-----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, H2yYcn+tP3LBmMKwEQm35R6uRMF5ra8C5Qs+wPGUkCGXneGn9NeZ/mwppBwIAmxs x6WS9REuofhFBTkSR+e//g== 0001047469-97-000893.txt : 19971016 0001047469-97-000893.hdr.sgml : 19971016 ACCESSION NUMBER: 0001047469-97-000893 CONFORMED SUBMISSION TYPE: SC 13E4 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971015 SROS: NONE SUBJECT COMPANY: 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: SC 13E4 SEC ACT: SEC FILE NUMBER: 005-51739 FILM NUMBER: 97696204 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 FILED BY: 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: SC 13E4 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 SC 13E4 1 FORM SC 13E-4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------- SCHEDULE 13E-4 Issuer Tender Offer Statement (Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934) ----------------------------------- HENDERSON CITIZENS BANCSHARES, INC. (Name of issuer) HENDERSON CITIZENS BANCSHARES, INC. (Name of Person(s) Filing Statement) ----------------------------------- Common Stock, par value, $5.00 per share (Title of Class of Securities) Not Applicable (CUSIP Number of Class of Securities) ----------------------------------- MILTON S. MCGEE, JR. President Henderson Citizens Bancshares, Inc. 201 West Main Street, P.O. Box 1009 Henderson, TX 75653 (903) 657-8521 (Name, address and telephone number of person authorized to receive notices and communications on behalf of the person(s) filing statement) October 15, 1997 (Date tender offer first published, sent or given to security holders) ----------------------------------- Copy To: BRIAN R. MAREK Jenkens & Gilchrist, a Professional Corporation Suite 3200 1445 Ross Avenue Dallas, Texas 75202 (214) 855-4500 ----------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF FILING FEE - -------------------------------------------------------------------------------- TRANSACTION VALUATION* AMOUNT OF FILING FEE - -------------------------------------------------------------------------------- $2,030,000 $406.00 - -------------------------------------------------------------------------------- * Calculated solely for purposes of determining the filing fee, based upon the purchase of 140,000 shares at the maximum tender offer price per share of $14.50. / / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: N/A Filing Party: N/A Form or Registration No.: N/A Date File: N/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- This Issuer Tender Offer Statement on Schedule 13E-4 (the "Statement") relates to the tender offer by Henderson Citizens Bancshares, Inc., a Texas corporation (the "Company"), to purchase up to 140,000 shares of its common stock, $5.00 par value per share (the "Shares"), at a price, net to the seller in cash, of $14.50 per Share, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated October 15, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, as they may be amended from time to time, are herein collectively referred to as the "Offer"). Copies of the Offer to Purchase and Letter of Transmittal are filed as Exhibits (a)(1) and (a)(2), respectively, to this Statement. ITEM 1. SECURITY AND ISSUER. (a) The name of the issuer is HENDERSON CITIZENS BANCSHARES, INC., a Texas corporation. The address of its principal executive offices is 201 West Main Street, P.O. Box 1009, Henderson, Texas 75653. (b) The information set forth on the cover page and in Section 4 "Number of Shares; Proration; Extension of the Offer" and Section 15 "Transactions and Arrangements Concerning the Common Stock" in the Offer to Purchase is incorporated herein by reference. The Offer is being made to all holders of Shares, including officers, directors and affiliates of the Company. (c) The information set forth on the cover page and in Section 11 "Price Range of Common Stock; Dividends" in the Offer to Purchase is incorporated herein by reference (d) This Statement is being filed by the Issuer at the address set forth on the cover page of the Offer. ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) The information set forth in Section 12 "Source and Amount of Funds" in the Offer to Purchase is incorporated herein by reference. (b) Not applicable. ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER. (a)-(j) The information set forth on the cover page and in Sections 1 "Purpose of the Offer; Certain Effects of the Offer; Plans of the Company After the Offer", Section 12 "Source and Amount of Funds", and Section 15 "Transactions and Arrangements Concerning the Common Stock" in the Offer to Purchase is incorporated herein by reference. ITEM 4. INTEREST IN SECURITIES OF THE ISSUER. The information set forth in Section 15 "Transactions and Arrangements Concerning the Common Stock" in the Offer to Purchase is incorporated herein by reference. ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER'S SECURITIES. Not applicable. ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth in the cover page, Section 15 "Transactions Concerning the Common Stock" and in Section 18 "Fees and Expenses" to the Offer to Purchase is incorporated herein by reference. ITEM 7. FINANCIAL INFORMATION. (a)-(b) The information set forth (i) in Section 13 "Certain Information About the Company" in the Offer to Purchase, (ii) in Section 14 "Certain Pro Forma Financial Information; (iii) on pages 24 through 45 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996, filed as Exhibit (g)(1) hereto, and (iv) on 2 pages 2 through 11 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, filed as Exhibit (g)(2) hereto, are all incorporated herein by reference. ITEM 8. ADDITIONAL INFORMATION. (a) Not applicable. (b) The information set forth in Section 16 "Government Regulation" in the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 1 "Purpose of the Offer; Certain Effects of the Offer; Plans of the Company After the Offer" in the Offer to Purchase is incorporated herein by reference. (d) Not applicable. (e) The information set forth in the Offer to Purchase and the related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, is incorporated herein by reference. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Form of Offer to Purchase dated October 15, 1997. (a)(2) Form of Letter of Transmittal with Substitute Form W-9. (a)(3) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(4) Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Form of Letter dated October 15, 1997 to shareholders from the Company. (b) Not applicable. (c) Not applicable. (d) Not applicable. (e) Not applicable. (f) Not applicable. (g)(1) Pages 24 through 45 of the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996 (incorporated by reference). (g)(2) Pages 2 through 11 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, (incorporated by reference). 3 SIGNATURE After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. HENDERSON CITIZENS BANCSHARES, INC. By: /s/ Rebecca G. Tanner ------------------------------------- Name: Rebecca G. Tanner Title: Chief Accounting Officer Dated: October 15, 1997 4 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 99.(a)(1) Form of Offer to Purchase dated October 15, 1997. 99.(a)(2) Form of Letter of Transmittal with Substitute Form W-9. 99.(a)(3) Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees, dated October 15, 1997. 99.(a)(4) Form of Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99.(a)(5) Form of Letter dated October 15, 1997 to Shareholders from the Company. 99.(g)(1) Pages 24 through 45 to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 13, 1996 (incorporated by reference from the Company's Form 10-K/A filed with the Commission on April 2, 1997) 99.(g)(2) Part 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, incorporated by reference from the Company's Form 10-Q filed with the Commission on August 11, 1997. 5 EX-99.(A)(1) 2 EXHIBIT 99.(A)(1) Exhibit 99.(a)(1) HENDERSON CITIZENS BANCSHARES, INC. 201 West Main Street Henderson, Texas 75653 OFFER TO PURCHASE FOR CASH UP TO 140,000 SHARES OF ITS COMMON STOCK AT $14.50 NET PER SHARE THE OFFER PERIOD WILL EXPIRE ON WEDNESDAY, NOVEMBER 12, 1997, AT 5:00 P.M., CENTRAL STANDARD TIME, UNLESS THE OFFER IS EXTENDED. ------------------------ TO THE HOLDERS OF SHARES OF COMMON STOCK OF HENDERSON CITIZENS BANCSHARES, INC.: Henderson Citizens Bancshares, Inc., a Texas corporation (the "Company"), hereby offers to purchase up to 140,000 shares of the total issued and outstanding shares (the "Shares") of its common stock, $5.00 par value per share (the "Common Stock"), at $14.50 net per share to the Seller in cash, upon the terms and conditions set forth herein and in the attached Letter of Transmittal (which together constitute the "Offer"). See Section 4, herein. Tendering shareholders will not be obligated to pay brokerage commissions, solicitation fees or, subject to Instruction 7 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares by the Company. However, any tendering shareholder or other payee who fails to complete fully and sign the box captioned "Substitute Form W-9" included in the Letter of Transmittal may be subject to a required tax withholding of 31% of the gross proceeds paid to the shareholder or other payee pursuant to the Offer. See Section 2, herein. The Company will pay all charges and expenses of Citizens National Bank, Henderson, Texas (the "Depositary"), incurred in connection with the Offer. THE OFFER IS NOT CONDITIONED UPON ANY MINIMUM NUMBER OF SHARES BEING TENDERED. THE OFFER, HOWEVER, IS SUBJECT TO CERTAIN OTHER CONDITIONS. SEE SECTION 10 HEREIN. Tenders pursuant to the Offer may be withdrawn (a) at any time prior to the Expiration Date (including any extensions) and (b) if not yet accepted for payment, after the expiration of forty (40) business days from the commencement of the Offer (that is, December 11, 1997), until accepted for payment. THE DATE OF THIS OFFER TO PURCHASE IS OCTOBER 15, 1997. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MAKING OF THE OFFER. HOWEVER, SHAREHOLDERS MUST MAKE THEIR OWN DECISIONS WHETHER TO TENDER SHARES AND, IF SO, HOW MANY SHARES TO TENDER. NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKES ANY RECOMMENDATION TO ANY SHAREHOLDER WITH RESPECT TO THE OFFER AND NO PERSON HAS BEEN AUTHORIZED BY THE COMPANY TO MAKE ANY SUCH RECOMMENDATION. SHAREHOLDERS SHOULD EVALUATE CAREFULLY ALL OF THE INFORMATION CONTAINED OR REFERRED TO HEREIN AND MAKE THEIR OWN DECISIONS AS TO WHETHER OR NOT TO TENDER SHARES PURSUANT TO THE OFFER. SHAREHOLDERS ARE URGED TO CONSULT A TAX ADVISER CONCERNING THE FEDERAL AND ANY STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF THE SALE OF SHARES TO THE COMPANY PURSUANT TO THE OFFER. IMPORTANT Any shareholder desiring to tender all or any portion of his Shares should either (i) complete and sign the Letter of Transmittal or a facsimile thereof in accordance with the instructions in the Letter of Transmittal, mail or deliver it with any required signature guarantee and any other required documents to the Depositary, and either mail or deliver the stock certificates for such Shares to the Depositary (with all such other documents) or (ii) request a broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such shareholder. A shareholder having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact that broker, dealer commercial bank, trust company or other nominee if such shareholder desires to tender such Shares. Shareholders who desire to tender Shares and whose certificates for such are not immediately available or whose other required documentation cannot be delivered to the Depositary, in either case, by the Expiration Date of the Offer should tender such Shares by following the procedures for guaranteed delivery set forth in Section 6. TO EFFECT A VALID TENDER OF SHARES, SHAREHOLDERS MUST VALIDLY COMPLETE THE LETTER OF TRANSMITTAL. Questions and requests for assistance or requests for additional copies of the Offer to Purchase and Letter of Transmittal, may be directed to Milton S. McGee, Jr., President, Henderson Citizens Bancshares, Inc., 201 West Main Street, Henderson, Texas 75653, (903) 657-8521. THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON BEHALF OF THE COMPANY AS TO WHETHER SHAREHOLDERS SHOULD TENDER OR REFRAIN FROM TENDERING SHARES PURSUANT TO THE OFFER. THE COMPANY HAS NOT AUTHORIZED ANY PERSON TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER ON BEHALF OF THE COMPANY OTHER THAN THOSE CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL. DO NOT RELY ON ANY SUCH RECOMMENDATION OR ANY SUCH INFORMATION OR REPRESENTATION, IF GIVEN OR MADE, AS HAVING BEEN AUTHORIZED BY THE COMPANY. ii TABLE OF CONTENTS SECTION PAGE - ------- ---- SPECIAL FACTORS...............................................................1 1. Purpose of the Offer; Certain Effects of the Offer; Plans of the Company After the Offer...........................................................1 2. Federal Income Tax Consequences.................................2 3. Fairness of the Offer, Reports and Opinions.....................5 THE OFFER.....................................................................7 4. Number of Shares; Proration; Extension of the Offer.............7 5. Tenders by Holders of Fewer than One Hundred (100) Shares.......8 6. Procedure for Tendering Shares..................................8 7. Withdrawal Rights..............................................10 8. Purchase of Shares and Payment of Purchase Price...............10 9. Conditional Tender of Shares...................................11 10. Certain Conditions of the Offer................................11 11. Price Range of Common Stock; Dividends.........................12 12. Source and Amount of Funds.....................................13 13. Certain Information about the Company..........................13 14. Certain Pro Forma Financial Information........................16 15. Transactions and Arrangements Concerning the Common Stock......19 16. Government Regulation..........................................22 17. Extension of the Offer Period; Termination; Amendments.........22 18. Fees and Expenses..............................................23 19. Miscellaneous..................................................24 Appendix A Opinion of The Bank Advisory Group, Inc.......................A-1 iii SPECIAL FACTORS 1. PURPOSE OF THE OFFER; CERTAIN EFFECTS OF THE OFFER; PLANS OF THE COMPANY AFTER THE OFFER The principal purposes of this Offer are as follows: First, the Company considers the repurchase of these Shares to be a good investment of its capital, and therefore beneficial to the long-term interests of the Company's remaining shareholders. The Company has experienced earnings growth in recent years resulting in an accumulation of capital in excess of current needs to support the continued growth of the Company. Purchase of Shares by the Company will have the effect of increasing the current book value per share of the Common Stock. In addition, the purchase should have the effect of increasing future return on equity for the Company and increasing earnings per share for those shareholders who elect to retain their shares. Second, as the Common Stock is not listed for quotation on any significant market or exchange, there is only limited trading activity with respect to the Common Stock. The Offer will provide a means for shareholders to dispose of medium to larger size blocks of stock in a timely and orderly manner. This Offer will give shareholders an opportunity to sell some or all of their stock at a fair price, without having to pay brokerage commissions or other transaction costs. The Company's purchase of Shares pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and is likely to reduce the number of shareholders. Prior to this Offer, there has been only limited trading of the Common Stock. Depending on the number of shareholders of the Company who tender all of their Shares, the Offer may have the effect of further limiting, or eliminating, any available trading market for the Common Stock. The absence of a trading market may make it difficult to sell Shares not tendered to the Company following the Expiration Date and may have an adverse effect on the price of the Common Stock. In 1991, the Company filed a Registration Statement on Form S-4 with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Act of 1933, as amended (the "Securities Act") to register its Common Stock to be issued in connection with the Company's acquisition of Enterprise Bancshares, Inc. on December 31, 1991. Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires companies having filed a registration statement with the Commission pursuant to the Securities Act to furnish certain information to its shareholders and to file periodic and current reports (e.g., annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K) with the Commission as required by section 13 of the Exchange Act. These periodic and current reports contain certain business and financial information regarding the Company and its subsidiaries. The Company began filing current reports with the Commission following the effective date of the registration statement filed pursuant to the Securities Act and continues to file such reports as required by section 13 of the Exchange Act. See discussion at Section 13 - "Additional Information." As of September 30, 1997, the Company had approximately 462 shareholders of record. Section 15(d) of the Exchange Act, however, permits companies whose number of shareholders of record is reduced to less than 300 persons to suspend periodic reporting obligations under 1 section 13 of the Exchange Act. The Company believes that its purchase of Shares pursuant to the Offer may result in the Common Stock becoming eligible for suspension of its reporting requirements under the Exchange Act. Depending on the number of shareholders of the Company who elect to participate in the Offer and who tender all of the Shares beneficially owned by them, the Company may have fewer than 300 shareholders of record following completion of the Offer. In the event that the Offer should result in the Company having fewer than 300 shareholders of record, management of the Company has indicated that it intends to suspend the Company's obligation to file periodic reports with the Commission pursuant to the Exchange Act. See Section 14 herein for pro forma financial statements showing the effects of the Company's purchase of Shares pursuant to the Offer. To the extent that Shares are purchased in the Offer, the proportionate equity interest of nontendering shareholders in the Company will be increased. The Offer is not conditioned upon any minimum number of Shares being tendered. Shares purchased pursuant to the Offer will be retained as treasury stock (unless and until the Company determines to retire such Shares) and be available for issue without further shareholder action (except as required by applicable law) for purposes including, but not limited to, the acquisition of other businesses and raising of additional capital for use in the Company's business. The Company has no current plan for issuance of Shares repurchased pursuant to the Offer. Following consummation of the Offer, the business and operations of the Company will be continued by the Company substantially as they are currently being conducted. The Company has no plans or proposals which relate to or would result in: (a) the acquisition by any person of additional securities of the Company or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) any change in its present Board of Directors (the "Board") or management of the Company; (e) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Company; (f) any other material change in the Company's corporate structure or business; or (g) any change in the Company's Articles of Incorporation or Bylaws or any actions which may impede the acquisition of control of the Company by any person. Following expiration of the Offer, the Company may, in its sole discretion, determine to purchase any remaining Shares through privately negotiated transactions, open market purchases or otherwise, on such terms and at such prices as the Company may determine from time to time, the terms of which purchases or offers could differ from those of the Offer, except that the Company will not make any such purchases of Shares until the expiration of ten (10) business days after the termination of the Offer. Any possible future purchases of Shares by the Company will depend on many factors, including the market price of the Shares, the Company's business and financial position, alternative investment opportunities available to the Company, the results of the Offer and general economic and market conditions. 2 2. FEDERAL INCOME TAX CONSEQUENCES The following discussion is based upon information provided by the Company, the Internal Revenue Code of 1986, as amended and in effect on the date hereof (the "Code"), existing and proposed regulations thereunder, reports of congressional committees, judicial decisions and current administrative rulings and practices. Any of these authorities could be repealed, overruled or modified at any time after the date hereof. Any such change could be retroactive and, accordingly, could modify the tax consequences discussed herein. No ruling from the Internal Revenue Service with respect to the matters discussed herein has been requested and there is no assurance that the Internal Revenue Service would agree with the conclusions set forth in this discussion. This discussion is for general information only and does not address the federal income tax consequences that may be relevant to particular shareholders of the Company in light of their personal circumstances or to certain types of shareholders of the Company (such as dealers in securities, insurance companies, foreign individuals and entities, financial institutions and tax-exempt entities) who may be subject to special treatment under the federal income tax laws. This discussion also does not address any tax consequences under state, local or foreign laws. GENERAL CONSEQUENCES Sales of Common Stock by tendering shareholders pursuant to the Offer will be taxable transactions for federal income tax purposes (and may be taxable transactions under state, local or foreign tax laws as well). The federal income tax consequences to a tendering shareholder may vary depending upon the particular facts and circumstances of that individual. Accordingly, each shareholder is urged to consult his own tax advisor with respect to the federal income tax consequences to him of the sale of his Shares in connection with the Offer, including the desirability of selling his Shares in the market instead of to the Company pursuant to the Offer, or of selling some of his Shares pursuant to the Offer and simultaneously disposing in the market of some or all of the other stock of the Company which he might own. Under the Code, a shareholder whose Shares are purchased pursuant to the Offer will generally recognize gain or loss in an amount equal to the difference between the cash received and such shareholder's adjusted basis for his Shares redeemed, if (i) as a result of the sale, his stock interest in the Company is completely terminated, (ii) as a result of the sale there is a substantially disproportionate redemption to the selling shareholder, or (iii) the receipt of cash in exchange for his Shares is deemed to be not essentially equivalent to a dividend. These tests are discussed in greater detail below. Such gain or loss generally will be treated as a capital gain or loss if the Shares are held as capital assets, and generally will be treated as a long-term capital gain or loss if the shareholder's holding period for such Shares is more than one year. Furthermore, such long-term capital gain may qualify for a reduced rate of tax if the tendering shareholder's holding period for such Shares is more than eighteen months. To determine whether the tests referred to above (and discussed herein) are met, there must be taken into account both (a) any shares actually owned by such shareholder and (b) any shares considered owned by such shareholder by reason of certain constructive ownership rules set forth in sections 318 and 302(c) of the Code. Under section 318 of the Code, a shareholder generally will be treated as owning shares which he has the right to acquire under options and shares owned (and, 3 in some cases, constructively owned) by members of the tendering shareholder's family and by related entities (such as corporations, partnerships, trusts and estates) in which such shareholder, a member of his family or a related entity has an interest. IF NONE OF THE FOREGOING TESTS (DESCRIBED IN GREATER DETAIL BELOW) ARE SATISFIED, THEN, WHETHER OR NOT A TENDERING SHAREHOLDER HOLDS HIS COMMON STOCK AS A CAPITAL ASSET, THE ENTIRE AMOUNT OF THE CASH RECEIVED PURSUANT TO THE OFFER WILL BE TREATED AS A DIVIDEND AND WILL BE TAXABLE AS ORDINARY INCOME TO THE EXTENT OF THE CURRENT AND ACCUMULATED EARNINGS AND PROFITS OF THE COMPANY. COMPLETE TERMINATION OF INTEREST A termination of the stock interest of a tendering shareholder will have occurred if, pursuant to the Offer, the Company purchases all of his Common Stock and such shareholder does not own directly and is not deemed to own, under the constructive ownership rules described above, any other stock of the Company. If the Offer is prorated, the Shares that are not purchased by reason of such proration must be taken into account in determining whether a shareholder has achieved a complete termination of his interest in the Company. If a shareholder would otherwise satisfy the complete termination requirement, but for his constructive ownership of Shares held by family members, under certain circumstances such shareholder may be entitled to disregard such constructive ownership. A shareholder who has a complete termination of his interest generally will receive capital gain or loss treatment provided that he holds his Shares as capital assets. SUBSTANTIALLY DISPROPORTIONATE REDEMPTION A substantially disproportionate redemption occurs as to a particular shareholder if the redemption results in the shareholder owning less than eighty percent (80%) of the percentage of all of the outstanding Common Stock that he owned immediately before the redemption and less than fifty percent (50%) of all of the outstanding Common Stock. In applying these tests, the constructive ownership rules discussed above will apply. A shareholder whose receipt of cash pursuant to the Offer qualifies as a substantially disproportionate redemption generally will receive capital gain or loss treatment provided that he holds his Shares as capital assets. NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND Even if there is not a complete termination of the shareholder's interest and the receipt of cash by such shareholder fails to satisfy the "substantially disproportionate" test, it is possible that the receipt of cash by such shareholder pursuant to the Offer may be treated as "not essentially equivalent to a dividend". Application of this test depends on the individual shareholder's circumstances. Under the applicable judicial authorities, the "not essentially equivalent to a dividend" test generally will be satisfied if, as a result of the sale of Common Stock pursuant to the Offer, a shareholder has realized a "meaningful reduction" in his proportionate interest in the Company, taking into account the constructive ownership rules. The Internal Revenue Service has indicated in a published ruling that a redemption qualified as "not essentially equivalent to a dividend" where (i) the shareholder's relative stock interest in the company was minimal, (ii) the shareholder exercised no control over the affairs of the company and (iii) as a result of the redemption, the shareholder experienced a reduction of his voting rights, rights to participate in current earnings and surplus and rights to share in assets on 4 liquidation. However, the Internal Revenue Service has also ruled that a redemption of shares of a shareholder who held a minimal interest in the corporation failed to qualify as "not essentially equivalent to a dividend" where the pro-rata stock interest of the shareholder was not reduced as a result of the redemption. Shareholders tendering Shares in this Offer should note that the change in their relative stock interest in the Company may be affected by any proration of the Offer. A shareholder who meets the requirements of the "not essentially equivalent to a dividend" test generally will receive capital gain or loss treatment provided that he holds his Shares as capital assets. ANY SHAREHOLDER SEEKING TO RELY ON THE "NOT ESSENTIALLY EQUIVALENT TO A DIVIDEND" TEST SHOULD CONSULT WITH HIS OWN TAX ADVISOR AS TO ITS APPLICATION IN HIS PARTICULAR SITUATION. TAXABLE DIVIDEND TREATMENT If none of the three tests described above is satisfied, then the shareholder generally will be treated as having received a dividend in an amount equal to the cash received by him pursuant to the Offer. Such a dividend will be taxable as ordinary income to the extent of current and accumulated earnings and profits of the Company. In addition, a shareholder also will recognize gain from the sale or exchange of property to the extent the cash received by him pursuant to the Offer exceeds the Company's earnings and profits and the shareholder's adjusted basis in his Common Stock. Corporate shareholders may be entitled to the dividends-received deduction, except that the amount of the deduction may be reduced under certain special tax rules. BACKUP WITHHOLDING REQUIREMENTS Under federal backup withholding rules, except in the case of certain exempt taxpayers, the Depositary will be required to withhold and will withhold thirty-one percent (31%) of the gross proceeds paid to a shareholder or other payee pursuant to the Offer unless the shareholder provides his tax identification number (employer identification number or social security number), certifies that such number is correct, and certifies that he is not subject to backup withholding under section 3406(a)(1)(C) of the Code. Each shareholder should fully complete and sign Box F captioned "Substitute Form W-9" included as part of the Letter of Transmittal, so as to provide the information and certifications necessary to avoid backup withholding. See the Letter of Transmittal and the Instructions thereto for further details. THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY. EACH SHAREHOLDER OF THE COMPANY IS URGED TO CONSULT HIS OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO HIM OF THE PURCHASE OF HIS COMMON STOCK PURSUANT TO THE OFFER, INCLUDING THE APPLICABILITY OF THE CONSTRUCTIVE OWNERSHIP RULES, THE APPLICABILITY OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, CHANGES IN APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION. 3. FAIRNESS OF THE OFFER, REPORTS AND OPINIONS Because of the absence of an established trading market for the Common Stock, the Board determined the amount of consideration that should be paid for each Share purchased pursuant to the Offer. The Board based its determination on a number of factors, including among other things, a valuation of a minority interest in the Company received from Bank Advisory Group, Inc., Austin, 5 Texas. The Bank Advisory Group, Inc., in its role as independent financial analyst, has rendered its opinion regarding the fairness, from the financial perspective of both the selling shareholders (those accepting the Offer) and the remaining shareholders (those electing not to accept the Offer) of the consideration to be paid by the Company pursuant to the Offer. The opinion of The Bank Advisory Group, Inc., attached hereto as APPENDIX A (the "Opinion"), sets forth the matters considered in rendering the Opinion and should be read by the shareholders in its entirety. The Bank Advisory Group, Inc. is a well-recognized investment banking firm engaged in the valuation of financial institutions and their securities in connection with mergers, acquisitions, share exchanges, underwriting of securities, private placements and other corporate transactions. The Bank Advisory Group, Inc. was retained by the Company based primarily upon its reputation in the industry on valuation matters. The Bank Advisory Group, Inc. does not, and its officers, directors and shareholders do not, own any shares of Common Stock. Prior to being retained by the Company in connection with this matter, The Bank Advisory Group, Inc. has not provided financial advisory services to the Company. In preparing its valuation and its Opinion, The Bank Advisory Group, Inc. considered the nature and history of the Company and its subsidiary banks, Citizens National Bank, Henderson, Texas ("Citizens Bank") and First State Bank, Waskom, Texas (the "Waskom Bank") (collectively referred to herein as the "Subsidiary Banks"), the competitive and economic outlook for the Subsidiary Banks' trade area and for the banking industry in general, the book value and financial condition of the Company, its future earnings and dividend paying capacity, the size of the minority block of Common Stock valued and the prevailing market prices of comparable financial institutions' stock. The Bank Advisory Group, Inc. relied primarily on three commonly recognized methods of valuation: (i) net asset value, which is generally defined as the value of the net worth of a bank or company, including every kind of property and value; (ii) market value, which represents an analysis of the price a willing buyer and a willing seller would agree upon in connection with the sale of a minority block of stock in comparison with the market price at which a minority interest in similar banking organizations is sold, as adjusted for the quality and quantity of the comparable trade data, and (iii) investment value, which represents an evaluation of the present value of a bank's or company's future earnings or cash flow and the residual value that a minority investment in stock would be anticipated to have. For purposes of the valuation and the Opinion, The Bank Advisory Group, Inc. relied without independent verification upon the accuracy and completeness of all of the financial and other information provided to it by the Company. Nonetheless, no limitations were imposed by the Company upon The Bank Advisory Group, Inc. with respect to the scope of the information it requested or the procedures it followed in rendering the valuation and its opinion. The Board and management of the Company cooperated fully with The Bank Advisory Group, Inc. in connection with its investigation. The Bank Advisory Group, Inc. believes that its analysis must be considered in its entirety and that selecting a portion of its analysis and the factors considered by it, without considering all such factors and analyses, could create a misleading view of the processes underlying its Opinion. The preparation of the Opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In its analysis, The Bank Advisory Group, Inc. made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the Company's control. 6 In establishing the amount of consideration to be paid for the Shares pursuant to the Offer, in addition to evaluation of the Opinion, the Board also considered the growth rate and earnings of the Company and the Subsidiary Banks, the book value and financial condition of the Company and the Subsidiary Banks, the capital structure of the Company and the Subsidiary Banks, the competitive and economic outlook for the trade area in which the Company and the Subsidiary Banks operate and for the banking industry in general, the capital needs of the Company and the Subsidiary Banks, and judgments as to future earnings and dividends prospects for the Company and the Subsidiary Banks. The Board also took into account the size of the block of Shares anticipated to be purchased. Based on the fairness opinion of The Bank Advisory Group, Inc. and the other factors mentioned above, the Company believes that the terms of the Offer are fair to all shareholders. The Company however, encourages each shareholder to make his or her own determination as to the fairness and adequacy of the consideration to be paid by the Company in the Offer. THE OFFER 4. NUMBER OF SHARES; PRORATION; EXTENSION OF THE OFFER Upon the terms and subject to the qualifications and conditions described herein and in the Letter of Transmittal, the Company will purchase up to 140,000 Shares which are duly tendered prior to 5:00 P.M., Central Standard Time, on Wednesday, November 12, 1997 (the "Expiration Date"). The Company reserves the right, at any time and from time to time, to extend the period of time during which the Offer is open by giving oral or written notice(s) of such extension(s) to the Depositary, in which event the "Expiration Date" shall be the latest time and date on which the Offer, as so extended, shall expire. See Section 17 for a description of the Company's right to extend the time during which the Offer is open and to terminate or amend the Offer. Subject to the conditions of the Offer, if 140,000 or fewer Shares are duly tendered prior to the Expiration Date, the Company will purchase all Shares so tendered. The Offer is not conditioned on any minimum number of shares being tendered. In the event of an oversubscription of the Offer, Shares tendered shall be purchased on a pro-rata basis, disregarding fractions, according to the number of Shares tendered by each shareholder prior to the Expiration Date, PROVIDED, HOWEVER, that: (a) All Shares tendered prior to the Expiration Date by any shareholder who owned beneficially as of September 30, 1997, an aggregate of fewer than one hundred (100) Shares and who tenders all of such Shares (partial tenders will not qualify for this preference) and completes Box E captioned "Odd Lots" in the Letter of Transmittal shall be purchased in full, prior to proration of Shares tendered by any other shareholder (except that if more than the maximum number of Shares to be purchased are tendered by such "odd lot" holders, Shares tendered by such holders shall be purchased pro rata, with appropriate adjustments to avoid purchases of fractional Shares); (b) The Company reserves the right to purchase, prior to purchasing any Shares to be purchased on a pro-rata basis, all Shares tendered by any shareholder who has tendered all Shares beneficially owned by him or her and, as a result of the contemplated prorating, would then own an aggregate of fewer than one hundred (100) Shares; and 7 (c) The Company reserves the right, in its sole discretion, to elect to purchase any or all of the excess Shares tendered; and so long as this excess number accepted by the Company does not exceed two percent (2%) of the issued and outstanding Shares, no extension of the offer period and no further notice to the shareholders will be required or given. If the Company elects to purchase excess tendered Shares, but less than all of the tendered Shares, then Shares tendered shall be purchased on a pro-rata basis, as described above (subject to the exceptions noted in paragraphs (a) and (b), above). If (i) the Company increases or decreases the price to be paid for the Shares, the Company increases the number of Shares being sought and such increase in the number of Shares being sought exceeds two percent (2%) of the outstanding Shares, or the Company decreases the number of Shares being sought AND (ii) the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth (10th) business day from, and including, the date that notice of such increase or decrease is first published, sent or given in the manner specified in Section 17, the Offer will be extended until the expiration of such period of ten (10) business days. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday or federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight, Eastern Standard Time. As of September 30, 1997, the Company had 2,115,680 Shares issued and outstanding. The Company does not have any outstanding options, warrants or similar rights to acquire additional shares of Common Stock. The 140,000 Shares that the Company is offering to purchase represent approximately 6.6% of the outstanding Shares. As of such date, there were approximately 462 holders of record of Common Stock, of which approximately fewer than 81 holders each held fewer than one hundred (100) Shares. Because certain shares are held in the names of brokers and nominees, the Company is unable to determine the total number of beneficial holders of fewer than one hundred (100) Shares or the aggregate number of Shares they own. This Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares as of September 30, 1997 and will be furnished to brokers, banks and similar persons whose names, or the names of whose nominees appear on the Company's shareholder list. 5. TENDERS BY HOLDERS OF FEWER THAN ONE HUNDRED (100) SHARES All Shares tendered for purchase by persons who beneficially held fewer than one hundred (100) Shares on September 30, 1997, and who properly tender all of their Shares prior to the Expiration Date, will be accepted before proration, if any, of the purchase of other tendered Shares, but only if the Shares so tendered do not exceed the maximum number of Shares to be purchased (see Section 1). Partial tenders will not qualify for this preference, and it is not available to holders who beneficially own one hundred (100) or more Shares on the Expiration Date even though such holders have separate stock certificates for fewer than one hundred (100) Shares. Any shareholder owning fewer than one hundred (100) Shares in the aggregate and who wishes to tender all such Shares must complete Box E, captioned "Odd Lots", in the Letter of Transmittal. As also indicated in Section 4, the Company has reserved the right, but will not be obligated, to purchase all Shares properly tendered by any shareholder who has tendered all Shares beneficially owned by him or her and as a result of prorating would then own an aggregate of fewer than one hundred (100) Shares. 8 6. PROCEDURE FOR TENDERING SHARES For a shareholder to tender Shares pursuant to the Offer, certificates for such Shares, together with a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal, must be actually received prior to the Expiration Date by the Depositary at the appropriate address set forth in the Letter of Transmittal, except as otherwise provided below in this Section 6. DEPOSIT OF THESE MATERIALS IN THE MAIL ON THE EXPIRATION DATE DOES NOT CONSTITUTE A TIMELY TENDER. No signature guarantee is required unless Special Payment Instructions or Special Delivery Instructions are given on the Letter of Transmittal. If a shareholder desires to tender Shares pursuant to the Offer and such shareholder's certificates are not immediately available or time will not permit the Letter of Transmittal and other required documents to reach the Depositary by the Expiration Date, such Shares may nevertheless be tendered, provided that all of the following conditions are satisfied: (a) such tenders are made by or through a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers or a commercial bank, trust company, savings and loan association or credit union with membership in an approved signature guarantee medallion program pursuant to the Commission's Rule 17Ad-15 (herein, an "Eligible Institution"); (b) the Depositary receives (by hand, mail, telegram or acceptable facsimile transmission), prior to the Expiration Date, a properly completed and duly executed Guarantee of Delivery contained in the Letter of Transmittal; and (c) the certificates for all tendered Shares, together with a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal, are received by the Depositary within ten (10) business days after receipt by the Depositary of such Guarantee of Delivery. Payments for Shares tendered and purchased will be made only after receipt by the Depositary of the certificate(s) therefor, a properly completed and duly executed Letter of Transmittal and any other documents required by the Letter of Transmittal. THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING SHARE CERTIFICATES, IS AT THE ELECTION AND RISK OF THE TENDERING SHAREHOLDER. IF DELIVERY IS BY MAIL, INSURED, REGISTERED MAIL, RETURN RECEIPT REQUESTED, SHOULD BE CONSIDERED, AND ENOUGH TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares will be determined by the Company, and its determination shall be final and binding. The Company reserves the absolute right to reject any or all tenders determined by it not to be in appropriate form or which would, in the opinion of the Company's counsel, be unlawful. The Company also reserves the absolute right to waive any of the conditions of the Offer or any defect or irregularity in any tender with respect to any particular Shares or any particular shareholder, and 9 the Company's interpretations of the terms and conditions of the Offer will be final and binding. Tenders will not be deemed to have been made until any defects and any irregularities have been cured or waived. Neither the Company, the Depositary nor any other person shall be obligated to give any such notice nor incur any liability for failure to give any such notice. A tender of Shares made pursuant to any one of the procedures set forth above will constitute an agreement between the tendering shareholder and the Company in accordance with the terms and subject to the conditions of this Offer. If any tendered Shares are not purchased, or if less than all Shares evidenced by a shareholder's certificate are tendered, certificates for unpurchased Shares will be returned as promptly as practicable after the expiration or termination of the Offer. CERTIFICATES FOR SHARES, TOGETHER WITH A PROPERLY COMPLETED LETTER OF TRANSMITTAL AND ANY OTHER DOCUMENTS REQUIRED BY THE LETTER OF TRANSMITTAL, MUST BE DELIVERED TO THE DEPOSITARY AND NOT THE COMPANY. ANY SUCH SHARES DELIVERED TO THE COMPANY WILL NOT BE DEEMED TO BE VALIDLY TENDERED. 7. WITHDRAWAL RIGHTS Tenders made pursuant to the Offer are revocable and may be withdrawn (i) at any time prior to the Expiration Date (including any extension of the Offer period), and (ii) if not yet accepted for payment, after the expiration of 40 business days from the commencement of the Offer (that is, any time after December 11, 1997), until the tender is accepted for payment. To be effective, a notice of withdrawal in written, telegraphic or facsimile form must be received in a timely manner by the Depositary at the appropriate address set forth in the Letter of Transmittal. Any notice of withdrawal must specify the name of the person having tendered the Shares to be withdrawn, the number of Shares tendered, the number of Shares to be withdrawn and, if certificates representing such Shares have been delivered to the Depositary, the name of the registered holder(s) of such Shares, as set forth in such certificates. If the certificates have been delivered to the Depositary, the tendering shareholder must also submit the serial numbers of the particular certificates for the Shares to be withdrawn and the signature on such shareholder's notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 6). All questions as to the form and validity (including the time of receipt) of notices of withdrawal will be determined by the Company, in its sole discretion, and its determination shall be final and binding on all parties. Neither the Company nor the Depository or any other person is or will be obligated to give notice of any defects or irregularities in any notice of withdrawal, and none of them will incur any liability for failure to give any such notice. Withdrawals may not be rescinded, and Shares properly withdrawn shall not be deemed to be duly tendered for purposes of the Offer. Withdrawn shares may, however, be re-tendered before the Expiration Date by again following one of the procedures described in Section 6. 8. PURCHASE OF SHARES AND PAYMENT OF PURCHASE PRICE Upon the terms and subject to the conditions of the Offer and as promptly as practicable after the Expiration Date, the Company will accept for payment and pay the Purchase Price for any and all Shares validly tendered. Thereafter, payment for all Shares accepted for payment pursuant to the 10 Offer will be made by the Depositary by check as promptly as practicable. In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for Shares. The Company shall be deemed to have purchased Shares pursuant to the Offer when, as and if it gives oral or written notice to the Depositary of its acceptance for payment of such Shares, which notice, subject to the provisions of the Offer, may be given at any time after the Expiration Date. However, in the event of proration, the Company does not expect to be able to determine the final proration factor and pay for tendered Shares until approximately ten (10) business days after the Expiration Date. Certificates for all tendered Shares not purchased (see Section 4) will be returned as soon as practicable after the Expiration Date or termination of the Offer, without expense to the tendering shareholder. The Company will pay all stock transfer taxes, if any, payable on the transfer to it of Shares purchased pursuant to the Offer. However, if payment of the purchase price is to be made to, or (in the circumstances permitted by the Offer) if unpurchased shares are to be registered in the name of any person other than the registered holder, or if tendered certificates are registered in the name of any person other than the person signing the Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. The Depositary will act as agent for tendering shareholders for the purpose of receiving payment from the Company and transmitting payment to tendering shareholders. The Company will not pay interest on the purchase price. ANY TENDERING SHAREHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY AND SIGN THE BOX CAPTIONED "SUBSTITUTE FORM W-9" IN THE LETTER OF TRANSMITTAL MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING OF THIRTY-ONE PERCENT (31%) OF THE GROSS PROCEEDS PAID TO SUCH SHAREHOLDER OR OTHER PAYEE PURSUANT TO THE OFFER. SEE SECTION 2. 9. CONDITIONAL TENDER OF SHARES Under certain circumstances and subject to the exceptions set forth in Section 4 above, the Company may prorate the number of Shares purchased pursuant to the Offer. As discussed in Section 2, the number of Shares to be purchased from a particular shareholder might affect the tax consequences to such shareholder of such purchase and such shareholder's decision whether to tender. Accordingly, a shareholder may tender Shares subject to the condition that a specified minimum number must be purchased, if any are purchased. Any shareholder desiring to make such a conditional tender should so indicate in Box D captioned "Conditional Tender" on the Letter of Transmittal. It is the tendering shareholder's responsibility to calculate such minimum number of Shares. If the effect of accepting tenders on a pro-rata basis is to reduce the number of Shares to be purchased from any shareholder below the minimum number so specified, such tender will automatically be regarded as withdrawn, except as provided in the next paragraph, and all Shares tendered by such shareholder will be returned as soon as practicable thereafter. If so many conditional tenders are withdrawn that the total number of Shares to be purchased falls below 140,000, then to the extent feasible the Company will select enough of such conditional tenders, which would otherwise have been withdrawn, to purchase such desired number of Shares. 11 In selecting among such conditional tenders, the Company will select by lot and will limit its purchase in each case to the designated minimum number of Shares to be purchased. 10. CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other term of the Offer, the Company may, at its option, withdraw the Offer and shall not be required to accept for payment or purchase or pay for any Shares tendered, if before termination of the Offer, any of the following events shall have occurred (or shall have been determined by the Company to have occurred) that, in the Company's judgment in any such case and regardless of the circumstances giving rise thereto (including any action or omission to act by the Company), makes it inadvisable to proceed with the Offer or with such acceptance for payment or payment: (a) there shall have been instituted or threatened any action or proceeding before any court or administrative agency which (i) challenges the acquisition of Shares pursuant to the Offer or otherwise relates in any manner to the Offer or (ii) in the judgment of the Company could otherwise materially and adversely affect the Company; or (b) any action shall have been taken, or any statute, rule, regulation or order shall have been proposed, enacted, enforced, or deemed to be applicable to the Offer, by any government or governmental agency or other regulatory administrative authority, domestic or foreign, which, in the judgment of the Company would or might prohibit, restrict or delay consummation of the Offer or materially impair the contemplated benefits of the Offer to the Company; or (c) there shall have occurred any commencement of armed hostilities directly or indirectly involving the United States or there shall have occurred any national emergency, banking moratorium or suspension of payments by banks in the United States; or (d) any change shall occur or be threatened in the business, condition (financial or otherwise), operations, stock ownership, or prospects of the Company or either of the Subsidiary Banks, which, in the judgment of the Company, is or may be material to the Company or either of the Subsidiary Banks, any of which, in the sole judgment of the Company, makes it inadvisable to proceed with such acceptance, purchase or payment. Any determination by the Company concerning any events described in this Section 10 and any related judgment or decision by the Company regarding the inadvisability of proceeding with the purchase of or payment for any Shares tendered shall be final and binding upon all parties. The foregoing conditions are for the sole benefit of the Company and may be asserted by the Company regardless of the circumstances (including any action or inaction by the Company) giving rise to any such condition or may be waived by the Company in whole or in part. The Company's failure at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 11. PRICE RANGE OF COMMON STOCK; DIVIDENDS There is no established public market for the shares of the Common Stock. The following table sets forth the range of the high and low sale prices of the Common Stock for the periods indicated for which the management of the Company had knowledge of the prices involved; the 12 number of transactions represented during the periods indicated; the total number of shares traded in such transactions; and the per-share dividends paid and/or declared on the Common Stock for each of the quarters indicated. THESE PRICES REFLECT ONLY THOSE 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 RESULT OF ISOLATED TRANSACTIONS AND ARE NOT NECESSARILY INDICATIVE OF THE ACTUAL OR MARKET VALUE OF SUCH SECURITIES. STOCK PRICES NUMBER OF NUMBER OF ------------ TRANSACTIONS SHARES DIVIDENDS HIGH LOW REPRESENTED REPRESENTED PER SHARE ---- --- ----------- ----------- --------- 1995 - ---- 1st Quarter. . . .$12.75 $12.75 4 3,980 $0.16 2nd Quarter. . . .$12.50 $12.00 7 7,180 $0.16 3rd Quarter. . . .$13.00 $12.00 9 3,400 $0.16 4th Quarter. . . .$12.00 $12.00 14 5,000 $0.16 1996 - ---- 1st Quarter. . . .$12.00 $12.00 3 732 $0.16 2nd Quarter. . . .$12.00 $12.00 10 4,329 $0.16 3rd Quarter. . . .$12.00 $12.00 5 1,190 $0.16 4th Quarter. . . .$12.00 $11.25 4 30,310 $0.16 1997 - ---- 1st Quarter. . . .$12.50 $12.00 8 1,550 $0.16 2nd Quarter. . . .$12.50 $12.00 20 23,700 $0.16 3rd Quarter. . . .$12.00 $12.00 1 400 $0.16 4th Quarter. . . . $-- $-- -- $ -- $ -- (through October 10) 12. SOURCE AND AMOUNT OF FUNDS Assuming that the Company purchases 140,000 Shares in this Offer, at a price of $14.50 per share, the total amount required to purchase the Shares (exclusive of costs and expenses of this Offer) would equal $2,030,000. The Company intends to pay for tendered Shares, as well as for the costs and expenses of this Offer, from the general funds and working capital of the Company. The Company will not incur any debt in connection with the Offer. 13. CERTAIN INFORMATION ABOUT THE COMPANY GENERAL INFORMATION 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 13 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. Waskom Bancshares, Inc. is an inactive shell corporation. 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 one-bank holding company. The Delaware BHC owns all of the issued and outstanding stock of the Subsidiary Banks. 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. 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, Citizens Bank moved to its current location at 201 West Main Street. Citizens Bank operates branch offices in Henderson, Overton, Mount Enterprise, Jefferson, Malakoff, and Chandler, Texas. Citizens Bank also operates a trust office in Corsicana, Texas. At June 30, 1997, Citizens Bank had approximately $323,943,000 in assets, $292,169,000 in deposits, $96,946,000 in loans (net of unearned discount), and $29,559,000 in shareholder's equity. Citizens Bank is regulated and supervised by the Comptroller. The Waskom Bank was originally chartered on November 26, 1954, as a Texas banking association. Its sole banking office is located at 745 Spur 156, Waskom, Texas. At June 30, 1997, the Waskom Bank had approximately $25,534,000 in assets, $21,748,000 in deposits, $6,395,000 in loans (net of unearned discount), and $3,623,000 in shareholder's equity. The Waskom Bank is regulated and supervised by the Federal Deposit Insurance Corporation and the Texas Department of Banking. 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 and real estate loans. The Subsidiary Banks also provide a wide range of consumer banking services, including savings and checking accounts, various savings programs and installment and other personal loans. Citizens Bank also offers trust services, safe deposit boxes, automatic teller machines and automated clearinghouse payroll services. In 1992, Citizens Bank began offering a wide array of investment products, such as annuities, mutual funds and discount brokerage services, to its customers. In 1994, Citizens Bank began offering a twenty-four (24) hour automated telephone account inquiry system, which was complemented in late 1995 by a loan by phone automated system. In January 1994 Citizens Bank began a Community Development Corporation, which is a subsidiary of the bank, and offers affordable housing to lower income persons in the community. 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. Citizens Bank 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, and Malakoff and Chandler, which includes Henderson County. The Waskom Bank 14 compliments the service area of Citizens Bank by servicing 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. 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. The Company conducts no other activity than the operation of the Delaware BHC and, indirectly, the Subsidiary Banks. Neither the Company nor the Delaware BHC engage in any nonbanking activities at this time. 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. As of June 30, 1997, the Company had, on a consolidated basis, total assets of approximately $349,180,000, total deposits of approximately $313,023,000, total loans, (net of unearned discount and allowance for loan losses) of approximately $102,146,000 and total shareholders' equity of approximately $32,587,000. HISTORICAL FINANCIAL INFORMATION The following table sets forth certain summary historical consolidated financial information of the Company and its subsidiaries. The historical financial information for fiscal years 1995 and 1996 has been derived from, and should be read in conjunction with, the audited consolidated financial statements of the Company as reported in the Company's Annual Reports on Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1996, which reports are incorporated herein by this reference. In addition, the historical financial information for the six months ended June 30, 1997 and 1996 is unaudited. Such historical financial information for fiscal year 1997 is set forth in the Company's Quarterly Report on Form 10-Q for the quarter and six months ended June 30, 1997 and 1996, which report is incorporated herein by this reference. The summary historical financial information should be read in conjunction with, and is qualified in its entirety by reference to, the audited and unaudited financial statements and the related notes thereto from which it has been derived. Copies of reports may be inspected or obtained from the Commission in the manner specified in "--Additional Information" below. 15 SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION UNAUDITED SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, -------------- ------------ 1997 1996 1996 1995 ---- ---- ---- ---- (In thousands, except per share data) INCOME STATEMENT DATA: Total revenues . . . . . . . . . . . . $ 12,497 $ 11,924 $ 23,959 $ 22,355 Net (loss) income. . . . . . . . . . 1,571 1,905 3,344 2,464 Net income per common share. . . . . . . . . . . . . . . . . 0.74 0.88 1.55 1.14 Weighted average number of common shares . . . . . . . . . . . . . . . . 2,126 2,160 2,153 2,160 BALANCE SHEET DATA: Total assets . . . . . . . . . . . . . $349,180 $319,726 $356,830 $326,879 Long-term debt . . . . . . . . . . . . -- -- -- -- Shareholders' equity . . . . . . . . . 32,587 31,019 31,988 31,206 Book value per common share. . . . . . 15.40 14.36 15.02 14.45 ADDITIONAL INFORMATION Additional information concerning the Company is set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, in the Company's Proxy Statement dated March 25, 1997, and in the Company's Quarterly Report on Form 10-Q for the six months ended June 30, 1997. Such reports are available upon request from the Company. The Company also has filed a Transaction Statement on Schedule 13E-3 and an Issuer Tender Offer Statement on Schedule 13E-4 with the Commission, which includes certain additional information relating to the Offer. Forms 10-K and 10-Q as well as other periodic reports, proxy statements and other information are regularly filed by the Company with the Commission. Such material may be inspected and copied at prescribed rates at the Commission's public reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC. The Commission maintains an Internet Web site on the World Wide Web at http://www.sec.gov., containing reports, proxy and information statements and other information regarding companies who file reports electronically with the Commission. 14. CERTAIN PRO FORMA FINANCIAL INFORMATION The following summary unaudited consolidated pro forma balance sheets as of December 31, 1996, and June 30, 1997, have been prepared on the assumption that the Company acquired 140,000 shares of its Common Stock for $14.50 per share pursuant to the Offer on December 31, 1996 and June 30, 1997, respectively. The only pro forma effects on the balance sheets of the Company are (a) to reduce assets and shareholders' equity by approximately $2,100,000 for the retirement of the stock and related expenses and (b) to show the effect of the dividends that would not have been declared and paid if the stock had been repurchased as of December 31, 1996 and June 30, 1997. 16 PRO FORMA CONSOLIDATED BALANCE SHEETS (UNAUDITED) (In thousands, except share data) ASSETS:
JUNE 30, DECEMBER 31, 1997 1996 ---- ---- Cash and due from banks. . . . . . . . . . . . . . $ 11,974 $ 14,205 Federal funds sold . . . . . . . . . . . . . . . . 600 1,150 Cash and cash equivalents. . . . . . . . . . . . 12,674 15,455 Investment securities. . . . . . . . . . . . . . . 220,269 228,155 Loans, net of unearned discount and fees . . . . . 103,342 101,971 Less: allowance for loan losses. . . . . . . . . 1,196 1,146 ------- ------- Net loans. . . . . . . . . . . . . . . . . . . 102,146 100,825 Premises and equipment, net. . . . . . . . . . . . 4,801 3,751 Accrued interest receivable. . . . . . . . . . . . 3,403 3,449 Other assets . . . . . . . . . . . . . . . . . . . 3,933 3,195 ------- ------- Total assets . . . . . . . . . . . . . . . . . . $347,126 $354,730 ------- ------- ------- ------- LIABILITIES: Deposits: Noninterest-bearing demand . . . . . . . . . . . $ 32,501 $ 31,785 Savings and time . . . . . . . . . . . . . . . . 280,522 288,888 ------- ------- Total deposits . . . . . . . . . . . . . . . . $313,023 $320,673 Accrued interest payable and other liabilities . . 3,570 4,169 ------- ------- Total liabilities. . . . . . . . . . . . . . . . $316,593 $324,842 ------- ------- SHAREHOLDERS EQUITY: Common stock ($5.00 par value per share) 10,000,000 shares authorized; 1,976,080 would have been outstanding at June 30, 1997 and 1,990,300 would have been outstanding at December 31, 1996). . . . . . . . $ 10,800 $ 10,800 Capital surplus. . . . . . . . . . . . . . . . . . 5,400 5,400 Net unrealized loss on securities available for sale . . . . . . . . . . . . . . . . . . . . (824) (703) Undivided profits. . . . . . . . . . . . . . . . . 17,763 16,825 ------- ------- 33,139 32,322 Less treasury stock, 183,920 shares and 169,700 shares, respectively, at cost at June 30, 1997 and December 31, 1996. . . . . . . . . . . . . . . (2,606) (2,434) ------- ------- Net shareholders equity . . . . . . . . . . . . 30,533 29,888 ------- ------- Total liabilities and shareholders equity . . $347,126 $354,730 ------- ------- ------- -------
The Company intends to pay for tendered Shares, as well as for the costs and expenses of the Offer, from the general funds and working capital of the Company. The Company will not incur any debt in connection with the Offer. For the 140,000 shares assumed to have been repurchased on December 31, 1996, the pro forma balance sheet for June 30, 1997, includes an increase in undivided profits of approximately 17 $45,000 for the dividends that would not have been declared in February and May 1997 and paid in March and June 1997, on the assumed repurchased Shares. The loss of interest income from funds used to repurchase the Shares associated with this Offer are estimated to be immaterial, with an effect on the Company's income statement equivalent to less than $0.03 and $0.02 per Share, respectively, for the year ended December 31, 1996 and the six month period ended June 30, 1997. Because there would have been only an immaterial effect on the net income of the Company had the transaction occurred at the beginning of 1996 or 1997, the pro forma income statements would not be materially different from the historical amounts included in the income statements for the year ended December 31, 1996 and the six month period ended June 30, 1997. Therefore, no pro forma income statements are presented for these two periods. Pro forma earnings per share would be impacted by the assumed repurchase of 140,000 Shares by the immaterial effect on net income of the loss of interest income from funds used to repurchase the Shares associated with this Offer and by the reduction of the number of Shares outstanding. The pro forma book value per share would also be impacted by the reduction in capital and reduction in the number of Shares outstanding. The following table shows the historical and pro forma average shares outstanding and earnings per share for the year ended December 31, 1996 and the six month period ended June 30, 1997 as if the repurchase had occurred on January 1, 1996. Additionally, the historical and pro forma book value per share as of December 31, 1996 and June 30, 1997 are presented as if the repurchase had occurred on December 31, 1996 and June 30, 1997, respectively. AS OF OR FOR THE AS OF OR FOR THE SIX MONTH PERIOD ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- Average shares outstanding: Historical. . . . . . . . 2,125,946 2,153,333 Pro forma . . . . . . . . 1,985,946 2,013,333 Earnings per share: Historical. . . . . . . . $0.74 $1.55 Pro forma . . . . . . . . $0.77 $1.59 Book value per share Historical. . . . . . . . $15.40 $15.02 Pro forma . . . . . . . . $15.45 $15.02 The Company and the Subsidiary Banks are both subject to regulatory requirements regarding maintaining minimum capital. The following table shows the historical capital ratios of the Company and each of the Subsidiary Banks at December 31, 1996 and June 30, 1997 (with the pro forma ratios assuming that 140,000 Shares had been purchased by the Company at December 31, 1996) and the minimum required regulatory ratios. 18
JUNE 30, 1997 DECEMBER 31, 1996 ------------- ----------------- CITIZENS WASKOM CITIZENS WASKOM BANK BANK COMPANY BANK BANK COMPANY ---- ---- ------- ---- ---- ------- Risk-based capital ratio: Historical . . . . . . . . . 25.2% 27.5% 25.0% 24.4% 25.5% 24.0% Pro forma . . . . . . . . . 24.0% 26.5% 23.8% 23.2% 24.5% 22.8% Minimum required ratios to be considered "well" capitalized 10.0% 10.0% 10.0% 10.0% 10.0% 10.0% Leverage ratio: Historical . . . . . . . . . 9.2% 9.1% 9.1% 9.0% 8.9% 8.8% Pro forma . . . . . . . . . 8.7% 8.6% 8.6% 8.4% 8.4% 8.2% Minimum required ratios to be considered well capitalized 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
The Company's pro forma financial statements should be read in conjunction with the historical consolidated financial information incorporated herein by reference and do not purport to be indicative of future earnings or financial positions or of what earnings or financial position would have been had the Offer been consummated as of the dates for which pro forma statements are presented. 15. TRANSACTIONS AND ARRANGEMENTS CONCERNING THE COMMON STOCK The following table sets forth information concerning transactions in the Common Stock by the Company, its subsidiaries, its executive officers and directors, which, if any, occurred during the period of sixty (60) business days prior to the date of this Offer:
DATE OF NUMBER PRICE MEANS OF EFFECTING IDENTITY OF PERSON TRANSACTION OF SHARES PER SHARE TRANSACTION ------------------ ----------- --------- --------- ----------- Henderson Citizens Bancshares, Inc. 8-14-97 400 $12.00 private transaction
In addition to the foregoing, the following paragraphs provide information concerning purchases of the Common Stock by the Company since the second full fiscal year preceding the date of this Offer. On October 10, 1996, the Company completed the repurchase of 29,700 shares of 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. In addition, during the period between April 24, 1997 and May 30, 1997, the Company repurchased an aggregate of 14,220 shares of Common Stock (representing approximately 0.6676% of its then outstanding shares) in a series of privately negotiated transactions. Such shares were 19 purchased at prices ranging from $12.00 to $12.50 per share. The purchase price for these shares was paid in cash using available cash resources, and the Company did not incur any debt in connection with such stock repurchases. The following table sets forth the information concerning the number of Shares owned beneficially as of October 15, 1997 by (i) the Company and the Subsidiary Banks, and (ii) each director and executive officer of the Company who owns Shares. PERCENTAGE OF NUMBER OF SHARES BENEFICIAL OWNER SHARES OWNED OUTSTANDING(1) ---------------- ------------ ----------- Citizens National Bank 401(k) Plan 8,000 0.3781% Directors: F. Landon Alford 140,228(2) 6.6280% R. M. Ballenger 800 0.0378% Stayton M. Bonner, Jr. 145,622(3) 6.8830% David J. Burks 9,775 0.4620% Billy Crawford 1,000 0.0473% Sheila Gresham 6,120 0.2893% James M. Kangerga 9,188(4) 0.4343% J. Mark Mann 5,710(5) 0.2699% Milton S. McGee, Jr. 6,698(6) 0.3166% Charles H. Richardson 24,160(7) 1.1419% - ------------------------ (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 2,115,680 shares outstanding. (2)Includes 2,000 shares held by Mr. Alford's spouse. (3)A total of 6,798 of these shares are held in trust for Mr. Bonner's three minor sons, John S. Bonner, Stayton M. Bonner III and Walter N. Bonner (2,266 shares each). Also included are 900 shares held in the name of Bonner Brothers Partnership, the partners of which are Mr. Bonner's three minor sons. Also includes 2,000 shares held in the name of Stayton M. Bonner, Jr., Living Trust, for which Mr. Bonner who 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. In addition, it appears that Mr. Bonner is also co-trustee with Citizens National Bank on two other trusts of which he is not a beneficiary, which trusts own an aggregate of 88,560 shares of Company Stock. The shares of Company Stock held in all four of these trusts (the "Shaw Trusts") are voted solely by Mr. Bonner. Therefore, the 132,840 shares of Company Stock held in the four Shaw Trusts are included in the total shares beneficially owned by Mr. Bonner. (4)Includes 2,722 shares owned by CNB Co. as trustee for a self-directed I.R.A. account for the benefit of James M. Kangerga, who has voting authority for these shares. Also includes 20 shares in the name of Mr. Kangerga's minor children. (5)Shares are held jointly by Mr. Mann and his wife. (6)Includes 50 shares owned by Mr. McGee's minor son and 6,648 shares held jointly by Mr. McGee and his wife. (7)Includes 2,160 shares held jointly by Mr. Richardson and his wife. 20 PERCENTAGE OF NUMBER OF SHARES BENEFICIAL OWNER SHARES OWNED OUTSTANDING ---------------- ------------ ----------- Tony Wooster 1,800(8) 0.0851% Alfred Wylie 32,764(9) 1.5486% Non-Director Executive Officers: Bill Hurst 1,280 0.0605% Nelwyn Richardson 280 0.0132% Rebecca G. Tanner 80 0.0038% ------- -------- TOTAL 437,785 20.6924% ------- -------- ------- -------- Executive officers and directors of the Company and the Subsidiary Banks will be eligible to tender Shares pursuant to this Offer. However, as of the date hereof, no executive officer or director of the Company or the Subsidiary Banks has specifically indicated whether he or she intends to tender any Shares pursuant to the Offer. Except as set forth herein, neither the Company nor, to the Company's knowledge, any of its executive officers or directors, or any of the executive officers or directors of any of its subsidiaries, is a party to any contract, arrangement, understanding or relationship relating, directly or indirectly, to this Offer with any other person with respect to the Common Stock. The Company may in the future purchase Shares in the open market, in private transactions, through tender offers or otherwise. However, Rule 13e-4 under the Exchange Act prohibits the Company from making any purchases of Shares until ten (10) business days after the Expiration Date, other than pursuant to the Offer. Thereafter, any purchases the Company may choose to make may be on the same terms as, or on terms more or less favorable to shareholders than, the terms of the Offer. Any possible future purchases by the Company will depend on numerous factors, including the market price of the Shares, the results of the Offer, the Company's business and financial condition and general economic and market conditions. Except as disclosed in this Offer to Purchase, the Company currently has no plans or proposals that relate to or would result in (a) the acquisition by any person of additional securities of the Company or the disposition of securities of the Company; (b) an extraordinary corporate transaction, such as a merger, reorganization or liquidation, involving the Company or any or all of its subsidiaries; (c) a sale or transfer of a material amount of assets of the Company or any of its subsidiaries; (d) any change in the present Board or management of the Company; (e) any material change in the present dividend rate or policy, or indebtedness or capitalization of the Company; (f) any other material change in the Company's corporate structure or business; or (g) any material change in the Company's Articles of Incorporation or Bylaws or any actions which may impede the acquisition of control of the Company by any person. - ------------------------ (8)Shares are held jointly by Mr. Wooster and his wife. (9)Includes 2,640 shares held by Mr. Wylie's wife. 21 As discussed at Section 1 herein, this Offer may have the effect of reducing the number of shareholders of the Company to a level that would permit the Company to suspend the Company's obligation to file periodic and current reports with the Commission pursuant to section 13 of the Exchange Act. Management of the Company has indicated that it will elect to suspend the Company's reporting obligations if a sufficient number of shareholders tender all of their shares pursuant to this Offer. 16. GOVERNMENT REGULATION The Company is not aware of any license or regulatory permit material to its business that might be adversely affected by its acquisition of Shares as contemplated in the Offer or of any approval or other action by any government or governmental, administrative or regulatory authority or agency, domestic or foreign, that would be required for the Company's acquisition or ownership of Shares as contemplated by the Offer. Under regulations promulgated by the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended, a bank holding company must give written notice to the Federal Reserve Board before purchasing or redeeming its equity securities if the gross consideration paid for the purchase or redemption equals or exceeds ten percent (10%) of the company's consolidated net worth, unless, (i) both before and following the redemption, the holding company meets the thresholds established for "well capitalized" state member banks under applicable regulations and (ii) the bank holding company received a composite "1" or "2" rating at its most recent examination. Because the aggregate consideration to be paid for Shares repurchased pursuant to the Offer will not exceed ten percent (10%) of the Company's consolidated net worth, the Company is not required to file a prior notice with the Federal Reserve Board. No approval of any other federal, state or local governmental body is required with respect to the Offer. Should any such approval or other action be required, the Company currently contemplates that it will seek such approval or other action. The Company cannot predict whether it may determine that it is required to delay the acceptance for payment of, or payment for, Shares tendered pursuant to the Offer pending the outcome of any such matter. There can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that the failure to obtain any such approval or other action might not result in adverse consequences to the Company's business. 17. EXTENSION OF THE OFFER PERIOD; TERMINATION; AMENDMENTS The Company reserves the right, in its sole discretion, at any time or from time to time, and regardless of whether or not any of the events set forth in Section 10 shall have occurred or shall be deemed by the Company to have occurred, to extend the period of time during which the Offer is open (and thereby delay acceptance for payment of, and payment for, any Shares) by giving oral or written notice of extension to the Depositary and making a public announcement thereof. The Company also reserves the right, in its sole discretion, to terminate the Offer and not to purchase or pay for any Shares not theretofore purchased or paid for upon the occurrence of any of the conditions specified in Section 10 by giving oral or written notice of such termination to the Depositary and making a public announcement thereof. The Company further reserves the right, in its sole discretion, and regardless of whether any of the events set forth in Section 10 shall have occurred or shall be deemed by the Company to have occurred, to amend the Offer in any respect (including, without limitation, by decreasing or increasing the consideration offered in the Offer to holders of Shares or 22 by decreasing or increasing the number of Shares being sought in the Offer). Amendments to the Offer may be made at any time and from time to time effected by public announcement thereof, such announcement, in the case of an extension, to be issued no later than 9:00 A.M., Eastern Standard time, on the next business day after the last previously scheduled or announced Expiration Date. Any public announcement made pursuant to the Offer will be disseminated promptly to shareholders in a manner reasonably designated to inform shareholders of such change. If the Company makes a material change in the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, the Company will extend the Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2) promulgated under the Exchange Act, which require that the minimum period during which an offer must remain open following material changes in the terms of the offer or information concerning the offer (other than a change in price or a change in percentage of securities sought) will depend upon the facts and circumstances, including the relative materiality of such terms or information. If (i) the Company increases or decreases the price to be paid for Shares, the Company increases the number of Shares being sought and such increase in the number of Shares being sought exceeds two percent (2%) of the outstanding Shares, or the Company decreases the number of Shares being sought, and (ii) the Offer is scheduled to expire at any time earlier than the expiration of a period ending on the tenth (10th) business day from, and including, the date that notice of such increase or decrease is first published, sent or given, the Offer will be extended until the expiration of such period of ten (10) business days. 18. FEES AND EXPENSES The Depositary will receive reasonable and customary compensation for its services, will be reimbursed for reasonable out-of-pocket expenses and will be indemnified against certain liabilities in connection with the Offer, including certain liabilities under the federal securities laws. The Company will reimburse any broker or dealer, commercial bank or trust company for customary handling and mailing expenses incurred in forwarding the Offer. No such broker, dealer, commercial bank or trust company has been authorized to act as an agent of the Company or the Depositary for purposes of the Offer. Other than as described above, the Company will not pay any solicitation fees to any broker, dealer, bank, trust company or other person for any Shares purchased in connection with the Offer. The Company will reimburse such persons for customary handling and mailing expenses incurred in connection with the Offer. The Company will pay all stock transfer taxes, if any, payable on account of the acquisition of the Shares by the Company pursuant to the Offer, except in certain circumstances where special payment or delivery procedures are utilized pursuant to Instruction 6 of the Letter of Transmittal. The expenses incurred, or estimated to be incurred, by the Company in connection with the Offer are set forth below. The Company will be responsible for paying all such expenses. 23 ESTIMATED EXPENSES THE COMPANY WILL INCUR IN CONNECTION WITH THE OFFER. Stationery and Postage $ 3,000.00 SEC Document Conversion and Filing Fee $ 2,000.00 Fairness Opinion $16,500.00 Legal Fees $15,000.00 Accounting Fees $10,000.00 Depository Fees $ 6,000.00 ---------- Total $52,500.00 ---------- ---------- 19. MISCELLANEOUS The Offer is being made to all holders of Shares. The Company is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to a valid state statute. If the Company becomes aware of any valid state statute prohibiting the making of the Offer, the Company will make a good faith effort to comply with such statute. If, after such good faith effort, the Company cannot comply with such statute, the Offer will not be made to, nor will tenders be accepted from or on behalf of, holders of Shares in such state. In those jurisdictions whose securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Company by or one or more registered brokers or dealers licensed under the laws of such jurisdiction. HENDERSON CITIZENS BANCSHARES, INC. 24 APPENDIX A 25 [ON LETTERHEAD OF THE BANK ADVISORY GROUP, INC.] October 15, 1997 Board of Directors Henderson Citizens Bancshares, Inc. Henderson, Texas Gentlemen: You have requested that The Bank Advisory Group, Inc. act as an independent financial analyst and advisor to the common shareholders of Henderson Citizens Bancshares, Inc., Henderson, Texas (the "Company"), in connection with a self tender offer whereby the number of Company shareholders may be reduced to a number sufficient to permit deregistration with the Securities and Exchange Commission (the "Offer"). In our role as an independent financial analyst, you have requested our opinion with regard to the fairness--from the perspective of the tendering common shareholders of Company--of the per share cash price to be paid for tendered shares in connection with the Offer, as outlined in the OFFER TO PURCHASE dated October 15, 1997. Our understanding is that Henderson Citizens Bancshares, Inc. proposes to consummate the Offer pursuant to the following financial terms: - Company will purchase up to 140,000 shares of its issued and outstanding common stock (the "Shares") at $14.50 per share in the form of cash.. - All Shares tendered by any shareholder who owned beneficially an aggregate of fewer than one hundred (100) Shares and who tenders all of such Shares shall be purchased in full. - Company reserves the right to purchase, prior to purchasing Shares to be purchased on a pro-rata basis, all Shares tendered by any shareholder who has tendered all Shares beneficially owned by him or her and, as a result of the contemplated prorating, would then own an aggregate of fewer than one hundred (100) Shares. A-1 Board of Directors Henderson Citizens Bancshares, Inc. October 15, 1997 Page 2 - Company reserves the right, in its sole discretion, to elect to purchase any or all of the excess Shares tendered; and so long as this excess number accepted by Company does not exceed two percent (2%) of the issued and outstanding Shares. - In the event of an oversubscription of the Offer, Shares tendered shall be purchased on a pro-rata basis, disregarding fractions, according to the number of Shares tendered by each shareholder. The Bank Advisory Group, Inc., as part of its line of professional services, specializes in rendering valuation opinions of banks and bank holding companies in connection with mergers and acquisitions nationwide. Prior to our retention for this assignment, The Bank Advisory Group has not provided financial advisory services to Company. In connection with this opinion and with respect to Henderson Citizens Bancshares, Inc., we have reviewed, among other things: 1. Audited consolidated financial statements for Company for the years ended December 31, 1996 and 1995; 2. Consolidated financial statements for Company presented on form F.R. Y-9C for the three years ended December 31, 1996, 1995, and 1994, and for the quarter ended June 30, 1997, as filed with federal bank regulatory agencies; 3. Reports of Condition and Income for Citizens National Bank, Henderson, Texas and First State Bank, Waskom, Texas (the "Banks") for the years ended December 31, 1996, 1995, and 1994, and for the quarter ended June 30, 1997, as filed with federal bank regulatory agencies; 4. Internal financial statements for Banks, as of September 30, 1997; 5. The condition of the commercial banking industry, as indicated in financial reports filed with various federal bank regulatory authorities by all federally-insured commercial banks; 6. Certain internal financial analyses and forecasts for Banks prepared by the management of Banks, including projections of future performance; 7. For Banks, certain other summary materials and analyses with respect to its respective loan portfolio, securities portfolio, deposit base, fixed assets, and operations including, but not limited to: (i) a schedule of loans and other assets identified by management as deserving special attention or monitoring given the characteristics of the loan/asset and the local economies, (ii) an analysis concerning the adequacy of the loan loss reserve, (iii) a schedule of "other real estate owned," including current A-2 Board of Directors Henderson Citizens Bancshares, Inc. October 15, 1997 Page 3 carrying values and recent appraisals, and (iv) a schedule of securities, detailing book values, market values, and lengths to maturity; and, 8. Such other information--including financial studies, analyses, investigations, and economic and market criteria--that we deem relevant to this assignment. In connection with this opinion and with respect to the proposed Offer, we further have reviewed, among other things: 1. The Offer to Purchase, in draft form dated October 10, 1997; 2. The price-to-equity and price-to-earnings multiples of banking organizations based in the Southwestern region of the United States that have publicly-traded common stocks, together with the financial performance and condition of such banking organizations; 3. The financial terms and price levels for commercial banking organizations with assets between $200 million and $500 million recently acquired in the United States for 100% cash, together with the financial performance and condition of such banking organizations; and, 4. Such other information--including financial studies, analyses, investigations, and economic and market criteria--that we deem relevant to this assignment. Based on our experience, we believe our review of, among other things, the aforementioned items provides a reasonable basis for our opinion, recognizing that we are expressing an informed professional opinion--not a certification of value. We have relied upon the information provided by the management of Company, or otherwise reviewed by us, as being complete and accurate in all material respects. Furthermore, we have not verified through independent inspection or examination the specific assets or liabilities of Company or Banks. We have also assumed that there has been no material change in the assets, financial condition, results of operations, or business prospects of Banks since the date of the last financial statements made available to us. We have met with the management of Company for the purpose of discussing the relevant information that has been provided to us. Based on all factors that we deem relevant and assuming the accuracy and completeness of the information and data provided to us, we conclude that the cash consideration of $14.50 per share offered to the existing shareholders of Company in connection with the Offer, is fair, from a financial standpoint, to tendering shareholders of Company. A-3 Board of Directors Henderson Citizens Bancshares, Inc. October 15, 1997 Page 4 This opinion is available for disclosure to the shareholders of Company. Accordingly, we hereby consent to the reference to this opinion and our Firm in any disclosure materials provided to the shareholders of Company. Respectfully submitted, THE BANK ADVISORY GROUP, INC. By /s/ J. Stephen Skaggs ----------------------------------------- A-4 EX-99.(A)(2) 3 EXHIBIT 99.(A)(2) THE OFFER WILL EXPIRE AT 5:00 P.M. CENTRAL STANDARD TIME ON NOVEMBER 12, 1997 LETTER OF TRANSMITTAL TO ACCOMPANY SHARES OF COMMON STOCK OF HENDERSON CITIZENS BANCSHARES, INC. (A TEXAS CORPORATION) TENDERED PURSUANT TO OFFER TO PURCHASE DATED OCTOBER 15, 1997 To: Citizens National Bank, Depositary BY MAIL OR HAND DELIVERY TO: Citizens National Bank Attention: Trust Department 201 West Main Street P.O. Box 1009 Henderson, Texas 75653 PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS Gentlemen: The undersigned shareholder ("Shareholder" or the "undersigned") of Henderson Citizens Bancshares, Inc., a Texas corporation (the "Company"), hereby agrees to sell and tenders to the Company the number of shares of common stock of the Company (the "Shares") indicated in Box A below and evidenced by the share certificate(s) either enclosed herewith or guaranteed to be transmitted as indicated below, to be purchased by the Company at a price of $14.50 net per Share, in cash, to the Shareholder, subject to the terms and conditions set forth in the Offer to Purchase dated October 15, 1997, and in this Letter of Transmittal (which together constitute the "Offer"). The undersigned acknowledges receipt and review of the Offer to Purchase. The undersigned hereby sells, assigns and transfers to, or upon the order of, the Company all Shares that are being tendered hereby that are purchased pursuant to the Offer. The undersigned represents that the undersigned has full authority to sell the tendered Shares and that such sale will convey to the Company full legal and beneficial title thereto, free and clear of all liens, charges and encumbrances and not subject to any adverse claim. Upon request, the undersigned will execute any additional documents necessary to complete the transfer. The undersigned hereby irrevocably constitutes and appoints the Depositary as the attorney-in-fact of the undersigned, with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver certificates for the tendered Shares, together with all accompanying evidences of transfer and authenticity, to or upon the order of the Company upon receipt of the purchase price by the Depositary, as the undersigned's agent, (b) present such certificates for transfer of the tendered Shares on the Company's books and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of the tendered Shares, all in accordance with the terms of the Offer. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assignees of the undersigned. This tender is revocable only to the extent and during the period stated in the Offer to Purchase. Unless otherwise indicated herein under Box B captioned "Special Payment Instructions" or Box C captioned "Special Delivery Instructions," please issue the check for the purchase price and the certificates for any unpurchased Shares (and accompanying documents, as appropriate) in the name of the undersigned and mail such check and any such certificates to the undersigned at the address shown below the undersigned's signature. The undersigned recognizes that the Company has no obligation, pursuant to the Special Payment Instructions, to transfer any certificate for Shares from the name of the holder thereof if the Company purchases none of the Shares represented by such certificate. BOX A - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED (See Instructions 4 and 5) - -------------------------------------------------------------------------------- NAMES AND ADDRESSES OF CERTIFICATES TENDERED REGISTERED HOLDERS (ATTACH SIGNED SCHEDULE IF NECESSARY) - -------------------------------------------------------------------------------- CERTIFICATE NO. OF NO. OF SHARES NO(S). SHARES TENDERED* - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL SHARES TENDERED - -------------------------------------------------------------------------------- * If you desire to transfer fewer than all the shares evidenced by any certificate listed above, please indicate in this column the number of shares from such certificate that you desire to tender. Otherwise all shares evidenced by such certificate will be deemed to have been tendered. - -------------------------------------------------------------------------------- NOTE IF YOUR CERTIFICATES ARE LOST, PLEASE REFER TO INSTRUCTION 12 TO THIS LETTER OF TRANSMITTAL. BOX B BOX C - ------------------------------------- -------------------------------------- SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 6 and 7) (See Instruction 7) - ------------------------------------- -------------------------------------- To be completed ONLY if To be completed ONLY if certificates for any unpurchased certificates for any unpurchased Shares and/or a check are to be Shares and/or a check, issued issued in the name of and sent to in the name of the undersigned, are someone other than the undersigned. to be sent to someone other than the undersigned or are to be sent to the undersigned at an address Issue / / Check / / Certificate(s) other than shown below the to: undersigned's signature. Name Mail / / Check / / Certificate(s) -------------------------------- to: Address Name ----------------------------- ---------------------------------- - ------------------------------------ Address (include ZIP Code) ------------------------------- - ------------------------------------ -------------------------------------- (Tax Identification or (include ZIP Code) Social Security Number) (See Instruction 1) - ------------------------------------- -------------------------------------- BOX D - -------------------------------------------------------------------------------- CONDITIONAL TENDER (See Instruction 8) - -------------------------------------------------------------------------------- Minimum number of Shares which must be purchased, if any are purchased: Shares. - ---------- - -------------------------------------------------------------------------------- BOX E - -------------------------------------------------------------------------------- ODD LOTS (See Instruction 10) - -------------------------------------------------------------------------------- This Section is to be completed ONLY if Shares are being tendered by or on behalf of a person owning beneficially as of close of business on September 30, 1997, an aggregate of fewer than 100 Shares. The undersigned either (check one): [ ] Is the beneficial owner, as of the close of business on September 30, 1997, of an aggregate of fewer than 100 Shares, all of which are being tendered; or [ ] Is a broker, dealer, commercial bank, trust company or other nominee which (i) is tendering, for the beneficial owner(s) thereof, Shares with respect to which it is the record owner, and (ii) believes, based upon representations made to it by each such beneficial owner, that such beneficial owner owned beneficially as of the close of business on September 30, 1997, an aggregate of fewer than 100 Shares and is tendering all of such Shares. Box F - -------------------------------------------------------------------------------- PAYER'S NAME: CITIZENS NATIONAL BANK - -------------------------------------------------------------------------------- SUBSTITUTE Part 1 -- PLEASE PROVIDE Social Security Number or Form W-9 YOUR TIN IN THE BOX AT Employer Identification Number RIGHT AND CERTIFY BY / // // /-/ // /-/ // // // / SIGNING AND DATING BELOW ------------------------------------------------------------ DEPARTMENT OF PART 2 -- / / Check the box if you are NOT subject to THE TREASURY withholding under the provisions of section 3406 (a) (1) INTERNAL REVENUE (C) of the Internal Revenue Code because (1) you have not SERVICE been notified that you are subject to backup withholding as a result of failure to report all interest or dividends or (2) the Internal Revenue Service has notified you that you are no longer subject to backup withholding. ------------------------------------------------------------ CERTIFICATION - UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT PAYER'S REQUEST AND COMPLETE. FOR TAXPAYER IDENTIFICATION SIGNATURE NUMBER (TIN) ------------------------------- DATE , 1997 Part 3-- ---------------- Awaiting TIN / / - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THE ABOVE FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW INSTRUCTION 9 AND GUIDELINES FOR COMPLETING CERTIFICATION STATEMENTS IN BOX F FOR ADDITIONAL DETAILS. BOX G BOX H - ------------------------------------- ------------------------------------- GUARANTEE OF DELIVERY SHAREHOLDER SIGN HERE (See Instruction 3) (See Instruction 6) - ------------------------------------- ------------------------------------- To be used ONLY if certificates IMPORTANT: Also complete Substitute are not transmitted herewith. The Form W-9 (Box F), above undersigned, / / a member of a registered ------------------------------ national securities exchange, / / a commercial bank or trust ------------------------------ company having an office, [Signature(s) of Owner(s)] branch or agency in the United States, [Please refer to Instruction 1 to determine if your signature must / / a member of the National be guaranteed.] Association of Securities Dealers, Inc., Name(s): --------------------------- guarantees delivery to the Depositary of certificates in proper form for transfer for the shares tendered by --------------------------- this Letter within ten (10) business (Please Print) days after delivery of this Letter to the Depositary. Address: --------------------------- - ------------------------------------- (Firm Name -- Please Print) --------------------------- - ------------------------------------- (Authorized Signature) --------------------------- Area Code and - ------------------------------------- Telephone No. ---------------------- - ------------------------------------- Tax Identification or (Address) Social Security Number ------------- - ------------------------------------- Signature(s) Medallion (Area Code and Telephone Number) Guaranteed By* (*If required, see Instruction 1) - ------------------------------------- ------------------------------------- - ------------------------------------- ------------------------------------- INSTRUCTIONS FOR COMPLETION OF LETTER OF TRANSMITTAL (Forming part of the Terms and Conditions of the Offer) 1. GUARANTEE OF SIGNATURES No signature guarantee on the Letter of Transmittal (Box H) is required unless special instructions have been given under Box B captioned "Special Payment Instructions" or Box C captioned "Special Delivery Institutions." If such special instructions have been given, signatures on this Letter of Transmittal must be guaranteed by an institution, such as a commercial bank, trust company, savings and loan association, credit union, or stockbroker or other member of the National Association of Securities Dealers ("NASD") or of a national securities exchange, provided such institution is a member of or a participant in a signature guarantee medallion program pursuant to S.E.C. Rule 17Ad-15 ("Eligible Institution"). Citizens National Bank is an Eligible Institution. 2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES The Letter of Transmittal is to be used only if certificates are forwarded herewith, unless delivery of certificates is guaranteed as described under Instruction 3. Certificates for all tendered Shares, together with a properly completed and duly executed Letter of Transmittal or facsimile thereof, and any other documents required by this Letter of Transmittal, should be mailed or delivered to Citizens National Bank, as Depositary, at the appropriate address set forth herein prior to the Expiration Date, as defined in Section 4 of the Offer to Purchase. ACTUAL DELIVERY to and receipt by the Depositary by the Expiration Date is AN ABSOLUTE REQUIREMENT unless delivery is properly guaranteed. DEPOSIT IN THE MAIL ON THE EXPIRATION DATE WILL NOT CONSTITUTE A TIMELY TENDER. 3. GUARANTEE OF DELIVERY Shares represented by certificates which are not immediately available may be tendered by commercial banks or trust companies, by members of any national securities exchange or by members of the NASD, acting on behalf of their customers, if the commercial bank, trust company, exchange or NASD member will execute this Letter of Transmittal in Box G above, provided the certificate number(s) are set forth (if available). The adequacy of such Guarantee will be determined solely in the discretion of the Company. Shares tendered pursuant to such a Guarantee should be accompanied by a properly executed Letter of Transmittal. The certificates for the tendered shares must be delivered to the Depositary within ten (10) business days after the Depositary's receipt of the Guarantee of Delivery. 4. INADEQUATE SPACE If the space provided herein is inadequate, the certificate numbers and the number of Shares should be listed on a separate schedule attached hereto. 5. PARTIAL TENDERS If fewer than all the Shares evidenced by any certificate submitted are to be tendered, fill in the number of Shares which are to be tendered in the column entitled "Number of Shares Tendered." A new certificate for the remainder of the Shares evidenced by your old certificate(s) will be sent to you, unless otherwise provided in the appropriate section on this Letter of Transmittal, as soon as practicable after the Expiration Date. All Shares represented by certificates listed are deemed to have been tendered unless otherwise indicated. 6. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS 6.1 If this Letter of Transmittal is signed by the owner of the certificates tendered hereby, the signature must correspond with the name as written on the face of the certificates, without any change whatsoever. If the names on tendered certificates are not identical, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are certificates in different names. 6.2 If the certificates tendered hereby are owned of record by two or more joint owners, all owners must sign this Letter of Transmittal. 6.3 If any tendered certificates are registered in different names, it will be necessary to complete, sign and submit a separate Letter of Transmittal for each different registration. 6.4 When this Letter of Transmittal is signed by the owner(s) of the certificates listed and transmitted hereby, no endorsements of certificates or separate stock powers are required. If, however, the certificates for unpurchased Shares are to be issued to a person other than the registered owner, then endorsement of certificates transmitted hereby or separate stock powers is required. See also Instruction 1, above, in such a circumstance. 6.5 If this Letter of Transmittal or any certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of a corporation or others acting in a fiduciary or representative capacity, such persons should so indicate when signing and must submit proper evidence satisfactory to the Company of their authority to so act, if requested. 7. STOCK TRANSFER TAXES The Company will pay all stock transfer taxes, if any, applicable to the transfer to it of Shares purchased pursuant to the Offer. If, however, payment of the purchase price is to be made to, or (in circumstances permitted by the Offer) if unpurchased Shares are to be registered in the name of, any person other than the registered owner, or if tendered certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder or such other person) payable on account of the transfer to such person will be deducted from the purchase price, if satisfactory evidence of the payment of such taxes, exemption therefrom, is not submitted. 8. CONDITIONAL TENDERS A tendering shareholder may condition his or her tender of Shares on the purchase by the Company of a specified number of the Shares tendered hereby, all as described in the Offer to Purchase, particularly Section 9 thereof. Unless such specified minimum is purchased by the Company pursuant to the terms of the Offer, none of the Shares tendered hereby will be purchased. It is the tendering shareholder's responsibility to calculate such minimum number of Shares, and such shareholder is urged to consult his or her own tax adviser. Unless Box D has been completed and a minimum specified, the tender will be deemed unconditional. 9. SUBSTITUTE FORM W-9 Under federal income tax law, a shareholder whose tendered Shares are accepted for payment is required by law to provide the Depositary (as payer) with his or her correct taxpayer identification number, which is accomplished by completing and signing Box F captioned "Substitute Form W-9." In addition, if a shareholder executes Box B captioned "Special Payment Instructions", a separate Substitute Form W-9 should also be executed by the alternate payee. If the Depositary is not provided with the correct taxpayer identification number, the shareholder may be subject to a $50.00 penalty imposed by the Internal Revenue Service. In addition, except in the case of certain exempt taxpayers, the Depositary will be required to withhold, and will withhold, 31% of the gross proceeds paid to that shareholder or other payee pursuant to the Offer, unless the shareholder or other payee provides the Depositary with his taxpayer identification number, certifies that such number is correct, and certifies that he is not subject to backup withholding under section 3406(a)(l)(C) of the Internal Revenue Code of 1986, as amended (the "Code"). The taxpayer identification number is the social security number or employer identification number of the shareholder or other payee. For further instructions on determining the proper identification number to give to the Depositary, see the Guidelines for Completing Certification Statements in Box F at the end of this Letter of Transmittal. Each tendering shareholder or other payee should fully complete and sign Box F captioned "Substitute Form W-9" and check the box in part 2 of Substitute Form W-9, if so eligible, so as to provide the information and certifications necessary to avoid backup withholding. You may be, or may have been, notified that you are subject to backup withholding under section 3406 (a)(1)(C) of the Code because you have underreported interest or dividends or you were required to but failed to file a return which would have included a reportable interest or dividend payment. IF YOU HAVE BEEN SO NOTIFIED AND YOU HAVE NOT RECEIVED A SUBSEQUENT NOTICE FROM THE INTERNAL REVENUE SERVICE ADVISING YOU THAT BACKUP WITHHOLDING HAS BEEN TERMINATED, YOU MUST STRIKE OUT THE LANGUAGE ON THE SUBSTITUTE FORM W-9 CERTIFYING THAT YOU ARE NOT SUBJECT TO BACKUP WITHHOLDING. If you are subject to backup withholding and you strike out the language on the Substitute W-9 certifying that you are not subject to backup withholding, you should nonetheless provide your correct taxpayer identification number to the Depositary and certify that it is correct. Exempt shareholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. (In order for a foreign individual to qualify as an exempt recipient, that shareholder must submit a statement, signed under penalty of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Depositary.) If backup withholding applies, the Depositary is required to withhold 31% of any such payments made to the shareholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be requested. 10. ODD LOTS As described in Section 4 of the Offer to Purchase, if less than all Shares tendered prior to the Expiration Date are to be purchased by the Company, the Shares purchased first will consist of all Shares tendered by any shareholder who owned beneficially as of September 30, 1997, an aggregate of fewer than 100 Shares and who tenders all of such Shares. This preference will not be available unless Box E captioned "Odd Lots" is completed. 11. IRREGULARITIES All questions as to the validity, form, eligibility (including time of receipt) and acceptance of any tender of Shares will be determined by the Company, which determination shall be final and binding. The Company reserves the right to reject any tenders of Shares not in appropriate form or the acceptance of or payment of which would, in the opinion of the Company's counsel, be unlawful. The Company also reserves the right to waive any of the conditions of the Offer or any defect in any tender, and the Company's interpretations of the terms and conditions of the Offer (including these instructions) shall be final and binding. The Company shall not be obligated to give notice of any defects or irregularities in tenders and shall not incur any liability for failure to give any such notice. Tenders will not be deemed to have been made until all defects and irregularities have been cured or waived. 12. LOST CERTIFICATES In the event that you are unable to deliver to the Depositary the certificate(s) for your Shares due to the loss or destruction of such certificate(s), such fact should be indicated on the face of the Letter of Transmittal. In such event, the Depositary will forward additional documentation that you must complete in order to effectively tender such lost or destroyed certificate(s). There may be a fee to replace lost certificates. Tenders will be processed after certificates are replaced. 13. ADDITIONAL INFORMATION AND COPIES Additional information, as well as additional copies of the Offer to Purchase and this Letter of Transmittal, may be obtained from the Depositary or from the Company at the following address: Henderson Citizens Bancshares, Inc. 201 West Main Street Henderson, Texas 75653 (903) 657-8521 IMPORTANT: IF YOU DESIRE TO TENDER ANY OR ALL OF YOUR SHARES, THE LETTER OF TRANSMITTAL OR FACSIMILE THEREOF (TOGETHER WITH CERTIFICATES AND OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE OF THE OFFER. DEPOSIT OF SUCH MATERIALS IN THE MAIL ON THE EXPIRATION DATE WILL NOT CONSTITUTE A TIMELY TENDER. GUIDELINES FOR COMPLETING CERTIFICATION STATEMENTS IN BOX F CERTIFICATION After you have read these instructions, place your signature and the current date in the space provided in Box F. If you are exempt from backup withholding, you should complete Box F of this Letter of Transmittal to avoid possible erroneous backup withholding. Enter your correct Taxpayer Identification Number ("TIN") in Part I, check the box in Part II, and sign and date the form. BACKUP WITHHOLDING Backup withholding will apply if: 1. You fail to furnish us with your taxpayer identification number; or 2. The Internal Revenue Services notifies us that you furnished an incorrect taxpayer identification number; or 3. You are notified that you are subject to backup withholding because you have underreported interest or dividend income to the Internal Revenue Service, or you were required to but failed to file a return which would have included a reportable interest or dividend payment; or 4. You fail to certify to us that you are not subject to backup withholding or fail to certify your taxpayer identification number. TAXPAYER IDENTIFICATION NUMBER For individuals and sole proprietors, the TIN is the social security number, which is a nine (9) digit number separated by two hyphens (i.e. 000-00-0000). For corporations, valid trusts, estates, pension trusts, partnerships, associations, clubs and other organizations which are not tax-exempt, the taxpayer number is the employer identification number, which is a nine (9) digit number separated by only one hyphen (i.e. 00-0000000). The following tables will help you determine the number to give us: FOR THIS TYPE OF ACCOUNT GIVE THE SOCIAL SECURITY NUMBER OF: 1. An individual's account The individual 2. Two or more individuals (joint The individual whose name appears first account) on the account caption 3. Husband and wife (joint account) The individual whose name appears first on the account caption 4. Custodian account of a minor The minor (Uniform Gift or Transfers to Minors Act) 5. Account in the name of a guardian The ward, minor, or incompetent person or committee for a designated ward, minor, or incompetent person 6. Sole proprietorship The owner FOR THIS TYPE OF ACCOUNT GIVE THE EMPLOYER IDENTIFICATION NUMBER OF: 1. Corporate The corporation 2. Valid trusts, estates, or pension The legal entity trusts 3. Partnership account held in the The partnership name of the business 4. Association, club, or other The organization organization which is not tax-exempt EXEMPTIONS FROM BACKUP WITHHOLDING The following include some of the entities which are specifically exempt from backup withholding on ALL payments: - A corporation - An organization exempt from tax under section 501(a), or an individual retirement plan (IRA) - All foreign governments and entities - A dealer in securities or commodities required to register in the U.S. - All federal, state and local government entities - A real estate investment trust - Nonresident aliens NOTE: Nonresident aliens are required to sign a Form W-8 or Substitute W-8 Bank form, Certificate of Foreign Status. PENALTIES Under certain circumstances, you may be subject to penalties imposed by the Internal Revenue Service, as follows: 1. The penalty for failure to furnish your taxpayer identification number to us will be $50.00 for each such failure unless your failure is due to reasonable cause and not to willful neglect. 2. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500.00. 3. If you falsify certifications or affirmations you may be subject to criminal penalties including fines and/or imprisonment. OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. EX-99.(A)(3) 4 EXHIBIT 99.(A)(3) OFFER BY HENDERSON CITIZENS BANCSHARES, INC. TO PURCHASE FOR CASH UP TO 140,000 SHARES OF ITS COMMON STOCK To Brokers, Dealers, Commercial Banks, Trust Companies and Nominees: October 15, 1997 We are enclosing the material listed below relating to the offer by Henderson Citizens Bancshares, Inc., a Texas corporation (the "Company"), to purchase, upon the terms and subject to the conditions of the Offer to Purchase dated October 15, 1997, and the related Letter of Transmittal (which together constitute the "Offer"), up to a maximum of 140,000 shares of its common stock (the "Shares") at a price of $14.50 net per Share to the selling shareholders. Enclosed herewith are copies of the following documents: 1. Offer to Purchase dated October 15, 1997. 2. Letter of Transmittal (including Substitute Form W-9 Guidelines) for your use and for the information of your clients; 3. Letter which may be sent to clients for whose account you hold Shares in your name or the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer; and 4. Letter dated October 15, 1997, to the Company's shareholders. Please advise us as to how many additional copies of these documents you will require for distribution to your clients by contacting our Depositary, Citizens National Bank, Henderson, Texas. No fees or commissions will be payable to brokers, dealers or persons for soliciting tenders of Shares pursuant to the Offer. However, the Company will reimburse brokers, dealers, commercial banks, trust companies and other nominees for their reasonable and necessary costs incurred in forwarding the Offer to Purchase and related documents to beneficial owners of Shares held by such entities as nominee or in a fiduciary capacity. Please forward invoices for reimbursement to Newlyn Richardson, the Company's Corporate Secretary, 201 West Main Street, Henderson, Texas, 75653. No such broker, dealer, bank, trust company or other nominee has been authorized to act as the agent of the Company or the Depositary. We urge you to contact your clients promptly. Please note that the withdrawal deadline, proration date and expiration date are all, Wednesday, November 12, 1997, at 5:00 p.m. Central Standard time (unless extended). As described in Section 6 of the Offer to Purchase, tenders may be made without the concurrent deposit of stock certificates and any other required documents, if such tenders are made by or through a broker or dealer which is a member firm of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office, branch or agency in the United States. Certificates for shares so tendered and any other required documents must be received within ten (10) business days after the Depositary has previously received a properly completed and duly executed Notice of Guaranteed Delivery. Any questions or requests for assistance or additional copies of the Offer to Purchase and the Letter of Transmittal may be directed to Milton S. McGee, Jr., the Company's President, at (903) 657-8521. Very truly yours, HENDERSON CITIZENS BANCSHARES, INC. - -------------------------------------------------------------------------------- NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR TO MAKE ANY STATEMENTS ON THEIR BEHALF IN CONNECTION WITH THE OFFER, OTHER THAN THE DOCUMENTS ENCLOSED HEREWITH AND THE STATEMENTS CONTAINED THEREIN. - -------------------------------------------------------------------------------- EX-99.(A)(4) 5 EXHIBIT 99.(A)(4) OFFER BY HENDERSON CITIZENS BANCSHARES, INC. TO PURCHASE FOR CASH UP TO 140,000 SHARES OF ITS COMMON STOCK To Our Clients: Enclosed for your consideration is an Offer to Purchase dated October 15, 1997, and a related Letter of Transmittal (which together constitute the "Offer"), relating to the Offer by Henderson Citizens Bancshares, Inc. (the "Company") to purchase up to a maximum of 140,000 shares of its common stock (the "Shares"). The Offer to Purchase and the Letter of Transmittal are being forwarded to you as the beneficial owner of Shares held by us in your account but not registered in your name. A tender of such Shares can be made only by us, since we are the holder of record, but only pursuant to your instructions. We request your instructions as to whether you wish to tender any or all Shares held by us for your account, pursuant to the terms and subject to the conditions set forth in the Offer. Your attention is called to the following: 1. Shareholders may tender Shares at a price of $14.50 net per share. 2. The Offer is not conditioned upon any minimum number of Shares being tendered, but up to 140,000 Shares may be purchased. 3. Tendering shareholders will not be obligated to pay brokerage commissions, solicitation fees or (subject to Instruction 7 of the Letter of Transmittal) stock transfer taxes on the purchase of Shares by the Company pursuant to the Offer. However, backup withholding at a 31% rate may be required (unless an exemption is proved or unless the required tax identification information is provided). See Instruction 9 to the Letter of Transmittal. 4. The withdrawal deadline, proration date and expiration date of the Offer are all Wednesday, November 12, 1997, at 5:00 p.m., Central Standard time (unless extended). 5. Shares must be validly tendered prior to Wednesday, November 12, 1997, at 5:00 p.m., Central Standard time, to ensure that at least a portion of such Shares tendered will be purchased by the Company. YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED IN AMPLE TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing and returning to us the attached instruction form. An envelope to return your instructions is enclosed. If you authorize us to tender your Shares, all such Shares will be tendered unless otherwise specified. The enclosed Letter of Transmittal is furnished to you for your information only and cannot be used to tender Shares. INSTRUCTIONS The undersigned acknowledge(s) receipt of your letter enclosing the Offer to Purchase dated October 15, 1997, and the related Letter of Transmittal (which together constitute the "Offer"), relating to the Offer by Henderson Citizens Bancshares, Inc. (the "Company"), to purchase up to 140,000 shares of its common stock (the "Shares"). This will instruct you to tender the number of Shares indicated (or, if no number is indicated below, all Shares), which are held by you for the account of the undersigned, pursuant to the terms and subject to the conditions set forth in the Offer. - -------------------------------------------------------------------------------- Aggregate number of Shares to be tendered* by us: _________________ *Unless otherwise indicated above, it will be assumed that all of your Shares held by us are to be tendered. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ODD LOTS / / By checking this box, the undersigned represents that the undersigned owned beneficially or of record as of September 30, 1997, an aggregate of less than 100 Shares and is tendering all such Shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGN HERE Signature: ------------------------------------------------------------ Name(s): ------------------------------------------------------------ (Please Print or Type) Address: ------------------------------------------------------------ ------------------------------------------------------------ (City) (State) (Zip Code) Area Code and Telephone No.:( ) ----------- ------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Tax identification or Social Security Number: --------------------------------------------------- Dated: --------------------------------------------------------------------- - -------------------------------------------------------------------------------- EX-99.(A)(5) 6 EXHIBIT 99.(A)(5) [ON LETTERHEAD OF HENDERSON CITIZENS BANCSHARES, INC.] October 15, 1997 Dear Shareholder: Henderson Citizens Bancshares, Inc. (the "Company") is offering to purchase up to 140,000 shares of its common stock at a price of $14.50 net per share, and our records indicate that you own shares of this stock. Enclosed for your consideration is an Offer to Purchase and a related Letter of Transmittal. These enclosures contain detailed information concerning the Offer, including its terms and conditions, the purpose of the Offer, the procedures for tendering shares, and information relating to certain tax consequences of selling shares pursuant to the Offer. We suggest that you read the enclosed information carefully before deciding whether or not you wish to tender your shares. In reviewing the enclosed material, please bear in mind the following: - The Offer expires at 5:00 P.M. Central Standard Time on Wednesday, November 12, 1997. CITIZENS NATIONAL BANK, AS DEPOSITORY, MUST RECEIVE THE CERTIFICATES REPRESENTING YOUR SHARES AND THE ACCOMPANYING LETTER OF TRANSMITTAL BY THAT TIME. - The sale of shares pursuant to the Offer is a taxable transaction under present Federal income tax laws. You may wish to consult your tax advisor regarding your own tax consequences of tendering shares, including the application and effect of your state and local taxes. - The Offer is not conditioned upon a minimum number of shares being tendered. - If more than 140,000 shares are tendered, the shares purchased by the Company are to be prorated among tendering shareholders based upon the total number of shares which have been tendered, unless the Company elects to increase the number of shares accepted for tender, in accordance with the terms of the Offer. The Company intends to purchase all shares from holders owning fewer than 100 shares, to the extent such shares are tendered. Although the Company's Board of Directors has authorized the Offer, neither the Board nor the Company makes any recommendation as to whether you should tender all or any of your shares. You should make your own decision as to whether to tender shares and, if so, how many shares to tender. If after reviewing the information set forth in the Offer to Purchase and Letter of Transmittal you wish to tender shares for purchase by the Company, please either follow the instructions contained in the Offer to Purchase and Letter of Transmittal or contact your broker, dealer, commercial bank, trust company or other nominee to effect the tender for you. If you should need additional information or assistance in connection with this offer, please contact Milton S. McGee, Jr., the Company's President, at (903) 657-8521. Sincerely, /s/ Milton S. McGee, Jr. Milton S. McGee, Jr. President EX-99.(G)(1) 7 EXHIBIT 99.(G)(1) 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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Shreveport, Louisiana March 4, 1997 24 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995 (dollars in thousands, except per share amounts)
ASSETS 1996 1995 ---- ---- Cash and due from banks $ 12,413 8,916 Interest-bearing deposits with financial institutions 3,892 2,642 Federal funds sold 1,150 -- Securities: Held to maturity, approximate market values of $82,465 in 1996 and $83,570 in 1995 82,415 82,750 Available for sale 145,740 143,700 --------- --------- 228,155 226,450 Loans, net 100,825 80,499 Premises and equipment, net 3,751 3,144 Accrued interest receivable 3,449 3,911 Other assets 3,195 1,317 --------- --------- $ 356,830 326,879 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand - noninterest-bearing $ 31,785 28,435 NOW accounts 74,984 68,089 Money market and savings 45,484 46,206 Certificates of deposit and other time deposits 168,420 150,881 --------- --------- Total deposits 320,673 293,611 Accrued interest payable 1,144 1,117 Other liabilities 3,025 945 --------- --------- 324,842 295,673 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 16,825 14,859 Net unrealized gains (losses) on securities available for sale, net of income taxes (703) 147 --------- --------- 32,322 31,206 Less treasury stock, 29,700 shares at cost (334) -- --------- --------- Total stockholders' equity 31,988 31,206 Commitments and contingencies --------- --------- $ 356,830 326,879 --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 25 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1996, 1995, and 1994 (dollars in thousands, except per share amounts)
1996 1995 1994 ---- ---- ---- Interest income: Loans $ 7,642 6,149 4,479 Investment securities: Taxable - available-for-sale 8,058 7,693 6,170 Taxable - held-to-maturity 3,182 4,261 2,678 Tax-exempt 1,390 1,582 1,425 Federal funds sold 117 174 18 Interest-bearing deposits with financial institutions 327 487 176 --------- --------- --------- Total interest income 20,716 20,346 14,946 --------- --------- --------- Interest expense: Deposits: NOW accounts 2,015 2,210 1,640 Money market and savings 1,322 1,456 1,210 Certificates of deposit and other time deposits 7,839 7,870 4,253 Other borrowed funds 27 -- 24 --------- --------- --------- Total interest expense 11,203 11,536 7,127 --------- --------- --------- Net interest income 9,513 8,810 7,819 Provision (reduction of allowance) for loan losses 264 180 (150) --------- --------- --------- Net interest income after provision (reduction of allowance) for loan losses 9,249 8,630 7,969 --------- --------- --------- Other income: Net gains (losses) on securities transactions 719 (128) (22) Income from fiduciary activities 632 587 568 Service charges, commissions, and fees 1,148 934 845 Other 744 616 285 --------- --------- --------- Total other income 3,243 2,009 1,676 --------- --------- --------- Other expenses: Salaries and employee benefits 4,770 4,205 3,592 Occupancy and equipment 927 781 585 Regulatory assessments 191 407 604 Other 2,150 2,163 1,578 --------- --------- --------- Total other expenses 8,038 7,556 6,359 --------- --------- --------- Income before income tax expense 4,454 3,083 3,286 Income tax expense 1,110 619 651 --------- --------- --------- Net income $ 3,344 2,464 2,635 --------- --------- --------- --------- --------- --------- Net income per common share $ 1.55 1.14 1.22 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 26 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity Years ended December 31, 1996, 1995, and 1994 (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 January 1, 1993 $ -- 10,800 5,400 12,525 435 -- 29,160 Net income -- -- -- 2,635 -- -- 2,635 Cash dividends ($0.64 per share) -- -- -- (1,383) -- -- (1,383) Net change in unrealized losses on securities available for sale -- -- -- -- (4,265) -- (4,265) ------ ------ ------ ------ ------ ------ ------ 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 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
See accompanying notes to consolidated financial statements. 27 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995, and 1994 (dollars in thousands)
1996 1995 1994 ---- ---- ---- Operating activities: Net income $ 3,344 2,464 2,635 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization (accretion) of premium (discount) on securities 589 (34) 774 Net (gains) losses on securities transactions (719) 128 22 Provision (reduction of allowance) for loan losses 264 180 (150) Net (gains) losses on sales of premises and equipment and other real estate -- -- (10) Depreciation and amortization 375 421 406 Decrease (increase) in accrued interest receivable 624 (303) (1,240) Decrease (increase) in other assets (74) 460 (859) Increase (decrease) in accrued interest payable (14) 222 279 Increase (decrease) in other liabilities 430 404 (96) ------- ------- ------- Net cash provided by operating activities 4,819 3,942 1,761 ------- ------- ------- Investing activities: Proceeds from sales of available-for-sale securities 55,669 15,700 8,040 Proceeds from maturities, paydowns, and calls of available-for-sale securities 25,473 31,372 28,117 Proceeds from maturities, paydowns, and calls of securities held to maturity 15,995 20,636 6,655 Purchases of available-for-sale securities (74,142) (25,676) (50,118) Purchases of securities held-to-maturity (11,291) (38,307) (40,776) Net increase in loans (15,051) (16,895) (7,188) Proceeds from sales, premises and equipment and other real estate -- -- 25 Purchases of bank premises and equipment (756) (270) (463) Cash received from acquisitions 1,544 -- 53,246 ------- ------- ------- Net cash used by investing activities (2,559) (13,440) (2,462) ------- ------- ------- Financing activities: Net increase (decrease) in deposits 5,349 8,089 (1,198) Cash dividends paid (1,378) (1,382) (1,383) Purchase of treasury stock (334) -- -- ------- ------- ------- Net cash provided (used) by financing activities 3,637 6,707 (2,581) ------- ------- ------- Increase (decrease) in cash and cash equivalents 5,897 (2,791) (3,282) Cash and cash equivalents at beginning of year 11,558 14,349 17,631 ------- ------- ------- Cash and cash equivalents at end of year $ 17,455 11,558 14,349 ------- ------- ------- ------- ------- -------
See accompanying notes to consolidated financial statements. 28 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996, 1995, and 1994 (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. 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. 29 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements 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 to record changes to the allowance based on their judgments about information available to them at the time of their examination. 30 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 2,153,333 in 1996, and 2,160,000 shares in 1995 and 1994. 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 Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (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 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): 31 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 ------ ------ ------ ------ On December 8, 1994, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of the Chandler and Malakoff branches of NationsBank of Texas, National Association. In addition to acquiring the assets and assuming the liabilities, the Company received approximately $40 million in cash, which was net of approximately $419,000 in premium paid for the deposits. The purchase method of accounting was used to record the acquisition. The premium is being amortized on a straight-line basis over five years. Operations of the Chandler and Malakoff branches 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 year ended December 31, 1994, as though this acquisition had occurred at the beginning of 1994 (in thousands of dollars, except per share amounts): Total interest income $ 17,601 ------ ------ Net interest income $ 8,791 ------ ------ Net income $ 2,867 ------ ------ Net income per share $ 1.33 ------ ------ The Company also purchased certain assets and assumed certain liabilities on September 23, 1994, of the Jefferson, Texas branch of Pacific Southwest Bank, F.S.B. Assets purchased included loans and related accrued interest receivable and fixed assets. Liabilities assumed included all deposits and related accrued interest payable. In addition, the Company received approximately $13 million in cash from Pacific Southwest Bank, F.S.B., which was net of $125,000 in premium paid for the deposits. The purchase method of accounting was used to record the acquisition. The premium is being amortized on a straight-line basis over five years. Operations of the Jefferson, Texas branch prior to the acquisition are not included in these consolidated financial statements. Pro forma information on the Jefferson, Texas branch acquisition is not provided due to its insignificance. 32 (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 $2,854,000 at December 31, 1995. There were no reserve requirements at December 31, 1996. (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 1997 net income by approximately $430,000. 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 defined capital category and become increasingly more severe as an 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 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, 1996, Citizens National Bank, Henderson, Texas' leverage ratio was 8.97%, Tier I risk-based ratio was 23.48%, and total risk-based ratio was 24.38% and First State Bank, Waskom, Texas' leverage ratio was 8.88%, Tier I risk-based ratio was 25.29%, and total risk-based ratio was 25.50%. 33 (5) SECURITIES The amortized cost (carrying value) and approximate fair value of securities held-to-maturity at December 31, 1996 and 1995, are summarized as follows (in thousands of dollars):
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 -------- -------- -------- -------- -------- -------- -------- -------- December 31, 1995 -------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 7,087 122 (46) 7,163 U.S. government agencies 16,293 158 (38) 16,413 State and municipal 32,511 571 (34) 33,048 Mortgage-backed securities and collateralized mortgage obligations 24,318 123 (73) 24,368 Other 2,541 37 -- 2,578 -------- -------- -------- -------- $ 82,750 1,011 (191) 83,570 -------- -------- -------- -------- -------- -------- -------- --------
The amortized cost and approximate fair value (carrying value) of securities available-for-sale at December 31, 1996 and 1995, are summarized as follows (in thousands of dollars): 34
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 -------- ------- ------- ------- -------- ------- ------- ------- December 31, 1995 -------------------------------------------------------- Gross Gross Amortized unrealized unrealized Fair cost gains losses value ---- ----- ------ ----- U.S. Treasury $ 55,984 967 (84) 56,867 U.S. government agencies 21,354 71 (154) 21,271 Mortgage-backed securities and collateralized mortgage obligations 62,760 326 (906) 62,180 Other securities 3,380 3 (1) 3,382 -------- ------- ------- ------- $ 143,478 1,367 (1,145) 143,700 -------- ------- ------- ------- -------- ------- ------- -------
The amortized cost and estimated fair value of securities at December 31, 1996, 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 $ 8,834 8,870 36 Due after one year through five years 35,500 35,533 33 Due after five years through ten years 8,001 8,104 103 Due after ten years 1,228 1,259 31 Mortgage-backed securities and collateralized mortgage obligations 28,852 28,699 (153) ------ ------ ------ $ 82,415 82,465 50 ------ ------ ------ ------ ------ ------
35
Securities Held-To-Maturity ------------------------------------------------ Net Amortized Estimated unrealized cost fair value gains (losses) ---- ---------- ------------- Due in one year or less $ 6,293 6,291 (2) Due after one year through five years 66,778 66,892 114 Mortgage-backed securities, collateralized mortgage obligations, and other amortizing securities 73,734 72,557 (1,177) -------- -------- -------- $ 146,805 145,740 (1,065) -------- -------- -------- -------- -------- --------
Proceeds from the sales of securities were $55,669,000 and $15,700,000 in 1996 and 1995, respectively. Gross gains of $763,000 and $216,000 were recognized on those sales in 1996 and 1995, respectively. Gross losses of $44,000 and $344,000 were recognized on sales in 1996 and 1995, respectively. Investment securities having a carrying value of $52,306,000 and $49,357,000 at December 31, 1996 and 1995, respectively, were pledged to secure public funds on deposit or for other purposes as required or permitted by law. 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, 1996 and 1995, is as follows (in thousands of dollars): 1996 1995 ---- ---- Real estate mortgage $ 46,211 34,009 Commercial and industrial 23,863 22,444 Installment and other 33,111 26,234 -------- ------- Total 103,185 82,687 -------- ------- Less: Allowance for loan losses (1,146) (1,019) Unearned discount (1,214) (1,169) -------- ------- Loans, net $ 100,825 80,499 -------- ------- -------- ------- 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 36 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 $752,000 and $3,401,000 at December 31, 1996 and 1995, respectively. The change during 1996 reflects $380,000 in new loans and $3,029,000 of repayments. At December 31, 1996 and 1995, the Banks had discontinued the accrual of interest on loans aggregating $147,000 and $99,000, respectively. Net interest income for 1996 and 1995 would have been higher by $6,400 and $5,000, respectively, had interest been accrued at contractual rates on nonperforming loans. At December 31, 1996 and 1995, the recorded investment in impaired loans was $147,000 and $99,000, respectively. The average recorded investment in impaired loans for 1996 and 1995 approximated $116,000 and $166,000, respectively. Interest income recognized on these impaired loans approximated $4,700 and $11,000 for 1996 and 1995, respectively. 1994 information on these impaired losses was not available but was insignificant. Changes in the allowance for loan losses are summarized as follows (in thousands of dollars): 1996 1995 1994 ---- ---- ---- Balance, January 1 $ 1,019 997 1,014 Provision (reduction of allowance) for loan losses 264 180 (150) Addition due to acquisition 24 -- -- Loans charged off (243) (247) (62) Recoveries on loans 82 89 195 ------ ------ ------ Balance, December 31 $ 1,146 1,019 997 ------ ------ ------ ------ ------ ------ During 1994, the Banks reduced loans through the repossession of other real estate and assets by $11,000. There were no such reductions in 1995 and 1996. (7) PREMISES AND EQUIPMENT Premises and equipment at December 31, 1996 and 1995, are summarized as follows (in thousands of dollars): Estimated December 31, -------------- useful lives 1996 1995 ------------ ----- ---- Land -- $ 442 422 Bank buildings 40 years 3,297 3,120 Furniture, fixtures, and equipment 5-10 years 2,947 2,530 Construction in progress 302 8 ------ ------ 6,988 6,080 Less accumulated depreciation (3,237) (2,936) ------ ------ Premises and equipment, net $ 3,751 3,144 ------ ------ ------ ------ 37 Amounts charged to operating expenses for depreciation were $375,000, $312,000, and $233,000, in 1996, 1995, and 1994, respectively. (8) TIME DEPOSITS Included in certificates of deposit and other time deposits at December 31, 1996 and 1995, were $53,609,000 and $43,166,000, respectively, of certificates of deposit in denominations of $100,000 or more. Interest expense on time deposits of $100,000 or more amounted to $2,281,000, $2,348,000, and $1,335,000, for the years ended December 31, 1996, 1995, and 1994, respectively. At December 31, 1996, the scheduled maturities of time deposits are as follows (dollars in thousands): Years ending December 31: 1997 $143,922 1998 11,554 1999 8,483 2000 3,476 2001 985 -------- $168,420 -------- -------- During 1996, 1995, and 1994, the Banks made interest payments of $11,149,000, $11,314,000, and $6,847,000, 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, 1996, 1995, and 1994, is as follows (in thousands of dollars): 1996 1995 1994 ------ ----- ----- Current $ 979 769 422 Deferred 131 (150) 229 ------ ------ ----- $1,110 619 651 ------ ------ ----- ------ ------ ----- Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% in 1996, 1995, and 1994, to pretax income when compared to actual income tax expense as follows (in thousands of dollars):
1996 1995 1994 ---- ---- ---- Computed "expected" tax expense $ 1,519 1,048 1,117 Increase (decrease) in income taxes resulting from: Tax-exempt interest (471) (465) (481) Other 62 36 15 ------ ------ ------ Actual income tax $ 1,110 619 651 ------ ------ ------ ------ ------ ------ Effective tax rate 24.9% 20.1 19.8 ------ ------ ------ ------ ------ ------
38 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995, are presented below (in thousands of dollars): 1996 1995 ---- ---- Deferred tax assets: Allowance for loan losses $ -- 60 Organizational costs 48 12 Accrued liabilities 40 34 Unrealized loss on securities available-for-sale 362 -- ---- ---- Total gross deferred tax assets 450 106 Less valuation allowance -- -- ---- ---- Net deferred tax assets 450 106 ---- ---- Deferred tax liabilities: Investment securities 67 48 Premises and equipment - depreciation 122 8 Unrealized gain on securities available-for-sale -- 75 Other assets 22 42 ---- ---- Total deferred tax liabilities 211 173 ---- ---- Net deferred tax asset (liability) $ 239 (67) ---- ---- ---- ---- 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 and other assets, respectively, in the accompanying consolidated balance sheets are current federal income taxes payable of $164,000 and $110,000 at December 31, 1996 and 1995, respectively. A net deferred federal income tax asset of $239,000 is included in other assets at December 31, 1996, and a net deferred federal income tax liability of $67,000 is included in other liabilities at December 31, 1995. Income taxes paid during 1996, 1995, and 1994, totaled $995,000, $205,000, and $460,000, 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 $281,000, $251,000, and $225,000 related to the plan for the years ended December 31, 1996, 1995, and 1994, respectively. 39 (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 1996, 1995, and 1994, the Company charged HCB a management fee of $15,000, $13,500, and $6,000, respectively for various services provided to HCB. The amount charged was considered to be the fair value of those services rendered. During 1996, 1995 and 1994, Citizens National Bank Henderson, Texas' trust department charged HCB an additional $6,530, $4,600 and $3,200, respectively, for management services related to HCB's mineral interests. During 1995, HCB purchased real estate from the Company for $43,000. In 1994, HCB financed the sale of certain other real estate properties through loans totaling $23,000. (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: 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. 40 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, 1996 and 1995. 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. The estimated fair values of the Company's financial instruments at December 31, 1996 and 1995, are as follows (in thousands of dollars):
1996 1995 -------------------------- -------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- Financial assets: Cash and due from banks $ 12,413 12,413 8,916 8,916 Interest-bearing deposits with financial institutions 3,892 3,892 2,642 2,642 Federal funds sold 1,150 1,150 -- -- Securities 228,155 228,205 226,450 226,706 Loans, net 100,825 99,410 80,499 79,688 Accrued interest receivable 3,449 3,449 3,911 3,911
41
1996 1995 -------------------------- -------------------------- Carrying Estimated Carrying Estimated amount fair value amount fair value ------ ---------- ------ ---------- Financial liabilities: Deposits: Demand - noninterest-bearing $ 31,785 31,785 28,435 28,435 NOW accounts 74,984 74,984 68,089 68,089 Money market and savings 45,484 45,484 46,206 46,206 Certificates of deposit and other time deposits 168,420 168,692 150,881 151,620 Accrued interest payable 1,144 1,144 1,117 1,117
(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, 1996 -------------------- Financial instruments whose contractual amounts represent credit risk: Commitments to extend credit $ 12,212,000 Standby letters of credit 327,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The 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. 42 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 44% at December 31, 1996) 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 $3,293,000 and $2,642,000 on deposit with the Federal Home Loan Bank of Dallas at December 31, 1996 and 1995, respectively. (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, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996. BALANCE SHEETS (Parent Only) December 31, 1996 and 1995 (dollars in thousands) ASSETS 1996 1995 ------ ---- ---- Cash in subsidiary bank $ 1,062 346 Investment in subsidiaries 32,791 31,181 Other assets 13 25 ------ ------ Total assets $ 33,866 31,552 ------ ------ ------ ------ 43 BALANCE SHEETS, CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 ------------------------------------ ---- ---- Liabilities: Dividends declared $ 341 346 Accounts payable 26 -- Other liabilities 1,511 -- -------- -------- 1,878 346 Stockholders' equity: Preferred stock -- -- Common stock 10,800 10,800 Capital surplus 5,400 5,400 Undivided profits 16,825 14,859 Net unrealized gains (losses) on securities available for sale (703) 147 Less treasury stock (334) -- -------- -------- Total stockholders' equity 31,988 31,206 -------- -------- Total liabilities and stockholders' equity $ 33,866 31,552 -------- -------- -------- --------
STATEMENTS OF INCOME (Parent Only) Years ended December 31, 1996, 1995, and 1994 (dollars in thousands)
1996 1995 1994 ---- ---- ---- Dividends, including dividends paid by subsidiary banks $ 4,368 1,384 1,389 Operating expenses 27 -- -- ------ ------ ------ Income before income tax benefit and equity in undistributed earnings of subsidiaries 4,341 1,384 1,389 Income tax expense 12 23 12 ------ ----- ------ Income before equity in undistributed earnings of subsidiaries 4,329 1,361 1,377 Equity in undistributed earnings of subsidiaries (985) 1,103 1,258 ------ ----- ------ Net income $ 3,344 2,464 2,635 ------ ----- ------ ------ ----- ------
44 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements STATEMENTS OF CASH FLOWS (Parent Only) Years ended December 31, 1996, 1995, and 1994 (dollars in thousands)
1996 1995 1994 ---- ---- ---- Operating activities: Net income $ 3,344 2,464 2,635 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries 985 (1,103) (1,258) Decrease in other assets 12 11 12 Increase (decrease) in accounts payable and dividends declared 21 -- 1 ------ ------ ------ Net cash provided by operating activities 4,362 1,372 1,390 Investing activities - purchase of subsidiary (1,934) -- -- Financing activities: Cash dividends paid (1,378) (1,382) (1,383) Purchase of treasury stock (334) -- -- ------ ------ ------ Net cash used by financing activities (1,712) (1,382) (1,383) Increase (decrease) in cash 716 (10) 7 Cash at beginning of year 346 356 349 ------ ------ ------ Cash at end of year $ 1,062 346 356 ------ ------ ------ ------ ------ ------
45 EX-99.(G)(2) 8 EXHIBIT 99.(G)(2) Part I. FINANCIAL INFORMATION Item 1. Financial Statements HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) June 30, 1997 and December 31, 1996 (dollars in thousands)
Assets 1997 1996 ------ -------- -------- Cash and due from banks $ 8,028 12,413 Interest-bearing deposits with other financial institutions 6,000 3,892 Federal funds sold 600 1,150 Securities: Held-to-maturity, approximate market value of $75,748 in 1997 and $82,465 in 1996 75,802 82,415 Available-for-sale 144,467 145,740 -------- -------- 220,269 228,155 Loans, net 102,146 100,825 Premises and equipment, net 4,801 3,751 Accrued interest receivable 3,403 3,449 Other assets 3,933 3,195 -------- -------- $349,180 356,830 ======== ======== Liabilities and Stockholders' Equity ------------------------------------ Deposits: Demand - non interest-bearing 32,501 31,785 Interest-bearing transaction accounts 71,370 74,984 Money market and savings 44,091 45,484 Certificates of deposit and other time deposits 165,061 168,420 -------- -------- Total deposits 313,023 320,673 -------- -------- Accrued interest payable 1,586 1,144 Notes payable 844 1,511 Other liabilities 1,140 1,514 -------- -------- 316,593 324,842 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 Surplus 5,400 5,400 Retained earnings 17,717 16,825 Net unrealized losses on securities available for sale, net of income taxes (824) (703) -------- -------- 33,093 32,322 Less treasury stock, 43,920 shares in 1997 and 29,700 shares in 1996, at cost (506) (334) -------- -------- Total stockholders' equity 32,587 31,988 Commitments and contingencies -------- -------- $349,180 356,830 ======== ========
See accompanying notes to consolidated financial statements. 2 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) (dollars in thousands, except per share amounts)
Three months Six months ended June 30 ended June 30 ----------------------- ----------------------- 1997 1996 1997 1996 ---------- ---------- ---------- ---------- Interest income: Loans $ 2,129 1,756 4,224 3,400 Securities Taxable - available-for-sale 2,336 2,775 4,530 5,585 Taxable - held-to-maturity 592 1,326 Tax-exempt 462 389 899 780 Federal funds sold 33 17 86 71 Interest-bearing deposits with other financial institutions 53 49 158 167 ---------- ---------- ---------- ---------- Total interest income 5,605 4,986 11,223 10,003 ---------- ---------- ---------- ---------- Interest expense: Deposits: Transaction accounts 473 476 990 1,007 Money market and savings 317 316 639 646 Certificates of deposit and other time deposits 2,112 1,899 4,192 3,845 Other 13 -- 26 -- ---------- ---------- ---------- ---------- Total interest expense 2,915 2,691 5,847 5,498 ---------- ---------- ---------- ---------- Net interest income 2,690 2,295 5,376 4,505 Provision for loan losses 83 70 170 120 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 2,607 2,225 5,206 4,385 ---------- ---------- ---------- ---------- Other income: Gains (losses) on securities transactions, net (26) 123 (64) 763 Income from fiduciary activities 150 154 288 318 Service charges, commissions, and fees 449 331 892 649 Other 83 92 158 191 ---------- ---------- ---------- ---------- Total other income 656 700 1,274 1,921 ---------- ---------- ---------- ---------- Other expenses: Salaries and employee benefits 1,404 1,182 2,666 2,245 Occupancy and equipment 253 212 486 418 Regulatory assessments 34 46 60 86 Other 632 504 1,235 994 ---------- ---------- ---------- ---------- Total other expenses 2,323 1,944 4,447 3,743 ---------- ---------- ---------- ---------- Income before income taxes 940 981 2,033 2,563 Income tax expense 204 230 462 658 ---------- ---------- ---------- ---------- Net income $ 736 751 1,571 1,905 ========== ========== ========== ========== Net income per common share $ .35 .35 .74 .88 ========== ========== ========== ========== Average number of shares outstanding 2,121,640 2,160,000 2,125,946 2,160,000 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 3 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (unaudited) Six months ended June 30, 1997 and 1996 (dollars in thousands, except per share amounts)
Net Unrealized Losses on Securities Total Preferred Common Retained Available Treasury Stockholder's Stock Stock Surplus Earnings for Sale Stock Equity --------- ------ ------- -------- -------------- -------- ------------- Balances at December 31, 1995 $ -- 10,800 5,400 14,859 147 -- 31,206 Net income -- -- -- 1,905 -- -- 1,905 Net change in unrealized losses on securities available for sale -- -- -- -- (1,401) -- (1,401) Cash dividends ($.32 per share) -- -- -- (691) -- -- (691) --------- ------ ------- -------- -------------- -------- ------------- Balances at June 30, 1996 $ -- 10,800 5,400 16,073 (1,254) -- 31,019 ========= ====== ======= ======== ============== ======== ============= Balances at December 31, 1996 $ -- 10,800 5,400 16,825 (703) (334) 31,988 Net income -- -- -- 1,571 -- -- 1,571 Net change in unrealized losses on securities available for sale -- -- -- -- (121) -- (121) Cash dividends ($.32 per share) -- -- -- (679) -- -- (679) Purchase of 14,220 shares of treasury stock -- -- -- -- -- (172) (172) --------- ------ ------- -------- -------------- -------- ------------- Balances at June 30, 1997 $ -- 10,800 5,400 17,717 (824) (506) 32,587 ========= ====== ======= ======== ============== ======== =============
See accompanying notes to consolidated financial statements. 4 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows (unaudited) Six months ended June 30, 1997 and 1996 (dollars in thousands)
1997 1996 ------- ------- Operating activities: Net income $ 1,571 1,905 Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of securities 190 334 Net (gains) losses on securities transactions 64 (763) Provision for loan losses 170 120 Depreciation and amortization 296 225 Decrease in accrued interest receivable 46 681 Increase in other assets (775) (8) Increase (decrease) in accrued interest payable 442 (62) Decrease in other liabilities (374) (179) ------- ------- Net cash provided by operating activities 1,630 2,253 ------- ------- Investing activities: Proceeds from maturities and paydowns of held-to-maturity securities 11,568 4,469 Purchases of held-to-maturity securities (5,130) (4,787) Proceeds from sales of available-for-sale securities 14,958 40,662 Proceeds from maturities and paydowns of available-for-sale securities 5,757 16,848 Purchases of available-for-sale securities (19,705) (44,521) Net (increase) in loans (1,490) (6,560) Purchases of bank premises and equipment (1,247) (239) ------- ------- Net cash provided by (used in) investing activities 4,711 5,872 ------- ------- Financing activities: Net decrease in deposits (7,650) (6,725) Payment on notes payable (667) -- Cash dividends paid (679) (691) Purchase of treasury stock (172) -- ------- ------- Net cash used in financing activities (9,168) (7,416) ------- ------- Increase (decrease) in cash and cash equivalents (2,827) 709 Cash and cash equivalents at beginning of period 17,455 11,558 ------- ------- Cash and cash equivalents at end of period $14,628 12,267 ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES Income taxes paid, net of refunds $ 590 555 ======= ======= Interest paid $ 5,405 5,560 ======= =======
See accompanying notes to consolidated financial statements. 5 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997 (1) BASIS OF PRESENTATION --------------------- The accompanying consolidated financial statements are unaudited, but include all adjustments, consisting of normal recurring accruals, which management considers necessary for a fair presentation of the financial position, results of operations, and cash flows. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Securities and Exchange Commission rules and regulations. The consolidated financial statements and footnotes included herein should be read in conjunction with the Company's annual consolidated financial statements as of December 31, 1996 and 1995, and for each of the years in the three year period ended December 31, 1996 included in the Company's Form 10-K. (2) SECURITIES ---------- The amortized cost (carrying value) and approximate market values of securities held-to-maturity at June 30, 1997, are summarized as follows (in thousands of dollars):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- U.S. Treasury $ 7,050 49 (65) 7,034 U.S. Government agencies 10,179 40 (45) 10,174 State and municipal 33,552 285 (108) 33,729 Mortgage-backed securities and collateralized mortgage obligations 24,021 15 (227) 23,809 Other securities 1,000 2 -- 1,002 --------- ---------- ---------- ------- $ 75,802 391 (445) 75,748 ========= ========== ========== =======
The amortized cost and approximate market values (carrying value) of securities available-for-sale at June 30, 1997, are summarized as follows (in thousands of dollars):
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- U.S. Treasury $ 51,957 184 (109) 52,032 U.S. Government agencies 22,237 28 (92) 22,173 Other securities 368 -- -- 368 Mortgage-backed securities and collateralized mortgage obligations 71,154 446 (1,705) 69,895 --------- ---------- ---------- ------- $ 145,716 658 (1,906) 144,468 ========= ========== ========== =======
6 HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997 (3) LOANS AND ALLOWANCE FOR LOAN LOSSES ----------------------------------- The composition of the Company's loan portfolio is as follows (in thousands of dollars):
June 30, December 31, 1997 1996 --------- ----------- Commercial and industrial $ 25,225 23,863 Real estate mortgage 48,545 46,211 Installment and other 30,569 33,111 --------- ---------- Total 104,339 103,185 Less: Allowance for loan losses (1,196) (1,146) Unearned discount (998) (1,214) --------- ---------- Loans, net $ 102,145 100,825 ========= ==========
Changes in the allowance for loan losses for the six months ended June 30, 1997 and 1996 are summarized as follows (in thousands of dollars):
1997 1996 --------- ---------- Balance, January 1 $ 1,146 1,019 Provision charged to operating expense 170 120 Loans charged off (176) (57) Recoveries on loans 56 39 --------- ---------- Balance, June 30 $ 1,196 1,121 ========= ==========
7 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC. FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 The following discussion and analysis of the financial condition and results of operations of the Company and its primary bank subsidiaries, Citizens National Bank and First State Bank, should be read in conjunction with the financial statements and the notes thereto, and other financial and statistical information appearing elsewhere in this report. RESULTS OF OPERATIONS - --------------------- Net income for the first six months of 1997 was $1,571,000 compared to $1,905,000 for the same period in 1996 primarily caused by changes in gains and losses on securities transactions. The decline in net income was offset by the acquisition of Waskom Bancshares, Inc., and its majority owned subsidiary, First State Bank, Waskom in late 1996 and the establishment of a trust office in Corsicana in March, 1997 (see "Acquisitions" below). During the first six months of 1997, net interest income increased due to increased loan demand and improved spreads and margins. The Company made a provision of $170,000 to the allowance for loan losses during the first six months of 1997. A provision of $120,000 was made for loan losses during the same period in 1996. The Company experienced losses on securities transactions totaling approximately $64,000 in the first six months of 1997 compared to gains of $763,000 in the first six months of 1996. Other income, excluding gains on securities transactions, for the first six months of 1997 was $1,338,000 compared to $1,158,000 for the same period in 1996 due to increased volumes. Total other expenses for the first six months of 1997 were $4,447,000 compared to $3,743,000 for the same period in 1996. Income tax expense for the first six months of 1997 and 1996 was $462,000 and $658,000, respectively. ACQUISITION - ----------- On August 31, 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 which was paid as a note payable due upon demand having an interest rate of 6.10%. The remaining balance on the note payable as of June 30, 1997 is $844,000. 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. On March 24, 1997, the Company expanded its trust operations by establishing a trust department in Corsicana, Texas. Three new employees were hired as a result of this transaction. NET INTEREST INCOME - ------------------- For the six months ended June 30, 1997, net interest income was $5,376,000 compared to $4,505,000 for the first six months of 1996. Approximately $468,000 of the increase in net interest income is due to the Waskom acquisition. The remainder of the increase is the result of an increase in loan volumes and improved net interest margins and spreads. Net interest income for the three month period ended June 30, 1997 was $2,690,000 compared to $2,295,000 in 1996. Approximately $240,000 of the increase in 1997 is a result of the Waskom acquisition. The remainder of the increase is the result of improved loan demand and improved net interest margins and spreads. PROVISION FOR LOAN LOSSES - ------------------------- During the first six months of 1997, the Company increased its allowance for loan losses through a provision of $170,000. The Company increased its allowance for loan losses during the same period of 1996 by $120,000. The Company experienced net charge offs of $120,000 in the first six months of 1997 compared to net charge offs of $18,000 in the same period in 1996. 8 For the three month period ended June 30, 1997, the Company increased its allowance through a provision of $83,000. The Company increased its allowance for loan losses during the same period in 1996 by $70,000. See additional information related to the Company's loan operations in the Allowance for Loan Loss section below. OTHER INCOME AND EXPENSES - ------------------------- Non-interest income, excluding securities losses was $1,338,000 for the first six months of 1997 as compared to $1,158,000 in the first six months of 1996. This increase is due to increases in service charges and volumes. Approximately $106,000 is related to the Waskom acquisition. The Company experienced losses on securities transactions for the first six months of 1997 of $64,000 which compares to gains on securities transactions for the first six months of 1996 of $763,000. The gain in 1996 was the result of the sale of certain taxable securities consistent with the Company's portfolio management policy. Other expenses for the six month period ended June 30, 1997 were $4,447,000 compared to $3,743,000 during the same period in 1996. The increase is due primarily to general salary and benefit increases. Approximately $423,000 of the increase in other expenses is related to the Waskom acquisition, and approximately $58,000 is related to the establishment of the trust office in Corsicana. For the three months ended June 30, 1997, non-interest income, excluding securities losses was $682,000 compared to $577,000 for the same period in 1996 due primarily from increases in service charges. The Company experienced losses on securities transactions in the three months ended June 30, 1997 of approximately $26,000 compared to gains on securities transactions of $123,000 for the three months ended June 30, 1996. INCOME TAXES - ------------ Income tax expense for the first six months of 1997 was $462,000, compared to $658,000 in the same period in 1996. The effective tax rate for the first six months of 1997 and 1996, respectively, was 22.7% and 25.7%. In 1996, the higher effective rate was due to the large gain on securities transactions and its effect on tax-exempt income as a percent of income. The effective tax rate decreased in 1997 due to the effect of increased tax exempt income from municipal securities. Income tax expense for the three months ended June 30, 1997 and June 30, 1996 were $204,000 and $230,000, respectively. FINANCIAL CONDITION - ------------------- The Company's total assets at June 30, 1997 of $349,180,000 decreased from the total assets at December 31, 1996 of $356,830,000. Total deposits were $313,023,000 at June 30, 1997, compared to the December 31, 1996 total of $320,673,000. Equity capital of the Company, excluding unrealized gains or losses on securities available for sale, as a percentage of total assets was 9.6% at June 30, 1997 compared to 9.2% at December 31, 1996. The risk-based Tier I and Tier II capital ratios and the leverage ratio of Citizens National Bank amounted to 24.3%, 25.2% , and 9.2%, respectively at June 30, 1997 compared to 23.5%, 24.4%, and 9.0%, respectively, at December 31, 1996. At June 30, 1997, First State Bank had Tier I and Tier II capital ratios and a leverage ratio of 27.1%, 27.5%, AND 9.1%, RESPECTIVELY, COMPARED TO 25.3%, 25.5%, AND 8.9%, RESPECTIVELY AT DECEMBER 31, 1996. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30 1997, cash and cash equivalents for the Company of $14,628,000 decreased from the December 31, 1996 amount of $17,455,000. The Company's stockholders' equity of $32,587,000 remains at a level considered to be adequate by management. Profits in excess of dividends paid to shareholders is reflected in the increase in undivided profits from 1996. 9 ALLOWANCE FOR LOAN LOSSES - ------------------------- The allowance for loan losses at June 30, 1997 and December 31,1996 was 1.15% and 1.11% of outstanding loans, respectively. By its nature, the process through which management determines the appropriate level of the allowance requires considerable judgment. The determination of the necessary allowance, and correspondingly the provision for loan losses, involves assumptions about projections of national and local economic conditions, the composition of the loan portfolio, and prior loss experience, in addition to other considerations As a result, no assurance can be given that future losses will not vary from the current estimates. However, management believes that the allowance at June 30, 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, if any, that are not identified otherwise. From these analyses, management determines which loans are potential candidates for nonaccrual status, including impaired loan status, or charge-off. Management continually reviews loans and classifies them consistent with the Comptroller's guidelines to help ensure that an adequate allowance is maintained. The allocation of the allowance for loan losses is based upon the inherent risks in the various components of the loan portfolio. Amounts allocated to each component are determined based on management's evaluations of concentrations of credit risks, current and anticipated economic conditions, historical analyses, and classification and estimated loss exposure assigned to specific credits. These reserve allocations are subject to change as various economic conditions dictate. The following table is an analysis of the Allowance for Loan Losses. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
For the Six Months Ended June 30, 1997 1996 ------ ------ Balance at beginning of period $1,146 1,019 Charge-offs: Commercial, financial, and agricultural 57 10 Real estate-mortgage 1 -- Installment loans to individuals 118 47 ------ ------ 176 57 Recoveries: Commercial, financial, and agricultural 32 20 Installment loans to individuals 24 19 ------ ------ 56 39 ------ ------ Net charge-offs 120 18 ------ ------ Additions charged to operations 170 120 ------ ------ Balance at end of period $1,196 1,121 ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period .10% .01% ====== ======
NON ACCRUAL, PAST DUE AND RESTRUCTURED LOANS - -------------------------------------------- The Company's policy is to discontinue the accrual of interest income on loans whenever it is determined that reasonable doubt exists with respect to timely collectibility of interest and principal. Loans are placed on nonaccrual status if either material deterioration occurs in the financial position of the borrower, payment in full of interest or principal is not anticipated, payment in full of interest or principal is past due 90 days or more unless well secured, payment in full of interest or principal on a loan is past due 180 days or more, regardless of collateral, or the loan in whole or in part is classified as doubtful. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well-secured. When a loan is placed on nonaccrual status, interest is no longer accrued or included in interest income and previously accrued income is reversed. 10 As of June 30, 1997 and 1996, the Company had $92,000 in nonaccrual loans. The total of accruing loans which are contractually past due 90 days or more as to principal or interest at June 30, 1997 is $18,000 compared to $67,000 as of June 30, 1996. Other real estate totaled $175,000 at June 30, 1997. At June 30, 1996, the Company did not have any other real estate. The following is a summary of the Company's problem loans as of June 30, 1997 and 1996.
At June 30, 1997 1996 ---- ---- (dollars in thousands) Nonaccrual loans $ 92 92 Restructured loans -- -- Other impaired loans -- -- Other real estate 175 -- ---- ---- Total nonperforming loans 267 92 ==== ==== Loans past due 90+ days and still 18 67 accruing ==== ==== Other potential problem loans -- -- ==== ==== Income that would have been recorded in accordance with original terms 5 2 Less income actually recorded -- -- ---- ---- Loss of income $ 5 2 ==== ====
CONCENTRATION OF CREDIT RISK - ---------------------------- The Company grants real estate, commercial, and industrial loans to customers primarily in Henderson, Texas, and surrounding areas of east Texas. Although the Company has a diversified loan portfolio, a substantial portion (approximately 46.5% at June 30, 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 Company typically requires collateral sufficient in value to cover the principal amount of the loan. Such collateral is evidenced by mortgages on property held and readily accessible to the Company. See additional information related to the composition of the Company's loan portfolio included in note 3 to the consolidated financial statements. CORPORATE OBJECTIVES - -------------------- It is the philosophy of the Company to continue to remain independent in ownership, to foster its image as the community leader in banking, to increase its market share through selected acquisitions and aggressive marketing, to maintain a sound earning-asset portfolio, and to assess liquidity needs while maximizing its profitability and return to its shareholders. 11 -----END PRIVACY-ENHANCED MESSAGE-----