<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to ________
Commission File Number 33-42286
HENDERSON CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2371232
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 WEST MAIN STREET, P. O. BOX 1009 75653
HENDERSON, TEXAS (Zip Code)
(Address of principal executive offices)
(903) 657-8521
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
[Title of Each Class] [Name of Each Exchange on Which Registered]
NONE NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the price of the voting stock in the most recent sale
transaction, which occurred on February 17, 1997, was $14,141,448. For purposes
of this computation, all officers, directors, and 5% beneficial owners of the
registrant are deemed to be affiliates. Further, the shares of registrant held
in trust by Citizens National Bank, Henderson, Texas are assumed to be held by
an affiliate of the registrant. Such determination should not be deemed an
admission that such officers, directors and beneficial owners are, in fact,
affiliates of the registrant.
Number of Shares outstanding of the registrant's common stock, as of March 3,
1997: 2,130,300
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1996 Annual Report to Shareholders are incorporated by reference
into Parts II and III. With the exception of such specific references as appear
in this report, the 1996 Annual Report to Shareholders is not deemed filed as
part of this report. (Index to Exhibits is located on page 25.)
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Report.
1. Financial Statements
The consolidated financial statements for 1996, 1995 and 1994 as
listed in Item 8 of this report, together with the report of KPMG Peat
Marwick LLP dated March 4, 1997, appearing on pages 24 through 45 of
the accompanying 1996 Annual Report to Shareholders are incorporated
herein by reference.
2. Financial Statement Schedules
None
3. Exhibits
13.1 Henderson Citizens Bancshares, Inc. 1996 Annual Report to
Shareholders.
21.1 Subsidiaries of registrant.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the fourth quarter of
1996.
(c) See the Exhibit Index attached hereto.
Management Contracts and Compensation Plans -- The following exhibits
listed in the Exhibit Index are identified below in response to Item 14(a)-
3 on Form 10-K:
Exhibit 10.2 Change in Control Agreement dated June 12, 1995 by and
between Henderson Citizens Bancshares, Inc. and Milton S.
McGee Jr.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HENDERSON CITIZENS BANCSHARES, INC.
By: /s/ Milton S. McGee, Jr.
------------------------------------------
Milton S. McGee, Jr., President
and Chief Executive Officer (Principal
Executive Officer)
By: /s/ William Hurst
------------------------------------------
William Hurst
Vice President, Treasurer and Chief
Financial Officer (Principal Financial
Officer)
By: /s/ Rebecca Tanner
------------------------------------------
Rebecca Tanner
Chief Accounting Officer (Principal
Accounting Officer)
Date: April 2, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ E. Landon Alford Director and Chairman of the April 2, 1997
- -------------------------- Board
E. Landon Alford
/s/ Milton S. McGee, Jr.
- -------------------------- Director, President and Chief April 2, 1997
Milton S. McGee, Jr. Executive Officer
/s/ R.M. Ballenger
- -------------------------- Director April 2, 1997
R. M. Ballenger
/s/ Stayton M. Bonner, Jr.
- -------------------------- Director April 2, 1997
Stayton M. Bonner, Jr.
/s/ D.J. Burks
- -------------------------- Director April 2, 1997
D. J. Burks
/s/ Billy Crawford
- -------------------------- Director April 2, 1997
Billy Crawford
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Sheila Gresham
- -------------------------- Director April 2, 1997
Sheila Gresham
/s/ James Michael Kangerga
- -------------------------- Director April 2, 1997
James Michael Kangerga
/s/ J. Mark Mann Director April 2, 1997
- --------------------------
J. Mark Mann
/s/ Charles H. Richardson Director April 2, 1997
- --------------------------
Charles H. Richardson
/s/ Tony Wooster Director April 2, 1997
- --------------------------
Director April 2, 1997
- --------------------------
Alfred Wylie
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit
- --------------------------------------------------------------------------------
3.1 Articles of Incorporation of Henderson Citizens Bancshares, Inc.
(incorporated herein by reference from the Company's Registration Statement
on Form S-4 (Registration No. 33-42286) filed with the Securities and
Exchange Commission on August 16, 1991).
3.2 Bylaws of Henderson Citizens Bancshares, Inc. (incorporated herein by
reference from the Company's Registration Statement on Form S-4
(Registration No. 33-42286) filed with the Securities and Exchange
Commission on August 16, 1991).
4.1 Specimen Common Stock Certificate of Henderson Citizens Bancshares, Inc.
(incorporated herein by reference from the Company's Registration Statement
on Form S-4 (Registration No. 33-42286) filed with the Securities and
Exchange Commission on August 16, 1991).
10.1 Citizens National Bank of Henderson - Profit Sharing Plan (incorporated
herein by reference from the Company's Registration Statement on Form S-4
(Registration No. 33-42286) filed with the Securities and Exchange
Commission on August 16, 1991).
10.2 Change in Control Agreement dated June 12, 1995 by and between Henderson
Citizens Bancshares, Inc. and Milton S. McGee, Jr., President of Henderson
Citizens Bancshares, Inc. (incorporated herein by reference from the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
13.1 Henderson Citizens Bancshares, Inc. 1996 Annual Report to Shareholders.
21.1 Subsidiaries of registrant.
27.1 Financial Data Schedule.
<PAGE>
EXHIBIT 13.1
SELECTED HISTORICAL FINANCIAL DATA OF THE COMPANY
The table below represents a summary of the major components of the
Company's income statements for the periods presented, together with selected
balance sheet items and financial ratios. All information concerning the Company
should be read in conjunction with the sections entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company" and the consolidated financial statements and related notes thereof
included elsewhere herein.
<TABLE>
<CAPTION>
Condensed Income Statements
Information and Related Data Year Ended December 31,
---------------------------------------------------
1996 1995 1994 1993 1992
--------- ------- ------- ------- -------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $ 20,716 20,346 14,946 15,324 17,499
Total interest expense 11,203 11,536 7,127 6,559 8,393
--------- ------- ------- ------- -------
Net interest income 9,513 8,810 7,819 8,765 9,106
Provision (reduction of allowance)
for loan losses 264 180 (150) (500) 100
--------- ------- ------- ------- -------
Net interest income after
provision (reduction of
allowance) for loan losses 9,249 8,630 7,969 9,265 9,006
Total other income 3,243 2,009 1,676 1,712 1,352
Total other expense (8,038) (7,556) (6,359) (6,031) (6,112)
--------- -------- ------- ------- -------
Income before income tax expense and
cumulative effect of change in
accounting principle $ 4,454 3,083 3,286 4,946 4,246
Income tax expense 1,110 619 651 1,420 1,022
--------- -------- ------- ------- -------
Income before cumulative effect of
change in accounting principle $ 3,344 2,464 2,635 3,526 3,224
Cumulative effect at January 1, 1993,
of changes in accounting principle - - - 255 -
--------- ------- -------- ------- -------
Net Income 3,344 2,464 2,635 3,271 3,224
========= ======== ======= ======= =======
Per share data:
Net income $ 1.55 1.14 1.22 1.51 1.49
Dividends $ .64 .64 .64 .61 .60
Dividend payment ratio 41.21% 56.14 52.50 40.29 40.13
Return on average assets 1.00% 0.76 0.99 1.28 1.27
Return on average equity 10.60% 8.25 9.42 11.82 12.60
Balance Sheet Information:
Loans, net $ 100,825 80,499 63,784 51,552 49,579
Allowance for loan losses 1,146 1,019 997 1,014 1,624
Total assets 356,830 326,879 313,038 257,721 251,381
Total deposits 320,673 293,611 285,522 227,152 223,070
Stockholders' equity 31,988 31,206 26,147 29,160 26,772
Stockholders' equity / total assets 8.96% 9.55 8.35 11.31 10.65
</TABLE>
<PAGE>
Dear Shareholders,
Certainly 1996 was a successful year with our earnings of $3,344,000, but I will
remember the loss of my friend and fellow director, Homer Bryce. Though my
association with Mr. Bryce, at Citizens National Bank, was only six plus years,
his impact and influence on my thinking will carry on the rest of my life. I
have never met a man, though almost twice my age, who was able to grasp complex
situations and make them simple, challenge you with thought provoking questions,
see the big picture and dream big dreams for our Company. We all have Homer
Bryce stories to tell and each one brings a smile to our face. What a legacy for
our Company and community. He truly loved our Bank and each employee.
Many good things happened in 1996. The acquisitions, over the last six years
that were branched into Citizens, continue to perform well financially. For
1996, the branches contributed 30% of the net income of the Company. We
completed the purchase of First State Bank of Waskom in September and left it as
a separate bank in the Holding Company as a sister bank to Citizens National
Bank. Our thinking was the identity of First State Bank in the East Texas and
Northwest Louisiana market was already established and making it a branch of
Citizens National Bank would negate many years of positive name recognition. We
were fortunate to retain all of the fine employees and management of First State
Bank. In November we added an ATM at the Waskom location. We will convert the
data processing of the First State Bank to Citizens National Banks system in
April of 1997.
We experienced strong loan demand during 1996 in all markets. Our loan growth
was 19%, excluding the acquisition of First State Bank, over last year and our
strengths continue to be in the real estate area, particularly in Henderson,
Chandler and Jefferson, as well as consumer loans in all branches.
Our automated phone system was introduced in 1994. It continues to be
successful, processing over 105,000 calls in 1996. During the year we added a
loan by phone option allowing customers to complete a simple consumer loan
application by phone 24 hours a day, seven days a week. In early 1997 we
installed an option for our Spanish speaking customers. Our ATM network
continues to be well received by our customers with 165,851 transactions and
$8,625,000 withdrawn at all machines in 1996. We anticipate selecting a vendor
in late 1997 to allow our customers to do home personal computer banking with
us. Over the last seven years we have invested approximately $2,000,000 in
technology, either in hardware or software, to assure ourselves that we will
remain competeive as a provider of financial services.
Those of you that surf the web can visit us at our web site. The address is
www.cnbtexas.com. If you would like to see the regulatory reports that we file
with the SEC, you may visit the SEC web site @ http://www.sec.gov. For
statistical information on our banks as well as other financial institutions you
may visit the FDIC web site @ http://www.fdic.gov.
Recent technological advances, government regulations and our substantial growth
have brought about the need for us to update and remodel our main bank facility.
By the time you get this letter, we will be within two or three months of
completion. The original building was built in 1973 and has served our needs
and the community well. We hope that you will come by and enjoy the new
facilities. Our employees are both appreciative and excited about the
investment in them.
2
<PAGE>
As you know, the financial institution industry has changed tremendously over
the last several years. Consolidation seems to be the buzz word in the industry
with large super regional and regional banks acquiring all around us. We
believe strongly that the well capitalized independent banks with
infrastructures in place, like ourselves, can better understand and serve local
community markets. We will not only survive but grow and make adequate returns
to sustain the growth, pay reasonable dividends and acquire other financial
providers. We anticipate remaining an independent bank, realizing we must
always judiciously employ our capital to make returns for the proper allocation
to our shareholders, employees and future growth. We will continue to look at
all opportunities to expand, as we did in 1996. Bids were not made on several
offers that presented themselves and we believe those opportunities will become
more limited. Our future growth will probably come from areas near markets we
already serve or from niches in our present markets.
Thank you very much for your support as shareholder and friend of our Company.
Your employees, of which 23% are owners, are some of the most capable bankers to
be found anywhere as well as being the most loyal. I am proud to be associated
with them.
Very truly yours,
Milton S. McGee, Jr., CPA
President and Chief Executive Officer
3
<PAGE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC.
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements, the notes thereto, and other financial and statistical
information appearing elsewhere in this 1996 Annual Report.
INTRODUCTION
- ------------
Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as a
Texas corporation on November 13, 1990 and was organized for the purpose of
becoming a second-tier bank holding company through the direct acquisition of
one hundred percent (100%) of the issued and outstanding shares of the common
stock of Henderson Citizens Delaware Bancshares, Inc. (the "Delaware BHC") and
through the indirect acquisition of one hundred percent (100%) of the issued and
outstanding shares of the $5.00 par value per share common stock of Citizens
National Bank (the "Citizens Bank"). The Delaware BHC was incorporated pursuant
to the laws of the State of Delaware on February 21, 1991 in order to facilitate
the acquisition of the Citizens Bank. The acquisition of the Delaware BHC by
the Company and the acquisition of the Citizens Bank by the Delaware BHC was
consummated on December 27, 1991.
The Company's primary activity is to provide assistance to its subsidiaries
in the management and coordination of their financial resources and to provide
capital, business development, long-range planning and public relations to its
subsidiaries. Delaware BHC and its subsidiaries operate under the day-to-day
management of its own officers and each entities' individual boards of directors
formulates its own policies. A number of directors or officers of the Company
are also directors or officers of its subsidiaries. The Company conducts no
other activity than the operation of its subsidiaries. The Company derives its
revenues primarily from the operation of its subsidiaries in the form of
dividends paid from the subsidiary banks.
Delaware BHC owns 100% of the issued and outstanding shares of the
subsidiary banks. The Delaware BHC was organized as a Delaware corporation in
1991 in order to facilitate the acquisition of Citizens Bank and to limit the
Company's Texas franchise tax liability. The Delaware BHC currently does not
conduct any significant activities and has no activities contemplated at this
time. The Delaware BHC owns 100% of the issued and outstanding stock of the
subsidiary banks.
Citizens Bank opened for business in 1930 as Citizens National Bank of
Henderson, a national banking association chartered by the Comptroller of the
Currency (the "Comptroller") and originally located at 101 East Main Street,
Henderson, Texas. In 1973, the Bank moved to its current location at 201 West
Main Street.
In 1990, Citizens Bank acquired certain assets and assumed substantially
all of the liabilities of General S&L from the Resolution Trust Corporation
("RTC"). With this acquisition, the Bank opened its Southside Branch at 1610
Highway 79 South in Henderson and a branch at 307 Commerce in Overton, Texas.
On December 31, 1991, the Company acquired 100% of the issued and
outstanding shares of Enterprise Bancshares, Inc. ("Enterprise"). At the date
of the acquisition of Enterprise, Merchants State Bank of Mount Enterprise,
Texas ("Merchants Bank") was a wholly owned subsidiary of Enterprise.
Immediately following the consummation of the Enterprise acquisition, Merchants
Bank was merged with and into Citizens Bank, becoming the third branch of
Citizens Bank. The branch is located at 110 Rusk Street (Highway 84) in Mt.
Enterprise, Texas. On December 29, 1995 Enterprise was merged with the Delaware
BHC.
In 1994, the Citizens Bank acquired three new branch locations and expanded
its service area outside of Rusk, County, Texas (see below). With the
acquisition of these branches, the Citizens Bank now has six branch locations.
5
<PAGE>
On September 23, 1994, the Citizens Bank purchased certain assets and
assumed certain liabilities associated with the Jefferson, Texas branch of
Pacific Southwest Bank, F.S.B., Corpus Christi, Texas located at 302 East
Broadway, Jefferson, Texas (the "Jefferson Branch"). The Citizens Bank began
operations of the Jefferson Branch effective at the close of business on
September 23, 1994. To acquire the Jefferson Branch, the Citizens Bank received
cash equal to the difference between (i) the book value of the assets of the
Jefferson Branch purchased and the book value of the liabilities of the
Jefferson branch assumed as of September 23, 1994, minus (ii) a premium of
$125,000. The acquisition of the Jefferson Branch resulted in an increase in
total assets of the Citizens Bank of approximately $14,500,000 and total
deposits of approximately $13,900,000 as of September 23, 1994.
On December 8, 1994, the Citizens Bank purchased certain assets and assumed
certain liabilities associated with the branches of NationsBank of Texas,
National Association, Dallas, Texas ("NationsBank"), located at 105 Highway
East, Chandler, Texas, and 115 West Royall Boulevard, Malakoff, Texas
(collectively, the "NationsBank Branches"). The Citizens Bank began operations
of the NationsBank Branches as branches of the Citizens Bank effective at the
close of business on December 8, 1994. To acquire the NationsBank Branches, the
Citizens Bank received cash equal to the difference between (i) the book value
of the assets of the NationsBank Branches purchased and the book value of the
liabilities of the NationsBank Branches assumed as of December 8, 1994, minus
(ii) a premium of $419,394. The acquisition of the NationsBank Branches resulted
in an increase in total assets of the Citizens Bank of approximately $51,300,000
and total deposits of $45,676,000 as of December 8, 1994.
On September 17, 1996, the Company completed its acquisition of all of the
issued and outstanding stock of Waskom Bancshares, Inc. and its majority-owned
subsidiary, the First State Bank (Waskom Bank). The Company acquired
approximately 93% of the stock of Waskom Bancshares, Inc. pursuant to the terms
of a Stock Purchase Agreement, dated as of May 24, 1996. The Company acquired
the remaining shares of Waskom Bancshares, Inc. and the minority interest of the
Waskom Bank not owned by Waskom Bancshares, Inc. pursuant to the terms of Stock
Purchase Agreements between the Company and each of the holders representing a
minority interest in Waskom Bancshares, Inc. and the Waskom Bank. Such stock was
acquired for cash, and the aggregate purchase price of $3,463,000 was funded
with a combination of notes payable and cash. The stock of the Waskom Bank
directly and indirectly acquired by the Company through the acquisition of
Waskom Bancshares, Inc. was thereafter contributed to the Delaware BHC. Waskom
Bancshares, Inc. is an inactive subsidiary of the Company. The Delaware BHC
currently operates Citizens Bank and the Waskom Bank as separate subsidiaries.
The Waskom Bank was originally chartered on December 4, 1954, as a Texas
banking association. Its sole banking office is located at 745 Spur 156, Waskom,
Texas. At December 31, 1996, the Waskom Bank had approximately $25,664,000 in
assets, $21,595,000 in deposits, $6,039,000 in loans (net of unearned discount
and allowance for loan losses), and $3,520,000 in shareholders equity. The
Waskom Bank is regulated and supervised by the Federal Deposit Insurance
Corporation (the "FDIC") and the Texas Department of Banking (the "TDB").
The Company's management continues their strategy to increase market share
and enhance long-range profitability by evaluating potential acquisitions. This
evaluation process involves maintenance of strong equity capital and consistent
earnings, and meeting internal financial objectives of the Company.
6
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net income for 1996 was $3,344,000 compared to $2,464,000 for 1995 and
$2,635,000 for 1993. The increase in earnings in 1996 was attributable to a gain
on sale of securities, improved non interest income and an increase in net
interest margins. The Company experienced a gain on sale of securities in 1996
of $719,000 compared to losses of $128,000 and $22,000 in 1995 and 1994,
respectively. A provision for loan losses of $264,000 was made in 1996 compared
to a provision of $180,000 in 1995 and a reversal of $150,000 in 1994. Net
interest income increased due to increases in volumes of loans as a result of
continued strong demand during 1996. Net interest margins in 1996 improved over
1995 but continue to lag 1994 levels. Other income, excluding securities
transactions, in 1996 increased approximately $387,000 over 1995. Other expenses
were $8,038,000 in 1996 compared to $7,556,000 in 1995.
NET INTEREST INCOME
- -------------------
Net interest income is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities.
In Table I, interest income on each category of interest-earning assets and the
interest expense on interest-bearing liabilities is weighted to produce yields
and rates for each category of assets and liabilities. The difference between
the weighted yields of assets and rates on liabilities is the net interest
spread. Net interest margin is net interest income as a percentage of total
interest-earning assets.
Net interest income was affected by both an increase in interest income of
$370,000 and a decrease in interest expense of $333,000. The majority of the
increase in interest income was the result of higher loan volumes which
generally are higher yielding assets than investment securities, whereas the
decrease in interest expense was due primarily to lower rates. Differences in
yields and volumes can be found in Table II.
Net interest spreads and margins for 1996 increased from 1995 in contrast
to the decline which was experienced from 1994 to 1995. Although the average
rate earned on interest bearing assets declined slightly from 6.90% in 1995 to
6.76% in 1996 the average rate paid on interest bearing liabilities declined
more steeply from 4.32% in 1995 to 4.11% in 1996. This had a positive affect on
spreads and margins for 1996. Net interest spreads were approximately 2.7%,
2.6%, and 2.9% for the years 1996, 1995, and 1994, respectively, and net
interest margins were 3.2%, 3.1%, and 3.4%, during the same three-year period.
INTEREST INCOME
- ---------------
SECURITIES. Yields on all securities decreased in 1996 from yields in 1995
for various reasons. In January of 1996 approximately $26,000,000 of U. S.
TREASURY securities were sold, and a gain on sale of approximately $586,000 was
recognized. Approximately $25,000,000 was immediately reinvested to establish a
three year rolling Treasury ladder, however these reinvestments were at lower
rates. The decline in yields on state and municipal securities in 1996 compared
to 1995 was due to maturities of higher yielding securities and lower rates on
reinvestments. The Company's yield on all securities decreased slightly during
1996 as compared to 1995, although yields remained well above 1994 levels. U.S.
governments yielded 5.65%, 6.36%, and 5.64%, in 1996, 1995, and 1994,
respectively. State and municipal yields were 6.65%, 7.54%, and 7.08%, in 1996,
1995, and 1994, respectively. Other securities, which includes mortgage backed
securities and collateralized mortgage obligations yielded 6.11% in 1996, 6.14%
in 1995, and 5.32% in 1994.
LOANS. In 1996, the Company experienced a 24.3% increase in average loan
-----
balances over 1995. The average loan balance was $88,684,000 in 1996 compared
to $71,347,000 in 1995. This resulted in an increase of approximately
$17,337,000 or 24%, over 1995. In 1995, the average loan balances increased
approximately $15,831,000 over the 1994 balances. The average loan balance
during 1996 increased due to continued strong loan demand, marketing efforts and
the waskom acquisition. Yields on loans remained stable in 1996 and 1995 at
8.62% compared to 8.07% in 1994.
OTHER INTEREST-EARNING ASSETS. Other interest-earning assets consist of
------------------------------
interest-bearing deposits with other financial institutions and federal funds
sold. Earnings from these assets are not significant.
7
<PAGE>
<TABLE>
<CAPTION>
Table I - Average Balances and Interest Yields and Spreads (dollars in thousands)
Years Ended December 31
------------------------------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate Balances Expense Rate
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest-bearing deposits 6,228 327 5.25 8,303 487 5.87 3,968 176 4.44
with financial
institutions
Federal funds sold 2,165 117 5.40 2,975 174 5.85 351 18 5.13
Securities:
U.S. governments 58,780 3,323 5.65 69,318 4,412 6.36 41,685 2,353 5.64
State and municipals* 31,664 1,390 6.65 31,778 1,582 7.54 30,496 1,425 7.08
Other*** 129,609 7,917 6.11 122,888 7,542 6.14 122,098 6,495 5.32
Loans, net** 88,684 7,642 8.62 71,347 6,149 8.62 55,516 4,479 8.07
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning 317,130 20,716 6.76 306,609 20,346 6.90 254,114 14,946 6.17
assets*
Other assets:
Cash and due from banks 9,582 8,932 7,044
Premises and equipment, net 3,300 3,177 2,240
Allowance for loan losses (1,097) (1,021) (1,048)
Other assets 5,188 5,138 3,769
-------- -------- --------
Total average assets $334,103 322,835 266,119
======== ======== ========
Interest-bearing
liabilities:
NOW, money market and 117,455 3,337 2.84 115,940 3,666 3.16 102,416 2,850 2.78
savings deposits
Time deposits 154,685 7,839 5.07 150,890 7,870 5.22 112,056 4,253 3.80
Other borrowed funds 443 27 6.09 - - - 592 24 4.05
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing 272,583 11,203 4.11 266,830 11,536 4.32 215,064 7,127 3.31
liabilities
Other liabilities and
stockholders equity:
Demand deposits 27,864 25,746 21,950
Other liabilities 2,117 1,606 1,185
Stockholders' equity 31,539 28,653 27,920
-------- -------- --------
Total average liabilities
and stockholders equity $334,103 322,835 266,119
======== ======== ========
Net interest income $ 9,513 8,810 7,819
======== ======== ========
Net interest spread* 2.65% 2.58 2.86
======== ======== ========
Net interest margin* 3.23% 3.14 3.37
======== ======== ========
</TABLE>
* Interest yields have been presented
on a tax equivalent basis using a
34% income tax rate.
** Non-accrual loans have been included in average balances, thereby reducing
yields.
*** Primarily consists of mortgage backed securities and collateralized mortgage
obligations.
8
<PAGE>
Table II provides a summary of the changes in interest income and interest
expense resulting from changes in volumes and rates of interest-earning assets
and interest-bearing liabilities for the periods indicated. The increase
(decrease) due to changes in volume reflected in the table below was calculated
by applying the preceding year's rate to the current year's change in the
average balance. The increase (decrease) due to changes in average rates was
calculated by applying the current year's change in the average rates to the
current year's average balances. Using this method of calculating increases
(decreases), any increase or decrease due to both changes in average balances
and rates is reflected in the changes attributable to average rate changes.
<TABLE>
<CAPTION>
Table II - Analysis of Changes in Net Interest Income (dollars in thousands)
1996 over 1995 1995 over 1994
------------------------------------------------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total
due to due to Increase due to due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest bearing deposits with
financial institutions $ (122) (38) (160) $ 193 118 311
Federal funds sold (47) (10) (57) 135 21 156
Securities:
U.S. governments (670) (419) (1,089) 1,559 500 2,059
State and municipals 9 (201) (192) 60 97 157
Other* 412 (37) 375 42 1,005 1,047
Loans, net 1,493 - 1,493 1,387 283 1,670
--------- --------- --------- --------- --------- ---------
Total interest income 1,075 (705) 370 3,376 2,024 5,400
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
NOW, money market and
savings deposits 48 (377) (329) 376 440 816
Time deposits 198 (229) (31) 1,476 2,141 3,617
Other borrowed funds 27 - 27 (24) - (24)
--------- --------- -- ------- --------- --------- ---------
Total interest expense 273 (606) (333) 1,828 2,581 4,409
--------- -------- -- ------- --------- --------- ---------
Net interest income $ 802 (99) 703 $1,548 (557) 991
========= ======== == ======= ========= ========= =========
</TABLE>
- --------------------------------
* Consists primarily of mortgage backed securities and collateralized mortgage
obligations.
INTEREST EXPENSE - DEPOSITS
- ----------------------------
Interest-bearing demand deposits consist of NOW, money market, and savings
deposits. These accounts averaged approximately $117,455,000 in 1996 compared to
$115,940,000 in 1995 and $102,416,000 in 1994. Time deposits which consist of
certificate of deposits and individual retirement accounts averaged $154,685,000
in 1996, $150,890,000 in 1995 and $112,056,000 in 1994. The increase of
$5,310,000 in average interest bearing deposits and other borrowed funds in 1996
over 1995 was largely the result of the Waskom acquisition. The significant
increase of $52,358,000 in average interest bearing deposits in 1995 over 1994
was primarily the result of the Jefferson, Malakoff, and Chandler acquisitions
in 1994. Total interest expense declined slightly in 1996 from 1995 due
primarily to rates. Total interest expense increased between 1995 and 1994 due
to volume and rate increases although the largest increases resulted from
increases in rates. Interest rates increased sharply in the beginning of 1995
but then leveled and moved slightly downward toward the end of the year. The
average interest rate on interest-bearing deposits was 4.09% in 1996, 4.32% in
1995 and 3.31% in 1994.
9
<PAGE>
NON-INTEREST INCOME
- -------------------
Income from sources other than interest-earning assets excluding securities
transactions is derived primarily from fiduciary activities and service charges
on customer deposit accounts. Non-interest income, excluding securities
transactions, was $2,524,000 in 1996 compared to $2,137,000 in 1995 and
$1,698,000 in 1994. The increase of approximately $387,000 in 1996 over 1995 was
primarily the result of increases in service charge income on customer deposit
accounts and increases in trust fiduciary income. The increase of approximately
$439,000 in 1995 over 1994 was the result of increases in volumes, primarily
from the three branch locations acquired in 1994.
NON-INTEREST EXPENSE
- --------------------
Total non-interest expense was $8,038,000 in 1996 compared to $7,556,000,
in 1995, and $6,359,000 in 1994. The increase in 1995 over 1994 was primarily a
result of increased costs related to the three branch acquisitions in 1994.
Other increases are explained in further detail by category below.
PERSONNEL EXPENSE. personnel costs for 1996 were $4,770,000, $4,205,000 in
-----------------
1995 and $3,592,000 in 1994. The increase of $565,000 over 1995 was due
primarily to general increases in salaries and benefits with approximately
$145,000 being the result of the Waskom acquisition.
OCCUPANCY EXPENSE AND EQUIPMENT EXPENSE. Total occupancy and equipment
---------------------------------------
expenses in 1996 were $927,000. The increase in 1996 was due to remodeling
related expenses, property tax increases, increased depreciation due to document
imaging as well as higher maintenance and service contract costs. In 1995, total
premises and equipment costs were $781,000 compared to $585,000 in 1994.
Approximately $128,000 of the $196,000 increase in 1995 over 1994 was related to
the three branch acquisitions at Jefferson, Malakoff and Chandler. The remainder
of the increase was related to depreciation of furniture and equipment for wide
area networking at all of the branches.
REGULATORY ASSESSMENTS AND OTHER EXPENSES. Regulatory assessments were
-----------------------------------------
$191,000 in 1996 compared to $407,000 in 1995, and $604,000 in 1994. The
decrease in regulatory assessments was a result of decreases in FDIC
assessments. However the Jefferson branch was charged a one time assessment in
1996 for former savings and loan deposits of approximately $73,000. Other
expenses were $2,150,000 in 1996 compared to $2,163,000 in 1995, and $1,578,000
in 1994. Decreases in 1996 were the result of continued cost cutting efforts.
Decreases occurred in legal fees, franchise tax, stationary and supplies,
advertising, telephone, entertainment and education. Increases did occur in some
categories such as other professional fees, insurance, fraud expense, and credit
card and merchant processing expenses.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses is the amount that is added to the allowance
for loan losses through a charge against earnings to maintain an appropriate
balance in the allowance with respect to outstanding loans. Management
evaluates the adequacy of the level of the allowance for loan losses in relation
to the level of the total loan portfolio and the elements of risk estimated to
be present in an effort to afford adequate reserves to cover potential loan
losses. Due to average loan growth of approximately 24%, a provision of $264,000
was made to the allowance for loan losses during 1996. In 1995 also due to rapid
average loan growth of approximately 29% management made a provision of $180,000
while in 1994, management reversed $150,000 from the allowance for loan losses.
See "Management's Discussion and Analysis of the Financial Condition and Results
of Operations of the Company -- Allowance for Loan Losses" for more discussion
relative to the provision for loan losses.
INCOME TAXES
- ------------
The Companys effective tax rate was 24.9% in 1996, 20.1% in 1995, and 19.8%
in 1994. This effective rate is less than the statutory rate primarily because
of tax-free income provided from state and municipal bonds. As state and
municipal bonds in the portfolio mature and are not replaced, the effective tax
rate has increased.
10
<PAGE>
FINANCIAL CONDITION
- -------------------
The Company's balance sheet has emphasized management's philosophy of
maximizing returns through securities. As detailed in the following Table III,
securities have been the Company's largest asset for the last five years
totaling 63.9%, 69.3%, 71.6%, 71.2%, and 72.6%, of total assets for the years
1996 through 1992, respectively. Total assets have grown from a December 31,
1992, level of $251,381,000 to $356,830,000 at December 31, 1996. The increase
in total assets which resulted from the Waskom transaction was approximately
$25,700,000. The increase in loans which resulted from the Waskom transaction
was approximaely $5,600,000. Approximately $4,600,000 increase in loans was
recognized from the branches acquired in 1994. Total assets at year-end 1994
increased approximately $55,317,000 from 1993 total assets of $257,721,000. The
increase is due to the Jefferson acquisition and NationsBank acquisitions which
accounted for approximately $14,556,000 and $45,676,000 in total assets,
respectively.
<TABLE>
<CAPTION>
Table III - Condensed Balance Sheet Information (dollars in thousands)
At December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with financial institutions $ 3,892 $ 2,642 3,661 10,896 7,576
Federal funds sold 1,150 - 2,000 - -
Securities 228,155 226,450 224,244 183,419 182,438
Loans, net 100,825 80,499 63,784 51,552 49,579
Cash and due from banks 12,413 8,916 8,688 6,735 6,258
Other 10,395 8,372 10,661 5,119 5,530
-------- -------- -------- -------- --------
Total assets $356,830 326,879 313,038 257,721 251,381
======== ======== ======== ======== ========
Liabilities:
Demand deposits-non-interest $ 31,785 $ 28,435 25,164 21,645 19,068
bearing
NOW, money market and
savings deposits 120,468 114,295 116,259 99,640 98,328
Time deposits 168,420 150,881 144,099 105,867 105,674
-------- -------- -------- -------- --------
Total deposits 320,673 293,611 285,522 227,152 223,070
Other liabilities 4,169 2,062 1,369 1,409 1,539
-------- -------- -------- -------- --------
Total liabilities 324,842 295,673 286,891 228,561 224,609
Stockholders' equity 31,988 31,206 26,147 29,160 26,772
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $356,830 326,879 313,038 257,721 251,381
======== ======== ======== ======== ========
</TABLE>
LIQUIDITY
- ---------
The Company invests in money market assets to meet its liquidity needs,
given day-to-day deposit fluctuations, loan demand, investment needs, and asset
growth. Money market assets consist of federal funds sold and interest-bearing
time and demand deposits with other financial institutions. The Company also
maintains an interest-bearing demand deposit account with the Federal Home Loan
Bank to invest its excess liquidity. The rates paid by the Federal Home Loan
Bank were comparable to the market rate for federal funds. It has been the
policy of the Company to maintain a high degree of liquidity in order to have
flexibility in investment decisions while adhering to the conservative
philosophy of having cash available for its banking needs. Cash positions and
market conditions are monitored closely in order to maximize income without
sacrificing liquidity and safety.
11
<PAGE>
OPERATING ACTIVITIES
- ---------------------
The Company uses cash in the conduct of its day-to-day operations for such
normal purposes as payroll, equipment and facilities acquisition and
maintenance, advertising, data processing, customer service activity, and
administrative activity. The Company generates cash from operations from
service charges and the net interest earned from the investment of customer
deposits. Net cash provided by operating activities was $4,819,000 in 1996,
$3,942,000 in 1995 and $1,761,000 in 1994.
INVESTING ACTIVITIES
- --------------------
The Company invests available funds primarily in securities and loans to
customers. Funds not otherwise used are invested in federal funds sold to Texas
Independent Bank and First USA Bank, and interest-bearing demand accounts with
the Federal Home Loan Bank.
FINANCING ACTIVITIES
- --------------------
In addition to cash provided and used by operating and investing
activities, the Company receives and disburses cash in connection with customer
deposit activities.
ASSET/LIABILITY MANAGEMENT
- --------------------------
Asset/liability management involves the acquisition and deployment of funds
at an appropriate rate and maturity structure so as to optimize net interest
income while satisfying the cash flow requirements of depositors and borrowers.
Generally, management maintains an excess of interest-sensitive liabilities over
interest-sensitive assets. Table IV provides an analysis of the Company's
interest rate sensitivity for its assets and liabilities. Note that the amounts
disclosed in Table IV are shown based upon the period the underlying asset or
liability is subject to repricing regardless of maturity.
<TABLE>
<CAPTION>
Table IV - Rate Sensitivity Analysis (dollars in thousands)
Interest Sensitivity/Gap Analysis
December 31, 1996
Over
1 - Month 3 - Month 6 - Month 1 - Year 1 - Year Total
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans $21,382 7,526 8,792 12,978 52,507 103,185
Securities 54,014 16,001 7,184 20,604 130,352 228,155
Other earning assets 4,443 500 - 99 - 5,042
--------- --------- --------- -------- -------- --------
79,839 24,027 15,976 33,681 182,859 336,382
Funding Source-
Interest bearing deposits 87,752 33,288 35,415 54,941 77,492 288,888
--------- --------- --------- -------- -------- --------
Repricing/Maturity Gap:
Period $(7,913) $ (9,261) $(19,439) $(21,260) $105,367
========= ========= ========= ======== ========
Cumulative (7,913) (17,174) (36,613) (57,873) 47,494
========= ========= ========= ======== ========
Period/Total Earning Assets (2.35%) (2.75%) (5.78%) (6.32%) 31.32%
</TABLE>
12
<PAGE>
LOANS
- -----
The Company's loan portfolio consists primarily of real estate, commercial
and industrial, and consumer loans. Total loans were $103,185,000 at December
31, 1996 compared to $82,687,000 at December 31, 1995 and $65,216,000 at
December 31, 1994.
As can be seen in Table V, a significant increase in loans occurred in 1996
and 1995 in real estate and installment loan categories. Real estate and
installment loans increased by approximately 35.9%, and 26.2%, respectively.
These increases were the result of strong loan demand and an approximately
$6,100,000 increase due to the acquisition of Waskom. Increases in loans not
related to the acquisition of Waskom were also the result of marketing efforts
aimed at real estate and installment customers. The increase in 1995 is the
result of increased loan demand, marketing efforts and branch acquisitions. The
increase in 1994 over 1993 is partially attributable to the acquisition of the
Jefferson Branch, and the NationsBank Branches and an increase in lease
financing receivables and tax-exempt obligations.
At December 31, 1996, real estate mortgage loans comprised 44.8% of the
loan portfolio, compared to 41.1% and 43.7% at December 31, 1995, and December
31, 1994, respectively.
<TABLE>
<CAPTION>
Table V - Loan Information (dollars in thousands) - Outstanding Balances at:
December 31,
---------------------------------------------------------------
Types of Loans 1996 1995 1994 1993 1992
- -------------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 23,863 22,444 18,410 14,787 15,751
Real estate - mortgage 46,211 34,009 28,683 24,404 23,287
Installment 33,111 26,234 18,123 13,956 12,984
--------- ------- ------- ------- -------
Total $103,185 82,687 65,216 53,147 52,022
========= ======= ======= ======= =======
</TABLE>
Approximately 13% of the Company's loans have adjustable interest rates
while most loans are on fixed rates maturing within five years. Table VI
presents a maturity analysis of the Company's loan portfolio at December 31,
1996:
<TABLE>
<CAPTION>
Table VI - Loan Interest and Maturity Information (dollars in thousands)
At December 31, 1996
--------------------------------------------------------
Commercial Real
and Industrial Estate Installment Totals
-------------- ------- ------------ ---------
<S> <C> <C> <C> <C>
Fixed rate loans:
Mature within one year $ 5,990 5,447 7,515 18,952
Mature in one to five years 9,070 26,354 23,705 59,129
Mature after five years 1,686 9,334 166 11,186
------- ------- -------- --------
Total fixed rate loans 16,746 41,135 31,386 89,267
Floating rate loans:
Mature within one year 6,391 4,407 1,724 12,522
Mature in one to five years 726 515 1 1,242
Mature after five years - 154 - 154
------- ------- -------- --------
Total floating rate loans 7,117 5,076 1,725 13,918
Total loans:
Mature within one year 12,381 9,854 9,239 31,474
Mature in one to five years 9,796 26,869 23,706 60,371
Mature after five years 1,686 9,488 166 11,340
------- ------- -------- --------
Total loans $23,863 46,211 33,111 103,185
======= ======= ======== ========
</TABLE>
13
<PAGE>
ALLOWANCE FOR LOAN LOSSES
- -------------------------
In 1996 and 1995 the Company made provisions to increase the allowance for
loan losses by $264,000 and $180,000, respectively, while in 1994 the Company
elected to decrease the allowance for loan losses and reversed $150,000. The
acquisition of Waskom accounted for approximately $24,000 of the increase in the
reserve for loan losses in 1996. Other increases in 1996 and 1995 were due to
continued increases in loan and lease balances. The reversal in 1994 was due to
continued improvement in credit quality and an upswing in the local economy. In
1996 the Company experienced net charge offs of $161,000 compared to net charge
offs in 1995 of $158,000. The balance in allowance for loan losses at December
31, 1996 was $1,146,000 compared to the December 31, 1995 balance of $1,019,000
and the December 31, 1994 balance of $997,000. The allowance for loan losses at
December 31, 1996, 1995 and 1994, was 1.11%, 1.23%, and 1.53%, of outstanding
loans, respectively.
By its nature, the process through which management determines the
appropriate level of the allowance requires considerable judgment. The
determination of the necessary allowance and, correspondingly, the provision for
loan losses, involves assumptions about and projections of national and local
economic conditions, the composition of the loan portfolio, and prior loss
experience, in addition to other considerations. As a result, no assurance can
be given that future losses will not vary from the current estimates. However,
management believes that the allowance at December 31, 1996 is adequate to cover
losses inherent in its loan portfolio. A migration analysis and an internal
classification system for loans also helps identify potential problems. From
these analyses, management determines which loans are potential candidates for
nonaccrual status or charge-off. Management continually reviews loans and
classifies them consistent with the regulatory guidelines to help ensure that an
adequate allowance is maintained.
The Company uses a combination of a loss migration approach and a specific
allocation approach to determine the adequacy of the allowance for loan and
lease losses. In general, the migration analysis tracks, on a quarter by quarter
basis, the percentage of various classified loan pools which ultimately becomes
a loss over a twelve month time period. The sum of the loss percentages for each
quarter of the analysis is used to estimate the loss that exists in the Companys
current population of classified loans. The methodology for determining loss
percentages on unclassified loans is based on historical losses on the pool of
loans that were considered pass credits twelve months prior to the loss.
Adjustments are then made to account for risks in the portfolio associated with:
(1) levels of, and trends in, delinquencies and non-accruals; (2) trends in
volume and terms of loans; (3) changes in lending policies and procedures; (4)
experience, ability and depth of lending management and staff; (5) national and
local economic trends and conditions; and (6) concentrations of credit.
Based on historical trends the Company estimates that approximately
$220,000 will be charged off in the year ending December 31, 1997. The breakdown
is as follows: $60,000 in commercial and industrial, $1,000 in real estate -
mortgage, and $159,000 in installment.
14
<PAGE>
<TABLE>
<CAPTION>
Table VII - Analysis of Allowance of Loan Losses (dollars in thousands)
Years Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,019 997 1,014 1,624 1,422
Charge-offs:
Commercial and industrial 20 90 27 148 95
Real estate mortgage - - 2 15 27
Installment loans 223 157 33 67 64
-------- -------- -------- -------- --------
Total charge-offs 243 247 62 230 186
-------- -------- -------- -------- --------
Recoveries:
Commercial and industrial 28 40 157 70 237
Real estate mortgage - - - - 7
Installment loans 54 49 38 50 44
-------- -------- -------- -------- --------
Total recoveries 82 89 195 120 288
-------- -------- -------- -------- --------
Net charge-offs (recoveries) 161 158 (133) 110 (102)
Additions charged (credited) to operations 264 180 (150) (500) 100
Addition due to acquisition 24 - - - -
-------- -------- -------- -------- --------
Balance at end of period $ 1,146 1,019 997 1,014 1,624
======== ======== ======== ======== ========
Average loans outstanding
during the period* $ 88,684 71,347 55,516 52,757 49,809
Gross charge-offs as a percent
of average loans* 0.29% 0.35 0.11 0.44 0.37
Recoveries as a percent
of gross charge-offs 33.75% 36.03% 314.52 52.17 154.84
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period* 0.19% 0.22 (0.24) 0.21 (0.20)
</TABLE>
* Net of unearned income
<TABLE>
<CAPTION>
Table VIII - Allocation of Allowance for Loan Losses (dollars in thousands)
As of December 31,
---------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ------------------ -------------------- ---------------- -------------------
Reserve Reserve Reserve Reserve Reserve
Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio* Amount Ratio*
------- ------ ------- ------ ------- ------ -------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial
and industrial $ 359 23.1% $ 468 27.2% $ 239 29.7% $ 343 27.8% $ 971 30.0%
Real estate -
mortgage 81 44.8 112 41.1 123 43.7 122 45.9 448 44.9
Installment 420 32.1 366 31.7 86 26.6 113 26.3 205 25.1
Unallocated 286 N/A 73 N/A 549 N/A 436 N/A N/A N/A
------- ------ ------- ------ ------- ------ -------- ------ ------- ------
$1,146 100.0% $1,019 100.0% $ 997 100.0% $ 1,014 100.0% $ 1,624 100.0%
======= ====== ======= ====== ======= ====== ======== ====== ======= ======
</TABLE>
*Represents the ratio of each loan category to gross loans (including unearned
interest)
15
<PAGE>
NONPERFORMING ASSETS
- --------------------
The Company's policy is to discontinue the accrual of interest income on
loans whenever it is determined that reasonable doubt exists with respect to
timely collectibility of interest and/or principal. Loans are placed on
nonaccrual status if either material deterioration occurs in the financial
position of the borrower, payment in full of interest or principal is not
anticipated, payment in full of interest or principal is past due 90 days or
more unless well secured, payment in full of interest or principal on a loan is
past due 180 days or more, regardless of collateral, or the loan in whole or in
part is classified doubtful. When a loan is placed on nonaccrual status,
interest is no longer accrued or included in interest income and previously
accrued income is reversed.
Nonaccrual loans totaled $147,000 in 1996, $99,000 in 1995, and $195,000 in
1994. The increase in nonaccrual loans in 1996 was the result of the Waskom
acquisition. The decrease in 1995 was the result of one nonaccrual loan being
paid off and reductions by payments received on loans. Restructured loans
include those for which there has been a reduction in stated interest rate,
extension of maturity, reduction in face amount of debt, or reduction in accrued
interest. As of December 31, 1996, the Company had no restructured loans.
Loans past due over ninety days and still accruing interest were $33,000 at
December 31, 1996, a decrease from the December 31, 1995 amount of $41,000.
<TABLE>
<CAPTION>
Table IX - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured Loans (dollars in thousands)
At December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 147 99 195 233 942
Restructured loans - - - - -
Other impaired loans - - - - -
Other real estate 151 - - 4 188
-------- -------- -------- -------- --------
Total nonperforming assets 298 99 195 237 1,130
======== ======== ======== ======== ========
Allowance for loan loss to
nonperforming assets 384.56% 1029.29% 511.28 427.85 143.72
Nonperforming assets as a per-
centage of stockholders' .9% .3% .7 .8 4.2
equity
Loans past due 90+ days and
still accruing $ 33 41 33 33 33
======== ======== ======== ======== ========
Other potential problem loans - - - - -
======== ======== ======== ======== ========
Income that would have been
recorded in accordance with
original terms $ 11 5 20 18 50
Less income actually
recorded 5 - - - -
-------- -------- -------- -------- --------
Loss of income $ 6 5 20 18 50
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
SECURITIES
- ----------
The Investment Committee, under the guidance of the Company's Investment
Policy, assesses the short and long-term needs of the Company after
consideration of loan demand, interest rate factors, and prevailing market
conditions. Recommendations for purchases and other transactions are then made
considering safety, liquidity, and maximization of return to the Company.
Management determines the proper classification of securities at the time of
purchase. Securities that management does not intend to hold to maturity or that
might be sold under certain circumstances are classified as available for sale.
For example, management might decide to sell certain of its mortgage backed
securities in response to changes in interest rates that may result in
subjecting the Company to unacceptable levels of prepayment risk. Management
might also decide to sell certain securities as a result of increases in loan
demand. If management has the intent and the Company has the ability at the time
of purchase to hold the securities until maturity, the securities will be
classified as held to maturity.
The management strategy for securities is to maintain a very high quality
portfolio with generally short duration. The quality of the portfolio is
maintained with 85% of the total comprised of U.S. Treasury, federal agency
securities, and agency issued mortgage securities. Treasury holdings are
currently positioned in a ladder structure. Three year treasury bonds are
purchased quarterly, held for two years, then sold with one year left to
maturity to take advantage of the slope in the yield curve. The collateralized
mortgage obligations (CMOs) and mortgage backed securities (MBS) held by the
Company are backed by agency collateral which consists of loans issued by the
Federal Home Loan Mortgage Corporation (FHLMC), Federal National Mortgage
Corporation (FNMA), and the Government National Mortgage Association (GNMA) with
a blend of fixed and floating rate coupons.
Credit risk is minimized through agency backing, however, there are other
risks associated with MBS and CMOs. These other risks include prepayment,
extension, and interest rate risk. MBS are securities which represent an
undivided interest in a pool of mortgage loans. CMOs are structured
obligations that are derived from a pool of mortgage loans or agency mortgage
backed securities. CMOs in general have widely varying degrees of risk, which
results from the prepayment risk on the underlying mortgage loans and its effect
on the cash flows of the security.
Prepayment risk is the risk of borrowers paying off their loans sooner than
expected in a falling rate environment by either refinancing or curtailment.
Extension risk is the risk that the underlying pool of loans will not exhibit
the expected prepayment speeds thus resulting in a longer average life and
slower cash flows than anticipated at purchase. Interest rate risk is based on
the sensitivity of yields on assets which change in a different time period or
in a different proportion from that of current market interest rates. This may
be as a result of a lagging index, such as the Cost of Funds Index (COIF), or
periodic and annual caps on floating rate pools. Changes in average life due
to prepayments and changes in interest rates in general will cause the market
value of MBS and CMOs to fluctuate.
The Companys MBS portfolio consists of fixed rate balloon maturity pools
with short stated final maturities and adjustable rate mortgage (ARM) pools with
coupons that reset annually and have longer maturities. Investments in CMOs
consist mainly of Planned Amortization Classes (PAC), Targeted Amortization
Classes (TAC), and sequential classes. Floating rate securities make up 73% of
the CMO portfolio. Support and liquidity classes with longer average lives and
floating rate coupons are a relatively small portion of the portfolio.
To maximize after-tax income, investments in tax-exempt municipal
securities are utilized but with somewhat longer maturities.
At December 31, 1996 the Companys level of structured notes was
insignificant.
Securities are the Companys single largest interest-earning asset
representing approximately 64%, 69%, and 72% of total assets at December 31,
1996, 1995, and 1994 respectively. The investment portfolio totaled $228.2
million at December 31, 1996, up only slightly from $226.4 million at December
31, 1995, and from $224.2 million at December 31, 1994.
17
<PAGE>
The various types of securities held by the Company are listed below in
Table X:
<TABLE>
<CAPTION>
Table X - Investment Securities Information (dollars in thousands)
Held to Maturity Portfolio At December 31,
(Carried at Amortized Cost) ------------------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasuries $ 7,062 7,087 39,991
U.S. Government Agencies 10,215 16,293 15,563
State and Municipal 34,069 32,511 33,808
Corporate securities 2,508 2,541 -
-------- -------- --------
53,854 58,432 89,362
Mortgage-backed securities
and collateralized mortgage
obligations 28,561 24,318 9,467
-------- -------- --------
Total Held to Maturity $ 82,415 82,750 98,829
======== ======== ========
Available for Sale Portfolio At December 31,
(Carried at Market Value) ------------------------------------------------------
1996 1995 1994
-------- -------- --------
U.S. Treasuries $ 54,115 56,867 31,188
U.S. Government Agencies 17,716 21,271 21,172
Corporate securities 1,004 3,034 -
Other securities 348 348 328
-------- -------- --------
73,183 81,520 52,688
Mortgage-backed securities and
collateralized mortgage obligations 72,557 62,180 72,727
-------- -------- --------
Total Available for Sale $145,740 143,700 125,415
======== ======== ========
</TABLE>
18
<PAGE>
The maturities and weighted yields of each portfolio by type of security
and their book and market values are detailed below in Table XI:
<TABLE>
<CAPTION>
Table XI - Investment Securities Maturities and Yield Information (dollars in thousands)
Held to Maturity Portfolio (Carried at amortized cost):
As of December 31, 1996
-----------------------
Matures in Matures in Matures in Matures in Amortizing
1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities
--------------- -------------- --------------- --------------- -------------- Total
Book Market
Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Value Value
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury and
government agencies $ - - 17,277 5.94 - - - - - - 17,277 17,319
State and Municipal* 6,326 6.42 18,223 6.19 8,292 7.27 1,228 7.89 - - 34,069 34,211
Corporate securities 2,508 7.07 - - - - - - - - 2,508 2,528
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------ ------
8,834 6.60 35,500 6.07 8,292 7.27 1,228 7.89 - - 53,854 54,058
Mortgage-backed
securities - - - - - - - - 28,561 6.01 28,561 28,407
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------ ------
Total $8,834 6.60 35,500 6.07 8,292 7.27 1,228 7.28 28,561 6.01 82,415 82,465
======== ===== ======= ===== ======= ===== ======= ===== ======= ===== ====== ======
Available for Sale Portfolio (Carried at Market Value):
As of December 31, 1996
-----------------------
Matures in Matures in Matures in Matures in Amortizing
1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities
--------------- -------------- --------------- --------------- ------------- Total
Amortized Market
Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Value Value
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury and
government agencies $5,291 5.65 66,430 5.79 - - - - - - 71,721 71,831
Corporate securities 1,002 7.07 - - - - - - - - 1,002 1,004
Other securities - - 348 5.00 - - - - - - 348 348
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- --------- -------
6,293 5.88 66,778 5.79 - - - - - - 73,071 73,183
Mortgage-backed
securities and
collateralized mortgage
obligations - - - - - - - - 73,734 6.18 73,734 72,557
-------- ----- ------- ----- ------- ----- ------- ----- ------- ----- --------- -------
Total $6,293 5.88 66,778 5.79 - - - - 73,734 6.17 146,805 145,740
======== ===== ======= ===== ======= ===== ======= ===== ======= ===== ========= =======
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate.
</TABLE>
19
<PAGE>
DEPOSITS
- --------
Total deposits at December 31, 1996 were $320.7 million, an increase of
approximately $27.1 million from the December 31, 1995 deposit total of $293.6
million. Approximately $21.6 million of the increase is a result of the Waskom
acquisition. Deposits totaled approximately $285.5 million at December 31,
1994.
Total average deposits in 1996 were $300,004,000, an increase of $7,428,000
over the December 31, 1995 total of $292,576,000. The majority of the increase
is a result of the Waskom acquisition. Average deposits at December 31, 1994
were $236,422,000. The increase in 1995 over 1994 was the result of the
acquisitions of the Jefferson Branch and the NationsBank Branches during the
latter part of 1994.
The average balances of the various deposit types for the last three years
along with the interest paid and average deposit interest rates follow:
<TABLE>
<CAPTION>
Table XII - Analysis of Depositor Average Balances (dollars in thousands)
Year Ended December 31,
------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- --------------------------- ---------------------------
Average Interest Average Average Interest Average Average Interest Average
Balances Expense Rate Balances Expense Rate Balances Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand $ 27,864 - -% $ 25,746 - -% 21,950 - -%
Interest-bearing demand 72,194 2,015 2.79 68,590 2,210 3.22 58,934 1,640 2.79
Savings 8,442 226 2.68 7,756 212 2.73 6,335 171 2.70
Money market accounts 36,819 1,096 2.98 39,594 1,244 3.14 37,147 1,063 2.86
Time 154,685 7,839 5.07 150,890 7,870 5.22 112,056 4,253 3.77
-------- ------- ------ -------- ------- ------ -------- ------ -----
Total $300,004 11,176 4.11% $292,576 11,536 4.32% $236,422 7,127 3.32%
======== ======= ====== ======== ======= ====== ======== ====== =====
</TABLE>
Time deposits consist of certificate of deposits and represent the types of
deposits most likely to affect the future earnings of the Company because of
their interest rate sensitivity. These deposits are generally more costly
sources of funds than other types of deposits. At December 31, 1996, 52.5% of
total average deposits were time deposits compared to 51.4%, and 47.4% at
December 31, 1995 and 1994, respectively.
Included in the table below are time deposits at December 31, 1996, with
balances of $100,000 or more. These deposits represent 17.9% of total time
deposits and, as can be seen in Table XIII, the majority of such deposits will
mature within three months, reflecting the volatile nature of these deposits.
The cost of these funds is generally higher than for other time deposits. The
following table provides an analysis of the maturity of these deposits:
<TABLE>
<CAPTION>
Table XIII - Certificates of Deposit $100,000 or more (dollars in thousands) at December 31,
1996
Maturity from Percent of
December 31, 1996 Total
----------------- ----------
<S> <C> <C>
Three months or less $35,567 66.35%
Within months four through six 4,277 7.98
Within months seven through twelve 9,618 17.94
Over one year 4,146 7.73
----------------- ---------
Total $53,608 100.0%
================= =========
</TABLE>
20
<PAGE>
SHORT-TERM BORROWINGS
- ----------------------
As of December 31, 1996, the Companys short term borrowings consisted of
notes payable issued as a result of the Waskom acquisition, and treasury tax and
loan deposits at Waskom which accumulate until the government requests payment
under the note option program. The Waskom notes payable plus accrued interest
totaled $1,538,000 at December 31, 1996 and were accruing interest at the rate
of 6.10%. As of March 15, 1997, the balance of the Waskom notes payable had been
reduced to $854,000 including accrued interest. From time to time, primarily due
to decreases in liquidity caused by timing of investment transactions, the
Company may borrow on a short term basis from the Federal Reserve Bank, or
purchase federal funds through lines of credit approved at Texas Independent
Bank.
CAPITAL RESOURCES
- -----------------
The Company's shareholders' equity of $31,988,000 at December 31, 1996
remains at a level considered to be adequate by management. Profits in excess
of dividends paid to shareholders is reflected in the increase in retained
earnings from 1995. Approximately $850,000 of the decrease in shareholder equity
from 1995 to 1996 is due to a turnaround in the unrealized gain or loss on
available for sale securities. The Company had a net unrealized gain on
available for sale securities of approximately $147,000 at December 31, 1995
compared to a loss of approximately $703,000 at December 31, 1996. The decrease
in the net unrealized gain or loss on available for sale securities was caused
by a general increase in interest rates which have a negative impact on the
market price of many of the Companys investment securities. Shareholders equity
was $31,206,000 at December 31, 1995 and $26,147,000 at December 31, 1994. The
regulatory agencies which govern banks require banks to meet certain minimum
capital guidelines. Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), Federal bank regulatory agencies adopted new
capital adequacy guidelines which link the adequacy of a bank's capital to the
risks inherent in both its on and off balance sheet activities. These
guidelines are termed "risk based" capital guidelines and became fully effective
on December 31, 1992. At that time, banks were required to have a minimum ratio
of Tier 1 capital to total risk-adjusted assets, as defined in the regulations,
of not less than 4%, and a ratio of combined Tier 1 and Tier 2 capital to total
risk-adjusted assets of not less than 8%. Tier 1 capital consists primarily of
the sum of common stock and perpetual noncumulative preferred stock less
goodwill less certain percentages of other intangible assets. Tier 2 capital
consists primarily of perpetual preferred stock not qualifying as Tier 1
capital, perpetual debt, mandatory convertible securities, subordinated debt,
convertible preferred stock with an original weighted average maturity of at
least five years and the allowance for loan and lease losses up to a maximum of
1.25% of risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes
qualifying total capital. The federal regulatory agencies may require higher
ratios in the event of certain circumstances that they, in their discretion,
deem to be of sufficient cause to require higher ratios. At December 31, 1996,
Citizens Bank had Tier 1 and total capital ratios of 23.5% and 24.4%
respectively. At December 31, 1995, Citizens Bank had a Tier 1 and total
capital ratio of 24.2% and 25.0% respectively. At December 31, 1994, Citizens
Banks Tier 1 and total capital ratios were 27.5%, and 28.8% respectively. At
December 31, 1996, the Waskom Bank had Tier 1 and total capital ratios of 25.3%
and 25.5% respectively.
The Federal and state bank regulatory agencies also require that a bank
maintain a minimum leverage capital ratio of Tier 1 capital to average total
consolidated assets of at least 3% for the most highly-rated, financially sound
banks and a minimum leverage ratio of at least 4% to 5% for all other banks.
Adjusted total assets is comprised of total assets less the intangible assets
that are deducted from Tier 1 capital. As of December 31, 1996, Citizens Banks
leverage ratio was 9.0%, compared to 9.5% as of December 31, 1995 and 11.3% as
of December 31, 1994. As of December 31, 1996, the Waskom Banks leverage ratio
was 8.9%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. The prompt corrective
actions of FDICIA place restrictions on any insured depository institution that
does not meet certain requirements including minimum capital ratios. The
restrictions are based on an institution's FDICIA defined capital category and
become increasingly more severe as in institution's capital category declines.
In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories, in declining
order, are "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." To be
"well capitalized," an institution is required to have at least a 5% leverage
ratio, a 6% Tier 1 risk-based capital ratio, and a 10% total risk-based capital
ratio. However, the regulatory agencies may impose higher minimum standards on
individual institutions or may downgrade an institution from one category
because of safety and soundness concerns. As of December 31, 1996, 1995 and
1994, Citizens Bank met all regulatory requirements to be deemed well
capitalized. As of December 31, 1996, the Waskom Bank met all regulatory
requirements to be deemed well capitalized.
21
<PAGE>
On October 10, 1996, the Company completed the repurchase of 29,700 shares of
its common stock (representing 1.375% of its then outstanding shares) in a
privately-negotiated transaction from a single shareholder. Such shares were
purchased for $334,125 in the aggregate, or $11.25 per share. The purchase
price was paid in cash using available cash resources, and the Company did not
incur any debt in connection with the stock repurchase.
EMPLOYEES
- ---------
At December 31, 1996, the Company employed approximately 137 full-time and
13 part-time employees. Management highly values and respects its excellent
relationship with its employees.
COMPETITION
- -----------
The Company services a large portion of the East Texas area with offices in
Henderson, Overton, and Mount Enterprise, which includes Rusk County, Jefferson,
which includes Marion County, Malakoff and Chandler, which includes Henderson
County, and Waskom, which includes Harrison County.
The activities in which the Company engages are competitive. Each activity
engaged in involves competition with other banks, as well as with nonbanking
financial institutions and nonfinancial enterprises. In addition to competing
with other commercial banks within and outside its primary service area, the
Company competes with other associations, credit unions, industrial loan
associations, insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, factors, certain governmental
agencies, credit card organizations and other enterprises. Additional
competition for deposits comes from government and private issuers of debt
obligations and other investment alternatives for depositors, such as money
market funds. The Company also competes with suppliers of equipment in
furnishing equipment financing and leasing services.
OUTLOOK AND CORPORATE OBJECTIVES
- ---------------------------------
Though many factors such as inflation, interest rate risks, credit quality,
regulatory environment and local economic conditions affect the earnings of the
Company, the outlook for 1997 appears to be reasonably good. The Company faces
the challenge of maintaining a high quality loan portfolio while trying to
increase its market share of loans, reduce its overhead by utilization of
economies of scale, coordinate its branch operations, maintain deposits in a
historically low interest rate environment, stay abreast of the latest
technological changes, preserve its strong dividend payout, and increase its non
interest income.
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are directly affected by inflation. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are important to the maintenance of
acceptable performance levels.
It is the philosophy of the Company to remain independent in ownership, to
foster its image as the community leader in banking, increase market share
through selected acquisitions and aggressive marketing, maintain a sound
earning-asset portfolio, and assess liquidity needs while maintaining our
profitability and the return to our shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
Effective January 1, 1995, the Company implemented the Financial Accounting
Standards Board (FASB) Statement 114 "Accounting by Creditors for Impairment of
Loans" (Statement 114), which changed the method of accounting for impaired
loans and Statement 118, "Accounting by Creditors for Impairment of a Loan:
Income Recognition and Disclosures," (Statement 118) which amended certain of
the income recognition provisions of Statement 114. The effect from the
implementation of Statements 114 and 118 was not material to the financial
condition or results of operations due to the Companys current low level of
impaired loans.
22
<PAGE>
Effective January 1, 1996, the Company implemented Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets To Be Disposed Of," ("Statement 121").
Statement 121 established guidance for recognizing and measuring impairment
losses on long-lived assets and requires that the carrying amount of an impaired
asset be reduced to fair value when events or circumstances indicate that the
carrying value may not be recoverable. Recoverability would generally be
determined by estimating future cash flows resulting from use and eventual
disposition of the asset. The effect of adopting Statement 121 in 1996 had no
effect on the Companys financial statements.
Effective January 1, 1996, the Company implemented the provisions of
Statement No. 122, "Accounting for Mortgage Servicing Rights," (Statement 122)
which required entities with mortgage banking operations to recognize as
separate assets rights to service mortgage loans for others, regardless of how
these servicing rights were acquired. Entities with mortgage banking operations
that acquire mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights) based on
their relative fair values. The impact of implementing Statement 122 in 1996 was
not significant to the financial condition or results of operations of the
Company.
23
<PAGE>
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
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets 1996 1995
------ --------- -------
<S> <C> <C>
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
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
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)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
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)
<TABLE>
<CAPTION>
Net
unrealized
gains (losses)
on securities Stock-
Preferred Common Capital Undivided available Treasury holders'
stock stock surplus profits for sale stock equity
----- ----- ------- --------- ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
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) 31,998
=== ====== ====== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
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.
(Continued)
29
<PAGE>
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.
(Continued)
30
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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):
(Continued)
31
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
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
======= ======
</TABLE>
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):
<TABLE>
<CAPTION>
<S> <C>
Total interest income $17,601
=======
Net interest income $ 8,791
=======
Net income $ 2,867
=======
Net income per share $ 1.33
=======
</TABLE>
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.
(Continued)
32
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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%.
(Continued)
33
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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):
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
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
======= ===== ==== ======
</TABLE>
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):
(Continued)
34
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
December 31, 1996
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ----------- -------
<S> <C> <C> <C> <C>
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
======== ===== ====== =======
</TABLE>
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.
<TABLE>
<CAPTION>
Securities Held-To-Maturity
--------------------------------------
Net
Amortized Estimated unrealized
cost fair value gains (losses)
--------- ----------- --------------
<S> <C> <C> <C>
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
========= ====== ======
</TABLE>
(Continued)
35
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Securities Available-For-Sale
------------------------------------------
Net
Amortized Estimated unrealized
cost fair value gains (losses)
----------- ------------- --------------
<S> <C> <C> <C>
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)
========= ======= ======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
========= =======
</TABLE>
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
(Continued)
36
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
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
====== ===== =====
</TABLE>
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):
<TABLE>
<CAPTION>
December 31,
Estimated -------------
useful lives 1996 1995
------------ ---- ----
<S> <C> <C> <C>
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
======= ======
</TABLE>
(Continued)
37
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1997 $143,922
1998 11,554
1999 8,483
2000 3,476
2001 985
--------
$168,420
========
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Current $ 979 769 422
Deferred 131 (150) 229
------ ---- ----
$1,110 619 651
====== ==== ====
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
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
====== ===== =====
</TABLE>
(Continued)
38
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995, are presented below (in thousands of
dollars):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
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)
===== ===
</TABLE>
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.
(Continued)
39
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) TRANSACTIONS WITH AFFILIATE
---------------------------
The Company is affiliated with H.C.B., Inc. (HCB). The Board of Directors
for both the Company and HCB are the same. HCB has been used in part to
own certain assets that supervisory agencies have generally not permitted
banks to own directly for extended periods of time. During the years
ended 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.
(Continued)
40
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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):
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
(Continued)
41
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
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
</TABLE>
(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.
<TABLE>
<CAPTION>
Contractual or
notional amount
at December 31, 1996
--------------------
<S> <C>
Financial instruments whose contractual amounts
represent credit risk:
Commitments to extend credit $ 12,212,000
Standby letters of credit 327,000
</TABLE>
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.
(Continued)
42
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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)
<TABLE>
<CAPTION>
Assets 1996 1995
------ ------ ------
<S> <C> <C>
Cash in subsidiary bank $ 1,062 346
Investment in subsidiaries 32,791 31,181
Other assets 13 25
------- ------
Total assets $33,866 31,552
======= ======
</TABLE>
(Continued)
43
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity 1996 1995
------------------------------------ ------ ------
<S> <C> <C>
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
======= ======
</TABLE>
STATEMENTS OF INCOME
(Parent Only)
Years ended December 31, 1996, 1995, and 1994
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
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
========= ===== =====
</TABLE>
(Continued)
44
<PAGE>
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)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
45
<PAGE>
MARKET FOR STOCK
There is no established public market for the shares of the $5.00 par value
per share common stock of the Company (the "Company Stock"). The following table
shows (i) the high and low sales price for each sale of the common stock of the
Company indicated for which the management of the Company had knowledge of the
prices involved through March 3, 1997, (ii) the number of such transactions for
the periods indicated, and (iii) the total number of shares traded in such
transactions. THESE PRICES REFLECT ONLY THE TRANSACTIONS WITH RESPECT TO WHICH
MANAGEMENT OF THE COMPANY HAS KNOWLEDGE OF THE PURCHASE PRICE. TRADE PRICES ARE
REPORTED ON AN INFORMAL BASIS, AND NO INDEPENDENT VERIFICATION OF THE TRADE
PRICES HAS BEEN MADE. THEY ARE THE RESULT OF ISOLATED TRANSACTIONS AND ARE NOT
NECESSARILY INDICATIVE OF THE ACTUAL OR MARKET VALUE OF SUCH SECURITIES.
<TABLE>
<CAPTION>
Company Stock
------------------------------------------
NUMBER OF NUMBER OF
TRANSACTIONS SHARES
1997 LOW HIGH REPRESENTED REPRESENTED
- ---- ------------------------------------------
<S> <C> <C> <C> <C>
First Quarter
(Through March
1, 1997) 12.00 12.50 3 750
1996
- ----
First Quarter 12.00 12.00 3 732
Second Quarter 12.00 12.00 10 4,329
Third Quarter 12.00 12.00 5 1,190
Fourth Quarter 11.25 12.00 4 30,310
1995
- ----
First Quarter 12.75 12.75 4 3,980
Second Quarter 12.00 12.50 7 7,180
Third Quarter 12.00 13.00 9 3,400
Fourth Quarter 12.00 12.00 14 5,000
</TABLE>
As of March 3, 1997, there were 459 shareholders of record.
46
<PAGE>
<TABLE>
<CAPTION>
INDEPENDENT AUDITORS LEGAL COUNSEL REGISTRAR/TRANSFER AGENT
<S> <C> <C>
KPMG Peat Marwick LLP Jenkens & Gilchrist, P.C. Citizens National Bank
Shreveport, Louisiana Dallas, Texas Accounting Department
P. O. Box 1009
Henderson, Texas 75653-1009
</TABLE>
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting of the Company will be held at Citizens
National Bank, 201 West Main, Henderson, Texas at 10:00 a.m. on Tuesday April 8,
1997.
FORM 10-K
The Company will, upon written request, provide after April 2, 1996, without
charge, a copy of the annual report on Form 10-K for 1996 filed with the
Securities and Exchange Commission to any shareholder to whom this 1996 Annual
Report is sent. Requests should be made to Henderson Citizens Bancshares, Inc.,
Attn: Chief Financial Officer, P.O. Box 1009, Henderson, Texas, 75653-1009. Any
exhibit will be provided on request upon payment of the reasonable expenses of
furnishing the exhibit.
47
<PAGE>
EXHIBIT 21.1
------------
Henderson Citizens Bancshares, Inc.
Henderson Citizens Delaware Bancshares,Inc. (100%)
Citizens National Bank (100%)
First State Bank (100%)
Waskom Bankshares,Inc. (100%)
