $ 156,565 $ 155,693 ============= ============ Securities Held to Maturity --------------------------- Estimated Amortized Fair Cost Value ---- ----- Due in one year or less $ 579 $ 579 Due after one year through five years 9,399 9,497 Due after five years through ten years 14,055 14,198 Due after ten years 20,789 20,346 Mortgage-backed securities and collateralized mortgage obligations 6,423 6,390 ------------ ----------- $ 51,245 $ 51,010 ============ ===========
Proceeds from the sales of available for sale securities were $31,124,000 and $31,207,000 in 1999 and 1998. Gross gains of $194,000 and $292,000 and gross losses of $7,000 and $0 were recognized on those sales. There were no sales of securities in 2000. 68 HENDERSON CITIZENS BANCSHARES, INC. Securities with a carrying value of $77,797,000 and $70,337,000 at December 31, 2000 and 1999 were pledged to secure public funds on deposit or for other purposes as required or permitted by law. 3. Loans and Allowance for Loan Losses ----------------------------------- Loans at December 31, 2000 and 1999 were as follows (in thousands of dollars):
2000 1999 ---- ---- Real estate mortgage $ 88,055 $ 77,935 Commercial and industrial 51,026 37,639 Installment and other 33,219 30,955 ------------ ------------ Total 172,300 146,529 Less: Allowance for loan losses (2,355) (2,200) Unearned discount (63) (132) ------------ ------------ Loans, net $ 169,882 $ 144,197 ============ ============
The Bank enters into various loans and other transactions in the ordinary course of business with their directors, executive officers, and some of their related business interests. In the opinion of management, these loans and other transactions are made on substantially the same terms as those prevailing at the time for comparable loans and similar transactions with other persons. The amounts of these loans were $465,000 and $451,000 at December 31, 2000 and 1999. The change during 2000 reflects $196,000 in new loans and $182,000 of repayments. At December 31, 2000 and 1999, the Company had discontinued the accrual of interest on loans aggregating $241,000 and $0. Net interest income for 2000 and 1999 would have been higher by $10,560 and $0 had interest been accrued at contractual rates on nonperforming loans. At December 31, 2000 and 1999, the recorded investment in impaired loans was $1,458,000 and $0. The average recorded investment in impaired loans for 2000 and 1999 was $1,023,000 and $64,000. Interest income of $139,000 and $0 was recognized on these impaired loans for 2000 and 1999. 69 HENDERSON CITIZENS BANCSHARES, INC. Changes in the allowance for loan losses are summarized as follows (in thousands of dollars):
2000 1999 1998 ---- ---- ---- Balance, January 1 $ 2,200 $ 1,701 $ 1,249 Provision for loan losses 290 354 623 Addition due to acquisition 8 - 165 Loans charged off (585) (890) (559) Recoveries 442 1,035 223 ------------ ------------ ------------ Balance, December 31 $ 2,355 $ 2,200 $ 1,701 ============ ============ ============
4. Premises and Equipment ---------------------- Premises and equipment at December 31, 2000 and 1999 were as follows (in thousands of dollars):
2000 1999 ---- ---- Land $ 1,406 $ 926 Bank buildings 6,963 5,936 Furniture, fixtures and equipment 5,653 4,985 Construction in progress 333 407 --------------- --------------- 14,355 12,254 Less accumulated depreciation (5,961) (5,222) --------------- --------------- Premises and equipment, net $ 8,394 $ 7,032 =============== ===============
Amounts charged to operating expenses for depreciation were $832,000, $711,000 and $577,000 in 2000, 1999, and 1998. 70 HENDERSON CITIZENS BANCSHARES, INC. 5. Deposits -------- Included in certificates of deposit and other time deposits at December 31, 2000 and 1999, were $47,694,000 and $44,393,000 of certificates of deposit in denominations of $100,000 or more. At December 31, 2000, the scheduled maturities of time deposits are as follows (in thousands of dollars): Years Ending December 31: Amount ------------------------- ------ 2001 $ 163,506 2002 25,329 2003 6,978 2004 668 2005 317 Thereafter - ---------- $ 196,798 ========== Deposits with directors, executive officers and their related business interests, in the opinion of management, are made substantially on the same terms as those prevailing at the time for comparable deposits with other persons, and totaled $5,220,000 and $5,286,000 at December 31, 2000 and 1999. 6. Other Borrowings ---------------- During July 2000, the Company elected the "note option" for its treasury tax and loan deposits instead of the "remittance option". The note option allows the Company to borrow TT&L deposits under an open-ended demand note payable to the Federal Reserve Bank. Interest on the note is payable monthly at 1/4% below the Federal Funds rate (5.72% at December 31, 2000). The note has a maximum limit of $5,000,000 and is secured by certain investment securities. The average balance outstanding under the note during 2000 was $631,000 and the maximum balance outstanding at any month-end was $2,845,000. The balance outstanding at December 31, 2000 was $1,148,000. 71 HENDERSON CITIZENS BANCSHARES, INC. 7. Income Taxes ------------ Federal income tax expense (benefit) applicable to income before tax for the years ended December 31, 2000, 1999, and 1998 was as follows (in thousands of dollars):
2000 1999 1998 ---- ---- ---- Current $ 650 $ 1,092 $ 1,020 Deferred (98) (362) (152) ----------- ------------ ------------ $ 552 $ 730 $ 868 =========== ============ ============
Actual income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% in 2000, 1999, and 1998, to pretax accounting income as follows (in thousands of dollars):
2000 1999 1998 ---- ---- ---- Computed "expected" tax expense $ 1,420 $ 1,580 $ 1,487 Increase (decrease) in income taxes resulting from: Tax-exempt interest (920) (904) (679) Other 52 54 60 ------------- ------------- ------------- Actual income tax expense $ 552 $ 730 $ 868 ============= ============= ============= Effective tax rate 13.2% 15.7% 19.8% ============= ============= =============
72 HENDERSON CITIZENS BANCSHARES, INC. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999, are presented below (in thousands of dollars):
2000 1999 ---- ---- Deferred tax assets: Allowance for loan losses $ 464 $ 365 Organization costs 65 118 Accrued liabilities 76 30 Net unrealized loss on securities available for sale 296 999 Net loan costs 273 227 -------- -------- Total gross deferred tax asset 1,174 1,739 Deferred tax liabilities: Investment securities (58) (38) Premises and equipment and related accumulated depreciation (206) (167) Other assets - (19) -------- -------- Total gross deferred tax liability (264) (224) -------- -------- Net deferred tax asset $ 910 $ 1,515 ======== ========
No valuation allowance was recorded against the gross deferred tax asset because management believes that it is more likely than not the gross deferred tax asset will be realized in full. The Company bases its conclusion on various factors, including ongoing profitable operations, as well as significant amounts of taxes available in the carryback period. Included in other assets in the accompanying consolidated balance sheets are current federal income taxes receivable of $19,000 and $33,000 at December 31, 2000 and 1999. The net deferred federal income tax asset at December 31, 2000 and 1999 is also included in other assets. 73 HENDERSON CITIZENS BANCSHARES, INC. 8. Benefit Plans ------------- The Company has a 401(k) savings plan which covers substantially all full-time employees with at least one year of service. With respect to employer contributions, vesting under the plan begins in the third year and participants become fully vested after seven years. Contributions are at the discretion of the Board of Directors. The Company expensed $410,000, $368,000, and $345,000 related to the plan for the years ended December 31, 2000, 1999, and 1998. The Company maintains a non-qualified deferred compensation plan and a performance and retention plan for certain management employees of the Company. Contributions by the Company are at the discretion of the Board of Directors and the plans generally provide for vesting over five years. The Company expensed $202,000, $145,000 and $120,000 related to these plans during 2000, 1999, and 1998. 9. Transaction With Affiliate -------------------------- The Company is affiliated with H.C.B., Inc. (HCB). The Board of Directors for both the Company and HCB are the same. HCB has been used, in part, to own certain assets amounting to approximately $1,438,000 and $1,387,000 at December 31, 2000 and 1999 that supervisory agencies have generally not permitted banks to own directly for extended periods of time. During the years ended December 31, 2000, 1999, and 1998, the Company charged HCB a management fee of $37,000, $32,000, and $32,500 for various services provided to HCB. The amount charged was considered to be the fair value of services rendered. During 2000, 1999, and 1998, the Bank's trust department charged HCB an additional $9,800, $12,000, and $10,000 for management services related to HCB's mineral interests. 10. Fair Value of Financial Instruments ----------------------------------- The estimated fair value approximates carrying value for financial instruments except those described below: Securities: Fair values for securities are based on quoted market prices or - ---------- dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. Loans: The fair value of fixed-rate loans and variable-rate loans which reprice - ----- on an infrequent basis is estimated by discounting future cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers of similar credit quality. Deposits: The fair value of deposit liabilities with defined maturities is - -------- estimated by discounting future cash flows using the interest rates currently offered for deposits of similar remaining maturities. 74 HENDERSON CITIZENS BANCSHARES, INC. Off-Balance Sheet Instruments: The fair values of these items are not material - ----------------------------- and are therefore not included on the following schedule. The estimated fair values of financial instruments at December 31, 2000 and 1999 were as follows (in thousands of dollars):
2000 1999 ---- ---- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- Financial assets: Cash and due from banks $ 11,385 $ 11,385 $ 24,041 $ 24,041 Interest-bearing deposits with financial institutions 10,403 10,403 5,357 5,357 Federal funds sold 4,205 4,205 9,285 9,285 Securities 206,938 206,703 192,254 189,925 Loans, net 169,882 170,898 144,197 144,824 Accrued interest receivable 4,320 4,320 3,664 3,664 Financial liabilities: Deposits: Demand - noninterest-bearing $ ( 70,852) $ ( 70,852) $ ( 44,807) $ ( 44,807) NOW accounts ( 53,111) ( 53,111) ( 79,371) ( 79,371) Money market and savings ( 58,361) ( 58,361) ( 47,876) ( 47,876) Certificates of deposit and (196,798) (196,843) (183,369) (183,582) other time deposits Accrued interest payable ( 1,803) ( 1,803) ( 1,177) ( 1,177) Other borrowings ( 1,148) ( 1,148) - -
While these estimates of fair value are based on management's judgment of appropriate factors, there is no assurance that, were the Company to have disposed of such items at December 31, 2000 and 1999, the estimated fair values would necessarily have been achieved at those dates, since market values may differ depending on various circumstances. The estimated fair values at December 31, 2000 and 1999 should not necessarily be considered to apply at subsequent dates. In addition, other assets, such as property and equipment, and liabilities of the Company that are not defined as financial instruments are not included in the above disclosures. Also, nonfinancial instruments typically not recognized in financial statements nevertheless may have value but are not included in the above disclosures. These include, among other items, the estimated earning power of core deposit accounts, the trained work force, customer goodwill and similar items. 75 HENDERSON CITIZENS BANCSHARES, INC. 11. Financial Instruments With Off-Balance Sheet Risk ------------------------------------------------- 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. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as they do for on-balance sheet instruments. Financial instruments with contractual or notional amounts that represent credit risk at December 31, 2000 and 1999 were as follows:
2000 1999 ---- ---- Commitments to extend credit $15,660,000 $ 18,707,000 Standby letters of credit 115,000 139,000
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the 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 and nature of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counter-party. Such collateral may include accounts receivable, inventory, property, plant, and equipment, real estate, and income-producing commercial and oil and gas properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private short-term borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. Although the maximum exposure is the amount of these commitments, at December 31, 2000, management anticipates no material losses from such activities. 76 HENDERSON CITIZENS BANCSHARES, INC. 12. Commitments and Contingent Liabilities -------------------------------------- The Company is involved in legal actions arising from normal business activities. Management believes that these actions will not materially affect the financial position or results of operations of the Company. 13. Concentrations of Credit Risk ----------------------------- The Bank grants real estate, commercial and industrial loans to customers primarily in Henderson, Texas, and surrounding areas of east Texas. Although the Bank has a diversified loan portfolio, a substantial portion (approximately 51% and 53% at December 31, 2000 and 1999) 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 Bank 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 Bank. The Bank has $8,122,000 and $4,460,000 on deposit with the Federal Home Loan Bank of Dallas at December 31, 2000 and 1999. 14. Regulatory Matters ------------------ The Company and the Bank are subject to various regulatory capital requirements administered by federal 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 and Bank'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 their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. 77 HENDERSON CITIZENS BANCSHARES, INC. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios as set forth in the following table. Management believes, as of December 31, 2000 and 1999, that the Company and the Bank met all capital adequacy requirements to which they are subject.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio --------- -------- --------- ------- ---------- ------ December 31, 2000: Total capital to risk weighted assets: Consolidated $ 38,204 18.59% $ 16,436 8.00% $ - -% Bank 37,923 18.12 16,743 8.00 20,929 10.00 Tier I capital to risk weighted assets: Consolidated 35,849 17.45 8,218 4.00 - - Bank 35,568 16.99 8,371 4.00 12,557 6.00 Tier I capital to average assets: Consolidated 35,849 8.76 16,374 4.00 - - Bank 35,568 8.69 16,374 4.00 20,467 5.00 December 31, 1999: Total capital to risk weighted assets: Consolidated $ 36,435 19.58% $ 14,884 8.00% $ - -% Bank 36,412 19.57 14,884 8.00 18,605 10.00 Tier I capital to risk weighted assets: Consolidated 34,235 18.40 7,442 4.00 - - Bank 34,212 18.39 7,442 4.00 11,163 6.00 Tier I capital to average assets: Consolidated 34,235 8.96 15,283 4.00 - - Bank 34,212 8.98 15,239 4.00 19,043 5.00
As of December 31, 2000 and 1999, the Bank met the level of capital required to be categorized as well capitalized under prompt corrective action regulations. Management is not aware of any conditions subsequent to those dates that would change the Bank's capital category. The Bank is a national banking association and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (OCC). The Bank is also a member of the Federal Reserve Banking System (FRB) and the Federal Deposit Insurance Corporation (FDIC). Because the FRB regulates the bank holding company parent of the Bank, the FRB also has supervisory authority that directly affects the Bank. In addition, upon making certain determinations with respect to the condition of any insured bank, the FDIC may begin proceedings to terminate a bank's federal deposit insurance. 78 HENDERSON CITIZENS BANCSHARES, INC. Dividends paid by the Company are mainly provided by dividends from its subsidiaries. However, certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. Regulatory approval is required in order to pay dividends in excess of the Bank's earnings retained for the current and prior two years. These guidelines do not currently restrict the Bank from paying normal dividends to the Company. 15. Other Comprehensive Income -------------------------- Other comprehensive income for the years ended December 31, 2000, 1999, and 1998 consisted of the following (in thousands of dollars):
2000 1999 1998 ----- ----- ----- Unrealized net holding gain (loss) on securities available for sale arising during the year $ 1,363 ($ 2,774) $ 1,177 Less: Reclassification adjustment for net realized gains included in net income - 187 193 ------- -------- -------- Total other comprehensive income (loss) $ 1,363 ($ 2,587) $ 984 ======= ======== ========
79 HENDERSON CITIZENS BANCSHARES, INC. 16. Parent Company Only Condensed Financial Information --------------------------------------------------- The financial information below summarizes the financial position of Henderson Citizens Bancshares, Inc. (parent company only) as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2000. Balance Sheets (Parent Only) December 31, 2000 and 1999 (Dollars in Thousands)
2000 1999 ------ ------ ASSETS - ------ Cash in subsidiary bank $ 409 $ 352 Investment in subsidiaries 38,853 35,761 Other assets 199 - -------- --------- Total assets $ 39,461 $ 36,113 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Liabilities: Dividends declared $ 339 $ 342 Accounts payable - - Notes payable - - -------- --------- 339 342 Stockholders' equity: Preferred stock - - Common stock 10,800 10,800 Additional paid-in capital 5,400 5,400 Retained earnings 25,894 23,628 Accumulated other comprehensive income (loss) (575) (1,938) Treasury stock (2,397) (2,119) -------- --------- Total stockholders' equity 39,122 35,771 -------- --------- Total liabilities and stockholders' equity $ 39,461 $ 36,113 ======== =========
80 HENDERSON CITIZENS BANCSHARES, INC. Statements of Income (Parent Only) Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands)
2000 1999 1998 ----- ----- ----- Dividends paid by subsidiary bank $ 1,895 $ 1,445 $ 2,185 Operating expenses - 3 25 ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries 1,895 1,442 2,160 Income tax expense - - - ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 1,895 1,442 2,160 Equity in undistributed earnings of subsidiaries 1,729 2,467 1,346 ------- ------- ------- Net income $ 3,624 $ 3,909 $ 3,506 ======= ======= =======
81 HENDERSON CITIZENS BANCSHARES, INC. Statements of Cash Flows (Parent Only) Years Ended December 31, 2000, 1999, and 1998 (Dollars in Thousands)
2000 1999 1998 ----- ----- ----- Operating activities: Net income $ 3,624 $ 3,909 $ 3,506 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (1,729) (2,467) (1,346) (Increase) decrease in other assets (199) - 27 Decrease in accounts payable and dividends declared (3) (5) (25) Decrease in notes payable and other liabilities - (444) (400) ------- -------- -------- Net cash provided by operating activities 1,693 993 1,762 Financing activities: Cash dividends paid (1,358) (1,370) (1,292) Purchase of treasury stock (278) (92) (16) ------- -------- -------- Net cash used in financing activities (1,636) (1,462) (1,308) ------- -------- -------- Increase (decrease) in cash 57 (469) 454 Cash at beginning of year 352 821 367 ------- -------- -------- Cash at end of year $ 409 $ 352 $ 821 ======= ======== ========
82 HENDERSON CITIZENS BANCSHARES, INC. 17. Subsequent Event ---------------- On February 6, 2001, the Company signed an Agreement and Plan of Reorganization by and between the Company and Rusk County Bancshares, Inc., Henderson, Texas. Pursuant to the agreement, the Company will pay $12,510,000 for 100% of the outstanding stock of Rusk County Bancshares, Inc. The transaction will be accounted for using the purchase method of accounting and will result in approximately $5,451,000 of goodwill, which, under current accounting guidance, will be amortized over fifteen years on a straight-line basis. The acquisition is expected to result in an increase in total assets of approximately $53,533,000 and in total deposits of approximately $45,219,000. The Agreement and Plan of Reorganization is subject to regulatory and stockholder approval. Assuming appropriate approvals are received, the Company expects to complete the transaction in the third quarter of 2001. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: /S/ Milton S. McGee, Jr. -------------------------------------- Milton S. McGee, Jr., President Milton S. McGee, Jr., CPA, President and Chief Executive Officer (Principal Executive Officer) By: /S/ Rebecca Tanner -------------------------------------- Rebecca Tanner Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) and Chief Accounting Officer (Principal Accounting Officer) Date: March 23, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signatures Title Date ---------- ----- ---- /S/ E. Landon Alford Director and Chairman of the March 23, 2001 - --------------------------- Board E. Landon Alford /S/ David Alford Director March 23, 2001 - --------------------------- David Alford /S/ R. M. Ballenger Director March 23, 2001 - --------------------------- R. M. Ballenger /S/ Stayton M. Bonner, Jr. Director March 23, 2001 - --------------------------- Stayton M. Bonner, Jr. /S/ D. J. Burks Director March 23, 2001 - --------------------------- D. J. Burks /S/ Billy Crawford Director March 23, 2001 - --------------------------- Billy Crawford 84 /S/ Sheila Gresham Director March 23, 2001 - --------------------------- Sheila Gresham /S/ James Michael Kangerga Director March 23, 2001 - --------------------------- James Michael Kangerga /S/ J. Mark Mann Director March 23, 2001 - --------------------------- J. Mark Mann /S/ Charles H. Richardson Director March 23, 2001 - --------------------------- Charles H. Richardson /S/ Tony Wooster Director March 23, 2001 - --------------------------- Tony Wooster /S/ William E. Wylie Director March 23, 2001 - --------------------------- William E. Wylie 85 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS, WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The following items will be sent to the shareholders of record of the Company on or before March 30, 2001, and copies of such information shall be sent to the Securities and Exchange Commission on or before such time: (1) Notice of Annual Meeting of Shareholders and Proxy Statement (2) Proxy Card 86 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- EXHIBITS to the FORM 10-K ANNUAL REPORT under THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended: December 31, 2000 ------------------- HENDERSON CITIZENS BANCSHARES, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2371232 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 201 West Main Street P.O. Box 1009, Henderson, Texas 75653 (Address of principal (Zip Code) executive offices) (903) 657-8521 (Registrant's telephone number, including area code) EXHIBIT INDEX Exhibit - -------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization, dated February 6, 2001, by and between Henderson Citizens Bancshares, Inc. and Rusk County Bancshares, Inc. 3.1 Articles of Incorporation of Henderson Citizens Bancshares, Inc. (incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 33-42286) filed with the Securities and Exchange Commission on August 16, 1991). 3.2 Bylaws of Henderson Citizens Bancshares, Inc. (incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 33-42286) filed with the Securities and Exchange Commission on August 16, 1991). 4.1 Specimen Common Stock Certificate of Henderson Citizens Bancshares, Inc. (incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 33-42286) filed with the Securities and Exchange Commission on August 16, 1991). 10.1 Citizens National Bank of Henderson - Profit Sharing Plan (incorporated herein by reference from the Company's Registration Statement on Form S-4 (Registration No. 33-42286) filed with the Securities and Exchange Commission on August 16, 1991). 10.2 Change in Control Agreement dated June 12, 1995 by and between Henderson Citizens Bancshares, Inc. and Milton S. McGee, Jr., President of Henderson Citizens Bancshares, Inc. (incorporated herein by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1995). 10.3 Amendment One to the Change in Control Agreement Between Henderson Citizens Bancshares, Inc. and Milton S. McGee, Jr. dated December 16, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.4 Citizens National Bank Non-Qualified Deferred Compensation Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.5 Citizens National Bank 1998 Performance and Retention Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 10.6 Citizens National Bank Employee Severance Protection Plan dated November 18, 1998 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998). 21.1 Subsidiaries of registrant. EX-2.1 2 0002.txt AGREEMENT AND PLAN OF REORGANIZATION EXHIBIT 2.1 ================================================================================ AGREEMENT AND PLAN OF REORGANIZATION BY AND BETWEEN HENDERSON CITIZENS BANCSHARES, INC. HENDERSON, TEXAS AND RUSK COUNTY BANCSHARES, INC. HENDERSON, TEXAS Dated as of February 6, 2001 ================================================================================ TABLE OF CONTENTS ARTICLE I. ACQUISITION OF RCBI BY HCBI........................................................... 1 Section 1.01 Merger of New RCBI with and into RCBI............................................ 1 ------------------------------------- Section 1.02 Effects of the Merger............................................................ 2 --------------------- Section 1.03 Articles of Incorporation and Bylaws............................................. 2 ------------------------------------ Section 1.04 Directors and Officers........................................................... 2 ---------------------- Section 1.05 Conversion of Securities......................................................... 2 ------------------------ Section 1.06 Shareholders' Meeting............................................................ 3 --------------------- Section 1.07 Delivery of Consideration........................................................ 4 ------------------------- Section 1.08 Reservation of Right............................................................. 5 -------------------- ARTICLE II. THE CLOSING, THE CLOSING DATE AND THE EFFECTIVE TIME.................................. 6 Section 2.01 Time and Place of the Closing and Closing Date................................... 6 ---------------------------------------------- Section 2.02 Actions to be Taken at the Closing by RCBI....................................... 6 ------------------------------------------ Section 2.03 Actions to be Taken at the Closing by HCBI....................................... 8 ------------------------------------------ Section 2.04 Further Assurances............................................................... 9 ------------------ Section 2.05 Effective Time................................................................... 9 -------------- ARTICLE III. REPRESENTATIONS AND WARRANTIES OF RCBI................................................ 10 Section 3.01 Organization and Qualification................................................... 10 ------------------------------ Section 3.02 Execution and Delivery........................................................... 11 ---------------------- Section 3.03 Capitalization................................................................... 11 -------------- Section 3.04 Compliance with Laws, Permits and Instruments.................................... 12 --------------------------------------------- Section 3.05 RCBI Financial Statements........................................................ 13 ------------------------- Section 3.06 Bank Financial Statements........................................................ 13 ------------------------- Section 3.07 Litigation....................................................................... 14 ---------- Section 3.08 Consents and Approvals........................................................... 14 ---------------------- Section 3.09 Undisclosed Liabilities.......................................................... 14 ----------------------- Section 3.10 Title to Assets.................................................................. 14 --------------- Section 3.11 Absence of Certain Changes or Events............................................. 15 ------------------------------------ Section 3.12 Leases, Contracts and Agreements................................................. 17 -------------------------------- Section 3.13 Taxes............................................................................ 18 ----- Section 3.14 Insurance........................................................................ 19 --------- Section 3.15 No Adverse Change................................................................ 19 ----------------- Section 3.16 Proprietary Rights............................................................... 19 ------------------ Section 3.17 Transactions with Certain Persons and Entities................................... 19 ---------------------------------------------- Section 3.18 Evidences of Indebtedness........................................................ 20 ------------------------- Section 3.19 Condition of Assets.............................................................. 20 ------------------- Section 3.20 Environmental Compliance......................................................... 20 ------------------------ Section 3.21 Regulatory Compliance............................................................ 21 --------------------- Section 3.22 Absence of Certain Business Practices............................................ 21 ------------------------------------- Section 3.23 Proxy Statement.................................................................. 21 --------------- Section 3.24 Dissenting Shareholders.......................................................... 22 ----------------------- Section 3.25 Books and Records................................................................ 22 ----------------- Section 3.26 Forms of Instruments, Etc........................................................ 22 ------------------------- Section 3.27 Fiduciary Responsibilities....................................................... 22 -------------------------- Section 3.28 Guaranties....................................................................... 22 ---------- Section 3.29 Voting Trust or Buy-Sell Agreements.............................................. 22 ----------------------------------- Section 3.30 Employee Relationships........................................................... 22 ---------------------- Section 3.31 Employee Benefit Plans........................................................... 23 ---------------------- Section 3.32 Representations Not Misleading................................................... 24 ------------------------------
(i) ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF HCBI................................................ 24 Section 4.01 Organization and Qualification................................................... 24 ------------------------------ Section 4.02 Execution and Delivery........................................................... 24 ---------------------- Section 4.03 Compliance with Laws, Permits and Instruments.................................... 25 --------------------------------------------- Section 4.04 Litigation....................................................................... 25 ---------- Section 4.05 Consents and Approvals........................................................... 25 ---------------------- Section 4.06 Proxy Statement.................................................................. 25 --------------- Section 4.07 Regulatory Approvals............................................................. 25 -------------------- Section 4.08 Ability to Pay Merger Consideration.............................................. 26 ----------------------------------- Section 4.09 Accredited Investor; Access to Information....................................... 26 ------------------------------------------ Section 4.10 Representations Not Misleading................................................... 26 ------------------------------ ARTICLE V. COVENANTS OF RCBI..................................................................... 26 Section 5.01 Best Efforts..................................................................... 26 ------------ Section 5.02 Merger Agreement................................................................. 26 ---------------- Section 5.03 Related Transactions............................................................. 26 -------------------- Section 5.04 Information for Applications..................................................... 26 ---------------------------- Section 5.05 Required Acts of RCBI. ......................................................... 27 --------------------- Section 5.06 Prohibited Acts of RCBI. ....................................................... 28 ----------------------- Section 5.07 Access; Pre-Closing Investigation................................................ 31 --------------------------------- Section 5.08 Invitations to and Attendance at Directors' and Committee Meetings............... 31 ------------------------------------------------------------------ Section 5.09 Additional Financial Statements.................................................. 32 ------------------------------- Section 5.10 Untrue Representations........................................................... 32 ---------------------- Section 5.11 Litigation and Claims............................................................ 32 --------------------- Section 5.12 Adverse Changes.................................................................. 32 --------------- Section 5.13 No Negotiation with Others....................................................... 32 -------------------------- Section 5.14 Consents and Approvals........................................................... 33 ---------------------- Section 5.15 Environmental Investigation; Right to Terminate Agreement........................ 33 --------------------------------------------------------- Section 5.16 Support Agreements and Option Holder Agreements.................................. 34 ----------------------------------------------- Section 5.17 Termination of Employee Plans.................................................... 34 ----------------------------- Section 5.18 Releases......................................................................... 35 -------- ARTICLE VI. COVENANTS OF HCBI..................................................................... 35 Section 6.01 Best Efforts..................................................................... 35 ------------ Section 6.02 Merger Agreement................................................................. 35 ---------------- Section 6.03 Information for Applications..................................................... 35 ---------------------------- Section 6.04 Acts of New RCBI................................................................. 36 ---------------- Section 6.05 Untrue Representations........................................................... 36 ---------------------- Section 6.06 Litigation and Claims............................................................ 36 --------------------- Section 6.07 Regulatory and Other Approvals................................................... 36 ------------------------------ Section 6.08 Adverse Change................................................................... 36 -------------- Section 6.09 Employee Benefit Plans........................................................... 36 ---------------------- Section 6.10 Director and Officer Indemnification............................................. 37 ------------------------------------
(ii) ARTICLE VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF RCBI........................................... 38 Section 7.01 Compliance with Representations, Warranties and Agreements....................... 38 ---------------------------------------------------------- Section 7.02 Shareholder Approvals............................................................ 38 --------------------- Section 7.03 Government and Other Approvals................................................... 38 ------------------------------ Section 7.04 No Litigation.................................................................... 38 ------------- Section 7.05 Fairness Opinion................................................................. 39 ---------------- ARTICLE VIII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HCBI.......................................... 39 Section 8.01 Compliance with Representations, Warranties and Agreements....................... 39 ---------------------------------------------------------- Section 8.02 Shareholder Approvals............................................................ 39 --------------------- Section 8.03 Government and Other Approvals................................................... 39 ------------------------------ Section 8.04 No Litigation.................................................................... 40 ------------- Section 8.05 Releases......................................................................... 40 -------- Section 8.06 No Material Adverse Change....................................................... 40 -------------------------- Section 8.07 Employment and Non Compete Agreements............................................ 40 ------------------------------------- Section 8.08 Surrender of Options............................................................. 40 -------------------- ARTICLE IX. TERMINATION AND ABANDONMENT........................................................... 41 Section 9.01 Right of Termination............................................................. 41 -------------------- Section 9.02 Notice of Termination............................................................ 42 --------------------- Section 9.03 Effect of Termination............................................................ 42 --------------------- Section 9.04 Termination Fee.................................................................. 43 --------------- ARTICLE X. CONFIDENTIAL INFORMATION.............................................................. 43 Section 10.01 Definition of "Recipient," "Disclosing Party", "Representative" and "Person".... 43 ---------------------------------------------------------------------------- Section 10.02 Definition of "Subject Information"............................................. 44 ----------------------------------- Section 10.03 Confidentiality................................................................. 44 --------------- Section 10.04 Securities Law Concerns......................................................... 44 ----------------------- Section 10.05 Return of Subject Information................................................... 44 ----------------------------- Section 10.06 Specific Performance/Injunctive Relief.......................................... 45 -------------------------------------- ARTICLE XI. MISCELLANEOUS......................................................................... 45 Section 11.01 Survival of Representations and Warranties...................................... 45 ------------------------------------------ Section 11.02 Expenses........................................................................ 45 -------- Section 11.03 Brokerage Fees and Commissions.................................................. 45 ------------------------------ Section 11.04 Entire Agreement................................................................ 45 ---------------- Section 11.05 Further Cooperation............................................................. 46 ------------------- Section 11.06 Severability.................................................................... 46 ------------ Section 11.07 Notices......................................................................... 46 ------- Section 11.08 GOVERNING LAW................................................................... 47 ------------- Section 11.09 Multiple Counterparts........................................................... 47 --------------------- Section 11.10 Certain Definitions............................................................. 47 ------------------- Section 11.11 Specific Performance............................................................ 48 -------------------- Section 11.12 Attorneys' Fees and Costs....................................................... 49 ------------------------- Section 11.13 Rules of Construction........................................................... 49 --------------------- Section 11.14 Binding Effect; Assignment...................................................... 49 -------------------------- Section 11.15 Public Disclosure............................................................... 49 ----------------- Section 11.16 Extension; Waiver............................................................... 50 ----------------- Section 11.17 Amendments...................................................................... 50 ----------
(iii) EXHIBITS Exhibit "A" - Form of Merger Agreement - ----------- Exhibit "B" - Form of Support Agreement - ----------- Exhibit "C" - Form of Release to Be Executed By Directors - ----------- Exhibit "D" - Form of Release to Be Executed By Officers - ----------- SCHEDULES Schedule 3.03 - Options Schedule 3.04 - Compliance with Laws, Permits and Instruments Schedule 3.07 - Litigation Schedule 3.08 - Consents and Approvals Schedule 3.09 - Undisclosed Liabilities Schedule 3.10 - Liens, Mortgages, Security Interests and Encumbrances Schedule 3.11 - Certain Changes or Events Schedule 3.12 - Contracts Schedule 3.14 - Insurance Matters Schedule 3.17 - Transactions With Insiders Schedule 3.18 - Credit Information Schedule 3.20 - Environmental Matters Schedule 3.21 - Regulatory Compliance Schedule 3.29 - Voting Trust or Buy-Sell Agreements Schedule 3.30 - Employee Relationships Schedule 3.31 - Employee Benefit Plans Schedule 4.05 - Consents and Approvals Schedule 6.09 - Terms of Employment and Non Compete Agreements Schedule 11.03 - Brokerage Agreement (iv) AGREEMENT AND PLAN OF REORGANIZATION ------------------------------------ This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and entered into as of the 6th day of February, 2001, by and between Henderson Citizens Bancshares, Inc., a Texas corporation and registered bank holding company with its principal offices in Henderson, Texas ("HCBI"), and Rusk County Bancshares, Inc., a Texas corporation and registered bank holding company with its principal offices in Henderson, Texas (the "Company"). W I T N E S S E T H: ------------------- WHEREAS, RCBI owns all of the stock of Rusk Delaware Financial Corporation ("RDFC") which in turn owns all of the stock of Peoples State Bank, Henderson, Texas, a Texas banking association (the "Bank"); WHEREAS, HCBI desires to acquire all of the issued and outstanding stock and options to purchase stock of RCBI through the merger of New RCBI, Inc., a wholly-owned subsidiary of HCBI ("New RCBI") with and into RCBI (the "Merger"); WHEREAS, HCBI and RCBI believe that the Merger, as provided for and subject to the terms and conditions set forth in this Agreement and all exhibits, schedules and supplements hereto, is in the best interests of HCBI, RCBI and their respective shareholders; WHEREAS, HCBI and RCBI desire to set forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement and certain additional agreements related to the transactions contemplated hereby; and WHEREAS, the respective boards of directors of HCBI and RCBI have approved this Agreement and the proposed transactions substantially on the terms and conditions set forth in this Agreement and have authorized the execution hereof; NOW, THEREFORE, for and in consideration of the foregoing and of the mutual representations, warranties, covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and subject to the conditions set forth below, the parties hereto undertake, promise, covenant and agree with each other as follows: ARTICLE I. ACQUISITION OF RCBI BY HCBI Section 1.01 Merger of New RCBI with and into RCBI. Subject to the terms ------------------------------------- and conditions of this Agreement and the Agreement and Plan of Merger to be entered into between RCBI and New RCBI (the "Merger Agreement"), attached hereto as Exhibit "A", HCBI shall cause New RCBI to be merged with and into RCBI ----------- pursuant to the provisions of Part Five of the Texas Business Corporation Act (the "TBCA") and with the effect provided in Article 5.06 of the TBCA. Section 1.02 Effects of the Merger. The Merger shall have the effects set --------------------- forth in Article 5.06 of the TBCA. Following the Merger, RCBI shall continue as the corporation resulting from the Merger (the "Resulting Corporation"), and the separate corporate existence of New RCBI shall cease. The name of the Resulting Corporation shall be "Rusk County Bancshares, Inc." The existing offices and facilities of RCBI immediately preceding the Merger shall be the principal offices and facilities of the Resulting Corporation following the Merger. At the Effective Time (as defined in Section 2.05), all rights, title and interests to all real estate and other property owned by each of New RCBI and RCBI shall be allocated to and vested in the Resulting Corporation without reversion or impairment, without further act or deed, and without any transfer or assignment having occurred, but subject to any existing liens or encumbrances thereon. At the Effective Time, all liabilities and obligations of New RCBI and RCBI shall be allocated to the Resulting Corporation, and the Resulting Corporation shall be the primary obligor therefor and no other party to the Merger shall be liable therefor. At the Effective Time, a proceeding pending by or against either New RCBI or RCBI may be continued as if the Merger did not occur, or the Resulting Corporation may be substituted in the proceedings. Section 1.03 Articles of Incorporation and Bylaws. The Articles of ------------------------------------ Incorporation and Bylaws, respectively, of the Resulting Corporation shall be as set forth in the Merger Agreement. Section 1.04 Directors and Officers. The directors and officers, ---------------------- respectively, of the Resulting Corporation shall be as set forth in the Merger Agreement. Section 1.05 Conversion of Securities. At the Effective Time: ------------------------ A. All of the shares of common stock of RCBI, par value $2.00 per share (the "RCBI Stock") issued and outstanding as of the Effective Time, including all of the shares of RCBI Stock (the "Option Shares") to be issued upon the exercise of options to acquire shares of RCBI Stock (the "Options"), shall be converted into the right to receive from HCBI, an aggregate amount in cash equal to the sum of (i) $12,550,000 plus (ii) if ---- the Closing Date (as defined in Section 2.01) does not occur on or before July 6, 2001, the sum of $3,000 per day for each day from July 7, 2001, until the Closing Date (the "Merger Consideration"). The Merger Consideration shall be allocated to the holders of RCBI Stock as follows: (i) For each share of RCBI Stock issued and outstanding at the Effective Time other than the Option Shares (the "Non-Option Shares"), an amount in cash (payable as provided in Section 1.07B) equal to: (a) the sum of (I) $12,550,000 plus (II) the Aggregate Exercise Price (as defined in ---- Section 3.03) plus (III) if the Closing Date does not occur on or before ---- July 6, 2001, the sum of $3,000 per day for each day from July 7, 2001, until the Closing Date; divided by (b) the number of shares of RCBI Stock ---------- issued and outstanding as of the Effective Time, assuming exercise of all of the Options; and (ii) For each Option Share, an amount in cash (payable as provided in Section 1.07B) equal to: (a) the sum of (I) $12,550,000 plus (II) the ---- Aggregate Exercise Price plus (III) if the Closing Date does not occur on ---- or before July 6, 2001, the sum of $3,000 per day for each day from July 7, 2001, until the Closing Date; divided by (b) the number of shares of RCBI Stock issued and outstanding as ---------- of the Effective Time, assuming exercise of all of the Options, minus (c) ----- the Exercise Price (as defined in Section 3.03) of each such Option. The amount determined pursuant to Section 1.05A(i) with respect to the Non-Option Shares, or pursuant to Section 1.05A(ii) with respect to the Option Shares, is referred to respectively herein as the "Per Share Consideration." B. The number of shares of the common stock of New RCBI outstanding at the Effective Time shall, at the Effective Time and by virtue of the Merger and without any action on the part of any holder thereof, be converted into a like number of shares of common stock of the Resulting Corporation with a par value of $1.00 per share, with the effect that the number of shares of the common stock of the Resulting Corporation outstanding immediately after the Effective Time shall be equal to the aggregate number of shares of RCBI Stock outstanding immediately before the Effective Time. The authorized number of shares of common stock of the Resulting Corporation shall be the same as the authorized number of shares of RCBI Stock immediately prior to the Effective Time. C. The shares of RCBI Stock issued and outstanding at the Effective Time shall, by operation of law and without any action on the part of the holder thereof, unless dissenters' rights under applicable law are being perfected with respect thereto, be converted into the right to receive the consideration set forth in Section 1.05A. D. Until surrendered to the Paying Agent as described in Section 1.07, each outstanding certificate formerly representing shares of RCBI Stock, including certificates issued for the Option Shares (each, a "Certificate"), shall be deemed for all purposes, subject only to dissenters' rights under applicable law, to evidence solely the right to receive the consideration described in Section 1.05A. Section 1.06 Shareholders' Meeting. RCBI, acting through its Board of --------------------- Directors, shall, in accordance with applicable law: A. Duly call, give notice of, convene and hold a meeting of its shareholders (the "Shareholders' Meeting") as soon as practicable for the purposes of (i) approving and adopting the Merger and the Merger Agreement and the transactions contemplated hereby and thereby, and (ii) approving and ratifying the payment of amounts as a result of the cashless exercise of the Options and the payment of amounts to Tommy L. Roberts and Alsia L. Medford pursuant to the Change in Control Agreements described on Schedule 3.31 (sometimes collectively referred to as the "Parachute Payments"), to the extent that such Parachute Payments constitute "excess parachute payments" under (S)280G(b) of the Internal Revenue Code of 1986, as amended (the "Code"); B. Require (i) no greater than the minimum vote of RCBI Stock required by applicable law in order to approve the Merger and the Merger Agreement, and (ii) the 3 requisite vote of the shareholders of RCBI to approve the Parachute Payments under (S)280G(b)(5)(A)(ii) of the Code; C. Unless the Board of Directors of RCBI is advised in writing by counsel that the fiduciary duty owed by the directors to the shareholders requires otherwise, include in the Proxy Statement (defined in Section 1.06(D)) the recommendation of the Board of Directors of RCBI that the shareholders of RCBI vote in favor of (i) `the approval and adoption of the Merger and the Merger Agreement, and (ii) the Parachute Payments; and D. Cause the Proxy Statement to be mailed to the shareholders of RCBI as soon as practicable, and use its best efforts to obtain (i) the approval and adoption of the Merger and the Merger Agreement by shareholders holding at least the minimum number of shares of RCBI Stock entitled to vote at the Shareholders' Meeting necessary to approve the Merger and the Merger Agreement under applicable law, and (ii) the approval and ratification of the Parachute Payments in accordance with (S)280G(b)(5)(A)(ii) of the Code. The letter to shareholders, notice of meeting, summary of the plan of merger and form of proxy to be distributed to shareholders in connection with the Merger and the Merger Agreement shall be in form and substance reasonably satisfactory to HCBI and are collectively referred to herein as the "Proxy Statement." Section 1.07 Delivery of Consideration. ------------------------- A. On the day prior to the Effective Time, HCBI shall deposit, or cause to be deposited, with Citizens National Bank, Henderson, Texas, or other entity mutually satisfactory to HCBI and RCBI (the "Paying Agent"), an amount of cash sufficient in the aggregate for the Paying Agent to make full payment of the Merger Consideration to the holders of all outstanding Certificates. B. No later than forty (40) calendar days prior to the Effective Time, HCBI shall furnish to RCBI drafts of: (i) a letter of transmittal specifying that delivery shall be effected and risk of loss shall pass, on or after the Effective Time only upon delivery of the Certificates to the Paying Agent, which shall be in a form and contain any other provisions as HCBI, the Paying Agent and RCBI may reasonably agree (the "Transmittal Letter"), and (ii) instructions for use in effecting the surrender of the Certificates in exchange for cash in the amount of the Per Share Consideration for each share of RCBI Stock represented by the Certificates (the "Instructions"). The Instructions shall request holders to deliver their Certificates, a properly completed, duly executed Transmittal Letter, and any other documentation that may be required from such holder pursuant to the Instructions, including, but not limited to, those items contemplated by Section 1.07E of this Agreement (collectively, the "Transmittal Items") to the Paying Agent, and shall state that (x) occurrence of the Effective Time is contingent upon the satisfaction of significant conditions, including regulatory approval of the Merger and expiration of statutory waiting periods, and (y) the Transmittal Items will be returned to the holders thereof if the Agreement is terminated prior to the Effective Time. No later than thirty (30) calendar days prior to the Effective Time, HCBI shall furnish to RCBI, and RCBI shall mail, the Transmittal Letter and the Instructions to each holder of record of RCBI Stock and the Options, addressed to the most current 4 address of such persons according to the records of RCBI, HCBI shall instruct the Paying Agent that, on and after the Effective Time, upon the delivery to or receipt by the Paying Agent of the Transmittal Items, the Paying Agent is to pay the holder of such Certificate in exchange therefor the amount of cash such holder is entitled to receive in respect of the Certificate surrendered, pursuant to the provisions of Section 1.05A and this Section 1.07B, payable by check or direct deposit to such shareholder's account with the Bank, and the Certificate so surrendered shall forthwith be canceled. Such payments shall be made, in the case of holders whose Transmittal Items are delivered to or received by the Paying Agent no later than ten (10) calendar days prior to the Effective Time, by mailing checks or making the direct deposit on the Closing Date, and in all other cases, by mailing checks promptly, but in no event more than ten (10) calendar days following the later of (i) the Effective Time, or (ii) the date on which the Transmittal Items are delivered to or received by the Paying Agent. Only holders of Certificates who have delivered their Transmittal Items to the Paying Agent no later than ten (10) calendar days prior to the Effective Time shall be eligible to receive payment at the Effective Time as herein provided. Notwithstanding the foregoing, neither the Paying Agent nor any other party to this Agreement shall be liable to any holder of Certificates for any amount paid to a public official pursuant to any applicable abandoned property, escheat or similar law. No payment shall be made for the Certificates prior to the Effective Time, and no interest shall be payable with respect to the payment of the Merger Consideration. C. After the Effective Time, there shall be no further registration or transfers on the records of RCBI of outstanding Certificates, and if a Certificate is presented to RCBI or HCBI, it shall be forwarded to the Paying Agent for cancellation and exchange for the consideration set forth in Section 1.05A. D. If the Per Share Consideration is to be issued to a person other than a person in whose name a Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise executed in proper form for transfer and that the person requesting such issuance shall pay to the Paying Agent any required transfer or other taxes or establish to the satisfaction of the Paying Agent that such tax has been paid or is not applicable. E. If any record holder of a Certificate is unable to locate any Certificate, prior to payment therefor by the Paying Agent, such person shall submit to the Paying Agent an affidavit of lost certificate and indemnification agreement in form acceptable to HCBI and the Paying Agent, and, if required by HCBI or the Paying Agent, a surety bond in an amount equal to the amount to be delivered in payment for such Certificate, in lieu of such Certificate. Section 1.08 Reservation of Right. HCBI may at any time, change the ---------------------- corporate structure of effecting the acquisition of RCBI by HCBI or any direct or indirect Subsidiary of HCBI, if and to the extent that HCBI deems such change to be desirable; provided, however, that no such change shall (A) alter or change either the amount or kind of consideration to be paid by HCBI or the tax consequences of the receipt of such consideration to the shareholders of RCBI under this 5 Agreement, or (B) materially impede or delay receipt of any approval referred to in Section 4.05 or the consummation of the transactions contemplated by this Agreement. ARTICLE II. THE CLOSING, THE CLOSING DATE AND THE EFFECTIVE TIME Section 2.01 Time and Place of the Closing and Closing Date. Within thirty ---------------------------------------------- (30) business days after the receipt of all necessary regulatory, corporate and other approvals and the expiration of any mandatory waiting periods, but in no event later than August 5, 2001 (herein called the "Closing Date"), a meeting (the "Closing") will take place at which the parties to this Agreement will exchange certificates, letters and other documents in order to determine whether all of the conditions set forth in Articles VII and VIII of this Agreement have been satisfied or waived or whether any condition exists that would permit a party to this Agreement to terminate this Agreement. If no such condition then exists or if no party elects to exercise any right it may have to terminate this Agreement, then and thereupon the appropriate parties shall execute such documents and instruments as may be necessary or appropriate in order to effect the transactions contemplated by this Agreement and shall file Articles of Merger pursuant to Article 5.04 of the TBCA. The Closing shall take place at the offices of Jenkens & Gilchrist, a Professional Corporation, Suite 3200, 1445 Ross Avenue, Dallas, Texas 75202 on the Closing Date, or at such other place to which the parties may agree. Section 2.02 Actions to be Taken at the Closing by RCBI. At the Closing, ------------------------------------------ RCBI shall execute and acknowledge (where appropriate) and deliver to HCBI, such documents and certificates necessary to carry out the terms and provisions of this Agreement, including without limitation, the following (all of such actions constituting conditions precedent to HCBI's obligations to close hereunder): A. True, correct and complete copies of the Articles of Incorporation of RCBI and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Texas; B. True, correct and complete copies of the Certificate of Incorporation of RDFC and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Delaware; C. True, correct and complete copies of the Articles of Association of the Bank and all amendments thereto, duly certified as of a recent date by the Texas Department of Banking (the "TDB"); D. Good standing and existence certificates of a recent date, issued by the appropriate state officials, duly certifying as to the existence and good standing of RCBI in Texas and RDFC in Delaware; 6 E. A certificate of existence, dated as of a recent date, issued by the TDB, duly certifying that the Articles of Association have been filed and a certificate of authority has been issued for the Bank, and that no certificate of dissolution has been filed for the Bank and that it is validly existing; F. A certificate of good standing, dated as of a recent date, issued by the Texas Comptroller of Public Accounts, duly certifying as to the good standing of the Bank in the State of Texas; G. A certificate, dated as of a recent date, issued by the Federal Deposit Insurance Corporation (the "FDIC"), duly certifying that the deposits of the Bank are insured by the FDIC pursuant to the Federal Deposit Insurance Act (the "FDIA"); H. A certificate, dated as of the Closing Date, duly executed by the Secretary or an Assistant Secretary of RCBI, acting solely in his capacity as an officer of RCBI, pursuant to which RCBI shall certify (i) the due adoption by the Board of Directors of RCBI of corporate resolutions attached to such certificate authorizing the execution and delivery of this Agreement and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, and the taking of all actions contemplated hereby and thereby; (ii) the due adoption by the shareholders of RCBI of resolutions (a) authorizing the transactions and the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby and (b) approving the Parachute Payments in accordance with (S)280G(b)(5)(A)(ii) of the Code; (iii) the incumbency and true signatures of those officers of RCBI duly authorized to act on its behalf in connection with the transactions contemplated by this Agreement and to execute and deliver this Agreement and other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby on behalf of RCBI; and (iv) that the copy of the Bylaws of RCBI attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; I. A certificate duly executed by the Secretary or an Assistant Secretary of RDFC, acting solely in his capacity as an officer of RDFC, pursuant to which RDFC shall certify that the copy of the Bylaws attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; J. A certificate duly executed by the Cashier or an Assistant Cashier of the Bank, acting solely in his capacity as an officer of the Bank, pursuant to which the Bank shall certify that the copy of the Bylaws attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; K. A certificate duly executed by a duly authorized officer of RCBI, acting solely in his capacity as an officer of RCBI, dated as of the Closing Date, pursuant to which RCBI shall certify that all of the representations and warranties made in Article III of this Agreement are true and correct in all material respects on and as of the date of such 7 certificate as if made on such date and, except as expressly permitted by this Agreement, there shall have been no Material Adverse Change since September 30, 2000; L. All consents required to be obtained by RCBI from third parties to consummate the transactions contemplated by this Agreement, including, but not limited to, those listed on Schedule 3.08; and M. All other documents required to be delivered to HCBI by RCBI under the provisions of this Agreement, and all other documents, certificates and instruments as are reasonably requested by HCBI or its counsel. Section 2.03 Actions to be Taken at the Closing by HCBI. At the Closing, ------------------------------------------ HCBI shall execute and acknowledge (where appropriate) and deliver to RCBI such documents and certificates necessary to carry out the terms and provisions of this Agreement, including without limitation, the following (all of such actions constituting conditions precedent to RCBI's obligations to close hereunder): A. True, correct and complete copies of the Articles of Incorporation of HCBI and all amendments thereto, duly certified as of a recent date by the Secretary of State of the State of Texas; B. True, correct and complete copies of the Articles of Incorporation and all amendments thereto of New RCBI, duly certified as of a recent date by the Secretary of State of the State of Texas; C. Good standing and existence certificates of a recent date, issued by the appropriate state officials, duly certifying as to the existence and good standing of HCBI and New RCBI in Texas; D. A certificate, dated as of the Closing Date, executed by the Secretary or an Assistant Secretary of HCBI, acting solely in his capacity as an officer of HCBI, pursuant to which HCBI shall certify (i) the due adoption by the Board of Directors of HCBI of corporate resolutions attached to such certificate authorizing the execution and delivery of this Agreement and the other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby; (ii) the incumbency and true signatures of those officers of HCBI duly authorized to act on its behalf in connection with the transactions contemplated by this Agreement and to execute and deliver this Agreement and other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby on behalf of HCBI, and (iii) that the copy of the Bylaws of HCBI attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; E. A certificate, dated as of the Closing Date, executed by the Secretary or an Assistant Secretary of New RCBI, acting solely in his capacity as an officer of New RCBI, pursuant to which New RCBI shall certify (i) the due adoption by the Board of Directors of New RCBI of corporate resolutions attached to such certificate authorizing the execution and delivery of the Merger Agreement and the taking of all actions contemplated thereby; 8 (ii) the due adoption by the sole shareholder of New RCBI of resolutions authorizing the Merger and the execution and delivery of the Merger Agreement and the other agreements and documents contemplated hereby and the taking of all actions contemplated hereby and thereby; (iii) the incumbency and true signatures of those officers of New RCBI duly authorized to act on its behalf in connection with the transactions contemplated by the Merger Agreement and to execute and deliver the Merger Agreement and the taking of all actions contemplated thereby on behalf of New RCBI; and (iv) that the copy of the Bylaws of New RCBI attached to such certificate is true and correct and such Bylaws have not been amended except as reflected in such copy; F. A certificate, dated as of the Closing Date, executed by a duly authorized officer of HCBI, acting solely in his capacity as an officer of HCBI, pursuant to which HCBI shall certify that all of the representations and warranties made in Article IV of this Agreement are true and correct in all material respects on and as of the date of such certificate as if made on such date; G. True, correct and complete copies of the Certificate of Merger of New RCBI with and into RCBI, duly certified as of a recent date by the Secretary of State of the State of Texas; H. All consents required to be obtained by HCBI from third parties to consummate the transactions contemplated by this Agreement, including, but not limited to, those listed on Schedule 4.05; and I. All other documents required to be delivered to RCBI by HCBI under the provisions of this Agreement, and all other documents, certificates and instruments as are reasonably requested by RCBI or its counsel. Section 2.04 Further Assurances. At any time and from time to time after ------------------ the Closing, at the request of any party to this Agreement and without further consideration, any party so requested will execute and deliver such other instruments and take such other action as the requesting party may reasonably deem necessary or desirable in order to effectuate the transactions contemplated hereby. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each party hereto shall take or cause to be taken all such action. Section 2.05 Effective Time. The "Effective Time" as that term is used in -------------- this Agreement means the Effective Time of the Merger under the terms of the Merger Agreement. ARTICLE III. REPRESENTATIONS AND WARRANTIES OF RCBI RCBI hereby makes the representations and warranties set forth in this Article III to HCBI. RCBI agrees at the Closing to provide HCBI with supplemental schedules reflecting any material changes thereto between the date of this Agreement and the Closing Date. 9 Section 3.01 Organization and Qualification. ------------------------------ A. RCBI is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). RCBI is a corporation, duly organized, validly existing and in good standing under all laws, rules and regulations of the State of Texas. RCBI has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated and to enter into and carry out its obligations under this Agreement and the Merger Agreement. True and complete copies of the Articles of Incorporation and Bylaws of RCBI as amended to date, certified by the Secretary of RCBI, have been delivered to HCBI. RCBI does not own or control any Affiliate (as defined in Section 11.10) or Subsidiary (as defined in Section 11.10), other than the Bank and RDFC. The nature of the business of RCBI and its activities do not require it to be qualified to do business in any jurisdiction other than the State of Texas. RCBI has no equity interest, direct or indirect, in any other bank or corporation or in any partnership, joint venture or other business enterprise or entity, other than the Bank and RDFC or as acquired through settlement of indebtedness, foreclosure, the exercise of creditors' remedies or in a fiduciary capacity, and the business carried on by RCBI has not been conducted through any other direct or indirect Subsidiary or Affiliate of RCBI other than the Bank and RDFC. B. RDFC is a bank holding company registered under the BHCA. RDFC is a corporation, duly organized, validly existing and in good standing under all laws, rules and regulations of the State of Delaware. RDFC has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated. True and complete copies of the Articles of Incorporation and Bylaws of RDFC as amended to date, certified by the secretary of RDFC, have been delivered to HCBI. RDFC does not own or control any Affiliate or Subsidiary, other than the Bank. The nature of the business of RDFC and its activities do not require it to be qualified to do business in any jurisdiction other than the State of Delaware. RDFC has no equity interest, direct or indirect, in any other bank or corporation or in any partnership, joint venture or other business enterprise or entity, other than the Bank or as acquired through settlement of indebtedness, foreclosure, the exercise of creditors' remedies or in a fiduciary capacity, and the business carried on by RDFC has not been conducted through any other direct or indirect Subsidiary or Affiliate of RDFC other than the Bank. C. The Bank is a Texas banking association, duly organized, validly existing and in good standing under all laws, rules, and regulations of the State of Texas. The Bank has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated and to enter into and to carry on the business and activities 10 now conducted by it. True and complete copies of the Articles and Bylaws of the Bank, as amended to date, have been delivered to HCBI. The Bank is an insured bank as defined in the FDIA and is not a member of the Federal Reserve System (the "Federal Reserve"). The Bank does not own or control any Affiliate or Subsidiary. The nature of the business of the Bank does not require it to be qualified to do business in any jurisdiction other than the State of Texas. The Bank has no equity interest, direct or indirect, in any other bank or corporation or in any partnership, joint venture or other business enterprise or entity, except as acquired through settlement of indebtedness, foreclosure, the exercise of creditors' remedies or in a fiduciary capacity, and the business carried on by the Bank has not been conducted through any other direct or indirect Subsidiary or Affiliate of the Bank. Section 3.02 Execution and Delivery. RCBI has taken all corporate action ---------------------- necessary to authorize the execution, delivery and (provided the required regulatory and shareholder approvals are obtained) performance of this Agreement and the other agreements and documents contemplated hereby to which it is a party, including, but not limited to, the Merger Agreement. This Agreement has been, and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, have been or at Closing will be, duly executed by RCBI and each constitutes the legal, valid and binding obligation of RCBI, enforceable in accordance with its respective terms and conditions, except as enforceability may be limited by bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership or similar laws and judicial decisions affecting the rights of creditors generally and by general principles of equity (whether applied in a proceeding at law or in equity). Section 3.03 Capitalization. -------------- A. The entire authorized capital stock of RCBI consists solely of (i) 500,000 shares of RCBI Stock, of which 167,761 shares are issued and outstanding and 87,177 shares are held in treasury. Schedule 3.03 sets forth the name of each person that has been granted Options, the number of shares that may be acquired as of December 1, 2000, upon the exercise of the Options, and the exercise price of such Options (the "Exercise Price"; the aggregate amount to be paid upon the exercise of the Options under the terms thereof is referred to herein as the "Aggregate Exercise Price"). Except for the Options, there are no (i) outstanding equity securities of any kind or character, (ii) outstanding subscriptions, options, convertible securities, rights, warrants, calls or other agreements or commitments of any kind issued or granted by, or binding upon, RCBI to purchase or otherwise acquire any security of or equity interest in RCBI, obligating RCBI to issue any shares of, restricting the transfer of or otherwise relating to shares of its capital stock of any class. All of the issued and outstanding shares of RCBI Stock have been duly authorized, validly issued and are fully paid and nonassessable, and have not been issued in violation of the preemptive rights of any person. Such shares of RCBI Stock have been issued in compliance with the securities laws of the United States and other jurisdictions having applicable securities laws. There are no restrictions applicable to the payment of dividends on the shares of RCBI Stock except pursuant to applicable laws and regulations, and except as set forth on Schedule 3.11, all dividends declared prior to the date of this Agreement have been paid. 11 B. The entire authorized capital stock of RDFC consists solely of 1,000 of common stock of the RDFC, par value $1.00 per share ("RDFC Stock"), all of which are issued and outstanding. All of the issued and outstanding shares of RDFC Stock have been duly authorized, validly issued, and are fully paid and nonassessable, and have not and will not have been issued in violation of the preemptive rights of any person. The securities of RDFC have been issued in compliance with the securities laws of the United States and the State of Delaware RCBI is, and as of the Closing Date will be, the lawful record and beneficial owner of all of the outstanding securities of RDFC, free and clear of any liens, claims, encumbrances, security interests or restrictions of any kind (other than transfer restrictions imposed by applicable federal and state securities laws). There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever under which RCBI, RDFC or the Bank is or may become obligated to issue, assign or transfer any securities of RDFC. There are no restrictions applicable to the payment of dividends on the shares of RDFC Stock except pursuant to applicable laws and regulations. C. The entire authorized capital stock of the Bank consists solely of 254,938 shares of common stock of the Bank, par value $2.00 per share (the "Bank Stock"), all of which are issued and outstanding. All of the issued and outstanding shares of the Bank Stock have been duly authorized, validly issued, and are fully paid and nonassessable, and have not and will not have been issued in violation of the preemptive rights of any person. The securities of the Bank have been issued in compliance with the securities laws of the United States and the State of Texas. RDFC is, and as of the Closing Date will be, the lawful record and beneficial owner of all of the outstanding securities of the Bank, free and clear of any liens, claims, encumbrances, security interests or restrictions of any kind (other than transfer restrictions imposed by applicable federal and state securities laws). There are no outstanding subscriptions, options, warrants, calls, contracts, demands, commitments, convertible securities or other agreements or arrangements of any character or nature whatever under which RCBI, RDFC or the Bank is or may become obligated to issue, assign or transfer any securities of the Bank. There are no restrictions applicable to the payment of dividends on the shares of the Bank Stock except pursuant to applicable laws and regulations. Section 3.04 Compliance with Laws, Permits and Instruments. Except as --------------------------------------------- disclosed on Schedule 3.04, each of RCBI, RDFC and the Bank has in all material respects performed and abided by all obligations required to be performed by it to the date hereof, and has complied with, and is in compliance with, and is not in default (and with the giving of notice or the passage of time will not be in default) under, or in violation of, (i) any provision of the Articles of Incorporation of RCBI or RDFC, the Articles of the Bank or the Bylaws of RCBI, RDFC or the Bank, (ii) any material provision of any mortgage, indenture, lease, contract, agreement or other instrument applicable to RCBI, RDFC, the Bank or their respective assets, operations, properties or businesses now conducted or heretofore conducted or (iii) any material permit, concession, grant, franchise, license, authorization, judgment, writ, injunction, order, decree, award, statute, federal, state or local law, ordinance, rule or regulation of any court, arbitrator or any federal, state, municipal or other governmental department, commission, board, bureau, agency or 12 instrumentality applicable to RCBI, RDFC, the Bank or their respective assets, operations, properties or businesses now conducted or heretofore conducted. Except as set forth on Schedule 3.04, the execution, delivery and (provided the required regulatory and shareholder approvals are obtained) performance of this Agreement and the other agreements contemplated hereby, including, but not limited to the Merger Agreement, and the consummation of the transactions contemplated hereby and thereby will not conflict with, or result, by itself or with the giving of notice or the passage of time, in any violation of or default or loss of a benefit under, (i) any provision of the Articles of Incorporation of RCBI or RDFC, the Articles of the Bank or the Bylaws of RCBI, RDFC or the Bank, (ii) any material mortgage, indenture, lease, contract, agreement or other instrument applicable to RCBI, RDFC, the Bank or their respective assets, operations, properties or businesses or (iii) any material permit, concession, grant, franchise, license, authorization, judgment, writ, injunction, order, decree, statute, law, ordinance, rule or regulation applicable to RCBI, RDFC, the Bank or their respective assets, operations, properties or businesses. Section 3.05 RCBI Financial Statements. RCBI has furnished to HCBI true ------------------------- and complete copies of the audited consolidated balance sheets of RCBI as of December 31, 1998 and 1999, and the related audited consolidated statements of income, stockholders' equity and cash flows for the years ended December 31, 1998 and 1999 and unaudited consolidated balance sheets of RCBI as of September 30, 2000, and the related unaudited consolidated statements of income for the nine month period ended September 30, 2000 (such consolidated balance sheets and the related statements of income, and, where applicable, stockholders' equity and cash flows, are collectively referred to herein as the "Financial Statements"). Except as described in the notes to the Financial Statements, the Financial Statements fairly present, in all material respects, the financial position of RCBI as of the respective dates thereof and the results of operations and changes in financial position of RCBI for the periods then ended, in conformity with generally accepted accounting principles ("GAAP"), applied on a basis consistent with prior periods, except as otherwise noted therein, subject, in the case of the unaudited interim financial statements, to normal year-end adjustments and the fact that they do not contain all of the footnote disclosures required by GAAP, and the accounting records underlying the Financial Statements accurately and fairly reflect in all material respects the transactions of RCBI. The Financial Statements do not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein. 13 Section 3.06 Bank Financial Statements. RCBI has furnished HCBI with a ------------------------- true and complete copy of the Report of Condition and Income as of September 30, 2000 (the "Call Report"), for the Bank. The Call Report fairly presents, in all material respects, the financial position of the Bank and the results of its operations at the date and for the period indicated in conformity with the Instructions for the Preparation of Call Reports as promulgated by applicable regulatory authorities. The Call Report does not contain any items of special or nonrecurring income or any other income not earned in the ordinary course of business except as expressly specified therein. The Bank has calculated its allowance for loan losses in accordance with regulatory accounting principles ("RAP") as applied to banking institutions and in accordance with all applicable rules and regulations. To the best knowledge of RCBI and the Bank, the allowance for loan losses account for the Bank is, adequate in all material respects to provide for all losses, net of recoveries relating to loans previously charged off, on all outstanding loans of the Bank. Section 3.07 Litigation. Except as set forth on Schedule 3.07, there ---------- are no actions, claims, suits, investigations, reviews or other legal, quasi- judicial or administrative proceedings of any kind or nature now pending or, to the best knowledge of RCBI, RDFC and the Bank, threatened against or affecting RCBI, RDFC or the Bank at law or in equity, or by or before any federal, state or municipal court or other governmental or administrative department, commission, board, bureau, agency or instrumentality, domestic or foreign, that in any manner involve RCBI, RDFC or the Bank or any of their properties or capital stock that might reasonably be anticipated to result in a Material Adverse Change or materially and adversely affect the transactions contemplated by this Agreement or the Merger Agreement, and neither RCBI, RDFC nor the Bank know or have any reason to be aware of any basis for the same. No legal action, suit or proceeding or judicial, administrative or governmental investigation is pending or, to the knowledge of RCBI, RDFC or the Bank, threatened against RCBI, RDFC or the Bank that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by RCBI, RDFC or the Bank pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. Section 3.08 Consents and Approvals. RCBI's Board of Directors (at a ---------------------- meeting duly called and held) has resolved to recommend approval and adoption of the Merger and the Merger Agreement, subject to the fulfillment by the directors of their fiduciary obligations under applicable law. Except as disclosed in Schedule 3.08, no approval, consent, order or authorization of, or registration, declaration or filing with, any governmental authority or other third party under any Contract (as defined below) is required on the part of RCBI, RDFC or the Bank in connection with the execution, delivery or performance of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement or the consummation by RCBI, RDFC and the Bank of the transactions contemplated hereby or thereby. Section 3.09 Undisclosed Liabilities. Neither RCBI, RDFC nor the Bank ----------------------- has any material liability or obligation, accrued, absolute, contingent or otherwise and whether due or to become due (including, without limitation, unfunded obligations under any Employee Benefit Plan (as defined in Section 3.31 of this Agreement) or liabilities for federal, state or local taxes or assessments or liabilities under any tax sharing agreements (as set forth on Schedule 3.17 of this Agreement)) that are not reflected in or disclosed in the Financial Statements or the Call Report, 14 except (A) those liabilities and expenses incurred in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices since the date of RCBI Financial Statements or the Call Report, respectively or (B) as disclosed on Schedule 3.09. Section 3.10 Title to Assets. Schedule 3.10 sets forth a list of all --------------- existing deeds, leases and title insurance policies for all real property owned or leased by the Bank, including all other real estate, and all mortgages, deeds of trust, security agreements and other documents describing encumbrances to which such property is subject, true and complete copies of which have been made available to HCBI. Each of RCBI, RDFC and the Bank has good and indefeasible title to all of its assets and properties including, without limitation, all personal and intangible properties reflected in the Financial Statements or the Call Report or acquired subsequent thereto, subject to no liens, mortgages, security interests, encumbrances or charges of any kind except (A) as described in Schedule 3.10, (B) as noted in the Financial Statements or the Call Report or as set forth in the documents made available to HCBI pursuant to this Section 3.10, (C) statutory liens not yet delinquent, (D) consensual landlord liens, (E) minor defects and irregularities in title and encumbrances that do not materially impair the use thereof for the purpose for which they are held, (F) pledges of assets in the ordinary course of business to secure public funds deposits, and (G) those assets and properties disposed of for fair value in the ordinary course of business since the dates of the Financial Statements or the Call Report. Section 3.11 Absence of Certain Changes or Events. Except as disclosed ------------------------------------ on Schedule 3.11, since September 30, 2000, each of RCBI, RDFC and the Bank has conducted its business only in the ordinary course and has not: A. Incurred any obligation or liability, absolute, accrued, contingent or otherwise, whether due or to become due, except deposits taken and federal funds purchased and current liabilities for trade or business obligations, other than in the ordinary course of business and consistent with past practices and safe and sound banking practices; B. Discharged or satisfied any lien, charge or encumbrance or paid any obligation or liability, whether absolute or contingent, due or to become due, other than in the ordinary course of business and consistent with past practices and safe and sound banking practices; C. Declared or made any payment of dividends or other distribution to its shareholders, or purchased, retired or redeemed, or obligated itself to purchase, retire or redeem, any of its shares of capital stock or other securities, except for dividends by the Bank to RDFC or dividends by RDFC to RCBI; D. Issued (except as a result of the cashless exercise of the Options), reserved for issuance, granted, sold or authorized the issuance of any shares of its capital stock or other securities or subscriptions, options, warrants, calls, rights or commitments of any kind relating to the issuance thereto; 15 E. Acquired any capital stock or other equity securities or acquired any ownership interest in any bank, corporation, partnership or other entity (except (i) through settlement of indebtedness, foreclosure, or the exercise of creditors' remedies or (ii) in a fiduciary capacity, the ownership of which does not expose it to any liability from the business, operations or liabilities of such person); F. Mortgaged, pledged or subjected to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible except (i) as described in Schedule 3.10, (ii) statutory liens not yet delinquent, (iii) consensual landlord liens, (iv) minor defects and irregularities in title and encumbrances that do not materially impair the use thereof for the purpose for which they are held, (v) pledges of assets to secure public funds deposits, and (vi) those assets and properties disposed of for fair value since the dates of the Financial Statements or the Call Report; G. Sold, transferred, leased to others or otherwise disposed of any of its assets (except for assets disposed of for fair value) or canceled or compromised any debt or claim, or waived or released any right or claim (except pursuant to the settlement of litigation described in Section 3.11(L)), other than in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; H. Terminated, canceled or surrendered, or received any notice of or threat of termination or cancellation of any contract, lease or other agreement or suffered any damage, destruction or loss which, individually or in the aggregate, would constitute a Material Adverse Change; I. Disposed of, permitted to lapse, transferred or granted any rights under, or entered into any settlement regarding the breach or infringement of, any United States or foreign license or Proprietary Right (as defined in Section 3.16) or modified any existing rights with respect thereto; J. Other than salary increases consistent with past practices, and the 2001 budget previously provided to HCBI, made any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, paid or agreed or orally promised to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to or for the benefit of any of its shareholders, directors, officers, employees or agents, or entered into any employment or consulting contract or other agreement with any director, officer or employee or adopted, amended in any material respect or terminated any pension, employee welfare, retirement, stock purchase, stock option, stock appreciation rights, termination, severance, income protection, golden parachute, savings or profit-sharing plan (including trust agreements and insurance contracts embodying such plans), any deferred compensation, or collective bargaining agreement, any group insurance contract or any other incentive, welfare or employee benefit plan or agreement maintained by it for the benefit of its directors, employees or former employees; 16 K. Except for improvements or betterments relating to Properties (as defined in Section 11.10), made any capital expenditures or capital additions or betterments in excess of an aggregate of $25,000; L. Instituted, had instituted against it, settled or agreed to settle any litigation, action or proceeding before any court or governmental body relating to its property other than routine collection suits instituted by it to collect amounts owed or suits in which the amount in controversy is less than $25,000; M. Suffered any change, event or condition that, in any case or in the aggregate, has caused or may result in a Material Adverse Change, or any Material Adverse Change in earnings or costs or relations with its employees, depositors, loan customers or correspondent banks; N. Except for the transactions contemplated by this Agreement or as otherwise permitted hereunder, entered into any transaction, or entered into, modified or amended any contract or commitment, other than in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; O. Entered into or given any promise, assurance or guarantee of the payment, discharge or fulfillment of any undertaking or promise made by any person, firm or corporation, other than in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; P. Sold, or knowingly disposed of, or otherwise divested itself of the ownership, possession, custody or control, of any corporate books or records of any nature that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period; Q. Made any, or acquiesced with any, change in any accounting methods, principles or material practices except as required by GAAP or RAP; R. Sold (provided, however, that payment at maturity is not deemed a sale) or purchased any investment securities in an aggregate amount of $100,000 or more, other than consistent with the Bank's current investment policy; S. Made, renewed, extended the maturity of, or altered any of the material terms of any loan to any single borrower and his related interests in excess of the principal amount of $100,000; or T. Entered into any agreement or made any commitment whether in writing or otherwise to take any of the types of action described in subsections A. through S. above. 17 Section 3.12 Leases, Contracts and Agreements. Schedule 3.12 sets forth -------------------------------- an accurate and complete description of all leases, subleases, licenses, contracts and agreements to which RCBI, RDFC or the Bank is a party or by which RCBI, RDFC or the Bank is bound that obligate or may obligate RCBI, RDFC or the Bank in the aggregate for an amount in excess of $25,000 on an annual basis or $50,000 over the entire term of such agreement or related contracts of a similar nature which in the aggregate obligate or may obligate RCBI, RDFC or the Bank for an amount in excess of $25,000 on an annual basis or $50,000 over the entire term of such agreement (the "Contracts"). RCBI has delivered true and correct copies of all Contracts to HCBI. For the purposes of this Agreement, the Contracts shall be deemed not to include loans made by, repurchase agreements made by, bankers acceptances of or deposits by the Bank, but does include unfunded loan commitments and letters of credit issued by the Bank where the borrowers' total direct and indirect indebtedness to the Bank is in excess of $50,000. Except as set forth in Schedule 3.12, no participations or loans have been sold that have buy back, recourse or guaranty provisions that create contingent or direct liabilities of RCBI, RDFC or the Bank. All of the Contracts are legal, valid and binding obligations of the parties to the Contracts enforceable in accordance with their terms, subject to the effects of bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to creditors' rights generally and to general equitable principles, and are in full force and effect. Except as described in Schedule 3.12, all rent and other payments by the Bank under the Contracts are current, there are no existing defaults by RCBI, RDFC or the Bank under the Contracts and no termination, condition or other event has occurred which (whether with or without notice, lapse of time or the happening or occurrence of any other event) would constitute a default. Each of RCBI, RDFC or the Bank, respectively, has a good and indefeasible leasehold interest in each parcel of real property leased by it free and clear of all mortgages, pledges, liens, encumbrances and security interests. Section 3.13 Taxes. Each of RCBI, RDFC and the Bank has duly and timely ----- filed with the appropriate Federal, state and local governmental agencies all tax returns and reports required to be filed, including, without limitation, income, excise, property, sales, use, franchise, value added, unemployment, employees' income withholding and social security taxes, imposed by the United States or by any foreign country or by any state, municipality, subdivision or instrumentality of the United States or of any foreign country, or by any other taxing authority, and has paid, or has established adequate reserves for the payment of, all taxes and assessments that are or are claimed to be due, payable or owed by RCBI, RDFC or the Bank, or for which RCBI, RDFC or the Bank may have liability, whether as a result of their own activities or by virtue of their affiliation with other entities and all interest and penalties thereon, whether disputed or not. All such tax returns and reports are accurately prepared and all deposits required by law to be made by RCBI, RDFC or the Bank, with respect to employees' withholding taxes have been duly made. Neither RCBI, RDFC nor the Bank is or has been delinquent in the payment of any foreign or domestic tax, assessment or governmental charge or deposit and has no tax deficiency or claim outstanding, proposed or assessed against it, and there is no basis for any such deficiency or claim. Within the last ten (10) years, neither RCBI's, RDFC's nor the Bank's Federal income tax return has been audited or examined and no such audit is currently pending or threatened. Neither RCBI, RDFC nor the Bank has been granted any extension of time with respect to the date on which any tax return was or is due to be filed by or with respect to RCBI, RDFC or the Bank, or any waiver or agreement by any such entity for the extension of time for the assessment or 18 collection of any tax. Neither RCBI, RDFC nor the Bank has extended or waived any statute of limitations on the assessment of any tax due that is currently in effect. The amounts set up as provisions for current or deferred taxes on the Financial Statements and the Call Report are sufficient for the payment of all unpaid Federal, state, county, local, foreign or other taxes (including any interest or penalties) of or on behalf of RCBI, RDFC and the Bank applicable to the periods covered by each entity's financial statements, and all years and periods prior thereto. True and complete copies of the Federal income tax returns of RCBI, RDFC and the Bank as filed with the Internal Revenue Service for the years ended December 31, 1997, 1998, and 1999, have been delivered to HCBI. Section 3.14 Insurance. Schedule 3.14 contains an accurate and complete --------- list and brief description of all policies of insurance, including fidelity and bond insurance, of RCBI, RDFC and the Bank, including the name of the insurer and whether the policy will lapse in the event of a change in control. All such policies (A) are sufficient for compliance by RCBI, RDFC and the Bank with all requirements of law and all agreements to which RCBI, RDFC or the Bank is a party and (B) are presently in full force and effect, no notice has been received of the cancellation, or threatened or proposed cancellation, of any such policy and there are no unpaid premiums due thereon. Neither RCBI, RDFC nor the Bank is in default with respect to the provisions of any such policy and has not failed to give any notice or present any claim thereunder in a due and timely fashion. Each material property of RCBI, RDFC and the Bank is insured for the benefit of RCBI, RDFC or the Bank in amounts deemed adequate by RCBI's management. Except as set forth on Schedule 3.14, there have been no claims under any fidelity bonds of RCBI, RDFC or the Bank within the last three (3) years and RCBI is not aware of any facts that would form the basis of a claim under such bonds. Section 3.15 No Adverse Change. Except as disclosed in the ----------------- representations and warranties made in this Article III, there has not been any Material Adverse Change since September 30, 2000, nor has any event or condition occurred that has resulted in, or has a reasonable possibility of resulting in the future, in a Material Adverse Change. Section 3.16 Proprietary Rights. Neither RCBI, RDFC nor the Bank owns ------------------ or requires the use of any patent, patent application, patent right, invention, process, trademark (whether registered or unregistered), trademark application, trademark right, trade name, service name, service mark, copyright or any trade secret ("Proprietary Rights") for the business or operations of RCBI, RDFC or the Bank. Neither RCBI, RDFC nor the Bank are infringing upon or otherwise acting adversely to, and have not in the past three (3) years infringed upon or otherwise acted adversely to, any Proprietary Right owned by any other person or persons. There is no claim or action by any such person pending, or to the knowledge of RCBI, RDFC or the Bank threatened, with respect thereto. Section 3.17 Transactions with Certain Persons and Entities. Except as ---------------------------------------------- disclosed in Schedule 3.17, neither RCBI, RDFC nor the Bank owes any amount to (excluding deposit liabilities), or has any loan, contract, lease, commitment or other obligation from or to any of the present or former directors or officers (other than compensation for current services not yet due and payable and reimbursement of expenses arising in the ordinary course of business) of RCBI or 19 the Bank, and none of such persons owes any amount to RCBI, RDFC or the Bank. Schedule 3.17 includes a list of all loans from the Bank to any director and any immediate family member of any director. Except as set forth on Schedule 3.17, neither RCBI, RDFC nor the Bank use any asset owned by any shareholder or any present or former directors or officers of RCBI, RDFC or the Bank in its operations, nor do any of such persons own real property that is adjacent to the property on which any Bank facility is located. Except as set forth on Schedule 3.17, there are no agreements, instruments, commitments, extensions of credit, tax sharing or allocation agreements or other contractual agreements of any kind between or among RCBI, whether on its own behalf or in its capacity as trustee or custodian for the funds of any employee benefit plan (as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and any of its Affiliates other than RDFC and the Bank. Section 3.18 Evidences of Indebtedness. All evidences of indebtedness ------------------------- and leases that are reflected as assets of RCBI, RDFC or the Bank are legal, valid and binding obligations of the respective obligors thereof, enforceable in accordance with their respective terms (except as limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors generally and the availability of injunctive relief, specific performance and other equitable remedies) and are not subject to any known or threatened defenses, offsets or counterclaims that may be asserted against RCBI, RDFC, the Bank or the present holder thereof, except as disclosed in Schedule 3.18. The credit files of the Bank contain all material information (excluding general, local or national industry, economic or similar conditions) known to RCBI, RDFC or the Bank that is reasonably required to evaluate in accordance with generally prevailing practices in the banking industry the collectibility of the loan portfolio of the Bank (including loans that will be outstanding if any of them advances funds they are obligated to advance). RCBI has disclosed all of the substandard, doubtful, loss, nonperforming or problem loans on the internal watch list of RCBI, RDFC and the Bank, a copy of which as of September 30, 2000, has been provided to HCBI. Section 3.19 Condition of Assets. All furniture, fixtures and equipment ------------------- used by RCBI, RDFC or the Bank are in good operating condition, ordinary wear and tear excepted, and conform with all applicable ordinances, regulations, zoning and other laws, whether Federal, state or local. Neither RCBI's, RDFC's nor the Bank's premises or equipment are in need of maintenance or repairs other than ordinary routine maintenance and repairs that are not material in nature or cost. Section 3.20 Environmental Compliance. Except as disclosed on Schedule ------------------------ 3.20: A. Each of RCBI, RDFC and the Bank, their respective operations and their respective Properties are in material compliance with all Environmental Laws (as defined in Section 11.10). Neither RCBI, RDFC nor the Bank is aware of, nor has RCBI, RDFC or the Bank received notice of, any past, present, or future conditions, events, activities, practices or incidents that may interfere with or prevent the material compliance of RCBI, RDFC or the Bank with all Environmental Laws. B. RCBI, RDFC and the Bank have obtained all material permits, licenses and authorizations that are required under all Environmental Laws. 20 C. No Hazardous Materials (as defined in Section 11.10) exist on, about or within any of the Properties, nor to the best knowledge of RCBI, RDFC and the Bank have any Hazardous Materials previously existed on, about or within or been used, generated, stored, transported, disposed of, on or released from any of the Properties. The use that RCBI, RDFC and the Bank make and intend to make of the Properties will not result in the use, generation, storage, transportation, accumulation, disposal or release of any Hazardous Material on, in or from any of the Properties. D. There is no action, suit, proceeding, investigation, or inquiry before any court, administrative agency or other governmental authority pending or to the best knowledge of RCBI threatened against RCBI, RDFC or the Bank relating in any way to any Environmental Law. Neither RCBI, RDFC nor the Bank has any liability for remedial action under any Environmental Law. Neither RCBI, RDFC nor the Bank has received any request for information by any governmental authority with respect to the condition, use or operation of any of the Properties nor has RCBI, RDFC or the Bank received any notice of any kind from any governmental authority or other person with respect to any violation of or claimed or potential liability of any kind under any Environmental Law. Section 3.21 Regulatory Compliance. Except as set forth on Schedule --------------------- 3.21, all reports, records, registrations, statements, notices and other documents or information required to be filed by RCBI, RDFC and the Bank with any federal or state regulatory authority, including, without limitation, the TDB, the Federal Reserve and the FDIC have been duly and timely filed and all information and data contained in such reports, records or other documents are true, accurate, correct and complete in all material respects. Except as set forth on Schedule 3.21, neither RCBI, RDFC nor the Bank is now or has been within the last five (5) years subject to any commitment letter, memorandum of understanding, cease and desist order, written agreement or other formal or informal administrative action with any such regulatory bodies. RCBI does not believe any such regulatory bodies have any present intent to place RCBI, RDFC or the Bank under any such administrative action. Except as set forth on Schedule 3.21, there are no actions or proceedings pending or threatened against RCBI, RDFC or the Bank by or before any such regulatory bodies or any other nation, state or subdivision thereof, or any other entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. Section 3.22 Absence of Certain Business Practices. Neither RCBI, RDFC ------------------------------------- nor the Bank, or any officer, employee or agent of RCBI, RDFC or the Bank, or any other person acting on their behalf, has, directly or indirectly, within the past five (5) years, given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of RCBI, RDFC or the Bank (or assist RCBI, RDFC or the Bank in connection with any actual or proposed transaction) that (A) might subject RCBI, RDFC or the Bank to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (B) if not given in the past, might have resulted in a Material Adverse Change or (C) if not continued in the future might result in a Material Adverse Change or might subject RCBI, RDFC or the Bank to suit or penalty in any private or governmental litigation or proceeding. Section 3.23 Proxy Statement. None of the information supplied or to be --------------- supplied by RCBI, RDFC, the Bank, or any of their directors, officers, employees or agents for inclusion in the Proxy Statement, or any amendment thereof or supplement thereto, will be false or misleading 21 with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the time of the Shareholders' Meeting, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the Shareholders' Meeting. All documents that RCBI, RDFC or the Bank are responsible for filing with any regulatory or governmental agency in connection with the Merger will comply in all material respects with the provisions of applicable law. Section 3.24 Dissenting Shareholders. RCBI has no knowledge of any plan ----------------------- or intention on the part of any of RCBI's shareholders to make written demand for payment of the fair value of their shares of RCBI Stock in the manner provided by applicable law. Section 3.25 Books and Records. The minute books, stock certificate ----------------- books and stock transfer ledgers of RCBI, RDFC and the Bank (A) have been kept accurately in the ordinary course of business, (B) are complete and correct in all material respects, (C) the transactions entered therein represent bona fide transactions, and (D) there have been no transactions involving the business of RCBI, RDFC or the Bank that properly should have been set forth therein and that have not been accurately so set forth. Section 3.26 Forms of Instruments, Etc. RCBI has made, and will make, ------------------------- available to HCBI copies of all standard forms of notes, mortgages, deeds of trust and other routine documents of a like nature used on a regular and recurring basis by RCBI, RDFC and the Bank in the ordinary course of its business. Section 3.27 Fiduciary Responsibilities. RCBI, RDFC and the Bank have -------------------------- performed in all material respects all of their respective duties as a trustee, custodian, guardian or as an escrow agent in a manner that complies in all material respects with all applicable laws, regulations, orders, agreements, instruments and common law standards, where the failure to so perform would result in a Material Adverse Change or materially and adversely affect the transactions contemplated by this Agreement, and neither RCBI, RDFC nor the Bank has any reason to be aware of any events that would constitute such a failure to perform. Section 3.28 Guaranties. Except for items in the process of collection ---------- in the ordinary course of the Bank's business, none of the obligations or liabilities of RCBI, RDFC or the Bank are guaranteed by any other person, firm or corporation, nor, except in the ordinary course of business, according to prudent business practices and in compliance with applicable law, has RCBI, RDFC or the Bank guaranteed the obligations or liabilities of any other person, firm or corporation. Section 3.29 Voting Trust or Buy-Sell Agreements. RCBI is not aware of ----------------------------------- any agreement between any of its shareholders relating to a right of first refusal with respect to the purchase or sale by any such shareholder of capital stock of RCBI or any voting agreement or voting trust with respect to shares of capital stock of RCBI. 22 Section 3.30 Employee Relationships. Except as set forth on Schedule ---------------------- 3.30, each of RCBI, RDFC and the Bank has complied in all material respects with all applicable laws relating to its relationships with its employees, and RCBI believes that the relationships between RCBI, RDFC and the Bank and their respective employees are good. To the best knowledge of RCBI, RDFC and the Bank, no key executive officer or manager of any of the operations operated by RCBI, RDFC or the Bank or of any group of employees of RCBI, RDFC or the Bank has or have any present plans to terminate their employment with RCBI, RDFC or the Bank. Except as expressly set forth on Schedule 3.30 to this Agreement, neither RCBI, RDFC nor the Bank is a party to any oral or written contracts or agreements granting benefits or rights to employees or any collective bargaining agreement or to any conciliation agreement with the Department of Labor, the Equal Employment Opportunity Commission or any federal, state or local agency that requires equal employment opportunities or affirmative action in employment. There are no unfair labor practice complaints pending against RCBI, RDFC or the Bank before the National Labor Relations Board and no similar claims pending before any similar state, local or foreign agency. There is no activity or proceeding of any labor organization (or representative thereof) or employee group to organize any employees of RCBI, RDFC or the Bank, nor of any strikes, slowdowns, work stoppages, lockouts or threats thereof, by or with respect to any such employees. Each of RCBI, RDFC and the Bank is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and neither RCBI, RDFC nor the Bank is engaged in any unfair labor practice. Section 3.31 Employee Benefit Plans. Set forth on Schedule 3.31 is a ---------------------- complete and correct list of all "employee benefit plans" (as defined in ERISA), all specified fringe benefit plans as defined in (S) 6039D of the Internal Revenue Code of 1986, as amended (the "Code"), and all other bonus, incentive, compensation, deferred compensation, profit sharing, stock option, stock appreciation right, stock bonus, stock purchase, employee stock ownership, savings, severance, supplemental unemployment, layoff, salary continuation, retirement, pension, health, life insurance, disability, group insurance, vacation, holiday, sick leave, fringe benefit or welfare plan or any other similar plan, agreement, policy or understanding (whether written or oral, qualified or nonqualified, currently effective or terminated), and any trust, escrow or other agreement related thereto, which (a) is maintained or contributed to by RCBI, RDFC or the Bank, or with respect to which RCBI, RDFC or the Bank has any liability, and (b) provides benefits, or describes policies or procedures applicable to any officer, employee, service provider, former officer or former employee of RCBI, RDFC or the Bank, or the dependents of any thereof, regardless of whether funded (the "Employee Plans"). No Employee Plan is a defined benefit plan within the meaning of (S) 3(2) of ERISA. There has been no actual or contingent liability imposed or threatened under Title IV of ERISA against RCBI, RDFC or the Bank with respect to any Employee Plans during the last six (6) years as a result of a termination or a partial or complete withdrawal as contemplated by Title IV of ERISA. During the last six (6) years, neither RCBI, RDFC nor the Bank has maintained, sponsored or been obligated to contribute to any Employee Plans that are subject to Title IV of ERISA. RCBI has delivered or made available to HCBI true, accurate and complete copies of the documents comprising each Employee Plan, and such other documents, records or other materials related thereto reasonably requested by HCBI. There have been no prohibited transactions, breaches of fiduciary duty or any other breaches or violations of any law applicable to the Employee Plans that 23 would subject HCBI, RCBI, RDFC or the Bank to any material liability. There are no pending or, to the best knowledge of RCBI, RDFC and the Bank, threatened claims, lawsuits or actions relating to any Employee Plan (other than ordinary course claims for benefits). No written or oral representations have been made to any employee or former employee of RCBI, RDFC or the Bank promising or guaranteeing any employer payment or funding for the continuation of medical, dental, life or disability coverage for any period of time beyond the end of the current plan year (except to the extent of coverage required under (S) 4980B of the Code). Except with respect to the Options and the Change in Control Agreements described in Schedule 3.31, the consummation of the transactions contemplated by this Agreement will not accelerate the time of payment or vesting, or increase the amount, of compensation due to any employee, officer, former employee or former officer of RCBI, RDFC or the Bank. There is not now, nor has there been during the five (5) preceding calendar years, any trade or business with which RCBI, RDFC or the Bank is required by any of the rules contained in the Code or ERISA to be treated as a single employer. Section 3.32 Representations Not Misleading. No representation or ------------------------------ warranty by RCBI contained in this Agreement, nor any written statement, exhibit or schedule furnished to HCBI by RCBI under and pursuant to, or in anticipation of this Agreement, contains or will contain on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading and such representations and warranties would continue to be true and correct following disclosure to any governmental authority having jurisdiction over RCBI, RDFC or the Bank or its properties of the facts and circumstances upon which they were based. Except as disclosed herein, there is no matter that materially adversely affects RCBI, RDFC or the Bank or RCBI's, RDFC's or the Bank's ability to perform the transactions contemplated by this Agreement or the other agreements contemplated hereby, or to the knowledge of RCBI, RDFC or the Bank, will in the future result in a Material Adverse Change. No information material to the Merger, and that is necessary to make the representations and warranties herein contained not misleading, has been withheld by RCBI, RDFC or the Bank. ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF HCBI HCBI hereby makes the representations and warranties set forth in this Article IV to RCBI. Section 4.01 Organization and Qualification. HCBI is a corporation duly ------------------------------ organized, validly existing and in good standing under all laws, rules, and regulations applicable to corporations located in the State of Texas. HCBI has all requisite corporate power and authority (including all licenses, franchises, permits and other governmental authorizations as are legally required) to carry on its business as now being conducted, to own, lease and operate its properties and assets as now owned, leased or operated and to enter into and carry out its obligations under this Agreement. Section 4.02 Execution and Delivery. HCBI has taken all corporate action ---------------------- necessary to authorize the execution, delivery and (provided the required regulatory approvals are obtained) performance of this Agreement and the other agreements and documents contemplated hereby to 24 which it is a party, including, but not limited to, the Merger Agreement. This Agreement has been, and the other agreements and documents contemplated hereby, including, but not limited to, the Merger Agreement, have been or at Closing will be, duly executed by HCBI and each constitutes the legal, valid and binding obligation of HCBI, enforceable in accordance with its respective terms and conditions, except as enforceability may be limited by bankruptcy, conservatorship, insolvency, moratorium, reorganization, receivership or similar laws and judicial decisions affecting the rights of creditors generally and by general principles of equity (whether applied in a proceeding at law or in equity). Section 4.03 Compliance with Laws, Permits and Instruments. The --------------------------------------------- execution, delivery and (provided the required regulatory approvals are obtained) performance of this Agreement and the other agreements contemplated hereby, including, but not limited to the Merger Agreement, and the consummation of the transactions contemplated hereby and thereby, will not conflict with, or result, by itself or with the giving of notice or the passage of time, in any violation of or default or loss of a benefit under, (A) any provision of the Articles of Incorporation or Bylaws of HCBI, (B) any material provision of any mortgage, indenture, lease, contract, agreement or other instrument applicable to HCBI or its assets, operations, properties or businesses now conducted or heretofore conducted or (C) any statute, law, ordinance, rule or regulation applicable to HCBI. Section 4.04 Litigation. No legal action, suit or proceeding or judicial, ---------- administrative or governmental investigation is pending or, to the knowledge of HCBI, threatened against HCBI that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by HCBI pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. Section 4.05 Consents and Approvals. Except for regulatory approvals as ---------------------- disclosed in Schedule 4.05, no approval, consent, order or authorization of, or registration, declaration or filing with, any governmental authority or other third party is required on the part of HCBI in connection with the execution, delivery or performance of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement or the consummation by HCBI of the transactions contemplated hereby or thereby. Section 4.06 Proxy Statement. None of the information supplied or to be --------------- supplied by HCBI or any of its directors, officers, employees or agents for inclusion in the Proxy Statement, or any amendment thereof or supplement thereto, will be false or misleading with respect to any material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the time of the Shareholders' Meeting, be false or misleading with respect to any material fact, or omit to state any material fact necessary to correct any statement in any earlier communication with respect to the solicitation of any proxy for the Shareholders' Meeting. All documents that HCBI is responsible for filing with any regulatory or governmental agency in connection with the Merger will comply in all material respects with the provisions of applicable law. Section 4.07 Regulatory Approvals. HCBI is not aware of any matter -------------------- (including, but not limited to, compliance with capital adequacy guidelines adopted by the Federal Reserve and the 25 Community Reinvestment Act) that would delay or prevent HCBI from obtaining all requisite regulatory approvals necessary to consummate the Merger as set forth in this Agreement, other than the effect that the proposed transaction may have on competition. 26 Section 4.08 Ability to Pay Merger Consideration. HCBI has the financial ----------------------------------- capacity to pay the Merger Consideration without resorting to outside financing. Section 4.09 Accredited Investor; Access to Information. HCBI is an ------------------------------------------ accredited investor, as such term is defined pursuant to Rule 501(a) of Regulation D promulgated under the Securities Act of 1933. HCBI has had an opportunity to perform due diligence with respect to RCBI, RDFC and the Bank, and has been provided access to all information requested by HCBI. The scope and results of HCBI's due diligence investigation performed prior to the date of this Agreement were satisfactory to HCBI. Section 4.10 Representations Not Misleading. No representation or ------------------------------ warranty by HCBI contained in this Agreement, nor any statement, exhibit or schedule furnished to RCBI by HCBI under and pursuant to, or in anticipation of this Agreement, contains or will contain on the Closing Date any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein, in light of the circumstances under which it was or will be made, not misleading and such representations and warranties would continue to be true and correct following disclosure to any governmental authority having jurisdiction over HCBI of the facts and circumstances upon which they were based. ARTICLE V. COVENANTS OF RCBI RCBI hereby makes the covenants set forth in this Article V to HCBI. Section 5.01 Best Efforts. RCBI will use its best efforts to cause the ------------ consummation of the transactions contemplated hereby in accordance with the terms and conditions of this Agreement. Section 5.02 Merger Agreement. RCBI will, as soon as practicable after ---------------- the execution of this Agreement, duly authorize and enter into the Merger Agreement, the form of which is attached hereto as Exhibit "A", and perform all ----------- of its obligations thereunder. Section 5.03 Related Transactions. Upon the request of HCBI, RCBI will -------------------- cooperate with HCBI to dissolve RCBI and RDFC, and to cause the Bank to merge into Citizens National Bank, Henderson, Texas ("Citizens Bank"), each after the Effective Time, and RCBI agrees to cooperate and join in with HCBI and Citizens Bank in the preparation, execution and processing of all applications and all director, shareholder and regulatory approvals of RCBI, RDFC and the Bank necessary or appropriate to obtain regulatory, corporate and other approvals of such transactions in a timely manner. Section 5.04 Information for Applications and Statements. RCBI will ------------------------------------------- promptly, but in no event later than ten (10) business days after receipt of a request by HCBI, prepare and furnish to HCBI all information concerning RCBI, RDFC and the Bank, including, but not limited to, financial statements, required for inclusion in any application or statement to be made by HCBI or 27 Citizens Bank to or filed by HCBI or Citizens Bank with any governmental body in connection with the transactions contemplated by this Agreement (including pursuant to Section 5.03), or in connection with any unrelated transactions during the pendency of this Agreement, and RCBI represents and warrants that all information so furnished for such statements and applications shall be true and correct in all material respects and shall not omit any material fact required to be stated therein or necessary to make the statements made, in light of the circumstances under which they were made, not misleading. RCBI shall, and shall cause RDFC and the Bank to, otherwise fully cooperate with HCBI and Citizens Bank in the filing of any applications or other documents necessary to consummate the transactions contemplated by this Agreement, including the Merger. Section 5.05 Required Acts of RCBI. Prior to the Closing, RCBI shall, and --------------------- shall cause RDFC and the Bank to, unless otherwise permitted in writing by HCBI: A. Operate only in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; B. Except as required by past business practices and with what management of RCBI reasonably believes to be prudent banking practices, use all reasonable efforts to preserve its business organization intact and to retain its present customers, depositors, correspondent banks, officers, directors and employees; C. Act in a manner reasonably intended to preserve or attempt to preserve its goodwill; D. Perform all of its material obligations under contracts, leases and documents relating to or affecting its assets, properties and business except such obligations as it may in good faith reasonably dispute, and upon request by HCBI made within forty-five (45) calendar days of the date of this Agreement, promptly provide notice to the applicable vendor or other third party of the intent to terminate or assign any Contract; E. Except as required by past business practices and with what management of RCBI reasonably believes to be prudent banking practices, maintain all offices, machinery, equipment, materials, supplies, inventories, vehicles and other properties owned, leased or used by it (whether under its control or the control of others), in good operating condition and repair, ordinary wear and tear excepted; F. Maintain in full force and effect all insurance policies now in effect or renewals thereof and, except as required by past business practices and with what management of RCBI reasonably believes to be prudent banking practices that do not jeopardize insurance coverage, give all notices and present all claims under all insurance policies in due and timely fashion; G. Timely file all reports required to be filed with governmental authorities and observe and conform, in all material respects, to all applicable laws, rules, regulations, 28 ordinances, codes, orders, licenses and permits, except those being contested in good faith by appropriate proceedings; H. Timely file all tax returns required to be filed by it and promptly pay all taxes, assessments, governmental charges, duties, penalties, interest and fines that become due and payable, except those being contested in good faith by appropriate proceedings; I. Withhold from each payment made to each of its employees the amount of all taxes (including, but not limited to, federal income taxes, FICA taxes and state and local income and wage taxes) required to be withheld therefrom and pay the same to the proper tax receiving officers; J. Continue to follow and implement policies, procedures and practices regarding the underwriting, monitoring and classification of all loans and other assets in substantially the same manner as it has in the past; and K. Account for all transactions in accordance with GAAP (unless otherwise instructed by RAP in which instance account for such transaction in accordance with RAP), and maintain the allowance for loan losses account in an amount reasonably deemed to be adequate to provide for all losses, net of recoveries relating to loans previously charged off, on all outstanding loans. Section 5.06 Prohibited Acts of RCBI. Except as set forth on Schedule ----------------------- 5.06, or as contemplated by this Agreement, prior to the Closing, neither RCBI, RDFC nor the Bank shall, without the prior written consent of HCBI: A. Introduce any new material method of management or operation; B. Take any action that could reasonably be anticipated to result in a Material Adverse Change; C. Take or fail to take any action, consistent with past practices that reasonably can be taken or should be refrained from, that would cause or permit the representations and warranties made in Article III hereof to be inaccurate at the time of the Closing or preclude RCBI from making such representations and warranties at the time of the Closing; D. Cause or fail to use its best efforts to prevent the loss of insurance coverage, unless replaced with coverage that is substantially similar in amount to that now in effect and issued by a comparable insurer; E. Change its Articles of Incorporation, Articles of Association, Bylaws or authorized capital stock; F. Enter into any transaction for an amount in excess of $25,000; G. Except as explicitly permitted hereunder or in accordance with applicable law, engage in any transaction with any affiliated person or allow such persons to acquire 29 any assets from RCBI except in the form of wages, salaries and reimbursement of expenses and by loans secured by collateral having a fair market value consistent with its loan policy in effect as of September 30, 2000, in the case of loans to its officers, directors and employees; H. Incur any obligation or liability, absolute, accrued, contingent or otherwise, except in the ordinary course of business consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; I. Discharge or satisfy any lien, charge or encumbrance or pay any obligation or liability, whether absolute or contingent, due or to become due, except in the ordinary course of business consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; J. Declare or make any payment of dividends or other distribution to its shareholders or purchase, retire or redeem, or obligate itself to purchase, retire or redeem, any of its shares of capital stock or other securities, except for dividends by the Bank to RDFC and dividends by RDFC to RCBI; K. Issue (except as a result of the exercise of the Options), reserve for issuance, grant, sell or authorize the issuance of any shares of its capital stock or other securities or subscriptions, options, warrants, calls, rights or commitments of any kind relating to the issuance thereto; L. Acquire any capital stock or other equity securities or acquire any equity or ownership interest in any bank, corporation, partnership or other entity (except (i) through settlement of indebtedness, foreclosure, or the exercise of creditors' remedies or (ii) in a fiduciary capacity, the ownership of which does not expose it to any liability from the business, operations or liabilities of such person); M. Mortgage, pledge or subject to lien, charge, security interest or any other encumbrance or restriction any of its property, business or assets, tangible or intangible except in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; N. Sell, transfer, lease to others or otherwise dispose of any of its assets or cancel or compromise any debt or claim, or waive or release any right or claim of material value, except in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; O. Terminate, cancel or surrender any contract, lease or other agreement or suffer any damage, destruction or loss (whether or not constituting, or reasonably anticipated to constitute, a Material Adverse Change or covered by insurance), which, in any case or in the aggregate, may result in a Material Adverse Change; 30 P. Dispose of, permit to lapse, transfer or grant any rights under, or breach or infringe upon, any United States or foreign license or Proprietary Right or modify any existing rights with respect thereto, except in the ordinary course of business and consistent with past business practices and with what management of RCBI reasonably believes to be prudent banking practices; Q. Other than salary increases consistent with past practices, and the 2001 budget previously provided to HCBI, make any change in the rate of compensation, commission, bonus or other direct or indirect remuneration payable, or pay or agree or orally promise to pay, conditionally or otherwise, any bonus, extra compensation, pension or severance or vacation pay, to or for the benefit of any of its shareholders, directors, officers, employees or agents, or enter into any employment or consulting contract or other agreement with any director, officer or employee or adopt, amend in any material respect or terminate any pension, employee welfare, retirement, stock purchase, stock option, stock appreciation rights, termination, severance, income protection, golden parachute, savings or profit-sharing plan (including trust agreements and insurance contracts embodying such plans), any deferred compensation, or collective bargaining agreement, any group insurance contract or any other incentive, welfare or employee benefit plan or agreement maintained by it for the benefit of its directors, employees or former employees, except for normal periodic increases in the compensation payable to officers or salaried employees, consistent with past practices and made in the ordinary course of business; R. Except for improvements or betterments relating to Properties, make any capital expenditures or capital additions or betterments in excess of an aggregate of $25,000; S. Hire or employ any person with an annual salary equal to or greater than $25,000; T. Enter into or give any promise, assurance or guarantee of the payment, discharge or fulfillment of any undertaking or promise made by any other person, firm or corporation; U. Sell or knowingly dispose of, or otherwise divest itself of the ownership, possession, custody or control, of any corporate books or records of any nature that, in accordance with sound business practice, normally are retained for a period of time after their use, creation or receipt, except at the end of the normal retention period; V. Make any, or acquiesce with any, change in any accounting methods, principles or material practices; W. Sell (provided, however, that the maturity of a security shall not be deemed a sale of such security) or purchase any investment securities in an aggregate amount of $100,000, other than United States treasury securities having a maturity of one year or less; or 31 X. Make, renew, extend the maturity of, acquire a participation in, reacquire an interest in a participation sold or alter any of the material terms of any loan to any single borrower and his related interests if, after taking such action the aggregate outstanding loans and commitments to that borrower and his related interests will exceed $100,000 in the aggregate, provided, however, that the consent of HCBI shall be deemed to have been given unless earlier given or denied in writing (i) with respect to any loan presented at a regularly scheduled meeting of the Bank's loan and discount committee, at the later of 5:00 p.m. on the business day of such meeting or the adjournment of such meeting, provided that all information provided to the members of the Bank's loan and discount committee with respect to such loan is delivered to HCBI at the same time it is delivered to such committee members, and (ii) with respect to all other loans, at the close of business on the next business day after HCBI's consent is requested and all information relating to the making, renewal or alteration of such loan is furnished to HCBI. Section 5.07 Access; Pre-Closing Investigation. Subject to the provisions --------------------------------- of Article X, RCBI shall afford the officers, directors, employees, attorneys, accountants, investment bankers and authorized representatives of HCBI reasonable access during normal business hours to the properties, books, contracts and records of RCBI, RDFC and the Bank, permit HCBI to make such inspections (including without limitation with regard to such properties physical inspection of the surface and subsurface thereof and any structure thereon) as they may require and furnish to HCBI during such period all such information concerning RCBI, RDFC and the Bank and their respective affairs as HCBI may reasonably request, in order that HCBI may have full opportunity to make such reasonable investigation as it shall desire to make of the affairs of RCBI, RDFC and the Bank, including, without limitation, access sufficient to verify the value of the assets and the liabilities of RCBI, RDFC and the Bank and the satisfaction of the conditions precedent to HCBI's obligations described in Article VIII of this Agreement. HCBI shall use reasonable, good faith efforts to conduct its inspections of RCBI in a manner that will not disrupt the normal business operations of RCBI or the Bank. RCBI agrees at any time, and from time to time, to furnish to HCBI as soon as practicable, any additional information that HCBI may reasonably request. Section 5.08 Invitations to and Attendance at Directors' and Committee --------------------------------------------------------- Meetings'. RCBI shall give notice, and shall cause the Bank to give notice, to - --------- two (2) designees of HCBI, who shall be officers of Citizens Bank, and shall invite such persons to attend all regular and special meetings of the board of directors of RCBI and the Bank and all regular and special meetings of any senior management committee (including but not limited to the loan and discount committee and the asset and liability management committee of the Bank) of RCBI or the Bank. Such designees shall have no right to vote and may be excluded from sessions of board and committees during which there is being discussed (A) matters involving this Agreement (B) information or material that RCBI or the Bank is required or obligated to maintain as confidential under applicable laws or regulations or policies or procedures of RCBI or the Bank, or (C) pending or threatened litigation or investigations if, in the opinion of counsel to RCBI, the presence of such designees would or might adversely affect the confidential nature of or any privilege relating to the matters being discussed. If the Merger is finally disapproved by any appropriate regulatory authority, such desginees will no longer be entitled to notice of and to attend any such meetings. 32 Section 5.09 Additional Financial Statements. RCBI shall promptly furnish ------------------------------- HCBI with (A) audited financial statements of RCBI as of December 31, 2000, (B) unaudited statements of condition and income of RCBI as of March 31, 2001, and (C) true and complete copies of each additional Report of Condition and Income of the Bank filed after September 30, 2000. Section 5.10 Untrue Representations. RCBI shall promptly notify HCBI in ---------------------- writing if RCBI becomes aware of any fact or condition that makes untrue, or shows to have been untrue, in any material respect, any schedule or any other information furnished to HCBI or any representation or warranty made in or pursuant to this Agreement or that results in RCBI's failure to comply with any covenant, condition or agreement contained in this Agreement. Section 5.11 Litigation and Claims. RCBI shall promptly notify HCBI in --------------------- writing of any litigation, or of any claim, controversy or contingent liability that might be expected to become the subject of litigation, against RCBI, RDFC or the Bank or affecting any of their respective properties if such litigation or potential litigation might reasonably be expected to, in the event of an unfavorable outcome, result in a Material Adverse Change, and RCBI shall promptly notify HCBI of any legal action, suit or proceeding or judicial, administrative or governmental investigation, pending or, to the knowledge of RCBI, threatened against RCBI, RDFC or the Bank that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement or any actions taken or to be taken by RCBI, RDFC or the Bank pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. Section 5.12 Adverse Changes. RCBI shall promptly notify HCBI in writing --------------- if any change shall have occurred or been threatened (or any development shall have occurred or been threatened involving a prospective change) in the business, financial condition, operations or prospects of RCBI, RDFC or the Bank that has or may reasonably be expected to have or lead to a Material Adverse Change. Section 5.13 No Negotiation with Others. RCBI shall not, except to the -------------------------- extent that the Board of Directors of RCBI shall conclude in good faith, after taking into account the written advice of its outside counsel, that to fail to do so could reasonably be determined to violate its fiduciary obligations under applicable law, directly or indirectly, nor shall it permit RDFC, the Bank or their respective officers, directors, employees, representatives or agents to, directly or indirectly encourage, solicit or initiate discussions or negotiations with, or entertain, discuss or negotiate with, or provide any information to, or cooperate with, any corporation, partnership, person or other entity or group (other than HCBI or its Affiliates or associates or officers, partners, employees or other authorized representatives of HCBI or such Affiliates or associates) concerning any merger, tender offer or other takeover offer, sale of substantial assets, sale of shares of capital stock or similar transaction involving RCBI, RDFC or the Bank. Immediately upon receipt of any unsolicited offer, the terms of which are equal to or superior to the terms of this Agreement, RCBI will communicate to HCBI the terms of any proposal or request for information and the identity of the parties involved. 33 Section 5.14 Consents and Approvals. RCBI shall use its best efforts to ---------------------- obtain and cause each of RDFC and the Bank to obtain all consents and approvals from third parties, including those listed on Schedule 3.08, at the earliest practicable time. Section 5.15 Environmental Investigation; Right to Terminate Agreement. --------------------------------------------------------- A. HCBI and its consultants, agents and representatives shall have the right to the same extent that RCBI, RDFC or the Bank has such right, but not the obligation or responsibility, to inspect any Property, including, without limitation, conducting asbestos surveys and sampling, environmental assessments and investigation, and other environmental surveys and analyses including soil and ground sampling ("Environmental Inspections") at any time on or prior to twenty (20) calendar days after the date of this Agreement. If, as a result of any such Environmental Inspection, further investigation ("secondary investigation") including, without limitation, test borings, soil, water, asbestos or other sampling, is deemed desirable by HCBI, HCBI shall (i) notify RCBI of any Property for which it intends to conduct such a secondary investigation and the reasons for such secondary investigation, and (ii) conclude such secondary investigation, on or prior to seventy-five (75) calendar days after the date of this Agreement. HCBI shall give reasonable notice to RCBI of such secondary investigations, and RCBI may place reasonable time and place restrictions on such secondary investigations. B. RCBI agrees to indemnify and hold harmless HCBI for any claims for damage to property, or injury or death to persons, made as a result of any Environmental Inspection or secondary investigation conducted by HCBI or its agents, which damage or injury is attributable to the negligent actions or negligent omissions of RCBI, RDFC the Bank or their respective agents. HCBI agrees to indemnify and hold harmless RCBI for any claims for damage to property, or injury or death to persons, attributable to the negligent actions or omissions of HCBI or its agents in performing any Environmental Inspection or secondary investigation except to the extent caused in whole or in part by the negligence of RCBI, RDFC or the Bank. HCBI shall provide to RCBI a copy of all written findings and reports HCBI receives as a result of any Environmental Inspection or secondary investigation or other environmental survey with respect to the Properties. HCBI shall not have any liability or responsibility of any nature whatsoever for the results, conclusions or other findings related to any Environmental Inspection, secondary investigation or other environmental survey. If this Agreement is terminated, then except as otherwise required by law, reports to any governmental authority of the results of any Environmental Inspection, secondary investigation or other environmental survey shall be made by RCBI and not by HCBI. HCBI shall make no such report prior to Closing unless required to do so by law, and in such case will give RCBI reasonable notice of HCBI's intentions. C. HCBI shall have the right to terminate this Agreement pursuant to this Section if, and only if, (i) RCBI, RDFC or the Bank refuses to allow HCBI to conduct an Environmental Inspection or secondary investigation in a manner that HCBI reasonably considers necessary; or (ii) the environmental inspection, secondary investigation or other environmental survey identifies: 34 (a) violations or potential violations (which are reasonably expected to become violations) of Environmental Laws; (b) any past or present event, condition or circumstance that would or potentially would require remedial or cleanup action; (c) the presence of any underground or above ground storage tank in, on or under any Property that is not shown to be in compliance with all Environmental Laws applicable to the tank either now or at a future time certain, or that has had a release of petroleum or some other Hazardous Material that has not been cleaned up to the satisfaction of the relevant governmental authority or any other party with a legal right to compel cleanup, or (d) the presence of any asbestos-containing material in, on or under any Property; and the cost of correcting such violations or potential violations, or the removal, remediation or cleanup actions (collectively, the "Environmental Costs") would reasonably exceed $25,000. D. RCBI agrees to make available to HCBI and its consultants, agents and representatives all documents and other material relating to environmental conditions of any Property including, without limitation, the results of other environmental inspections and surveys. RCBI also agrees that all engineers and consultants who prepared or furnished such reports may discuss such reports and information with HCBI and shall be entitled to certify the same in favor of HCBI and its consultants, agents and representatives and make all other data available to HCBI and its consultants, agents and representatives. Section 5.16 Support Agreements and Option Holder Agreements. ----------------------------------------------- Simultaneously with the execution of this Agreement, RCBI and all shareholders of RCBI who are directors of RCBI or the Bank shall execute the Voting Agreement, Irrevocable Proxy and Shareholder Support Agreement in the form of Exhibit "B" attached hereto (the "Support Agreement"). RCBI acknowledges that - ----------- pursuant to the Support Agreement, such shareholders will agree to vote the shares of RCBI Stock owned by them in favor of (i) the Merger Agreement and the Merger and the transactions contemplated hereby and thereby, subject to required regulatory approvals and (ii) for approval of the Parachute Payments in accordance with (S)280G(b)(5)(A)(ii) of the Code. Simultaneously with the execution of this Agreement, RCBI will provide to HCBI written agreements from all holders of the Options in which such Option holders agree (i) not to exercise any of the Options until the Effective Date, and (ii) to accept the Per Share Consideration for the Option Shares as described in Section 1.05(A)(ii) as of the Effective Time as full consideration for the Option Shares and as full satisfaction of all rights of the holders with respect to such Options (the "Option Holder Agreements"). Section 5.17 Termination of Employee Plans. RCBI shall, and shall cause ----------------------------- RDFC and the Bank to, terminate all Employee Plans effective on or prior to the Effective Time in accordance with all applicable law and the terms of such plans. As soon as reasonably possible following the 35 execution of this Agreement, RCBI shall, and shall cause RDFC and the Bank, to, with respect to all "employee pension plans" as defined in (S)3(2)(A) of ERISA, file with the Internal Revenue Service to secure a determination letter that states that termination of such plan will not affect the qualified status of such plan. Prior to the Effective Time, RCBI shall, and shall cause RDFC and the Bank to, make all contributions that are owed or may be owed under any of the Employee Plans under applicable law. Section 5.18 Releases. RCBI shall obtain from each of the directors of -------- RCBI, RDFC and the Bank an instrument executed by such director and dated the Closing Date, the form of which is attached as Exhibit "C", and RCBI shall ----------- endeavor to obtain from each of the officers of RCBI, RDFC and the Bank an instrument executed by such officer and dated the Closing Date, the form of which is attached as Exhibit "D." ------------ ARTICLE VI. COVENANTS OF HCBI HCBI hereby makes the covenants set forth in this Article VI to RCBI. Section 6.01 Best Efforts. HCBI agrees to use its best efforts to cause ------------ the consummation of the transactions contemplated hereby in accordance with the terms and conditions of this Agreement. Section 6.02 Merger Agreement. HCBI will incorporate and organize New ---------------- RCBI as a Texas corporation. HCBI will, and will cause New RCBI to, as soon as practicable, but in any event within 30 calendar days after the execution of this Agreement, enter into the Merger Agreement, a form of which is attached hereto as Exhibit "A", and HCBI shall perform, and shall cause New RCBI to ----------- perform, all of their respective obligations thereunder. HCBI shall vote all of the stock of New RCBI in favor of the Merger and the Merger Agreement. Section 6.03 Information for Applications and Statements. HCBI will ------------------------------------------- promptly furnish to RCBI all information concerning HCBI and New RCBI, including, but not limited to, financial statements, required for inclusion in (A) any Proxy Statement to be used by RCBI in connection with the approval of the shareholders of RCBI of the transactions contemplated hereby and (B) any application or statement to be made by RCBI to or filed by RCBI with any governmental body in connection with the transactions contemplated by this Agreement, or in connection with any unrelated transactions during the pendency of this Agreement, and HCBI represents and warrants that all information so furnished for such statements and applications shall be true and correct in all material respects and shall not omit any material fact required to be stated therein or necessary to make the statements made, in light of the circumstances under which they were made, not misleading. HCBI shall otherwise fully cooperate with RCBI in the filing of any applications or other documents necessary to consummate the transactions contemplated by this Agreement, including the Merger. 36 Section 6.04 Acts of New RCBI. Prior to the Closing, HCBI shall cause New ---------------- RCBI to refrain from taking any action or executing any agreement, document or certificate except as contemplated by this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement. Section 6.05 Untrue Representations. HCBI shall promptly notify RCBI in ---------------------- writing if HCBI becomes aware of any fact or condition that makes untrue, or shows to have been untrue, in any material respect, any schedule or any other information furnished to RCBI or any representation or warranty made in or pursuant to this Agreement or that results in HCBI's failure to comply with any covenant, condition or agreement contained in this Agreement. Section 6.06 Litigation and Claims. HCBI shall promptly notify RCBI of --------------------- any legal action, suit or proceeding or judicial, administrative or governmental investigation, pending or, to the knowledge of HCBI, threatened against HCBI or New RCBI that questions or might question the validity of this Agreement or the agreements contemplated hereby, including, but not limited to, the Merger Agreement, or any actions taken or to be taken by HCBI or New RCBI pursuant hereto or thereto or seeks to enjoin or otherwise restrain the transactions contemplated hereby or thereby. Section 6.07 Regulatory and Other Approvals. HCBI shall promptly, but in ------------------------------ no event later than forty-five (45) calendar days after the date of this Agreement, file or cause to be filed applications for all regulatory approvals required to be obtained by HCBI or New RCBI in connection with this Agreement and the other agreements contemplated hereby. HCBI shall promptly furnish RCBI with copies of all such regulatory filings and all correspondence for which confidential treatment has not been requested. HCBI shall use its best efforts to obtain all such regulatory approvals and any other approvals from third parties, including those listed on Schedule 4.05, at the earliest practicable time. Section 6.08 Adverse Change. HCBI shall promptly notify RCBI in writing -------------- if any change or development shall have occurred or been threatened that would adversely affect, prevent or delay consummation of the transactions contemplated by this Agreement or the other agreements contemplated hereby. Section 6.09 Employee Benefit Plans. HCBI presently intends that, after ---------------------- the Merger, HCBI and RCBI will not make additional contributions to the Employee Plans. Each employee of RCBI or any subsidiary of RCBI who remains an employee of RCBI, HCBI or any subsidiary of RCBI or HCBI (each, a "Continuing Employee") will be entitled to participate as a newly hired employee in the employee benefit plans and programs maintained for employees of HCBI and its affiliates, in accordance with the respective terms of such plans and programs, and HCBI shall take all actions necessary or appropriate to facilitate coverage of the Continuing Employees in such plans and programs from and after the Closing Date, subject to the following: A. Each Continuing Employee will be entitled to credit for prior service with RCBI or a Subsidiary of RCBI for all purposes under the employee welfare benefit plans and other employee benefit plans and programs (other than those described in subsection B. below and any stock option plans) sponsored by HCBI or its Affiliates to the extent RCBI or its Affiliates sponsored a similar type of plan that the Continuing Employee participated in immediately prior to the Closing Date. 37 Any preexisting condition exclusion applicable to such plans and programs shall be waived with respect to any Continuing Employee. For purposes of determining each Continuing Employee's benefit for the year in which the Merger occurs under the HCBI vacation program, any vacation taken by a Continuing Employee preceding the Closing Date for the year in which the Merger occurs will be deducted from the total HCBI vacation benefit available to such employee for such year. For purposes of determining the number of vacation days available with respect to each Continuing Employee for the year in which the Merger occurs, that the number of vacation days for such year shall be determined under RCBI's vacation policies in effect as of January 1, 2000. B. Each Continuing Employee shall be entitled to credit for past service with RCBI for the purpose of satisfying any eligibility or vesting periods applicable to the HCBI employee pension benefit plans that are subject to (S)(S) 401(a) and 501(a) of the Code. C. The compensation and employee benefits of Tommy L. Roberts, Alsia L. Medford and Donal R. Brooks shall be governed by Employment and Non Compete Agreements with each such officer containing the terms set forth in Schedule 6.09. The provisions of this Section are solely for the purpose of setting forth the understanding between HCBI and RCBI, shall not create or modify any employee benefit plan of HCBI or any of its Affiliates, and shall not be construed as creating any employment contract or right between HCBI or RCBI, on one hand, and any such employee, on the other hand. Section 6.10 Director and Officer Indemnification. On or prior to the ------------------------------------ Closing Date, RCBI may obtain an extended reporting period (otherwise known as "tail coverage") policy for a period of up to three (3) years from the Closing Date, provided that the annual premium for such policy does not exceed 125% of RCBI's current annual premium. HCBI agrees that all rights to limitation of liability and indemnification that the directors and officers of RCBI, RDFC and the Bank have pursuant to the Articles of Incorporation or Association (and their respective bylaws as of the date of this Agreement) of RCBI, RDFC and the Bank shall survive the Merger for four (4) years from the Closing Date. Nothing contained in this Section 6.10 shall require HCBI to indemnify any person who was a director or officer of RCBI, RDFC or the Bank to a greater extent than RCBI or the Bank is, as of the date of this Agreement, required to indemnify any such person. The indemnification provisions currently contained in the Articles and Bylaws of RCBI, RDFC and the Bank shall not be amended after the date of this Agreement. 38 ARTICLE VII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF RCBI All obligations of RCBI under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by RCBI: Section 7.01 Compliance with Representations, Warranties and Agreements. ---------------------------------------------------------- All representations and warranties made by HCBI in this Agreement or in any document or schedule delivered to RCBI pursuant hereto shall have been true and correct when made and shall be true and correct in all material respects as of the Closing with the same force and effect as if such representations and warranties were made at and as of the Closing, except with respect to those representations and warranties specifically made as of an earlier date (in which case such representations and warranties shall be true as of such earlier date). HCBI shall have performed or complied in all material respects with all agreements, terms, covenants and conditions required by this Agreement to be performed or complied with by HCBI prior to or at the Closing. Section 7.02 Shareholder Approvals. The holders of at least the minimum --------------------- number of shares of RCBI Stock necessary to approve the Merger and the Merger Agreement under applicable law shall have approved the Merger and the Merger Agreement. Section 7.03 Government and Other Approvals. HCBI and RCBI shall have ------------------------------ received approvals, acquiescence or consents, all on terms and conditions acceptable to HCBI, of the transactions contemplated by this Agreement, and the Merger Agreement, from all necessary governmental agencies and authorities and other third parties, including but not limited to the Federal Reserve, the FDIC, the Office of the Comptroller of the Currency ("OCC") and the TDB, and all applicable waiting periods shall have expired, and the approvals and consents of all third parties required to consummate this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement and the transactions contemplated hereby and thereby, including all consents described on Schedules 3.08 and 4.05. Such approvals and the transactions contemplated hereby shall not have been contested or threatened to be contested by any Federal or state governmental authority or by any other third party (except shareholders asserting statutory dissenters' appraisal rights) by formal proceedings. Section 7.04 No Litigation. No action shall have been taken, and no ------------- statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to the transaction by any Federal, state or foreign government or governmental authority or by any court, domestic or foreign, including the entry of a preliminary or permanent injunction, that would (a) make the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby illegal, invalid or unenforceable, (b) impose material limits in the ability of any party to this Agreement to consummate the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby, or (c) if the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby are consummated, subject RCBI or subject any officer, director, shareholder or employee of RCBI to criminal or civil liability. No action or proceeding before any court or governmental authority, domestic or foreign, by any 39 government or governmental authority or by any other person, domestic or foreign, shall be threatened, instituted or pending that would reasonably be expected to result in any of the consequences referred to in clauses (a) through (c) above. Section 7.05 Fairness Opinion. The Company shall have received a letter ---------------- from The Bank Advisory Group, Inc. dated as of the date of this Agreement and updated to a date not more than fifteen (15) days prior to the date the Proxy Statement is mailed to the shareholders of RCBI, to the effect that in the opinion of such firm, the Merger Consideration is fair to the Company's shareholders from a financial point of view. ARTICLE VIII. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF HCBI All obligations of HCBI under this Agreement are subject to the fulfillment, prior to or at the Closing, of each of the following conditions, any or all of which may be waived in whole or in part by HCBI. Section 8.01 Compliance with Representations, Warranties and Agreements. ---------------------------------------------------------- All representations and warranties made by RCBI in this Agreement or in any document or schedule delivered to HCBI pursuant hereto shall have been true and correct when made and shall be true and correct in all material respects as of the Closing with the same force and effect as if such representations and warranties were made at and as of the Closing, except with respect to those representations and warranties specifically made as of an earlier date (in which case such representations and warranties shall be true as of such earlier date). RCBI shall have performed or complied in all material respects with all agreements, terms, covenants and conditions required by this Agreement to be performed or complied with by RCBI prior to or at the Closing. Section 8.02 Shareholder Approvals. The holders of at least the minimum --------------------- number of shares of RCBI Stock necessary to approve the Merger and the Merger Agreement under applicable law shall have approved the Merger and the Merger Agreement, and the shareholders of RCBI shall have approved the Parachute Payments in accordance with (S)280G(b)(5)(A)(ii) of the Code. Section 8.03 Government and Other Approvals. HCBI and RCBI shall have ------------------------------ received approvals, acquiescence or consents, all on terms and conditions acceptable to HCBI, of the transactions contemplated by this Agreement and the Merger Agreement from all necessary governmental agencies and authorities, including but not limited to the Federal Reserve, the OCC, and the FDIC, and all applicable waiting periods shall have expired, and HCBI or RCBI shall have received the approvals and consents of all third parties required to consummate this Agreement and the other agreements contemplated hereby, including, but not limited to, the Merger Agreement and the transactions contemplated hereby and thereby, including all consents described on Schedules 3.08 and 4.05. Such approvals and the transactions contemplated hereby shall not have been contested or threatened to be contested by any Federal or state governmental authority or by any other third party (except shareholders asserting statutory dissenters' appraisal rights) by formal proceedings. However, if such contest is brought by formal proceedings, HCBI may, but shall not 40 be obligated to, answer and defend such contest or otherwise pursue this transaction over such objection. Section 8.04 No Litigation. No action shall have been taken, and no ------------- statute, rule, regulation or order shall have been promulgated, enacted, entered, enforced or deemed applicable to this Agreement, the Merger, or the transactions contemplated hereby or thereby by any Federal, state or foreign government or governmental authority or by any court, domestic or foreign, including the entry of a preliminary or permanent injunction, that would (a) make this Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby illegal, invalid or unenforceable, (b) require the divestiture of a material portion of the assets of RCBI or the Bank, (c) impose material limits on the ability of any party to this Agreement to consummate the Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby, (d) otherwise result in a Material Adverse Change or (e) if this Agreement or any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, or the transactions contemplated hereby or thereby are consummated, subject HCBI or New RCBI or subject any officer, director, shareholder or employee of HCBI or New RCBI to criminal or civil liability. No action or proceeding before any court or governmental authority, domestic or foreign, by any government or governmental authority or by any other person, domestic or foreign, shall be threatened, instituted or pending that would reasonably be expected to result in any of the consequences referred to in clauses (a) through (e) above. Section 8.05 Releases. HCBI shall have received from each of the directors -------- of RCBI and the Bank an instrument dated the Closing Date, the form of which is attached as Exhibit "C." HCBI shall have received from each of the officers of ------------ RCBI and the Bank an instrument dated the Closing Date, the form of which is attached as Exhibit "D." ------------ Section 8.06 No Material Adverse Change. There shall have been no -------------------------- Material Adverse Change since September 30, 2000. Section 8.07 Employment and Non Compete Agreements. Tommy L. Roberts, ------------------------------------- Alsia L. Medford and Donal R. Brooks shall have executed employment and non compete agreements with HCBI, the terms of which are described on Schedule 6.09. Section 8.08 Surrender of Options. On or prior to the Effective Time, all -------------------- holders of Options shall have executed and delivered to HCBI the Option Holder Agreements and all of the Options outstanding as of the date of this Agreement and not exercised prior to the Effective Time shall have been surrendered to RCBI for cancellation. ARTICLE IX. TERMINATION AND ABANDONMENT Section 9.01 Right of Termination. This Agreement and the transactions -------------------- contemplated hereby may be terminated and abandoned at any time prior to or at the Closing (notwithstanding approval thereof by the shareholders of RCBI), as follows, and in no other manner: 41 A. By the mutual consent of HCBI and RCBI, duly authorized by the board of directors of each of HCBI and RCBI. B. By either RCBI or HCBI if the conditions precedent to such party's obligations to close specified in Articles VII and VIII, respectively, hereof have not been met or waived or the Closing shall not have occurred on or before August 5, 2001, or such later date as has been approved by HCBI and RCBI. C. By either HCBI or RCBI if any of the transactions contemplated by this Agreement or the Merger Agreement are disapproved by any regulatory authority whose approval is required to consummate such transactions or if any court of competent jurisdiction in the United States or other United States (federal or state) governmental body shall have issued an order, decree or ruling or taken any other action restraining, enjoining, invalidating or otherwise prohibiting the Agreement or the transactions contemplated hereby and such order, decree, ruling or other action shall have been final and nonappealable. D. By HCBI if it reasonably determines, in good faith, after consulting with counsel and with the concurrence of RCBI, that there is substantial likelihood that any necessary regulatory approval will not be obtained or will be obtained only upon a condition or conditions that make it inadvisable to proceed with the transactions contemplated by this Agreement. E. By HCBI if there shall have been any Material Adverse Change. F. By HCBI if RCBI shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement or in any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, and such failure shall not have been cured within a period of ten (10) calendar days after notice from HCBI, or if any of the representations or warranties of RCBI contained herein or therein shall be inaccurate in any material respect. G. By HCBI pursuant to Section 5.15. H. By RCBI if HCBI shall fail to comply in any material respect with any of its covenants or agreements contained in this Agreement or in any other agreement contemplated hereby, including, but not limited to, the Merger Agreement, and such failure shall not have been cured within a period of ten (10) calendar days after notice from RCBI, or if any of the representations or warranties of HCBI contained herein or therein shall be inaccurate in any material respect. I. By RCBI if the Board of Directors of RCBI shall in good faith determine that a Takeover Proposal constitutes a Superior Proposal, provided, however, that RCBI shall not be permitted to terminate this Agreement pursuant to this Section 9.01I unless (i) it has not breached any covenant contained in Section 1.06 and (ii) it delivers to HCBI simultaneously with such notice of termination, the fee referred to in Section 9.04 below. As used in this Agreement: (i) "Takeover Proposal" means a bona fide proposal or offer by a person to 42 make a tender or exchange offer, or to engage in a merger, consolidation or other business combination involving RCBI or to acquire in any manner a substantial equity interest in, or all or substantially all of the assets of, RCBI, and (ii) "Superior Proposal" means a bona fide proposal or offer made by a person to acquire RCBI pursuant to a tender or exchange offer, a merger, consolidation or other business combination or an acquisition of all or substantially all of the assets of RCBI and the Bank on terms which the Board of Directors of RCBI shall determine in good faith, after taking into account the advice of counsel, to be more favorable to RCBI and its shareholders than the transactions contemplated hereby. J. By HCBI upon written notice to RCBI if (A) the Board of Directors of RCBI fails to recommend, withdraws, or modifies in a manner materially adverse to HCBI, its approval or recommendation of this Agreement, or the transactions contemplated hereby, (B) after RCBI enters into an agreement to engage in or the occurrence of an Acquisition Event (as defined below) or after a third party shall have made a proposal to RCBI or RCBI's shareholders to engage in an Acquisition Event, the transaction contemplated hereby are not approved at the meeting of RCBI shareholders contemplated by Section 1.06, or (C) the meeting of RCBI shareholders contemplated by Section 1.06 is not held within 150 days from the date of this Agreement and RCBI has failed to comply with its obligations under Section 1.06. "Acquisition Event" means any of the following: (i) a merger, consolidation or similar transaction involving RCBI or the Bank or any successor to RCBI or the Bank, as a result of which (x) shareholders of RCBI constitute holders of less than 50% of the resulting company's shares of common stock and (y) RCBI's directors represent less than 50% of the resulting company's board of directors, (ii) a purchase or other acquisition in one or a series of related transactions of assets of RCBI or the Bank representing 50% or more of the consolidated assets of RCBI and the Bank or (iii) a purchase or other acquisition (including by way of merger, consolidation, share exchange or any similar transaction) in one or a series of related transactions of beneficial ownership of securities representing 50% or more of the voting power of RCBI or the Bank in each case with or by a person or entity other than HCBI or an affiliate of HCBI. Section 9.02 Notice of Termination. The power of termination provided for --------------------- by Section 9.01 hereof may be exercised only by a notice given in writing, as provided in Section 11.07 of this Agreement. Section 9.03 Effect of Termination. Without limiting any other relief to --------------------- which either party hereto may be entitled for breach of this Agreement, in the event of the termination and abandonment of this Agreement pursuant to the provisions of Section 9.01 hereof, no party to this Agreement shall have any further liability or obligation in respect of this Agreement, except for (a) liability of a party for expenses pursuant to Section 11.02 hereof, and (b) the provisions of Article X hereof shall remain applicable. Section 9.04 Termination Fee. --------------- A. Notwithstanding any provision in this Agreement to the contrary, if this Agreement is terminated pursuant to Section 9.01I or 9.01J and prior thereto or within twelve months after such termination: 43 (i) RCBI or the Bank or any successor to RCBI or the Bank shall have entered into an agreement to engage in an Acquisition Event or an Acquisition Event shall have occurred; or (ii) the Board of Directors of RCBI shall have authorized or approved an Acquisition Event or shall have publicly announced an intention to authorize or approve or shall have recommended that the shareholders of RCBI approve or accept any Acquisition Event, then RCBI shall promptly, but in no event later than five business days after the first of such events to have occurred, pay HCBI a termination fee equal to $500,000. Each of HCBI and RCBI acknowledge that HCBI shall be entitled only to one payment of the $500,000 termination fee, regardless of whether such fee is paid pursuant to Section 9.01I or 9.01J. B. In the event that this Agreement is terminated pursuant to either Section 9.01I or 9.01J above, HCBI's exclusive remedy for such termination shall be the payment of the termination fee provided to HCBI pursuant to Section 9.04A, provided, however, RCBI and HCBI will continue to be responsible for their respective expenses pursuant to Section 11.02 hereof and the provisions of Article X hereof shall survive such termination. ARTICLE X. CONFIDENTIAL INFORMATION Section 10.01 Definition of "Recipient," "Disclosing Party", ---------------------------------------------- "Representative" and "Person". For purposes of this Article X, the term - ----------------------------- "Recipient" shall mean the party receiving the Subject Information (as defined in Section 10.02) and the term "Disclosing Party" shall mean the party furnishing the Subject Information. The terms "Recipient" or "Disclosing Party", as used herein, include: (1) all persons and entities related to or affiliated in any way with the Recipient or the Disclosing Party, as the case may be, and (2) any person or entity controlling, controlled by or under common control with the Recipient or the Disclosing Party, as the case may be. The term "Representative" as used herein, shall include all directors, officers, shareholders, employees, representatives, advisors, attorneys, accountants and agents of any of the foregoing. The term "person" as used in this Article X shall be broadly interpreted to include, without limitation, any corporation, RCBI, group, partnership, governmental agency or individual. Section 10.02 Definition of "Subject Information". For purposes of this ----------------------------------- Article X, the term "Subject Information" shall mean all information furnished to the Recipient or its Representatives (whether prepared by the Disclosing Party, its Representatives or otherwise and whether or not identified as being nonpublic, confidential or proprietary) by or on behalf of the Disclosing Party or its Representatives relating to or involving the business, operations or affairs of the Disclosing Party or otherwise in possession of the Disclosing Party. The term "Subject Information" shall not include information that (i) was already in the Recipient's possession at the time it was first furnished to Recipient by or on behalf of Disclosing Party, provided that such information is not known by the Recipient, after due inquiry, to be subject to another confidentiality agreement with or other obligation of secrecy to the Disclosing Party, its Subsidiaries or another party, or (ii) becomes generally available to the public other than as a result of a disclosure by the Recipient or its Representatives, or (iii) becomes available to the Recipient on a non- confidential basis from a source other than the Disclosing Party, its Representative or 44 otherwise, provided that such source is not known by the Recipient, after due inquiry, to be bound by a confidentiality agreement with or other obligation of secrecy to the Disclosing Party, its Representative or another party. Section 10.03 Confidentiality. Each Recipient hereby agrees that the --------------- Subject Information will be used solely for the purpose of reviewing and evaluating the transactions contemplated by this Agreement and the other agreements contemplated hereby, including the Merger Agreement, and that the Subject Information will be kept confidential by the Recipient and the Recipient's Representatives; provided, however, that (i) any of such Subject Information may be disclosed to the Recipient's Representatives (including, but not limited to, the Recipient's accountants and attorneys) who need to know such information for the purpose of evaluating any such possible transaction between the Disclosing Party and the Recipient (it being understood that such Representatives shall be informed by the Recipient of the confidential nature of such information and that the Recipient shall direct and cause such persons to treat such information confidentially); and (ii) any disclosure of such Subject Information may be made to which the Disclosing Party consents in writing prior to any such disclosure by Recipient. Section 10.04 Securities Law Concerns. Each Recipient hereby acknowledges ----------------------- that the Recipient is aware, and the Recipient will advise the Recipient's Representatives who are informed as to the matters that are the subject of this Agreement, that the United States securities laws prohibit any person who has received material, non-public information from an issuer of securities from purchasing or selling securities of such issuer or from communicating such information to any other person under circumstances in which it is reasonably foreseeable that such person is likely to purchase or sell such securities. Section 10.05 Return of Subject Information. In the event of termination ----------------------------- of this Agreement or the Merger Agreement, for any reason, the Recipient shall promptly return to the Disclosing Party all written material containing or reflecting any of the Subject Information other than information contained in any application, notice or other document filed with any governmental agency and not returned to the Recipient by such governmental agency. In making any such filing, the Recipient will request confidential treatment of such Subject Information included in any application, notice or other document filed with any governmental agency. 45 Section 10.06 Specific Performance/Injunctive Relief. Each Recipient -------------------------------------- acknowledges that the Subject Information constitutes valuable, special and unique property of the Disclosing Party critical to its business and that any breach of Article X of this Agreement by it will give rise to irreparable injury to the Disclosing Party that is not compensable in damages. Accordingly, each Recipient agrees that the Disclosing Party shall be entitled to obtain specific performance and/or injunctive relief against the breach or threatened breach of Article X of this Agreement by the Recipient or its Representatives. Each Recipient further agrees to waive, and use its reasonable efforts to cause its Representatives to waive, any requirement for the securing or posting of any bond in connection with such remedies. Such remedies shall not be deemed the exclusive remedies for a breach of Article X of this Agreement, but shall be in addition to all other remedies available at law or in equity to the Disclosing Party. ARTICLE XI. MISCELLANEOUS Section 11.01 Survival of Representations and Warranties. The parties ------------------------------------------ hereto agree that all of their respective representations and warranties contained in this Agreement shall not survive the Closing Date. Section 11.02 Expenses. RCBI shall pay all of its expenses and costs -------- (including, without limitation, all counsel fees and expenses), and HCBI shall pay all of its expenses and costs (including, without limitation, all counsel fees and expenses), incurred in connection with this Agreement and the consummation of the transactions contemplated hereby. Section 11.03 Brokerage Fees and Commissions. HCBI hereby represents to ------------------------------ RCBI that no agent, representative or broker has represented HCBI in connection with the transactions described in this Agreement. RCBI shall not have any responsibility or liability for any fees, expenses or commissions payable to any agent, representative or broker of HCBI, and HCBI hereby agrees to indemnify and hold RCBI harmless for any amounts owed to any agent, representative or broker of HCBI. RCBI hereby represents to HCBI that no agent, representative or broker has represented RCBI, the Bank, their respective directors and officers, or, to the best knowledge of RCBI, any of the other shareholders of RCBI in connection with the transactions described in this Agreement, other than The Bank Advisory Group, Inc., Austin, Texas (the "Advisor"), and neither HCBI nor RCBI shall have any responsibility or liability for any fees, expenses or commissions payable to any agent, representative or broker of RCBI, the Bank or any shareholder of RCBI other than to the Advisor. A true, correct and complete copy of the agreement with the Advisor is set forth as Schedule 11.03. Section 11.04 Entire Agreement. This Agreement and the other agreements, ---------------- documents, schedules and instruments executed and delivered by the parties to each other at the Closing constitute the full understanding of the parties, a complete allocation of risks between them and a complete and exclusive statement of the terms and conditions of their agreement relating to the subject matter hereof and supersede any and all prior agreements, whether written or oral, that may exist between the parties with respect thereto. Except as otherwise specifically provided in this Agreement, no conditions, usage of trade, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this 46 Agreement shall be binding unless hereafter or contemporaneously herewith made in writing and signed by the party to be bound, and no modification shall be effected by the acknowledgment or acceptance of documents containing terms or conditions at variance with or in addition to those set forth in this Agreement. Section 11.05 Further Cooperation. The parties agree that they will, at ------------------- any time and from time to time after the Closing, upon request by the other and without further consideration, do, perform, execute, acknowledge and deliver all such further acts, deeds, assignments, assumptions, transfers, conveyances, powers of attorney, certificates and assurances as may be reasonably required in order to fully consummate the transactions contemplated hereby in accordance with this Agreement or to carry out and perform any undertaking made by the parties hereunder. Section 11.06 Severability. In the event that any provision of this ------------ Agreement is held to be illegal, invalid or unenforceable under present or future laws, then (a) such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision were not a part hereof; (b) the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by such illegal, invalid or unenforceable provision or by its severance from this Agreement; and (c) there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and still be legal, valid and enforceable. Section 11.07 Notices. Any and all payments (other than payments at the ------- Closing), notices, requests, instructions and other communications required or permitted to be given under this Agreement after the date hereof by any party hereto to any other party may be delivered personally or by nationally recognized overnight courier service or sent by mail or (except in the case of payments) by telex or facsimile transmission, at the respective addresses or transmission numbers set forth below and shall be effective (a) in the case of personal delivery, telex or facsimile transmission, when received; (b) in the case of mail, upon the earlier of actual receipt or five (5) business days after deposit in the United States Postal Service, first class certified or registered mail, postage prepaid, return receipt requested; and (c) in the case of nationally-recognized overnight courier service, one (1) business day after delivery to such courier service together with all appropriate fees or charges and instructions for such overnight delivery. The parties may change their respective addresses and transmission numbers by written notice to all other parties, sent as provided in this Section 11.07. All communications must be in writing and addressed as follows: 47 IF TO RCBI: Mr. Tommy L. Roberts President Rusk County Bancshares, Inc. 2320 Highway 79 South P.O. Box 1750 Henderson, Texas 75653-1750 FAX: (903) 657-4326 IF TO HCBI: Mr. Milton S. McGee, Jr. President Henderson Citizens Bancshares, Inc. 201 West Main P.O. Box 1009 Henderson, Texas 75653-1009 FAX: (903) 657-9224 Section 11.08 GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS (INCLUDING THOSE LAWS RELATING TO CHOICE OF LAW) APPLYING TO CONTRACTS ENTERED INTO AND TO BE PERFORMED WITHIN THE STATE OF TEXAS. Section 11.09 Multiple Counterparts. For the convenience of the parties --------------------- hereto, this Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and all counterparts hereof so executed by the parties hereto, whether or not such counterpart shall bear the execution of each of the parties hereto, shall be deemed to be, and shall be construed as, one and the same Agreement. A telecopy or facsimile transmission of a signed counterpart of this Agreement shall be sufficient to bind the party or parties whose signature(s) appear thereon. Section 11.10 Certain Definitions. ------------------- A. "Affiliate" means, with respect to any entity, any entity that, directly or indirectly, controls, is controlled by, or is under common control with, such entity in question. For the purposes of this definition, "control" (including, with correlative meaning, the terms "controlled by" and "under common control with") as used with respect to any entity, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such entity, whether through the ownership of voting securities or by contract or otherwise. 48 B. "Subsidiary," when used with reference to an entity, means any corporation, a majority of the outstanding voting securities of which are owned directly or indirectly by such entity or any partnership, joint venture or other enterprise in which any entity has, directly or indirectly, any equity interest. C. "Material Adverse Change" means any material adverse change in the condition (financial or otherwise), assets, properties, liabilities (absolute, accrued, contingent or otherwise), reserves, business or results of operations of RCBI, RDFC or the Bank and specifically includes any change that reduces the shareholders' equity of RCBI (on a consolidated basis) by an amount equaling or exceeding $250,000. Material Adverse Change does not include any change with respect to, or effect on RCBI, RDFC or the Bank resulting from a change in law, rule, regulation or GAAP or from any other matter affecting federally insured depository institutions generally including, without limitation, changes in general economic conditions and changes in prevailing interest or deposit rates; provided, any such change does not impact RCBI more adversely than other similarly situated financial institutions. D. "Environmental Laws" means the common law and all federal, state, local and foreign laws or regulations, codes, orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder, now or hereafter in effect, relating to pollution or protection of public or employee health or safety or the environment, including, without limitation, laws relating to (i) emissions, discharges, releases or threatened releases of Hazardous Materials, into the environment (including, without limitation, ambient air, indoor air, surface water, ground water, land surface or subsurface strata), (ii) the manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of Hazardous Materials, and (iii) underground and above ground storage tanks, and related piping, and emissions, discharges, releases or threatened releases therefrom. E. "Hazardous Material" means, without limitation, any pollutant, contaminant, chemical, or toxic or hazardous substance, constituent, material or waste, or any other chemical, substances, constituent or waste including, without limitation, petroleum, including crude oil or any fraction thereof, or any petroleum product. F. "Property" or "Properties" shall include all real property owned or leased by RCBI or the Bank, including, but not limited to properties that the Bank has foreclosed on as well as their respective premises and all improvements and fixtures thereon. 49 Section 11.11 Specific Performance. Each of the parties hereto -------------------- acknowledges that the other party would be irreparably damaged and would not have an adequate remedy at law for money damages in the event that any of the covenants contained in this Agreement were not performed in accordance with its terms or otherwise were materially breached. Each of the parties hereto therefore agrees that, without the necessity of proving actual damages or posting bond or other security, the other party shall be entitled to temporary or permanent injunction or injunctions to prevent breaches of such performance and to specific enforcement of such covenants in addition to any other remedy to which they may be entitled, at law or in equity. Section 11.12 Attorneys' Fees and Costs. In the event attorneys' fees or ------------------------- other costs are incurred to secure performance of any of the obligations herein provided for, or to establish damages for the breach thereof, or to obtain any other appropriate relief, whether by way of prosecution or defense, the prevailing party shall be entitled to recover reasonable attorneys' fees and costs incurred therein. Section 11.13 Rules of Construction. Each use herein of the masculine, --------------------- neuter or feminine gender shall be deemed to include the other genders. Each use herein of the plural shall include the singular and vice versa, in each case as the context requires or as it is otherwise appropriate. The word "or" is used in the inclusive sense. All articles and sections referred to herein are articles and sections, respectively, of this Agreement and all exhibits and schedules referred to herein are exhibits and schedules, respectively, attached to this Agreement. Descriptive headings as to the contents of particular sections are for convenience only and shall not control or affect the meaning, construction or interpretation of any provision of this Agreement. Any and all schedules, exhibits, annexes, statements, reports, certificates or other documents or instruments referred to herein or attached hereto are and shall be incorporated herein by reference hereto as though fully set forth herein verbatim. Section 11.14 Binding Effect; Assignment. All of the terms, covenants, -------------------------- representations, warranties and conditions of this Agreement shall be binding upon, and inure to the benefit of and be enforceable by, the parties hereto and their respective successors, representatives and permitted assigns. Nothing expressed or referred to herein is intended or shall be construed to give any person other than the parties hereto any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provision herein contained, it being the intention of the parties hereto that this Agreement, the assumption of obligations and statements of responsibilities hereunder, and all other conditions and provisions hereof are for the sole benefit of the parties to this Agreement and for the benefit of no other person. Nothing in this Agreement shall act to relieve or discharge the obligation or liability of any third party to any party to this Agreement, nor shall any provision give any third party any right of subrogation or action over or against any party to this Agreement. No party to this Agreement shall assign this Agreement, by operation of law or otherwise, in whole or in part, without the prior written consent of the other party. Any assignment made or attempted in violation of this Section 11.14 shall be void and of no effect. 50 Section 11.15 Public Disclosure. The parties will cooperate in the ----------------- preparation of a press release to be issued at the time of execution of this Agreement. Neither HCBI nor RCBI will make, issue or release any other announcement, statement, press release, acknowledgment or other public disclosure of the existence of, or the terms, conditions or the status of, this Agreement or the transactions contemplated hereby without the prior written consent of the other party to this Agreement; provided, however, that notwithstanding the foregoing, HCBI and RCBI will be permitted to make any public disclosures or governmental filings as legal counsel may deem necessary to maintain compliance with or to prevent violations of applicable federal or state laws or regulations or that may be necessary to obtain regulatory approval for the transactions contemplated hereby. Section 11.16 Extension; Waiver. At any time prior to the Closing Date, ----------------- the parties may (i) extend the time for the performance of any of the obligations or other acts of the other party hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document, certificate or writing delivered pursuant hereto, or (iii) waive compliance with any of the agreements or conditions contained herein. Such action shall be evidenced by a signed written notice given in the manner provided in Section 11.07 hereof. No party to this Agreement shall by any act (except by a written instrument given pursuant to Section 11.07 hereof) be deemed to have waived any right or remedy hereunder or to have acquiesced in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising any right, power or privilege hereunder by any party hereto shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver of any party of any right or remedy on any one occasion shall not be construed as a bar to any right or remedy that such party would otherwise have on any future occasion or to any right or remedy that any other party may have hereunder. Section 11.17 Amendments. To the extent permitted by applicable law, ---------- this Agreement may be amended by action taken by or on behalf of the Board of Directors of HCBI and RCBI at any time before or after adoption of this Agreement by the shareholders of RCBI but, after any submission of this Agreement to such shareholders of RCBI for approval, no amendment shall be made that (i) decreases the consideration to be paid for RCBI Stock as set forth in Section 1.05, or (ii) materially and adversely affects the rights or obligations of the shareholders of RCBI hereunder, without the approval of the shareholders. This Agreement may be amended, modified or supplemented only by an instrument in writing executed by the party against which enforcement of the amendment, modification or supplement is sought. 51 IN WITNESS WHEREOF, HCBI and RCBI have caused this Agreement to be executed by their duly authorized officers as of the date first above written. HENDERSON CITIZENS BANCSHARES, INC. By: /s/ Milton S. McGee, Jr. --------------------------------------- Milton S. McGee, Jr. President RUSK COUNTY BANCSHARES, INC. By: /s/ Tommy L. Roberts --------------------------------------- Name: Tommy L. Roberts Title: President 52 EX-21.1 3 0003.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 ------------ Henderson Citizens Bancshares, Inc. Henderson Citizens Delaware Bancshares, Inc. (100%) Citizens National Bank, Henderson, Texas (100%) CNB Community Development Corporation (100%) HCB Insurance Agency, Inc. (100%) Waskom Bancshares, Inc. (100%) -----END PRIVACY-ENHANCED MESSAGE-----