-----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, KO/vhnP88//6q9XTeafDG+ODfcFX3SrtLCI/1nzAtfwda5GATfZqqlVIkZr5+beZ 2+ymDyDi67jPleGQkjxuOQ== 0000930661-98-000621.txt : 19980330 0000930661-98-000621.hdr.sgml : 19980330 ACCESSION NUMBER: 0000930661-98-000621 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NONE 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: 98575938 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 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, 1997 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 (I.R.S. Employer Identification No.) of incorporation or organization) 201 WEST MAIN STREET, P. O. BOX 1009 HENDERSON, TEXAS 75653 (Address or 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 21, 1997, was $13,189,679. 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 2, 1998: 2,017,494 DOCUMENTS INCORPORATED BY REFERENCE Portions of the 1997 Annual Report to Shareholders are incorporated by reference into Parts II and III. With the exception of such specific references as appear in this report, the 1997 Annual Report to Shareholders is not deemed filed as part of this report. (Index to Exhibits is located on page 24.) 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"), and one hundred percent (100%) of the issued and outstanding shares of the common stock of Waskom Bancshares, Inc. 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"), and one hundred percent (100%) of the issued and outstanding shares of the $1.25 par value per share common stock (the "Waskom Bank Stock") of First State Bank, Waskom, Texas (the "Waskom Bank"). The Citizens Bank and the Waskom Bank sometimes are referred to herein collectively as the "Subsidiary Banks". The Company's primary activity is to provide assistance to the Delaware BHC and the Subsidiary Banks 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 Subsidiary Banks. The Delaware BHC and the Subsidiary Banks 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 Subsidiary Banks. 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 Subsidiary Banks. The Company derives its revenues primarily from the operation of the Subsidiary Banks in the form of dividends paid from the Subsidiary Banks 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 Subsidiary Banks. Neither the Company nor the Delaware BHC engage 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 guidelines of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and would need to obtain regulatory approval to engage in such activities. As of December 31, 1997, the Company had, on a consolidated basis, total assets of approximately $358,493,000, total deposits of approximately $322,107,000, total loans, (net of unearned discount and allowance for loan losses) of approximately $106,061,000 and total stockholders' equity of approximately $32,729,000. 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 and 100,000 shares (100%) of the issued and outstanding Waskom 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 Subsidiary Banks and will derive its revenues primarily from the operation of the Subsidiary Banks in the form of dividends. ACQUISITIONS - ------------ 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 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 aggregate purchase price of $3,463,000 was funded with a combination of notes 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 Delaware BHC currently operates the Citizens Bank and the Waskom Bank as separate subsidiaries. As described elsewhere herein, the Company plans to merge the Waskom Bank with and into the Citizens Bank, which affiliate merger is expected to be completed during the second quarter of 1998. On October 10, 1996, the Company completed the repurchase of 29,700 shares of its common stock (representing approximately 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 plus related expenses of approximately $77,000. The purchase of shares appropriately tendered and 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. THE SUBSIDIARY BANKS - -------------------- General. ------- The Citizens Bank opened for business in 1930 as Citizens National Bank of Henderson, a national banking association chartered by the Office of the Comptroller of the Currency (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, and Chandler, Texas. On March 24, 1997, the Citizens Bank opened a trust office in Corsicana, Texas. Three former employees of the Corsicana, Texas Nations Bank trust department were hired to operate this trust office. Presently, the Citizens Bank plans to open a loan production office at the Corsicana, Texas location in March of 1998. At December 31, 1997, the Citizens Bank had approximately $332,389,000 in assets, $300,725,000 in deposits, $98,573,000 in loans (net of unearned discount and allowance for loan losses), and $29,445,000 in shareholders' equity. The Citizens Bank is regulated and supervised by the Comptroller. 2 The Waskom Bank was originally chartered on December 4, 1954, as a Texas banking association. Its sole banking office is located at 745 Spur 156, Waskom, Texas. At December 31, 1997, the Waskom Bank had approximately $25,979,000 in assets, $22,114,000 in deposits, $7,488,000 in loans (net of unearned discount), and $3,644,000 in shareholder's equity. The Waskom Bank is regulated and supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Texas Department of Banking (the "TDB"). Services. The Subsidiary Banks are full service banks offering a variety -------- of services to satisfy the needs of the consumer and commercial customers in the area. The Subsidiary Banks offer most types of loans, including commercial, agribusiness, credit card, consumer, mortgage, home equity, and real estate loans. The Subsidiary Banks also provide a wide range of consumer banking services, including savings and checking accounts, MasterMoney 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. Saturday drive up banking has been offered at the Malakoff location since its acquisition in 1994, and Saturday drive up banking has been offered in Henderson at the Southside branch since November 1995. Saturday drive up banking has been offered at the Chandler branch since April 1996. 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, and Malakoff and Chandler, which includes Henderson County. The Waskom Bank compliments the service area of the Citizens Bank by serving Harrison County in East Texas. The activities in which the Subsidiary Banks engage are competitive. Each activity engaged in 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 Subsidiary Banks compete 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 Subsidiary Banks also compete with suppliers of equipment in furnishing equipment financing and leasing services. Year 2000. The Company recognizes that the arrival of the Year 2000 poses --------- a unique challenge to the ability of all systems to recognize the date change from December 31, 1999 to January 1, 2000 and, like other companies, has assessed and is repairing its computer applications and business processes to provide for their continued functionality. An assessment of the readiness of external entities which it interfaces with, such as vendors, customers, payment systems, and others, is ongoing. Effort is under way to address this issue, including a process of inventory, scoping and analysis, modification, testing and certification, and implementation. A major portion of the costs associated with correcting Year 2000 deficiencies will be met from existing resources through a reprioritization of technology development initiatives, with the remainder representing incremental costs. The Company estimates that it will incur costs for testing of computer applications and purchases of new hardware and software. Certain of these hardware improvements would have probably been made regardless of the Year 2000 issue based on the Company's history of technology upgrades. It is anticipated that the Company will be Year 2000 compliant by early 1999. The Company does not anticipate that the related overall costs will be material to any single year. 3 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 collateralizes 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 Subsidiary Banks are not a party to any pending legal proceedings under any environmental statute, nor are the Subsidiary Banks aware of any instances that may give rise to such liability of the Subsidiary Banks. Employees. At December 31, 1997, the Citizens Bank employed approximately --------- 132 fulltime and 19 part-time employees, and the Waskom Bank employed approximately 12 full-time employees and 1 part-time employee. Affiliate Merger. During the first quarter of 1998, the Citizens Bank and ---------------- the Waskom Bank anticipate filing an application with the Comptroller for prior approval to merge the Waskom Bank with and into the Citizens Bank under the charter and title of the Citizens Bank (the "Affiliate Merger"). The sole banking office of the Waskom Bank will be operated as a full-service branch of the Citizens Bank upon completion of the Affiliate Merger. It is not anticipated that the Affiliate Merger will result in any diminution of products and services currently available to customers of the Waskom Bank or the Citizens Bank. It is anticipated, however, that the Affiliate Merger will generate certain operational efficiencies by operating under one bank charter rather than two separate charters regulated by different regulatory authorities. It is anticipated that the Affiliate Merger will be completed during the second quarter of 1998, although no assurance can be given that the Affiliate Merger will be completed or that such timetable will be met. Supervision and Regulation - -------------------------- 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 constraints. Bank Holding Company Regulation. Both the Company and the Delaware BHC are ------------------------------- registered bank holding companies under the Bank Holding Company Act of 1956 (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. 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. 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. 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. 4 In addition, the Texas Finance Code permits a bank holding company owning stock of a bank located outside the State of Texas (a "Foreign Holding Company") to acquire a bank or bank holding company located in Texas. Until September 1, 2001, such acquisition may occur only if the Texas bank to be directly or indirectly controlled by the Foreign Holding Company (i) was in existence on or had its charter application filed before July 15, 1987 and has continuously operated since such date, or (ii) has existed and continuously operated as a bank for a period of at least five (5) years. In any event, however, a Foreign Holding Company may not acquire a Texas bank or bank holding company, if after the acquisition, the Foreign Holding Company would own or control banks in Texas the deposits of which would exceed twenty-five percent (25%) of the total deposits of all state and national banks located in Texas. Pursuant to a Texas Attorney General opinion interpreting the relevant provisions of applicable law, a Foreign Holding Company acquiring a bank or bank holding company located in the State of Texas may not become involved in its day-to-day operations. The Comptroller, the Federal Reserve Board and 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 24.7% and a Tier 1 Capital Ratio of 23.8% at December 31, 1997. 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 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 is comprised of total assets less intangible assets. As of December 31, 1997, the Company's Leverage Capital Ratio was 9.0%. The ability of the Company to pay dividends is 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 Subsidiary Banks. The ability of the Citizens Bank to pay dividends is restricted by provisions of the National Bank Act, and the ability of the Waskom Bank to pay dividends is restricted by provisions of the Texas Finance Code. See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- Dividends." 5 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 Waskom Bank is chartered under the Texas Finance Code and is subject to supervision, examination and regulation of both the TDB and the FDIC, and is subject to the power of the TDB and the FDIC to enforce compliance with applicable banking statutes and regulations. The majority of the Subsidiary Banks' 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 Subsidiary Banks 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 ability of the Subsidiary Banks to pay dividends are restricted by provisions of the National Bank Act in the case of the Citizens Bank, and the Texas Finance Code in the case of the Waskom Bank. 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 to a bank holding company by any affiliated 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 recently expressed the view that national banks and bank holding companies should refrain from dividend increases or reduce or eliminate dividends under certain circumstances. Under the Texas Finance Code, The Waskom Bank generally may not pay a dividend reducing its capital and surplus without the prior approval of the Banking Commissioner of the State of Texas. All dividends must be paid out of net profits then on hand, after deducting expenses, including loses and provisions for loan losses. Additionally, under provisions of the Federal Deposit Insurance Act, the FDIC has the right to prohibit the payment of dividends by a bank where such payment is deemed to be an unsafe and unsound banking practice. The ability of the Subsidiary Banks to pay dividends are also restricted by the requirement that they each 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 a 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, 1997, the Subsidiary Banks had capital ratios as follows:
Tier 1 Total Leverage Capital Ratio Capital Ratio Capital Ratio ------------- ------------- ------------- Citizens Bank 23.7% 24.7% 9.1% Waskom Bank 29.0% 29.5% 9.6%
See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- Dividends." The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") became law on December 19, 1991, with the primary objective of recapitalizing federal deposit insurance funds and making them more secure. FDICIA reinforces the authority of federal regulatory agencies over banks, changes bank accounting and auditing rules and establishes levels of capitalization to be used in determining the extent of regulatory intervention into a bank's activities and whether to approve proposals submitted by banks (such as branch applications, acquisitions or entry into new lines of business). FDICIA requires the establishment of safety and soundness standards, and requires certain actions to be taken by the federal regulatory authorities in dealing with problem banks. Subject to certain limitations, FDICIA requires that banks be assessed for payments made by the FDIC on uninsured deposits of other institutions and prescribes FDIC assessments based on the risks inherent in a bank's assets. Under FDICIA, a holding company is required to guarantee compliance with any capital restoration 6 plan entered into by a subsidiary bank which is not "adequately capitalized" within the meaning of FDICIA. FDICIA generally restricts activities of state- chartered banks to those permissible for national banks, requires the adoption of uniform real estate loan regulations, establishes certain safeguards against insider abuses, and calls for regulations designed to limit the risks posed by one bank's exposure to another bank. The Financial Institution Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was signed into law on August 9, 1989. This legislation included various provisions that affect or may affect the Company, the Delaware BHC and the Subsidiary Banks. Among other things, FIRREA generally permits bank holding companies to acquire healthy thrifts as well as failed or failing thrifts. FIRREA also removed certain crossmarketing prohibitions previously applicable to thrift and bank subsidiaries of a common holding company. Such changes could increase the competition facing the Subsidiary Banks in their service areas. Furthermore, a multi-bank holding company may now 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 Subsidiary Banks 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. These 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, indemnifications 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. In 1994, Congress adopted the Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Reigle Act"). Such statute provides for nationwide interstate banking, but does permit each state to make an election as to whether such state will permit interstate branching. During its 1995 term, the Texas legislature passed legislation providing that interstate branching will not be permitted in Texas until at least 1999. Accordingly, banks located outside the State of Texas are effectively prohibited from opening a branch in Texas. Similarly, banks located in Texas are generally prohibited from opening branches outside Texas. The Texas legislature is expected to revisit the issue of interstate branching in the 1999 session and, until then, interstate branching will be prohibited in Texas. Interstate banking (e.g., out-of-state holding companies acquiring Texas financial institutions), however, cannot be prohibited and must be permitted by all the states, subject to certain permissible state law limitations on the ages of the banks to be acquired and limitations on the total amount of deposits within a state that a bank holding company is permitted to control. 7 ITEM 2. PROPERTIES THE CITIZENS BANK - ----------------- The Citizens Bank owns its main banking office and six branch offices. 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. There is a six-lane drive-in facility located directly behind the Citizens Bank. An automated teller machine ("ATM") is also located in a separate building at this address. The Citizens Bank has five additional ATMs in Henderson, located in a convenience store at 321 State Highway 64 West, in a convenience store at 1414 West Main Street, in the local hospital at 300 Wilson, in a general merchandise store at 2121 Highway 79 South, and in a convenience store located at the traffic star which is the intersection of U.S. Highways 79 and 259 and State Highways 64 and 43. The Citizens Bank has six 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 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 302 East Broadway, Jefferson, Texas. The Jefferson branch office contains approximately 1,600 square feet and one drive-in lane. The Jefferson branch also maintains an ATM located at a convenience store at 105 South Walcott, 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 1,600 square feet, one drive-in lane and an ATM. A speed of service drive-in facility located at 230 Highway 31 East, Chandler, Texas is currently under construction and is currently scheduled to open in June 1998, although no assurances can be made that the facility will open on schedule. The trust office is located at 400 W. Collin Street, Corsicana, Texas. This office is in a leased building that has approximately 4,000 square feet. THE WASKOM BANK - --------------- The Waskom Bank owns its sole banking office, which is located at 745 spur 156, Waskom, Texas. The building is a single story, brick building containing approximately 6,000 square feet. One drive in lane is attached to the building and one remote drive in lane is located on the property. Additionally, one drive up ATM is located on the property. The Waskom Bank also maintains an ATM located in a grocery store at Highway 79 North in Bethany, Texas. 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 Subsidiary Banks. 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 1997. 8 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 2, 1998, (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 1998 LOW HIGH REPRESENTED REPRESENTED - ------------ -------------- -------------- ------------------------ --------------------- First Quarter (Through March 2, 1998) - - - - 1997 - ------------ First Quarter $12.00 $12.50 7 1,550 Second Quarter $12.00 $12.50 20 23,700 Third Quarter $12.00 $12.00 1 400 Fourth Quarter $14.50 $14.50 54 98,215 1996 - ------------ First Quarter $12.00 $12.00 3 732 Second Quarter $12.00 $12.00 10 4,329 Third Quarter $12.00 $12.00 5 1,190 Fourth Quarter $11.25 $12.00 4 30,310
As of March 2, 1998, there were 413 shareholders of record. 9 DIVIDENDS The Company declared and paid four quarterly dividends on the Company stock during 1997. The Company declared quarterly dividends on the Company stock during 1997 that approximated $341,000 (or $0.16 per share) for the first quarter of 1997, $339,000 (or $0.16 per share) for the second quarter of 1997, $339,000 (or $0.16 per share) for the third quarter of 1997, and $323,000 (or $0.16 per share) for the fourth quarter of 1997. The Company paid four quarterly dividends on the Company stock during 1997. On January 2, 1997 and on March 31, 1997, the Company paid a dividend on the Company stock that approximated $341,000 (or $0.16 per share). On June 30, 1997 the Company paid a dividend on the Company stock that approximated $339,000 (or $0.16 per share). On September 30, 1997 the Company paid a dividend on the Company stock that approximated $339,000 (or $0.16 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 Subsidiary Banks. 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 Subsidiary Banks to pay dividends. The ability of the Subsidiary Banks to pay dividends is restricted by provisions of the National Bank Act, in the case of the Citizens Bank, and the Texas Finance Code, in the case of the Waskom Bank. 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. Under the Texas Finance Code, the Waskom Bank generally may not pay a dividend reducing its capital and surplus without the prior approval of the Banking Commissioner of the State of Texas. All dividends must be paid out of net profits then on hand, after deducting expenses, including loses and provisions for loan losses. Additionally, under provisions of the Federal Deposit Insurance Act, the FDIC has the right to prohibit the payment of dividends by a bank where such payment is deemed to be an unsafe and unsound banking practice. The ability of the Company, the Delaware BHC, and the Subsidiary Banks 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, the TDB in the case of the Waskom 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 riskbased 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, 1997 were 23.8%, 24.7% and 9.0%, respectively, and thus were above the regulatory minimums. See "ITEM 1. BUSINESS -- Supervision and Regulation." 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 Subsidiary Banks' ability to pay dividends. As of December 31, 1997, neither the Company nor the Subsidiary Banks had entered into any agreement with any regulatory authority requiring the Company or the Subsidiary Banks to maintain higher ratios than regulations normally require. 10 ITEM 6. SELECTED FINANCIAL DATA Information in response to this requirement is presented on the inside front cover page of the accompanying 1997 Annual Report to Shareholders, which page is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The information required in response to this item is presented on pages 4 through 24 of the accompanying 1997 Annual Report to Shareholders, which pages are hereby incorporated by reference. ITEM 7A. QUANTITATIVE ANS QUALITATIVE DISCLOSURE ABOUT MARKET RISK The information required in response to this item is presented on pages 12 through 13 of the accompanying 1997 Annual Report to Shareholders, which pages are hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the Company and its subsidiaries, included on pages 25 through 47 of the accompanying 1997 Annual Report to Shareholders, are hereby incorporated by reference. Independent Auditors' Report for the Years ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheets - December 31, 1997 and 1996. Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995. Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 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 ---------- ------------------------------- E. Landon Alford (62) Director and Chairman of the Board R.M. Ballenger (77) Director Stayton M. Bonner, Jr. (45) Director David J. Burks (74) Director Billy Crawford (73) Director Sheila Gresham (43) Director William A. Hurst (60) Vice President, Treasurer and Chief Financial Officer James Michael Kangerga (45) Director J. Mark Mann (42) Director Milton S. McGee, Jr. (48) Director, President and Chief Executive Officer Charles H. Richardson (76) Director Nelwyn Richardson (48) Secretary Rebecca G. Tanner (42) Chief Accounting Officer Tony Wooster (53) Director Alfred Wylie (71) Director BUSINESS EXPERIENCE - ------------------- 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 also serves as Chairman of the Board of the Waskom Bank. Mr. Alford is also Chairman of the Board of H.C.B. Inc., a Texas corporation ("HCB") and an affiliate of the Company. 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 the Waskom Bank and HCB. Mr. Ballenger has been the owner of Max Ballenger Real Estate & Lease Brokerage for over 25 years. 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 the Waskom Bank and 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. 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 the Waskom Bank and 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 the Waskom Bank and HCB. Mr. Crawford is a retired funeral director. 12 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 the Waskom Bank and HCB. Ms. Gresham has served as President of Smith Chevrolet-Oldsmobile-Cadillac Company since August 1993, and she served as President of Smith Chevrolet Company from February 1980 until August 1993. William A. Hurst has served as Executive Vice President and Cashier of the Citizens Bank since February 1981 and as a member of the Investment Committee since February 1986. Mr. Hurst has served as Vice President, Treasurer and Chief Financial Officer of the Company since 1990. Mr. Hurst is also an officer of HCB. 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 the Waskom Bank and 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 the Waskom Bank and 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 RepublicBank Brownwood from August 1983 to July 1986. Mr. McGee also serves as a director of the Waskom Bank and 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 the Waskom Bank and HCB. Prior to his retirement over six 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. Rebecca G. Tanner has served as Chief Accounting Officer of the Company since 1990. Ms. Tanner has served as Vice President and Controller of the Citizens Bank since September 1991. Ms. Tanner served as an Assistant Vice President at the Citizens Bank beginning in January 1990. Prior to that, Ms. Tanner served as Assistant Vice President and Controller of NCNB Texas in Henderson, Texas for approximately eleven years. 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 the Waskom Bank and 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. ALFRED WYLIE has served as a director of the Company since November 1990 and as a director of the Citizens Bank since 1970. He served as Senior Vice President and Trust Officer from 1984 until 1994 when he retired. Mr. Wylie has been a member of various Board of Directors' committees at the Citizens Bank since 1984. Mr. Wylie also serves as a director of the Waskom Bank and HCB. 13 FAMILY RELATIONSHIPS - -------------------- Charles Richardson, a director of the Company, HCB, the Citizens Bank and the Waskom Bank, is the uncle of Stayton M. Bonner, Jr., who is also a director of the Company, HCB, the Citizens Bank and the Waskom Bank. There are no other family relationships between the members of the Board of Directors or executive officers of the Company, the Citizens Bank or the Waskom 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 received during 1997, 1996 or 1995 salary and bonus exceeding $100,000 in the aggregate. SUMMARY COMPENSATION TABLE
Annual Compensation/(1)/ --------------------------------------------------------------- Name and Principal All Other Position Year Salary/(2)/ Bonus Compensation/(3)/ - ------------------ ---- --------- -------- ----------------- Milton S. McGee, Jr. 1997 $165,600 $80,600 $23,238 President and Chief Executive 1996 157,716 74,286 21,734 Officer of the Company, the 1995 149,143 62,907 20,545 Citizens Bank, the Waskom Bank and HCB
/(1)/ Neither the Company nor the Citizens Bank has any long-term compensation programs, so disclosure of such items is omitted. /(2)/ Includes directors' fees. /(3)/ 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 Subsidiary Banks 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. All directors of the Company, HCB and the Subsidiary Banks (except for the Chairman of the Board) are paid a total of $1,000 per month for attending all four Board of Directors' meetings (including committee meetings) and outside directors receive an additional $500 in December. The Chairman of the Board receives $2,000 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. 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 of money 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 14 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 $303,000 to the profit sharing plan in 1997, $281,000 in 1996, and $251,000 in 1995. The Citizens Bank's contribution during 1997, 1996 and 1995 to the account of Milton S. McGee, Jr. is 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 - ----------------- ----------------------- ------------------------------- 1997 1996 1995 ---- ---- ---- Milton S. McGee, Jr. $20,141 $18,920 $17,204 - ----------------------------------------------------------------------------- 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"). The Severance Agreement is designed to provide certain benefits to McGee in the event there is a change 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 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). 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 15 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 reelect 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 (other than as a result of year to year variations in bonuses or overtime consistent with past practices) 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 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 any 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 such agreement. The Company does not have any stock option or other executive compensation plans. 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SHAREHOLDERS - ---------------------- At March 2, 1998, the Company had 413 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. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP / PERCENT OF CLASS OF HENDERSON CITIZENS BANCSHARES INC. COMMON STOCK Name and Address of Number and Percent of Shares Beneficial Owner Owned of Company Stock/(1)/ - ---------------- ---------------------------- E. Landon Alford 140,228 / 6.95%/(2)/ P. O. Box 67 Henderson, TX 75653 John R. Alford, Jr. 165,040 / 8.18% P. O. Box 5219 Austin, TX 78763 Stayton M. Bonner, Jr. 145,622 / 7.22%/(3)/ P. O. Box 1833 Henderson, TX 75653 Michael Kangerga 132,978 / 6.59% 102 1/2 E. Main Street Henderson, TX 75652 Ella Langdon Alford Trust 165,044 / 8.18% P. O. Box 10 Brixey, MO 65618 Citizens National Bank 132,840 / 6.58%/(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 2,017,494 shares outstanding. /(2)/ Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford. /(3)/ Includes 9,698 shares owned by Odyssey Partners LTD. for which Mr. Bonner has 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 2.19% of Company Stock. In addition, it appears that Mr. Bonner is also cotrustee with the Citizens Bank (but not a beneficiary) of two such trusts, which own an aggregate of 88,560 shares, or 4.39%, of the Company Stock. The shares held in all three trusts are voted solely by Mr. Bonner. 17 MANAGEMENT - ---------- The following table sets forth the number of shares of the Company Stock beneficially owned (i) by each director and advisory director of the Company and (ii) by the directors and executive officers of the Company as a group as of March 2, 1998. Number and Percent of Shares Name Owned of Company Stock/(1)/ ---- ---------------------------- E. Landon Alford 140,228 / 6.95%/(2)/ R. M. Ballenger 800 / 0.04% Stayton M. Bonner, Jr. 145,622 / 7.22%/(3)/ David J. Burks 9,775 / 0.48% Billy Crawford 1,000 / 0.05% Sheila Gresham 6,120 / 0.30% James M. Kangerga 9,188 / 0.46% J. Mark Mann 5,710 / 0.28%/(4)/ Milton S. McGee, Jr. 6,698 / 0.33%/(5)/ Charles H. Richardson 24,160 / 1.20%/(6)/ Tony Wooster 1,800 / 0.09%/(7)/ Alfred Wylie 32,764 / 1.62%/(8)/ Directors and executive offic 383,865/ 19.03%/(9)/ the Company as a group (12 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 2,017,494 shares outstanding. /(2)/ Mr. Alford's wife, Phyllis P. Alford, owns 2,000 of these shares. /(3)/ A total of 9,698 of these shares are owned by Odyssey Partners LTD. Mr. Bonner has sole voting authority for the shares owned by Odyssey Partners LTD. Also includes 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. In addition, Mr. Bonner is also co-trustee with the Citizens Bank of two other trusts of which he is not a beneficiary, which trusts own an aggregate of 88,560 shares of common stock. The shares of Company Stock held in all three of these trusts ("the "Shaw Trusts") are voted solely by Mr. Bonner. Therefore, the 132,840 shares of common stock held in such trusts are included in the total shares 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. /(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. 18 /(8)/ Includes 2,640 shares held by Mr. Wylie's wife, Gladys M. Wylie. /(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 Subsidiary Banks have had, and are expected to have in the future, banking transactions in the ordinary course of business with certain of the Company's and the Subsidiary Bank's respective directors, executive officers and their "associates." Management of the Company and the Subsidiary Banks believe that all such loans 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 THE COMPANY CONSOLIDATED FINANCIAL STATEMENTS, Footnote 6, reflected on page 37 of the 1997 Annual Report to Shareholders. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of Report. 1. Financial Statements The consolidated financial statements for 1997, 1996 and 1995 as listed in Item 8 of this report, together with the report of KPMG Peat Marwick LLP dated March 4, 1997, appearing on pages 25 through 47 of the accompanying 1997 Annual Report to Shareholders are incorporated herein by reference. 2. Financial Statement Schedules None 3. Exhibits 13.1 Henderson Citizens Bancshares, Inc. 1997 Annual Report to Shareholders. 21.1 Subsidiaries of registrant. 27.1 Financial Data Schedule. (b) Reports on Form 8 - K. There were no reports on Form 8 - K filed during the fourth quarter of 1997. (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. 19 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 and Chief Executive Officer (Principal Executive Officer) By: /s/ William Hurst -------------------------------------------- William Hurst Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) By: /s/ Rebecca Tanner -------------------------------------------- Rebecca Tanner Chief Accounting Officer (Principal Accounting Officer) Date: March 18, 1998 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 March 18, 1998 - -------------------------- the Board E. Landon Alford /s/ Milton S. McGee, Jr. - -------------------------- Director, President and March 18, 1998 Milton S. McGee, Jr. Chief Executive Officer /s/ R. M. Ballenger Director March 18, 1998 - -------------------------- R. M. Ballenger /s/ Stayton M. Bonner, Jr. Director March 18, 1998 - -------------------------- Stayton M. Bonner, Jr. /s/ D. J. Burks Director March 18, 1998 - -------------------------- D. J. Burks /s/ Billy Crawford Director March 18, 1998 - -------------------------- Billy Crawford
20 /s/ Sheila Gresham Director March 18, 1998 - -------------------------- Sheila Gresham /s/ James Michael Kangerga Director March 18, 1998 - -------------------------- James Michael Kangerga /s/ J. Mark Mann Director March 18, 1998 - -------------------------- J. Mark Mann /s/ Charles H. Richardson Director March 18, 1998 - -------------------------- Charles H. Richardson /s/ Tony Wooster Director March 18, 1998 - -------------------------- Tony Wooster /s/ Alfred Wylie Director March 18, 1998 - -------------------------- Alfred Wylie
21 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 28, 1998, and copies of such information shall be sent to the Securities and Exchange Commission on or before such time: (1) 1997 Annual Report to Shareholders (2) Notice of Annual Meeting to Shareholders and Proxy Statement (3) Proxy Card 22 EXHIBIT INDEX Exhibit - -------------------------------------------------------------------------------- 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). 13.1 Henderson Citizens Bancshares, Inc. 1997 Annual Report to Shareholders. 21.1 Subsidiaries of registrant. 27.1 Financial Data Schedule. EX-13.1 2 ANNUAL REPORT EXHIBIT 13.1 SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY The table below represents a summary of the major components of the Company's income statements for the periods presented, together with selected balance sheet items and financial ratios. All information concerning the Company should be read in conjunction with the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company" and the consolidated financial statements and related notes thereof included elsewhere herein.
Condensed Income Statements Information and Related Data Year Ended December 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------------- ------------ ------------ ------------ ------------ (dollars in thousands except per share data) Total interest income $ 22,267 20,716 20,346 14,946 15,324 Total interest expense 11,546 11,203 11,536 7,127 6,559 -------------- ------------ ------------ ------------ ------------ Net interest income 10,721 9,513 8,810 7,819 8,765 Provision (reduction of allowance) for loan losses 330 264 180 (150) (500) -------------- ------------ ------------ ------------ ------------ Net interest income after provision (reduction of allowance) for loan losses 10,391 9,249 8,630 7,969 9,265 Total other income 3,290 3,243 2,009 1,676 1,712 Total other expense (9,265) (8,038) (7,556) (6,359) (6,031) -------------- ------------ ------------ ------------ ------------ Income before income tax expense and cumulative effect of change in accounting principle 4,416 4,454 3,083 3,286 4,946 Income tax expense 1,026 1,110 619 651 1,420 -------------- ------------ ------------ ------------ ------------ Income before cumulative effect of change in accounting principle 3,390 3,344 2,464 2,635 3,526 Cumulative effect at January 1, 1993, of changes in accounting principle - - - - 255 -------------- ------------ ------------ ------------ ------------ Net Income 3,390 3,344 2,464 2,635 3,271 ============== ============ ============ ============ ============ Per share data: Net income 1.61 1.55 1.14 1.22 1.51 Dividends $ .64 .64 .64 .64 .61 Dividend payment ratio 39.53% 41.21 56.14 52.50 40.29 Return on average assets 0.98% 1.00 0.76 0.99 1.28 Return on average equity 10.56% 10.60 8.25 9.42 11.82 Balance Sheet Information: Loans, net $ 106,061 100,825 80,499 63,784 51,552 Allowance for loan losses 1,249 1,146 1,019 997 1,014 Total assets 358,493 356,830 326,879 313,038 257,721 Total deposits 322,107 320,673 293,611 285,522 227,152 Stockholders' equity 32,729 31,988 31,206 26,147 29,160 Stockholders' equity / total assets 9.13% 8.96 9.55 8.35 11.31
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, 1997 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 1997 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"). In addition to the Citizens Bank, the Delaware BHC also owns 100% of the issued and outstanding shares of the common stock of First State Bank (these subsidiaries are sometimes referred to herein as the "Subsidiary Banks"). The Delaware BHC was incorporated pursuant to the laws of the State of Delaware on February 21, 1991 in order to facilitate the acquisition of the Citizens Bank. The acquisition of the Delaware BHC by the Company and the acquisition of the Citizens Bank by the Delaware BHC was 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 its subsidiaries operate under the day-to-day management of its 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 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 Subsidiary Banks. Delaware BHC owns 100% of the issued and outstanding shares of the Subsidiary Banks. The Delaware BHC was organized as a Delaware corporation in 1991 in order to facilitate the acquisition of Citizens Bank and 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 Delaware BHC owns 100% of the issued and outstanding stock of the Subsidiary Banks. 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, 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 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. In 1994, the Citizens Bank acquired three new branch locations and expanded its service area outside of Rusk, County, Texas (see below). With the acquisition of these branches, the Citizens Bank now has six branch locations. 4 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. To acquire the Jefferson Branch, the Citizens Bank received cash equal to the difference between (i) the book value of the assets of the Jefferson Branch purchased and the book value of the liabilities of the Jefferson branch assumed as of September 23, 1994, minus (ii) a premium of $125,000. 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. To acquire the NationsBank Branches, the Citizens Bank received cash equal to the difference between (i) the book value of the assets of the NationsBank Branches purchased and the book value of the liabilities of the NationsBank Branches assumed as of December 8, 1994, minus (ii) a premium of $419,394. 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. 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 ("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 aggregate purchase price of $3,463,000 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 Waskom Bank was originally chartered on December 4, 1954, as a Texas banking association. Its sole banking office is located at 745 Spur 156, Waskom, Texas. At December 31, 1997, the Waskom Bank had approximately $25,979,000 in assets, $22,114,000 in deposits, $7,339,000 in loans (net of unearned discount and allowance for loan losses), and $3,644,000 in shareholders' equity. The Waskom Bank is regulated and supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Texas Department of Banking (the "TDB"). The Delaware BHC currently operates Citizens Bank and the Waskom Bank as separate subsidiaries. However, during the first quarter of 1998, the Citizens Bank and the Waskom Bank anticipate filing an application with the Comptroller for prior approval to merge the Waskom Bank with and into the Citizens Bank under the charter and title of the Citizens Bank (the "Affiliate Merger"). The sole banking office of the Waskom Bank will be operated as a full-service branch of the Citizens Bank upon completion of the Affiliate Merger. It is not anticipated that the Affiliate Merger will result in any diminution of products and services currently available to customers of the Waskom Bank or the Citizens Bank. It is anticipated, however, that the Affiliate Merger will generate certain operational efficiencies by operating under one bank charter rather than two separate charters regulated by different regulatory authorities. It is anticipated that the Affiliate Merger will be completed during the second quarter of 1998, although no assurance can be given that the Affiliate Merger will be completed or that such timetable will be met. 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. 5 RESULTS OF OPERATIONS - --------------------- Net income for 1997 was $3,390,000 compared to $3,344,000 for 1996 and $2,464,000 for 1995. The increase in earnings in 1997 was attributable to an improved net interest margin, and improved non-interest income. The Company experienced a gain on sale of securities in 1997 of $191,000 compared to a gain in 1996 of $719,000 and a loss of $128,000 in 1995. A provision for loan losses of $330,000 was made in 1997 compared to provisions of $264,000 and $180,000 in each of 1996 and 1995, respectively. Net interest income increased due to increases in volumes of loans as a result of continued strong demand during 1997. In addition, net interest margins in 1997 improved over 1996 and 1995 levels. Other income, excluding securities transactions, in 1997 increased approximately $575,000 over 1996. Other expenses were $9,265,000 in 1997 compared to $8,038,000 in 1996. 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 is 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 $1,551,000 and an increase in interest expense of $343,000. The majority of the increase in interest income was the result of higher loan volumes, which generally are higher yielding assets than investment securities, whereas the increase in interest expense was due to higher volumes. Differences in yields and volumes can be found in Table II. Net interest spreads and margins for 1997 increased from 1996 levels, as they did in 1996 from 1995 levels. Although the average rate earned on interest bearing assets increased slightly from 6.76% in 1996 to 6.99% in 1997, the average rate paid on interest bearing liabilities remained constant at 4.11% in 1996 and 1997. With rates earned increased and rates paid remaining constant the result was a positive effect on spreads and margins for 1997. Net interest spreads were approximately 2.8%, 2.7%, and 2.6% for the years 1997, 1996, and 1995, respectively, and net interest margins were 3.5%, 3.2%, and 3.1%, during the same three-year period. INTEREST INCOME - --------------- SECURITIES. Yields on all securities, other than mortgage-backed securities and collateralized mortgage obligations, increased in 1997 from yields in 1996 for various reasons. In January of 1996 approximately $26,000,000 of U. S. Treasury securities were sold, and a gain on sale of approximately $586,000 was recognized. Approximately $25,000,000 was immediately reinvested to establish a three year rolling Treasury ladder, however these reinvestments were at lower rates. The increase in yields on state and municipal securities in 1996 compared to 1995 was due to maturities of lower yielding securities and reinvestments into higher yielding securities with slightly longer final maturities. The Company's yield on all securities increased during 1997 as compared to 1996, and 1996. U.S. governments yielded 5.97%, 5.65% and 6.36%, in 1997, 1996, and 1995, respectively. State and municipal yields were 6.95%, 6.65%, and 7.54%, in 1997, 1996, and 1995, respectively. Other securities, which includes mortgage backed securities and collateralized mortgage obligations, yielded 6.23% in 1997, 6.11% in 1996, and 6.14% in 1995. LOANS. In 1997, the Company experienced a 14.2% increase in average loan balances over 1996. The average loan balance increased approximately $12,561,000 to $101,245,000 in 1997, compared to $88,684,000 in 1996. In 1996, the average loan balances increased approximately $17,337,000 over the 1995 balances. The average loan balance during 1997 increased due to continued strong loan demand and marketing efforts. Yields on loans increased slightly to 8.73% in 1997 compared to 8.62% in 1996 and 1995. OTHER INTEREST-EARNING ASSETS. Other interest-earning assets consist of interest-bearing deposits with other financial institutions and federal funds sold. The yield on interest-bearing deposits with other financial institutions increased to 5.49% in 1997 from 5.25% in 1996. The 1996 rate of 5.25% was a decline from 5.87% in 1995. The yield on federal funds sold increased to 6.20% in 1997 from 5.40% in 1996. In contrast the 1996 rate of 5.40% declined from 5.85% in 1995. 6 Table I - Average Balances and Interest Yields and Spreads (dollars in thousands)
Years Ended December 31, -------------------------------------------------------------------------------------- 1997 1996 1995 -------- --------- --------- Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balances Expense Rate Balances Expense Rate Balances Expense Rate -------- ------- ------ -------- ------- ------ -------- ------- ------ Interest-bearing deposits with financial institutions 7,565 389 5.14 6,228 327 5.25 8,303 487 5.87 Federal funds sold 3,257 202 6.20 2,165 117 5.40 2,975 174 5.85 Securities: U.S. governments 60,996 3,640 5.97 58,780 3,323 5.65 69,318 4,412 6.36 State and municipals* 32,200 1,478 6.95 31,664 1,390 6.65 31,778 1,582 7.54 Other*** 123,977 7,718 6.23 129,609 7,917 6.11 122,888 7,542 6.14 Loans, net** 101,245 8,840 8.73 88,684 7,642 8.62 71,347 6,149 8.62 -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-earning assets* 329,240 22,267 6.99 317,130 20,716 6.76 306,609 20,346 6.90 Other assets: Cash and due from banks 7,486 9,582 8,932 Premises and equipment, net 4,652 3,300 3,177 Allowance for loan losses (1,159) (1,097) (1,021) Other assets 6,258 5,188 5,138 -------- -------- -------- Total average assets $ 346,477 334,103 322,835 ======== ======== ======== Interest-bearing liabilities: NOW, money market and savings deposits 117,556 3,195 2.72 117,455 3,337 2.84 115,940 3,666 3.16 Time deposits 162,297 8,298 5.11 154,685 7,839 5.07 150,890 7,870 5.22 Other borrowed funds 860 53 6.16 443 27 6.09 - - - -------- ------- ------ -------- ------- ------ -------- ------- ------ Total interest-bearing liabilities 280,713 11,546 4.11 272,583 11,203 4.11 266,830 11,536 4.32 Other liabilities and stockholders equity: Demand deposits 31,955 27,864 25,746 Other liabilities 2,538 2,117 1,606 Stockholders' equity 32,115 31,539 28,653 -------- -------- -------- Total average liabilities and stockholders equity $ 346,477 334,103 322,835 ======== ======== ======== Net interest income $10,721 9,513 8,810 ======= ======= ======= Net Interest spread* 2.88% 2.65 2.58 ====== ====== ====== Net interest margin* 3.49% 3.23 3.14 ====== ====== ======
* Interest yields have been presented on a tax equivalent basis using a 34% income tax rate. ** Non-accrual loans have been included in average balances, thereby reducing yields. *** Primarily consists of mortgage-backed securities and collateralized mortgage obligations. 7 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)
1997 over 1996 1996 over 1995 --------------------------------------------------------------------------------------- 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: Interest bearing deposits with financial institutions $ 70 (8) 62 (122) (38) (160) Federal funds sold 59 26 85 (47) (10) (57) Securities: U.S. governments 125 192 317 (670) (419) (1,089) State and municipals 24 64 88 9 (201) (192) Other* (337) 138 (199) 412 (37) 375 Loans, net 1,085 113 1,198 1,493 - 1,493 -------------- ------------- ------------- ------------- -------------- ------------- Total interest income 1,026 525 1,551 1,075 (705) 370 -------------- ------------- ------------- ------------- -------------- ------------- Interest-bearing liabilities: NOW, money market and savings deposits 3 (145) (142) 48 (377) (329) Time deposits 385 74 459 198 (229) (31) Other borrowed funds 25 1 26 27 27 -------------- ------------- ------------- ------------- -------------- ------------- Total interest expense 413 (70) 343 273 (606) (333) -------------- ------------- ------------- ------------- -------------- ------------- Net interest income $ 613 595 1,208 802 (99) 703 ============== ============= ============= ============= ============== =============
- -------------------- * 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. These accounts averaged approximately $117,556,000 in 1997 compared to $117,455,000 in 1996 and $115,940,000 in 1995. Time deposits, which consist of certificate of deposits and individual retirement accounts averaged $162,297,000 in 1997, $154,685,000 in 1996, and $150,890,000 in 1995. Average interest bearing deposits increased $7,713,000 from 1996 to 1997 and $5,753,000 from 1995 to 1996. Total interest expense increased slightly in 1997 from 1996 due primarily to volume. Total interest expense decreased slightly between 1996 and 1995 primarily due to rates. Longer-term interest rates moved down slightly during 1997 while short term rates increased slightly as the yield curve flattened. Interest rates increased sharply in the beginning of 1995 but then leveled and moved slightly downward toward the end of the year. The average interest rate on interest-bearing liabilities was 4.11% in 1997, 4.11% in 1996, 4.32% in 1995. 8 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 $3,099,0000 in 1997 compared to $2,524,000 in 1996 and $2,137,000 in 1995. The increase of approximately $575,000 in 1997 over 1996 was primarily the result of increases in service charge income on customer deposit accounts, as well as increases in trust fiduciary income and other fee income. The increase of approximately $387,000 in 1996 over 1995 was primarily the result of increases in service charge income on customer deposit accounts and increases in trust fiduciary income. NON-INTEREST EXPENSE - -------------------- Total non-interest expense was $9,265,000 in 1997 compared to $8,038,000 in 1996, and $7,556,000, in 1995. These increases are explained in further detail by category below. PERSONNEL EXPENSE. Personnel costs for 1997 were $5,601,000, $4,770,000 in 1996, and $4,205,000 in 1995. The increase of $831,000 over 1996 was due primarily to general increases in salaries and benefits, as well as a full year of expense related to the acquisition of the Waskom Bank. The increase due to the Waskom Bank was approximately $268,000. OCCUPANCY EXPENSE AND EQUIPMENT EXPENSE. Total occupancy and equipment expenses were $1,038,000 in 1997, $927,000 in 1996, and $781,000 in 1995. The increase in 1997 was due to remodeling at the main bank location at 201 W. Main Street, Henderson, Texas, the addition of a trust office in Corsicana, Texas, maintenance and service contracts, and the full year effect of the acquisition of the Waskom Bank. The increase due to the Waskom Bank was approximately $74,000. The increase in 1996 over 1995 was due to remodeling related expenses, property tax increases, increased depreciation due to document imaging as well as higher maintenance and service contract costs. REGULATORY ASSESSMENTS AND OTHER EXPENSES. Regulatory assessments were $127,000 in 1997 compared to $191,000 in 1996 and $407,000 in 1995. The decrease in regulatory assessments from 1996 to 1997 and from 1996 and 1995 was a result of decreases in FDIC assessments. In 1996 the Jefferson branch was charged a one-time assessment for former savings and loan deposits of approximately $73,000. Other expenses were $2,499,000 in 1997 compared to $2,150,000 in 1996, and $2,163,000 in 1995. The increase in 1997 from 1996 is due to legal fees, stationery and supplies, telephone, hotels and travel, educational meetings, special events, Pulse service fees, and the effects of a full year of other expenses related to the acquisition of the Waskom Bank. The increase due to the Waskom Bank was approximately $285,000. The decrease in 1996 from 1995 was the result of cost cutting efforts. Decreases occurred in legal fees, franchise tax, stationery and supplies, advertising, telephone, entertainment and education. Increases did occur in some categories such as other professional fees, insurance, fraud expense, and credit card and merchant processing expenses. PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses is the amount that is added to the allowance for loan losses through a charge against earnings to maintain an appropriate balance in the allowance with respect to outstanding loans. Management evaluates the adequacy of the level of the allowance for loan losses in relation to the level of the total loan portfolio and the elements of risk estimated to be present in an effort to afford adequate reserves to cover potential loan losses in the future. Due to average loan growth of approximately 14%, a provision of $330,000 was made to the allowance for loan losses during 1997. In 1996 management made a provision of $264,000 due to average loan growth of approximately 24%, and in 1995 management made a provision of $180,000 also due to rapid average loan growth of approximately 29%. See "Management's Discussion and Analysis of the Financial Condition and Results of Operations of the Company -- Allowance for Loan Losses" for more discussion relative to the provision for loan losses. INCOME TAXES - ------------ The Company's effective tax rate was 23.2% in 1997, 24.9% in 1996, and 20.1% in 1995. This effective rate is less than the statutory rate primarily because of tax-free income provided from state and municipal bonds, leases and obligations. As these tax-free investments, leases, and obligations mature and are replaced, the effective tax rate is affected. 9 FINANCIAL CONDITION - ------------------- The Company's balance sheet has emphasized management's philosophy of maximizing returns through securities. As detailed in the following Table III, securities have been the Company's largest asset for the last five years totaling 60.8%, 63.9%, 69.3%, 71.6%, and 71.2%, of total assets for the years 1997 through 1993, respectively. Total assets have grown from a December 31, 1993, level of $257,721,000 to $358,493,000 at December 31, 1997. The increase in total assets that resulted from the Waskom transaction in 1996 was approximately $25,700,000. The increase in loans that resulted from the Waskom transaction was approximately $5,600,000. Approximately $4,600,000 increase in loans was recognized from the branches acquired in 1994. Total assets at year-end 1994 increased approximately $55,317,000 from 1993 total assets of $257,721,000. The increase was due to the Jefferson acquisition and NationsBank acquisitions which accounted for approximately $14,556,000 and $45,676,000 in total assets, respectively. Table III - Condensed Balance Sheet Information (dollars in thousands)
At December 31, ------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------------ Assets: Interest-bearing deposits with financial institutions $ 8,212 3,892 2,642 3,661 10,896 Federal funds sold 5,040 1,150 - 2,000 - Securities 217,973 228,155 226,450 224,244 183,419 Loans, net 106,061 100,825 80,499 63,784 51,552 Cash and due from banks 8,886 12,413 8,916 8,688 6,735 Other 12,321 10,395 8,372 10,661 5,119 ---------- ---------- ---------- ---------- ----------- Total assets $ 358,493 356,830 326,879 313,038 257,721 ========== =========== ========== ========== =========== Liabilities: Demand deposits-non-interest bearing $ 32,860 31,785 28,435 25,164 21,645 Interest-bearing demand and savings deposits 126,016 120,468 114,295 116,259 99,640 Time deposits 163,231 168,420 150,881 144,099 105,867 ---------- ---------- ---------- ---------- ----------- Total deposits 322,107 320,673 293,611 285,522 227,152 Other liabilities 3,657 4,169 2,062 1,369 1,409 ---------- ---------- ---------- ---------- ----------- Total liabilities 325,764 324,842 295,673 286,891 228,561 Stockholders' equity 32,729 31,988 31,206 26,147 29,160 ---------- ---------- ---------- ---------- ----------- Total liabilities and stockholders' equity $ 358,493 356,830 326,879 313,038 257,721 ========== ========== ========== ========== ===========
LIQUIDITY - --------- The Company invests in 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. 10 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 by charging fees and service charges as well as the net interest earned from the investment of customer deposits. Net cash provided by operating activities was $3,341,000 in 1997, $4,819,000 in 1996 and $3,942,000 in 1995. INVESTING ACTIVITIES - -------------------- The Company invests available funds primarily in securities and loans to customers. Funds not otherwise used are invested in federal funds sold to Texas Independent Bank and First USA Bank, and interest-bearing demand accounts 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. 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, 1997
Over 1 - Month 3 - Month 6 - Month 1 - Year 1 - Year Total Earning assets: Loans $14,560 3,639 3,475 6,295 80,037 108,006 Securities 32,333 9,457 5,155 27,010 144,018 217,973 Other earning assets 12,359 - 297 391 205 13,252 --------- --------- --------- -------- -------- ------- 59,252 13,096 8,927 33,696 224,260 339,231 Funding Source- Interest bearing deposits 151,901 28,253 25,238 48,532 35,323 289,247 --------- --------- --------- -------- -------- ------- Repricing/Maturity Gap: Period $ (92,649) $ (15,157) $ (16,311) $(14,836) $188,937 ========= ========= ========= ======== ======== Cumulative (92,649) (107,806) (124,117) (138,953) 49,984 ========= ========= ========= ======== ======== Period/Total Earning Assets (27.31%) (4.47%) (4.81%) (4.37%) 55.70%
11 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. 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 contractual 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, 1997. The expected maturity categories take into consideration historical prepayment speeds as well as actual amortization of principal and does 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, 1997. 12 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, 1997:
Weighted Average Over Fair Effective Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield ASSETS Securities Fixed Rate 35,006 61,757 23,084 9,934 5,938 12,833 148,552 148,917 5.93% Floating Rate 7,980 2,689 7,497 7,880 5,093 37,914 69,053 69,053 6.29% Equity Securities 368 368 368 5.69% ------------------------------------------------------------------------------ Total Securities 42,986 64,446 30,581 17,814 11,031 51,115 217,973 218,338 Loans Fixed Rate 37,059 18,460 16,459 6,597 7,053 7,499 93,127 89,033 9.69% Floating Rate 7,015 667 1,309 1,052 692 4,144 14,879 14,879 9.08% ------------------------------------------------------------------------------ Total 44,074 19,127 17,768 7,649 7,745 11,643 108,006 103,912 LIABILITIES Savings, NOW, and Money Market Deposits - - - - - 126,016 126,016 126,016 2.72% Certificates of 143,378 13,880 4,052 735 1,186 - 163,231 163,872 4.58% Deposit Short-term Borrowings - 844 - - - - 844 844 5.61%
13 LOANS - ----- The Company's loan portfolio consists primarily of real estate, commercial and industrial, and consumer loans. Total loans were $108,006,000 at December 31, 1997 compared to $103,185,000 at December 31, 1996 and $82,687,000 at December 31, 1995. As can be seen in Table V, a strong increase of approximately 17.2% in commercial and industrial loans, a moderate increase of approximately 8.5% in real estate loans occurred while installment loans decreased a moderate 9.7% in 1997. The increases in 1996 from 1995 were the result of strong loan demand and an approximately $6,100,000 increase due to the acquisition of Waskom. Increases in loans not related to the acquisition of Waskom were also the result of marketing efforts aimed at real estate and installment customers. The increase in 1995 is the result of increased loan demand, marketing efforts and branch acquisitions. The increase in 1994 over 1993 is partially attributable to the acquisition of the Jefferson Branch, and the NationsBank Branches and an increase in lease financing receivables and tax-exempt obligations. At December 31, 1997, real estate mortgage loans comprised 46.4% of the loan portfolio, compared to 44.8% and 43.7% at December 31, 1996, and December 31, 1995, respectively. Table VI - Loan Information (dollars in thousands) - Outstanding Balances at:
December 31, ------------------------------------------------------------------- Types of Loans 1997 1996 1995 1994 1993 - -------------- ------------- ------------- ------------ ------------- ------------ Commercial and industrial $ 27,973 23,863 22,444 18,410 14,787 Real estate - mortgage 50,122 46,211 34,009 28,683 24,404 Installment 29,911 33,111 26,234 18,123 13,956 ------------- ------------- ------------ ------------- ------------ Total $ 108,006 103,185 82,687 65,216 53,147 ============= ============= ============ ============= ============
Approximately 13% 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, 1997: Table VII - Loan Interest and Maturity Information (dollars in thousands)
At December 31, 1997 ----------------------------------------------------------- Commercial Real and Industrial Estate Installment Totals ---------------- ------------- -------------- ------------ Fixed rate loans: Mature within one year $ 5,638 3,821 5,614 15,073 Mature in one to five years 10,321 31,335 23,104 64,760 Mature after five years 3,600 9,653 505 13,758 ---------------- ------------- -------------- ------------ Total fixed rate loans 19,559 44,809 29,223 93,591 Floating rate loans: Mature within one year 5,326 1,234 453 7,013 Mature in one to five years 1,677 1,807 235 3,719 Mature after five years 1,411 2,272 - 3,683 ---------------- ------------- -------------- ------------ Total floating rate loans 8,414 5,313 688 14,415 Total loans: Mature within one year 10,964 5,055 6,067 22,086 Mature in one to five years 11,998 33,142 23,339 68,479 Mature after five years 5,011 11,925 505 17,441 ---------------- ------------- -------------- ------------ Total loans $ 27,973 50,122 29,911 108,006 ================ ============= ============== ============
14 ALLOWANCE FOR LOAN LOSSES - ------------------------- In 1997, 1996 and 1995 respectively the Company made provisions to increase the allowance for loan losses by $330,000, $264,000 and $180,000. The larger provision during 1997 was made due to continued growth in loan and lease balances. The acquisition of the Waskom Bank accounted for approximately $24,000 of the increase in the allowance for loan losses in 1996. As in 1997, increases in 1996 and 1995 were due to continued increases in loan and lease balances. In 1997 the Company experienced net charge offs of $227,000 compared to net charge offs in 1996 of $161,000. The balance in allowance for loan losses at December 31, 1997 was $1,249,000 compared to the December 31, 1996 balance of $1,146,000 and the December 31, 1995 balance of $1,019,000. The allowance for loan losses at December 31, 1997, 1996 and 1995, was 1.16%, 1.11%, and 1.23%, of outstanding loans, respectively. By its nature, the process through which management determines the appropriate level of the allowance requires considerable judgment. The determination of the necessary allowance and, correspondingly, the provision for loan losses, involves assumptions about 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, 1997 is adequate to cover losses inherent in its loan portfolio. A migration analysis and an internal classification system for loans also helps identify potential problems. 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. 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 which 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 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. Based on historical trends, the Company estimates that approximately $319,000 will be charged off in the year ending December 31, 1998. The breakdown of this estimate is as follows: $39,000 in commercial and industrial, $30,000 in real estate - mortgage, and $250,000 in installment. 15 Table VIII - Analysis of Allowance of Loan Losses (dollars in thousands)
Years Ended December 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------ ------------- ------------ ------------- Balance at beginning of period $ 1,146 1,019 997 1,014 1,624 Charge-offs: Commercial and industrial 57 20 90 27 148 Real estate mortgage - 2 15 1 - Installment loans 289 223 157 33 67 ------------- ------------ ------------- ------------ ------------- Total charge-offs 347 243 247 62 230 ------------- ------------ ------------- ------------ ------------- Recoveries: Commercial and industrial 49 28 40 157 70 Real estate mortgage - - - - - Installment loans 71 54 49 38 50 ------------- ------------ ------------- ------------ ------------- Total recoveries 120 82 89 195 120 ------------- ------------ ------------- ------------ ------------- Net charge-offs (recoveries) 227 161 158 (133) 110 Additions charged (credited) to operations 330 264 180 (150) (500) Addition due to acquisition - 24 - - - ------------- ------------ ------------- ------------ ------------- Balance at end of period $ 1,249 1,146 1,019 997 1,014 ============= ============ ============= ============ ============= Average loans outstanding during the period* $ 101,245 88,684 71,347 55,516 52,757 Gross charge-offs as a percent of average loans* 0.34% 0.29 0.35 0.11 0.44 Recoveries as a percent of gross charge-offs 34.58% 33.75 36.03 314.52 52.17 Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period* 0.22% 0.19 0.22 (0.24) 0.21
* Net of unearned income Table IX - Allocation of Allowance for Loan Losses (dollars in thousands)
As of December 31, ------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ----------------- ------------------ ----------------- ----------------- ----------------- Reserve Reserve Reserve Reserve Reserve Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- Commercial and industrial $ 619 49.5% $ 359 23.1% $ 468 27.2% $ 239 29.7% $ 343 27.8% Real estate - mortgage 191 15.3 81 44.8 112 41.1 123 43.7 122 45.9 Installment 413 33.1 420 32.1 366 31.7 86 26.6 113 26.3 Unallocated 26 2.1 286 N/A 73 N/A 549 N/A 436 N/A -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- $ 1,249 100.0% $ 1,146 100.0% $1,019 100.0% $ 997 100.0% $ 1,014 100.0% ======== ======== ========= ======== ======== ======== ======== ======== ======== ========
*Represents the ratio of each loan category to gross loans (including unearned interest) 16 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 $172,000 in 1997, $147,000 in 1996, and $99,000 in 1995. The increase from 1996 to 1997 was the result of one loan being moved to nonaccrual status. The increase in nonaccrual loans in 1996 was the result of the Waskom Bank acquisition. The decrease in 1995 was the result of one nonaccrual loan being paid off and reductions by payments received on loans. 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, 1997, the Company had no restructured loans. Loans past due over ninety days and still accruing interest were $20,000 at December 31, 1997, a decrease from the December 31, 1996 amount of $33,000. Table X - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured Loans (dollars in thousands)
At December 31, ------------------------------------------------------------------- 1997 1996 1995 1994 1993 ------------- ------------ ------------- ------------ ------------- Nonaccrual loans $ 172 147 99 195 233 Restructured loans - - - - - Other impaired loans - - - - - Other real estate 186 151 - - 4 ------------- ------------ ------------- ------------ ------------- Total nonperforming assets 358 298 99 195 237 ============= ============ ============= ============ ============= Allowance for loan loss to nonperforming assets 348.88% 384.90 1029.29 511.28 427.85 Nonperforming assets as a per- centage of stockholders' equity 1.1% .9 .3 .7 .8 Loans past due 90+ days and still accruing $ 20 $ 33 41 33 33 ============= ============ ============= ============ ============= Other potential problem loans - - - - - ============= ============ ============= ============ ============= Income that would have been recorded in accordance with original terms $ 5 7 5 20 18 Less income actually recorded - 3 - - - ------------- ------------ ------------- ------------ ------------- Loss of income $ 5 4 5 20 18 ============= ============ ============= ============ =============
17 SECURITIES - ---------- The Investment Committee, under the guidance of the Company's Investment Policy, assesses the short and long-term needs of the Company after consideration of loan demand, interest rate factors, and prevailing market conditions. Recommendations for purchases and other transactions are then made considering safety, liquidity, and maximization of return to the Company. Management determines the proper classification of securities at the time of purchase. Securities that management does not intend to hold to maturity or that might be sold under certain circumstances are classified as available for sale. 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 85% of the total comprised of U.S. Treasury, federal agency securities, and agency issued mortgage securities. Treasury holdings are currently positioned in a ladder structure. Three year treasury bonds are purchased quarterly, held for two years, then sold with one year left to maturity to take advantage of the slope in the yield curve. The collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS) held by the Company are backed by agency collateral which consists of loans issued by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage Corporation (FNMA), and the Government National Mortgage Association (GNMA) with a blend of fixed and floating rate coupons. 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 which 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. Floating rate securities make up 77% of the CMO portfolio. Support and liquidity classes with longer average lives and floating rate coupons are a relatively small portion of the portfolio. To maximize after-tax income, investments in tax-exempt municipal securities are utilized, but with somewhat longer maturities. At December 31, 1997, the Company's level of structured notes was insignificant. Securities are the Company's single largest interest-earning asset representing approximately 61%, 64%, and 69% of total assets at December 31, 1997, 1996, and 1995 respectively. The investment portfolio totaled $218.0 million at December 31, 1997, down from $228.2 million at December 31, 1996, and from $226.4 million at December 31, 1995. 18 The various types of securities held by the Company are listed below in Table XI: Table XI - Investment Securities Information (dollars in thousands)
Held to Maturity Portfolio At December 31, --------------------------------------------- (Carried at Amortized Cost) 1997 1996 1995 ------------- ------------- ------------- U.S. Treasuries $ 7,038 7,062 7,087 U.S. Government Agencies 10,144 10,215 16,293 State and Municipal 32,213 34,069 32,511 Corporate securities - 2,508 2,541 ------------- ------------- ------------- 49,395 53,854 58,432 Mortgage-backed securities and collateralized mortgage obligations 19,838 28,561 24,318 ------------- ------------- ------------- Total Held to Maturity $ 69,233 82,415 82,750 ============= ============= ============= Available for Sale Portfolio At December 31, --------------------------------------------- (Carried at Market Value) 1997 1996 1995 ------------- ------------- ------------- U.S. Treasuries $ 60,282 54,115 56,867 U.S. Government Agencies 20,029 17,716 21,271 Corporate securities - 1,004 3,034 Other securities 368 348 348 ------------- ------------- ------------- 80,679 73,183 81,520 Mortgage-backed securities and collateralized mortgage obligations 68,061 72,557 62,180 ------------- ------------- ------------- Total Available for Sale $148,740 145,740 143,700 ============= ============= =============
19 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) Held to Maturity Portfolio (Carried at amortized cost):
As of December 31, 1997 Matures in Matures in Matures in Matures in Amortizing 1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities Total ----------------- ---------------- ----------------- ---------------- ----------------- Book Market Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Value Value -------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- ------- U.S Treasury and government agencies $ 4,992 6.82% 12,190 5.60 - - - - - - 17,182 17,199 State and Municipal* 6,543 6.57 13,461 6.66 8,116 7.65 4,093 7.47 - - 32,213 32,573 Corporate securities - - - - - - - - - - - - -------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- ------- 11,535 6.68 25,651 6.16 8,116 7.65 4,093 7.47 - - 49,395 49,772 Mortgage-backed securities - - - - - - - - 19,838 6.11 19,838 19,826 -------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- ------- Total $11,535 6.68 25,651 6.16 8,116 7.65 4,093 7.47 19,838 6.11 69,233 69,598 ======== ======== ======== ======= ======== ======== ======== ======= ======== ======== ======= =======
Available for Sale Portfolio (Carried at Market Value):
As of December 31, 1997 ----------------------- Matures in Matures in Matures in Matures in Amortizing 1 Year of 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 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------- ------- U.S Treasury and government agencies $18,990 5.21 61,005 6.05 - - - - - - 79,995 80,311 Corporate - - - - - - - - - - - - securities Other securities - - 368 5.70 - - - - - - 368 368 ------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- 18,990 5.21 61,373 6.05 - - - - - - 80,363 80,679 Mortgage-backed securities and collateralized mortgage obligations - - - - - - - - 68,885 6.18 68,885 68,061 ------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- ------- Total $18,990 5.21 61,373 6.05 - - - - 68,885 6.18 149,248 148,740 ======= ======= ======= ======= ====== ======= ======= ======= ====== ======= ======= =======
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate. 20 DEPOSITS - -------- Total deposits at December 31, 1997 were $322.1 million, an increase of approximately $1.4 million from the December 31, 1996 deposit total of $320.7 million. Deposits totaled approximately $293.6 million at December 31, 1995. Approximately $21.6 million of the increase from 1995 to 1996 was a result of the Waskom Bank acquisition. Total average deposits in 1997 were $311,808,000, an increase of $11,804,000 over the December 31, 1996 total of $300,004,000. Average deposits at December 31, 1995 were $292,576,000. The majority of the increase from 1996 to 1997 and from 1995 to 1996 was a result of the Waskom Bank acquisition. 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, ----------------------------------------------------------------------------------------------- 1997 1996 1995 ------------------------------ ----------------------------- ------------------------------ Average Interest Average Average Interest Average Average Interest Average Balances Expense Rate Balances Expense Rate Balances Expense Rate Non-interest-bearing demand $ 31,955 - -% $ 27,864 - -% $ 25,746 - -% Interest-bearing demand 73,665 1,910 2.59 72,194 2,015 2.79 68,590 2,210 3.22 Savings 9,419 250 2.65 8,442 226 2.68 7,756 212 2.73 Money market accounts 34,472 1,035 3.00 36,819 1,096 2.98 39,594 1,244 3.14 Time 162,297 8,298 5.11 154,685 7,839 5.07 150,890 7,870 5.22 -------- -------- ------- -------- -------- ------- -------- -------- ------- Total $311,808 11,493 4.11% $300,004 11,176 4.11% $292,576 11,536 4.32% ======== ======= ======= ======== ======== ======= ======== ======== =======
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, 1997, 52.1% of total average deposits were time deposits compared to 52.5%, and 51.4% at December 31, 1996 and 1995, respectively. Included in the table below are time deposits at December 31, 1997, with balances of $100,000 or more. These deposits represent 32.6% of total time deposits and, as can be seen in Table XIII, the majority of such deposits will mature within three 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, 1997
Maturity from Percent of December 31, 1997 Total ----------------- ------------ Three months or less $ 34,509 64.83% Within months four through six 3,483 6.54 Within months seven through twelve 12,535 23.55 Over one year 2,703 5.08 ------------- ------------- Total $ 53,230 100.00% ============= =============
21 SHORT-TERM BORROWINGS - --------------------- As of December 31, 1997, the Company's short term borrowings consisted of notes payable issued as a result of the Waskom acquisition. The Waskom notes payable plus accrued interest totaled $894,000 at December 31, 1997 and were accruing interest at the rate of 6.10%. As of March 15, 1998, the balance of the Waskom notes payable had been reduced to $449,000 including accrued interest. The rate of interest on these notes payable changed from 6.10% to 5.61% on September 17, 1997 and will remain at this rate for a period of one year. 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. CAPITAL RESOURCES - ----------------- The Company's shareholders' equity of $32,729,000 at December 31, 1997 remains at a level considered to be adequate by management. Profits in excess of dividends paid to shareholders are reflected in the increase in retained earnings from 1996. Approximately $368,000 of the increase in shareholder equity from 1996 to 1997 is due to an improvement in the unrealized gain or loss on available for sale securities. The Company had a net unrealized loss on available for sale securities of approximately $703,000 at December 31, 1996 compared to a loss of approximately $335,000 at December 31, 1997. The decrease in the net unrealized loss on available for sale securities was caused by a decline in long term interest rates which have a positive impact on the market price of many of the Company's investment securities. Shareholders' equity was $31,988,000 at December 31, 1996 and $31,206,000 at December 31, 1995. 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 new 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. At that time, banks were 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, 1997, Citizens Bank had Tier 1 and total capital ratios of 23.7% and 24.7% respectively. At December 31, 1996, Citizens Bank had a Tier 1 and total capital ratio of 23.5% and 24.4% respectively. At December 31, 1995, Citizens Bank's Tier 1 and total capital ratios were 24.2%, and 25.0% respectively. At December 31, 1997, the Waskom Bank had Tier 1 and total capital ratios of 27.5% and 28.0% respectively. At December 31, 1996, the Waskom Bank had Tier 1 and total capital ratios of 25.3% and 25.5% 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 is comprised of total assets less the intangible assets that are deducted from Tier 1 capital. As of December 31, 1997, Citizens Bank's leverage ratio was 9.1%, compared to 9.0% as of December 31, 1996 and 9.5% as of December 31, 1995. As of December 31, 1997, the Waskom Bank's leverage ratio was 9.1%, compared to 8.9% at December 31, 1996. 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, 1997, 1996 and 1995, Citizens Bank met all regulatory requirements to be deemed "well capitalized." As of December 31, 1997 and 1996, the Waskom Bank met all regulatory requirements to be deemed "well capitalized." 22 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 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. EMPLOYEES - --------- At December 31, 1997, the Company employed approximately 144 full-time and 20 part-time employees. Management highly values and respects its excellent relationship with its employees. COMPETITION - ----------- The Company services 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, Malakoff and Chandler, which includes Henderson County, Waskom, which includes Harrison County, and Corsicana which includes Navarro County. The activities in which the Company engages are competitive. Each activity engaged in 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 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 1998 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, reduce its overhead by utilization of economies of scale, coordinate its branch operations, maintain deposits in a historically low interest rate environment, stay abreast of the latest technological changes, preserve its strong dividend payout, and increase 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. 23 RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------- The following new accounting pronouncements were issued during 1997 together with the expected impact on the Company. FASB 128, Earnings per Share - This Statement specifies the computation, presentation, and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. Due to the relatively simple capital structure of the Company, there was no effect from the implementation of this Statement. FASB 129, Disclosure of Information about Capital Structure - This Statement establishes standards for disclosing information about an entity's capital structure. Due to prior disclosures made by the Company, there are no new disclosures as a result of implementation of this Statement. FASB 130, Reporting Comprehensive Income - This Statement requires the Company to report both comprehensive income and net income for all periods presented beginning with the quarter ending with March 31, 1998. The Company plans to implement this Statement in 1998. 24 Independent Auditors' Report ---------------------------- The Board of Directors and Stockholders Henderson Citizens Bancshares, Inc.: We have audited the accompanying consolidated balance sheets of Henderson Citizens Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP KPMG PEAT MARWICK LLP Shreveport, Louisiana March 2, 1998 25 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 (dollars in thousands, except per share amounts)
Assets 1997 1996 ------ ---- ---- Cash and due from banks $ 8,886 12,413 Interest-bearing deposits with financial institutions 8,212 3,892 Federal funds sold 5,040 1,150 Securities: Held to maturity, approximate market values of $69,598 in 1997 and $82,465 in 1996 69,233 82,415 Available for sale 148,740 145,740 ------- ------- 217,973 228,155 Loans, net 106,061 100,674 Premises and equipment, net 5,209 3,751 Accrued interest receivable 3,311 3,449 Other assets 3,801 3,346 ------- ------- $ 358,493 356,830 ======= ======= Liabilities and Stockholders' Equity ------------------------------------ Deposits: Demand - noninterest-bearing $ 32,860 31,785 NOW accounts 79,810 74,984 Money market and savings 46,206 45,484 Certificates of deposit and other time deposits 163,231 168,420 ------- ------- Total deposits 322,107 320,673 Accrued interest payable 1,105 1,144 Other liabilities 2,552 3,025 ------- ------- 325,764 324,842 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 Capital surplus 5,400 5,400 Undivided profits 18,875 16,825 Net unrealized losses on securities available for sale, net of income taxes (335) (703) ------- ------- 34,740 32,322 Less treasury stock, 142,506 shares in 1997 and 29,700 shares in 1996 at cost (2,011) (334) ------- ------- Total stockholders' equity 32,729 31,988 ------- ------- Commitments and contingencies $ 358,493 356,830 ======= =======
See accompanying notes to consolidated financial statements. 26 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1997, 1996, and 1995 (dollars in thousands, except per share amounts)
1997 1996 1995 ---- ---- ---- Interest income: Loans $ 8,840 7,642 6,149 Investment securities: Taxable - available-for-sale 8,829 8,058 7,693 Taxable - held-to-maturity 2,529 3,182 4,261 Tax-exempt 1,478 1,390 1,582 Federal funds sold 202 117 174 Interest-bearing deposits with financial institutions 389 327 487 ------ ------ ------ Total interest income 22,267 20,716 20,346 ------ ------ ------ Interest expense: Deposits: NOW accounts 1,910 2,015 2,210 Money market and savings 1,285 1,322 1,456 Certificates of deposit and other time deposits 8,298 7,839 7,870 Other borrowed funds 53 27 -- ------ ------ ------ Total interest expense 11,546 11,203 11,536 ------ ------ ------ Net interest income 10,721 9,513 8,810 Provision (reduction of allowance) for loan losses 330 264 180 ------ ------ ------ Net interest income after provision (reduction of allowance) for loan losses 10,391 9,249 8,630 ------ ------ ------ Other income: Net gains (losses) on securities transactions 191 719 (128) Income from fiduciary activities 753 632 587 Service charges, commissions, and fees 1,440 1,148 934 Other 906 744 616 ------ ------ ------ Total other income 3,290 3,243 2,009 ------ ------ ------ Other expenses: Salaries and employee benefits 5,601 4,770 4,205 Occupancy and equipment 1,038 927 781 Regulatory assessments 127 191 407 Other 2,499 2,150 2,163 ------ ------ ------ Total other expenses 9,265 8,038 7,556 ------ ------ ------ Income before income tax expense 4,416 4,454 3,083 Income tax expense 1,026 1,110 619 ------ ------ ------ Net income $ 3,390 3,344 2,464 ====== ====== ====== Net income per common share $ 1.61 1.55 1.14 ====== ====== ======
See accompanying notes to consolidated financial statements. 27 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1997, 1996, and 1995 (dollars in thousands, except per share amounts)
NET UNREALIZED GAINS (LOSSES) TOTAL ON SECURITIES STOCK- PREFERRED COMMON CAPITAL UNDIVIDED AVAILABLE TREASURY HOLDERS' STOCK STOCK SURPLUS PROFITS FOR SALE STOCK EQUITY ----- ----- ------- ------- -------- ----- ------ Balances at December 31, 1994 $ -- 10,800 5,400 13,777 (3,830) -- 26,147 Net income -- -- -- 2,464 -- -- 2,464 Cash dividends ($0.64 per share) -- -- -- (1,382) -- -- (1,382) Net change in unrealized gains on securities available for sale -- -- -- -- 3,977 -- 3,977 ------ ------ ----- ------ ------ ------ ------ Balances at December 31, 1995 -- 10,800 5,400 14,859 147 -- 31,206 Net income -- -- -- 3,344 -- -- 3,344 Cash dividends ($0.64 per share) -- -- -- (1,378) -- -- (1,378) Net change in unrealized losses on securities available for sale -- -- -- -- (850) -- (850) Purchase of 29,700 shares of treasury stock -- -- -- -- -- (334) (334) ------ ------ ----- ------ ------ ------ ------ Balances at December 31, 1996 -- 10,800 5,400 16,825 (703) (334) 31,988 Net income -- -- -- 3,390 -- -- 3,390 Cash dividends ($0.64 per share) -- -- -- (1,340) -- -- (1,340) Net change in unrealized losses on securities available for sale -- -- -- -- 368 -- 368 Purchase of 112,806 shares of treasury stock -- -- -- -- -- (1,677) (1,677) ------ ------ ----- ------ ------ ------ ------ Balances at December 31, 1997 $ -- 10,800 5,400 18,875 (335) (2,011) 32,729 ====== ====== ===== ====== ====== ====== ======
See accompanying notes to consolidated financial statements. 28 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996, and 1995 (dollars in thousands)
1997 1996 1995 ---- ---- ---- Operating activities: Net income $ 3,390 3,344 2,464 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization (accretion) of premium (discount) on securities 352 589 (34) Net (gains) losses on securities transactions (191) (719) 128 Provision (reduction of allowance) for loan losses 330 264 180 Depreciation and amortization 437 375 421 Decrease (increase) in accrued interest receivable 138 624 (303) Decrease (increase) in other assets (618) (74) 460 Increase (decrease) in accrued interest payable (39) (14) 222 Increase (decrease) in other liabilities (458) 430 404 ------- ------- ------- Net cash provided by operating activities 3,341 4,819 3,942 ------- ------- ------- Investing activities: Proceeds from sales of available-for-sale securities 31,909 55,669 15,700 Proceeds from maturities, paydowns, and calls of available-for-sale securities 18,452 25,473 31,372 Proceeds from maturities, paydowns, and calls of securities held to maturity 19,722 15,995 20,636 Purchases of available-for-sale securities (52,634) (74,142) (25,676) Purchases of securities held-to-maturity (6,871) (11,291) (38,307) Net increase in loans (5,869) (15,051) (16,895) Proceeds from sales, premises and equipment and other real estate 157 -- -- Purchases of bank premises and equipment (1,941) (756) (270) Cash received from acquisitions -- 1,544 -- ------- ------- ------- Net cash used by investing activities 2,925 (2,559) (13,440) ------- ------- ------- Financing activities: Net increase (decrease) in deposits 1,434 5,349 8,089 Cash dividends paid (1,340) (1,378) (1,382) Purchase of treasury stock (1,677) (334) -- ------- ------- ------- Net cash provided (used) by financing activities (1,583) 3,637 6,707 ------- ------- ------- Increase (decrease) in cash and cash equivalents 4,683 5,897 (2,791) Cash and cash equivalents at beginning of year 17,455 11,558 14,349 ------- ------- ------- Cash and cash equivalents at end of year $ 22,138 17,455 11,558 ======= ======= =======
See accompanying notes to consolidated financial statements. 29 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1996, and 1995 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ BUSINESS -- Henderson Citizens Bancshares, Inc. (the "Company") through its indirect subsidiaries, Citizens National Bank, Henderson, Texas and First State Bank, Waskom, Texas (the "Banks"), provides a full range of banking services to individual and corporate customers in east Texas. The Company and the Banks are subject to regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities. BASIS OF PRESENTATION -- The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and income and expenses for the period. CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest- bearing deposits with financial institutions, and federal funds sold. Generally, federal funds are sold for one-day periods. SECURITIES -- The Company accounts for its debt and marketable equity securities under the provisions of Statement of Financial Accounting Standards No. 115 (Statement 115), Accounting for Certain Investments in Debt and Equity Securities. Under Statement 115, the Company classifies its debt and marketable equity securities in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary is charged to operations, resulting in the establishment of a new cost basis for the security. (Continued) 30 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Premiums and discounts are amortized or accreted either over the life of the related security as an adjustment to yield using the effective interest method, or are periodically adjusted to reflect the actual payment experience on the underlying mortgage loans, which does not materially differ from the interest method. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific identification method for determining the cost of securities sold. LOANS -- Interest on real estate, commercial, and industrial loans is accrued as earned. Interest on installment loans is deferred and recognized under the sum-of-the-digits method, which generally results in level rates of return on principal balances outstanding. A loan is considered impaired when based upon current information, it is probable that a creditor will be unable to collect amounts due. If a loan is impaired, then impairment is measured by (1) the present value of expected future cash flows discounted at the loan's original effective interest rate, or (2) the market price of impaired loans, or (3) the fair value of collateral. The accrual of income on loans is generally discontinued and all interest income previously accrued and unpaid is deducted from income when a loan becomes more than ninety days delinquent, or when certain factors indicate reasonable doubt as to the timely collectibility of all amounts due. A loan may remain on accrual status if it is in the process of collection and is either well secured or guaranteed. Generally, loans on which the accrual of income has been discontinued are designated as nonaccruing loans, and includes all loans classified as "impaired" loans. Generally, nonaccruing loans are returned to an accrual status only when none of the principal or interest is due and unpaid and the full collectibility of the outstanding loan balance is reasonably assured. Cash receipts on nonaccruing loans are generally applied to the principal balance until the remaining balance is considered fully collectible. ALLOWANCE FOR LOAN LOSSES -- The allowance for loan losses is maintained at a level believed adequate by management to absorb potential loan losses. Management's determination of the adequacy of the allowance is based on an evaluation of the relative risks inherent in the loan portfolio, taking into consideration the nature, volume, and quality of the portfolio, specific problem loans, past credit loss experience, current and future economic conditions, results of internal review procedures, and other relevant factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans. The provision for loan losses is charged to expense, and loans charged off, net of recoveries, are charged directly to the allowance. While the Company uses available information to recognize losses on loans, future changes to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company (Continued) 31 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements to record changes to the allowance based on their judgments about information available to them at the time of their examination. PREMISES AND EQUIPMENT -- 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. Maintenance and repairs are charged to operating expense, and renewals and betterments are capitalized. Gains or losses on dispositions are reflected currently in the statement of income. INCOME TAXES -- The Company uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. NET INCOME PER COMMON SHARE -- Net income per common share is calculated based on the weighted average number of shares outstanding during the year. The weighted average common shares outstanding were 2,109,747 in 1997, 2,153,333 in 1996 and 2,160,000 in 1995. In February 1997, the Financial Accounting Standards Board issued Statement 128, Earnings Per Share, effective for 1997. The adoption of this Statement had no impact on the Company's calculation or presentation of earnings per share. GOODWILL -- Goodwill, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally five to fifteen years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the CompanyOs average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. RECLASSIFICATIONS -- Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. (2) ACQUISITIONS ------------ On September 17, 1996, the Company acquired substantially all of the outstanding shares of Waskom Bancshares, Inc. and its majority owned subsidiary, First State Bank, Waskom, Texas. Pursuant to the purchase agreement, the Company paid $3,463,000, $1,511,000 of (Continued) 32 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements which was paid as a note payable due upon demand having an interest rate of 6.10%. This transaction resulted in approximately $1,337,000 in goodwill, which is being amortized over fifteen years on a straight-line basis. The transaction was accounted for using the purchase method of accounting. This acquisition resulted in an increase in total assets of $24,075,000 and total deposits of $21,714,000. Operations of Waskom Bancshares, Inc. and First State Bank prior to the acquisition are not included in these consolidated financial statements. The following unaudited pro forma information reflects the results of operations for the years ended December 31, 1996 and 1995, as though this acquisition had occurred at the beginning of 1995 (in thousands of dollars, except per share amounts):
1996 1995 ---- ---- Total interest income $ 21,836 21,945 ====== ====== Net interest income $ 10,080 9,642 ====== ====== Net income $ 3,457 2,630 ====== ====== Net income per share $ 1.61 1.22 ====== ======
(3) CASH AND DUE FROM BANKS ----------------------- The Banks are a member of the Federal Reserve System and are required to maintain reserve balances in accordance with Federal Reserve Bank requirements. Such reserve requirements totaled $794,000 and $998,000 at December 31, 1997 and 1996, respectively. (4) REGULATORY MATTERS ------------------ Applicable federal and state regulations impose restrictions on the amounts of dividends that may be declared by the Banks. In addition to the formal statutes and regulations, regulatory authorities also consider the adequacy of the Banks' total capital in relation to its assets, deposits, and other such items. National and state banks are generally required to obtain approval of the regulatory agencies if dividends declared in any year exceed the profits of that year combined with the net retained profits of the preceding two years. For 1997, the Banks will be required to obtain approval of the regulatory agencies before they can declare any dividends which exceed 1998 net income by approximately $799,000. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was signed into law on December 19, 1991. The prompt corrective actions of the 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 (Continued) 33 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements defined capital category and become increasingly more severe as an institutions 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 considered "well capitalized," an institution is required to have at least a 5% leverage ratio, a 6% Tier I 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. At December 31, 1997, Citizens National Bank, Henderson, Texas' leverage ratio was 9.1%, Tier I risk-based ratio was 23.5%, and total risk-based ratio was 24.4% and First State Bank, Waskom, Texas' leverage ratio was 9.1%, Tier I risk-based ratio was 27.5%, and total risk-based ratio was 28.0%. (5) SECURITIES ---------- The amortized cost (carrying value) and approximate fair value of securities held-to-maturity at December 31, 1997 and 1996, are summarized as follows (in thousands of dollars):
December 31, 1997 ------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 7,038 39 (27) 7,050 U.S. government agencies 10,144 14 (9) 10,149 State and municipal 32,213 412 (52) 32,573 Mortgage-backed securities and collateralized mortgage obligations 19,838 52 (64) 19,826 ------ --- ---- ------ $ 69,233 517 (152) 69,598 ====== === ==== ======
(Continued) 34
December 31, 1996 --------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 7,062 72 (58) 7,076 U.S. government agencies 10,215 67 (39) 10,243 State and municipal 34,069 263 (121) 34,211 Mortgage-backed securities and collateralized mortgage obligations 28,561 37 (191) 28,407 Other 2,508 20 -- 2,528 ------ ------ ------- ------ $ 82,415 459 (409) 82,465 ====== ====== ======= ======
The amortized cost and approximate fair value (carrying value) of securities available-for-sale at December 31, 1997 and 1996, are summarized as follows (in thousands of dollars):
December 31, 1997 ---------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 60,004 322 (44) 60,282 U.S. government agencies 19,991 56 (18) 20,029 Mortgage-backed securities and collateralized mortgage obligations 68,885 288 (1,112) 68,061 Other securities 368 -- -- 368 ------- ----- ------ ------- $ 149,248 666 (1,174) 148,740 ======= ===== ====== ======= December 31, 1996 ------------------------------------------------ Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 53,963 313 (161) 54,115 U.S. government agencies 17,758 67 (109) 17,716 Mortgage-backed securities and collateralized mortgage obligations 73,734 323 (1,500) 72,557 Other securities 1,350 2 -- 1,352 ------- ----- ------ ------- $ 146,805 705 (1,770) 145,740 ======= ===== ====== =======
(Continued) 35 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The amortized cost and estimated fair value of securities at December 31, 1997, by contractual maturity, are shown below (in thousands of dollars). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Securities Held-To-Maturity ------------------------------------------------ Net Amortized Estimated unrealized cost fair value gains (losses) ---- ---------- ------------- Due in one year or less $ 11,535 11,552 17 Due after one year through five years 25,651 25,686 35 Due after five years through ten years 8,116 8,367 251 Due after ten years 4,093 4,167 74 Mortgage-backed securities and collateralized mortgage obligations 19,838 19,826 (12) -------- ------- ------ $ 69,233 69,598 365 ======== ======= ======
Securities Available-For-Sale ------------------------------------------------ Net Amortized Estimated unrealized cost fair value gains (losses) ---- ---------- ------------- Due in one year or less $ 18,990 18,967 (23) Due after one year through five years 61,005 61,344 339 Due after five years through ten years 368 368 -- Mortgage-backed securities, collateralized mortgage obligations, and other amortizing securities 68,885 68,061 (824) -------- ------- ------ $ 149,248 148,740 (508) ======== ======= ======
Proceeds from the sales of securities were $31,909,000 and $55,669,000 in 1997 and 1996, respectively. Gross gains of $259,000 and $763,000 were recognized on those sales in 1997 and 1996, respectively. Gross losses of $68,000 and $44,000 were recognized on sales in 1997 and 1996, respectively. Investment securities having a carrying value of $60,382,000 and $52,306,000 at December 31, 1997 and 1996, respectively, were pledged to secure public funds on deposit or for other purposes as required or permitted by law. (Continued) 36 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements During 1995 Citizens National Bank, Henderson, Texas transferred securities having an amortized cost of $33,439,000 from its held-to-maturity portfolio to its available-for-sale portfolio. At the time of the transfer, these securities had net unrealized gains of approximately $775,000. This transfer was made during the one time reassessment allowed by the Financial Accounting Standards Board for the reclassification of held-to-maturity and available-for-sale investment security portfolios. (6) LOANS AND ALLOWANCE FOR LOAN LOSSES ----------------------------------- The composition of the loan portfolio at December 31, 1997 and 1996, is as follows (in thousands of dollars):
1997 1996 ---- ---- Real estate mortgage $ 49,979 46,211 Commercial and industrial 28,195 23,863 Installment and other 29,832 33,111 ------- ------- Total 108,006 103,185 ------- ------- Less: Allowance for loan losses (1,249) (1,146) Unearned discount (696) (1,214) ------- ------- Loans, net $ 106,061 100,825 ======= =======
The Banks enter 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 $737,000 and $783,000 at December 31, 1997 and 1996, respectively. The change during 1997 reflects $554,000 in new loans and $600,000 of repayments. At December 31, 1997 and 1996, the Banks had discontinued the accrual of interest on loans aggregating $172,000 and $147,000 respectively. Net interest income for 1997 and 1996 would have been higher by $5,600 and $6,400, respectively, had interest been accrued at contractual rates on nonperforming loans. At December 31, 1997 and 1996, the recorded investment in impaired loans was $172,000 and $147,000, respectively. The average recorded investment in impaired loans for 1997 and 1996 approximated $107,000 and $116,000, respectively. No interest income was recognized on these impaired loans for 1997 and 1996. (Continued) 37 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Changes in the allowance for loan losses are summarized as follows (in thousands of dollars):
1997 1996 1995 ---- ---- ---- Balance, January 1 $ 1,146 1,019 997 Provision (reduction of allowance) for loan losses 330 264 180 Addition due to acquisition -- 24 -- Loans charged off (347) (243) (247) Recoveries on loans 120 82 89 ----- ----- ----- Balance, December 31 $ 1,249 1,146 1,019 ===== ===== =====
During 1997, the Banks reduced loans through the repossession of other real estate and assets by $152,000. There were no such reductions in 1996 and 1995. (7) PREMISES AND EQUIPMENT ---------------------- Premises and equipment at December 31, 1997 and 1996, are summarized as follows (in thousands of dollars):
December 31, Estimated ------------- useful lives 1997 1996 ------------ ---- ---- Land -- $ 442 442 Bank buildings 40 years 5,032 3,297 Furniture, fixtures, and equipment 5-10 years 3,754 2,947 Construction in progress 14 302 ------ ------ 9,242 6,988 Less accumulated depreciation (4,033) (3,237) ------ ------ Premises and equipment, net $ 5,209 3,751 ====== ======
Amounts charged to operating expenses for depreciation were $437,000, $375,000, and $312,000 in 1997, 1996, and 1995, respectively. (8) TIME DEPOSITS ------------- Included in certificates of deposit and other time deposits at December 31, 1997 and 1996, were $53,230,000 and $53,609,000, respectively, of certificates of deposit in denominations of $100,000 or more. Interest expense on time deposits of $100,000 or more amounted to $2,650,000, $2,281,000, and $2,348,000, for the years ended DecemberE31, 1997, 1996, and 1995, respectively. (Continued) 38 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements At December 31, 1997, the scheduled maturities of time deposits are as follows (dollars in thousands):
Years ending December 31: 1998 $ 143,378 1999 13,880 2000 4,052 2001 735 2002 1,186 -------- $ 163,231 ========
During 1997, 1996, and 1995, the Banks made interest payments of $11,496,000, $11,149,000, and $11,314,000, respectively, to depositors and other banks. (9) INCOME TAXES ------------ Federal income tax expense (benefit) applicable to income before tax for the years ended December 31, 1997, 1996, and 1995, is as follows (in thousands of dollars):
1997 1996 1995 ---- ---- ---- Current $ 1,151 979 769 Deferred (125) 131 (150) ----- ----- ---- $ 1,026 1,110 619 ===== ===== ====
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% in 1997, 1996, and 1995, to pretax income when compared to actual income tax expense as follows (in thousands of dollars):
1997 1996 1995 ---- ---- ---- Computed "expected" tax expense $ 1,501 1,519 1,048 Increase (decrease) in income taxes resulting from: Tax-exempt interest (542) (471) (465) Other 67 62 36 ----- ----- ----- Actual income tax $ 1,026 1,110 619 ===== ===== ===== Effective tax rate 23.2% 24.9 20.1 ===== ===== =====
(Continued) 39 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996, are presented below (in thousands of dollars):
1997 1996 ---- ---- Deferred tax assets: Allowance for loan losses $ 64 -- Organizational/acquisition costs 89 48 Accrued liabilities 83 40 Unrealized loss on securities available-for-sale 173 362 --- --- Total gross deferred tax assets 409 450 Less valuation allowance -- -- --- --- Net deferred tax assets 409 450 --- --- Deferred tax liabilities: Investment securities 170 67 Premises and equipment - depreciation -- 122 Other assets 64 22 --- --- Total deferred tax liabilities 234 211 --- --- Net deferred tax asset $ 175 239 === ===
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 based its conclusion on various factors, including ongoing profitable operations as well as significant taxes available in the carryback period. Included in other liabilities in the accompanying consolidated balance sheets are current federal income taxes payable of $235,000 and $164,000 at December 31, 1997 and 1996, respectively. A net deferred federal income tax asset of $175,000 and $239,000 is included in other assets at December 31, 1997 and 1996, respectively. Income taxes paid during 1997, 1996, and 1995, totaled $1,155,000, $995,000, and $205,000, respectively. (10) PROFIT SHARING PLAN ------------------- The Company has a 401(k) savings plan which covers substantially all full- time employees with 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 $303,000, $281,000, and $251,000 related to the plan for the years ended December 31, 1997, 1996, and 1995, respectively. (Continued) 40 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (11) TRANSACTIONS 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 that supervisory agencies have generally not permitted banks to own directly for extended periods of time. During the years ended 1997, 1996, and 1995, the Company charged HCB a management fee of $27,500, $15,000, and $13,500, respectively for various services provided to HCB. The amount charged was considered to be the fair value of those services rendered. During 1997, 1996 and 1995, Citizens National Bank Henderson, Texas' trust department charged HCB an additional $9,282, $6,530 and $4,600, respectively, for management services related to HCB's mineral interests. During 1995, HCB purchased real estate from the Company for $43,000. (12) COMMITMENTS AND CONTINGENCIES ----------------------------- The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's financial position and results of operations. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS ----------------------------------- Statement of Financial Accounting Standards No. 107 (Statement 107), Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: (Continued) 41 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL INSTITUTIONS, AND FEDERAL FUNDS SOLD -- For these short-term investments, the carrying amount is a reasonable estimate of fair value. SECURITIES -- The fair value, which approximates the estimated market values, of longer-term securities and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value, which approximates the estimated market values, of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. LOANS -- Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, and consumer. The carrying amounts of performing loans that were funded or will mature within three months of the balance sheet date approximate the fair values of those loans. Additionally, the carrying amounts of adjustable rate loans that reprice within ninety days also approximate the fair values of those loans. The fair values of the remaining performing and nonperforming loans are calculated by discounting scheduled cash flows through the estimated maturity, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. The estimate of maturity is based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. DEPOSITS -- The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts, and money market accounts, is equal to the amount payable as of December 31, 1997 and 1996. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. INTEREST ACCRUALS -- The fair values of the Company's accrued interest receivable and accrued interest payable amounts approximate their carrying values due to the short maturity of these financial instruments. (Continued) 42 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The estimated fair values of the Company's financial instruments at December 31, 1997 and 1996, are as follows (in thousands of dollars):
1997 1996 -------------------- -------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- Financial assets: Cash and due from banks $ 8,886 8,886 12,413 12,413 Interest-bearing deposits with financial institutions 8,212 8,212 3,892 3,892 Federal funds sold 5,040 5,040 1,150 1,150 Securities 217,973 218,338 228,155 228,205 Loans, net 106,061 103,912 100,825 99,410 Accrued interest receivable 3,311 3,311 3,449 3,449 Financial liabilities: Deposits: Demand - noninterest-bearing 32,860 32,860 31,785 31,785 NOW accounts 79,810 79,810 74,984 74,984 Money market and savings 46,206 46,206 45,484 45,484 Certificates of deposit and other time deposits 163,231 163,872 168,420 168,692 Accrued interest payable 1,105 1,105 1,144 1,144
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK ------------------------------------------------- The Banks are 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 risk in excess of the amount recognized in the balance sheets. The contractual or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Banks' 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 Banks use the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Contractual or notional amount at December 31, 1997 -------------------- Financial instruments whose contractual amounts represent credit risk: Commitments to extend credit $ 13,361,000 Standby letters of credit 376,000
(Continued) 43 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount and nature of collateral obtained, if deemed necessary by the Banks 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 Banks 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 Banks hold collateral supporting those commitments for which collateral is deemed necessary. (15) CONCENTRATION OF CREDIT RISK ---------------------------- The Banks grant real estate, commercial, and industrial loans to customers primarily in Henderson, Texas, and surrounding areas of east Texas. Although the Banks have a diversified loan portfolio, a substantial portion (approximately 47.1% at December 31, 1997) 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 Banks typically require 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 Banks. The Banks had $7,119,000 and $3,293,000 on deposit with the Federal Home Loan Bank of Dallas at December 31, 1997 and 1996, respectively. (Continued) 44 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (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, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997. BALANCE SHEETS (Parent Only) December 31, 1997 and 1996 (dollars in thousands)
Assets 1997 1996 ------ ------ ------ Cash in subsidiary bank $ 367 1,062 Investment in subsidiaries 33,551 32,791 Other assets 27 13 ------ ------ Total assets $ 33,945 33,866 ====== ====== Liabilities and Stockholders' Equity ------------------------------------ Liabilities: Dividends declared $ 323 341 Accounts payable 49 26 Other liabilities 844 1,511 ------ ------ 1,216 1,878 Stockholders' equity: Preferred stock -- -- Common stock 10,800 10,800 Capital surplus 5,400 5,400 Undivided profits 18,875 16,825 Net unrealized losses on securities available for sale (335) (703) Less treasury stock (2,011) (334) ------ ------ Total stockholders' equity 32,729 31,988 ------ ------ Total liabilities and stockholders' equity $33,945 33,866 ====== ======
(Continued) 45 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements STATEMENTS OF INCOME (Parent Only) Years ended December 31, 1997, 1996, and 1995 (dollars in thousands)
1997 1996 1995 ---- ---- ---- Dividends, including dividends paid by subsidiary banks $ 3,070 4,368 1,384 Interest expense 10 -- -- Operating expenses 50 27 -- ----- ----- ----- Income before income tax benefit and equity in undistributed earnings of subsidiaries 3,010 4,341 1,384 Income tax expense 12 12 23 ----- ----- ----- Income before equity in undistributed earnings of subsidiaries 2,998 4,329 1,361 Equity in undistributed earnings of subsidiaries 392 (985) 1,103 ----- ----- ----- Net income $ 3,390 3,344 2,464 ===== ===== =====
(Continued) 46 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements STATEMENTS OF CASH FLOWS (Parent Only) Years ended December 31, 1997, 1996, and 1995 (dollars in thousands)
1997 1996 1995 ---- ---- ---- Operating activities: Net income $ 3,390 3,344 2,464 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (392) 985 (1,103) Decrease (increase) in other assets (14) 12 11 Increase in accounts payable and dividends declared 5 21 -- Decrease in other liabilities (667) -- -- ------ ------ ------ Net cash provided by operating activities 2,322 4,362 1,372 Investing activities - purchase of subsidiary -- (1,934) -- Financing activities: Cash dividends paid (1,340) (1,378) (1,382) Purchase of treasury stock (1,677) (334) -- ------ ------ ------ Net cash used by financing activities (3,017) (1,712) (1,382) Increase (decrease) in cash (695) 716 (10) Cash at beginning of year 1,062 346 356 ------ ------ ------ Cash at end of year $ 367 1,062 346 ====== ====== ======
47 INDEPENDENT AUDITORS LEGAL COUNSEL REGISTRAR/TRANSFER AGENT KPMG Peat Marwick LLP Jenkens & Gilchrist, P.C. Citizens National Bank Shreveport, Louisiana Dallas, Texas Accounting Department P. O. Box 1009 Henderson, Texas 75653-1009 ANNUAL SHAREHOLDERS' MEETING The annual shareholders' meeting of the Company will be held at Citizens National Bank, 201 West Main, Henderson, Texas at 10:00 a.m. on Tuesday April 14, 1998. FORM 10-K The Company will, upon written request, provide after April 1, 1998, without charge, a copy of the annual report on Form 10-K for 1997 filed with the Securities and Exchange Commission to any shareholder to whom this 1997 Annual Report is sent. Requests should be made to Henderson Citizens Bancshares, Inc., Attn: Chief Financial Officer, P.O. Box 1009, Henderson, Texas, 75653-1009. Any exhibit will be provided on request upon payment of the reasonable expenses of furnishing the exhibit. - -------------------------------------------------------------------------------- HENDERSON CITIZENS DELAWARE BHC BANCSHARES, INC. OFFICERS OFFICERS CHAIRMAN OF THE BOARD DIRECTOR & PRESIDENT Landon Alford Milton S. McGee, Jr., CPA PRESIDENT VICE PRESIDENT & TREASURER Milton S. McGee, Jr., CPA William A. Hurst VICE PRESIDENT, SECRETARY TREASURER & CHIEF Nelwyn Richardson FINANCIAL OFFICER William A. Hurst ASST. SECRETARY, ASST. TREASURER & CHIEF FINANCIAL OFFICER SECRETARY Rebecca G. Tanner, CPA Nelwyn Richardson CHIEF ACCOUNTING OFFICER Rebecca G. Tanner, CPA 48 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 2, 1998, (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 1998 LOW HIGH REPRESENTED REPRESENTED - ---- --------- --------- ------------ ----------- First Quarter (Through March 2, 1998) - - - - 1997 - ---- First Quarter $12.00 $12.50 7 1,550 Second Quarter $12.00 $12.50 20 23,700 Third Quarter $12.00 $12.00 1 400 Fourth Quarter $14.50 $14.50 54 98,215 1996 - ---- First Quarter $12.00 $12.00 3 732 Second Quarter $12.00 $12.00 10 4,329 Third Quarter $12.00 $12.00 5 1,190 Fourth Quarter $11.25 $12.00 4 30,310 As of March 2, 1998, there were 413 shareholders of record. 49 EX-21.1 3 LIST OF SUBSIDIARIES EXHIBIT 21.1 ------------ Henderson Citizens Bancshares, Inc. Henderson Citizens Delaware Bancshares, Inc. (100%) Citizens National Bank, Henderson, Texas (100%) First State Bank, Waskom, Texas (100%) Waskom Bancshares, Inc. (100%) EX-27.1 4 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 8,886 8,212 5,040 0 148,740 69,233 69,598 106,757 1,249 358,493 322,107 844 2,813 0 0 0 10,800 21,929 358,493 8,840 13,427 0 22,267 11,493 11,546 10,721 330 191 9,265 4,416 4,416 0 0 3,390 1.61 1.61 6.99 172 20 0 0 1,146 347 120 1,249 1,249 0 26
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