<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: June 30, 1998 Commission file number: 33-42286
HENDERSON CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 6712 75-2371232
- ----------------- ----------------- --------------
(State or other (Primary Standard (IRS Employer
jurisdiction of Industrial Identification
incorporation or Classification No.)
organization) Code Number)
201 WEST MAIN STREET, P.O. BOX 1009
HENDERSON, TEXAS 75653
(903) 657-8521
(Address, including ZIP code, and telephone number, including
area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes No
----------- -----------
At June 30, 1998, 2,017,474 shares of Common Stock, $5.00 par value, were
outstanding.
1
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
June 30, 1998 and December 31, 1997
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Assets 1998 1997
------- -------------- --------------
<S> <C> <C>
Cash and due from banks $ 6,913 8,886
Interest-bearing deposits with
other financial institutions 4,976 8,212
Federal funds sold 4,050 5,040
Securities:
Held-to-maturity, approximate market value of $66,568
in 1998 and $69,598 in 1997 65,988 69,233
Available-for-sale 142,408 148,740
-------------- --------------
208,396 217,973
Loans, net 113,723 106,061
Premises and equipment, net 5,369 5,209
Accrued interest receivable 3,441 3,311
Other assets 3,221 3,801
-------------- --------------
$ 350,089 358,493
============== ==============
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand - noninterest-bearing 37,642 32,860
Interest-bearing transaction accounts 70,897 79,810
Money market and savings 44,922 46,206
Certificates of deposit and other time deposits 160,420 163,231
-------------- --------------
Total deposits 313,881 322,107
Accrued interest payable 1,083 1,105
Notes payable 444 844
Other liabilities 445 1,708
-------------- --------------
315,853 325,764
Stockholders' equity:
Preferred stock, $5 par value; 2,000,000 shares authorized
none issued or outstanding -- --
Common stock, $5 par value; 10,000,000 shares authorized,
2,160,000 issued 10,800 10,800
Surplus 5,400 5,400
Retained earnings 19,978 18,875
Accumulated other comprehensive income 69 (335)
-------------- --------------
36,247 34,740
Less treasury stock, 142,526 shares in 1998 and 142,506 shares (2,011) (2,011)
in 1997, at cost
-------------- --------------
Total stockholders' equity 34,236 32,729
Commitments and contingencies
-------------- --------------
$ 350,089 358,493
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months Six months
ended June 30, ended June 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,382 2,129 4,658 4,224
Securities
Taxable - available-for-sale 2,129 2,336 4,327 4,530
Taxable - held-to-maturity 463 592 998 1,326
Tax-exempt 387 462 743 899
Federal funds sold 111 33 191 86
Interest-bearing deposits with other financial 113 53 311 158
institutions
------------- ------------- ------------- -------------
Total interest income 5,585 5,605 11,228 11,223
------------- ------------- ------------- -------------
Interest expense:
Deposits:
Transaction accounts 474 473 965 990
Money market and savings 320 317 642 639
Certificates of deposit and other time deposits 2,084 2,112 4,190 4,192
Other 8 13 15 26
------------- ------------- ------------- -------------
Total interest expense 2,886 2,915 5,812 5,847
------------- ------------- ------------- -------------
Net interest income 2,699 2,690 5,416 5,376
Provision for loan losses 164 83 293 170
------------- ------------- ------------- -------------
Net interest income after provision for loan
losses 2,535 2,607 5,123 5,206
------------- ------------- ------------- -------------
Other income:
Gains (losses) on securities transactions, net 40 (26) 66 (64)
Income from fiduciary activities 200 150 405 288
Service charges, commissions, and fees 796 449 1,407 892
Other 139 83 287 158
------------- ------------- ------------- -------------
Total other income 1,175 656 2,165 1,274
------------- ------------- ------------- -------------
Other expenses:
Salaries and employee benefits 1,536 1,404 2,926 2,666
Occupancy and equipment 330 253 638 486
Regulatory assessments 30 34 64 60
Other 756 632 1,430 1,235
------------- ------------- ------------- -------------
Total other expenses 2,652 2,323 5,058 4,447
------------- ------------- ------------- -------------
Income before income taxes 1,058 940 2,230 2,033
Income tax expense 217 204 482 462
------------- ------------- ------------- -------------
Net income $ 841 736 1,748 1,571
============= ============= ============= =============
Basic net income per common share $ 0.42 0.35 0.87 0.74
============= ============= ============= =============
Average number of shares outstanding 2,017,478 2,121,640 2,017,486 2,125,946
============= ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(unaudited)
Six months ended June 30, 1998 and 1997
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income
--------------
Net Unrealized
Gains (Losses)
on Securities Total
Preferred Common Retained Available Treasury Stockholders'
Stock Stock Surplus Earnings For Sale Stock Equity
----------- ------- -------- --------- --------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996 $ -- 10,800 5,400 16,825 (703) (334) 31,988
Net income -- -- -- 1,571 -- -- 1,571
Net change in unrealized
losses on securities
available for sale -- -- -- -- (121) -- (121)
Cash dividends ($.32 per
share) -- -- -- (679) -- -- (679)
Purchase of 14,220 shares of
treasury stock -- -- -- -- -- (172) (172)
----------- ------- -------- --------- --------------- -------- -------------
Balances at June 30, 1997 $ -- 10,800 5,400 17,717 (824) (506) 32,587
=========== ======= ======== ========= =============== ======== =============
Balances at December 31, 1997 $ -- 10,800 5,400 18,875 (335) (2,011) 32,729
Net income -- -- -- 1,748 -- -- 1,748
Net change in unrealized gains
on securities available for
sale -- -- -- -- 404 -- 404
Cash dividends ($.32 per
share) -- -- -- (645) -- -- (645)
----------- ------- -------- --------- --------------- -------- -------------
Balances at June 30, 1998 $ -- 10,800 5,400 19,978 69 (2,011) 34,236
=========== ======= ======== ========= =============== ======== =============
</TABLE>
4
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
(unaudited)
Six months ended June 30, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Operating activities:
Net income $ 1,748 1,571
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization of premium on securities 206 190
Net (gains) losses on securities transactions, net (66) 64
Provision for loan losses 293 170
Depreciation and amortization 500 296
(Increase) decrease in accrued interest receivable (130) 46
(Increase) decrease in other assets 407 (775)
Increase (decrease) in accrued interest payable (22) 442
Decrease in other liabilities (1,149) (374)
-------------- --------------
Net cash provided by operating activities 1,787 1,630
-------------- --------------
Investing activities:
Proceeds from maturities and paydowns of held-to-maturity securities 11,857 11,568
Purchases of held-to-maturity securities (8,756) (5,130)
Proceeds from sales of available-for-sale securities 10,017 14,958
Proceeds from maturities and paydowns of available-for-sale securities 24,987 5,757
Purchases of available-for-sale securities ( 28,055) (19,705)
Net increase in loans (7,955) (1,490)
Purchases of bank premises and equipment (487) (1,247)
-------------- --------------
Net cash provided by investing activities 1,608 4,711
-------------- --------------
Financing activities:
Net decrease in deposits (8,226) (7,650)
Payment on notes payable (400) (667)
Cash dividends paid (968) (679)
Purchase of treasury stock -- (172)
-------------- --------------
Net cash used in financing activities (9,594) (9,168)
-------------- --------------
Decrease in cash and cash equivalents (6,199) (2,827)
Cash and cash equivalents at beginning of period 22,138 17,455
-------------- --------------
Cash and cash equivalents at end of period $ 15,939 14,628
============== ==============
Supplemental disclosures of cash flow activities:
Income taxes paid, net of refunds $ 740 590
============== ==============
Interest paid $ 5,834 5,405
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(1) BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements are unaudited, but
include all adjustments, consisting of normal recurring accruals, which
management considers necessary for a fair presentation of the financial
position, results of operations, and cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Securities and
Exchange Commission rules and regulations. The consolidated financial
statements and footnotes included herein should be read in conjunction
with the Company's annual consolidated financial statements as of
December 31, 1997 and 1996, and for each of the years in the three year
period ended December 31, 1997 included in the Company's Form 10-K.
(2) SECURITIES
----------
The amortized cost (carrying value) and approximate market values of
securities held-to-maturity at June 30, 1998, are summarized as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,026 23 (7) 7,042
U.S. Government agencies 6,102 15 -- 6,117
State and municipal 36,560 582 (58) 37,084
Mortgage-backed securities
and collateralized mortgage
obligations 16,300 35 (20) 16,315
------------- ------------- -------------- --------------
$ 65,988 655 (85) 66,558
------------- ------------- -------------- --------------
</TABLE>
The amortized cost and approximate market values (carrying value) of
securities available- for-sale at June 30, 1998, are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 60,072 292 (9) 60,355
U.S. Government agencies 13,463 9 (36) 13,436
Mortgage-backed securities
and collateralized mortgage
obligations 68,400 317 (468) 68,249
Other 368 -- -- 368
------------- ------------- -------------- --------------
$ 142,303 618 (513) 142,408
------------- ------------- -------------- --------------
</TABLE>
6
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998
(3) LOANS AND ALLOWANCE FOR LOAN LOSSES
-----------------------------------
The composition of the Company's loan portfolio is as follows (in thousands
of dollars):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------------- -----------------
<S> <C> <C>
Commercial and industrial $ 30,029 28,195
Real estate mortgage 55,689 49,979
Installment and other 30,001 29,832
-------------- -----------------
Total 115,719 108,006
Less:
Allowance for loan losses (1,513) (1,249)
Unearned discount (483) (696)
-------------- -----------------
Loans, net $ 113,723 106,061
============== =================
</TABLE>
Changes in the allowance for loan losses for the six months ended June 30,
1998 and 1997 are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
-------------- -----------------
<S> <C> <C>
Balance, January 1 $ 1,249 1,146
Provision charged to operating expense 293 170
Loans charged off (126) (176)
Recoveries on loans 97 56
-------------- -----------------
Balance, June 30 $ 1,513 1,196
============== =================
</TABLE>
(4) TOTAL COMPREHENSIVE INCOME
--------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS 130 requires that an entity include in total comprehensive
income certain amounts that were previously recorded directly in
stockholders' equity. For the six-month periods ended June 30, 1998 and
1997, other comprehensive income amounts included in total comprehensive
income consisted only of net unrealized gains (losses) on securities
available for sale, net of income taxes. Total comprehensive income for the
six-month periods ended June 30, 1998 and 1997, were $2,152,000 and
$1,450,000, respectively.
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HENDERSON CITIZENS BANCSHARES, INC.
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
The following discussion and analysis of the financial condition and results of
operations of the Company and its primary bank subsidiaries, Citizens National
Bank, Henderson, Texas, and First State Bank, Waskom, Texas, should be read in
conjunction with the consolidated financial statements and the notes thereto,
and other financial and statistical information appearing elsewhere in this
report.
Results of Operations
- ---------------------
Net income for the first six months of 1998 increased to $1,748,000 compared to
$1,571,000 for the same period in 1997. The increase was primarily caused by an
increase in non-interest income. During the first six months of 1998, net
interest income increased slightly due to heightened loan demand although loan
and deposit interest rates generally remained unchanged. The Company made a
provision of $293,000 to the allowance for loan losses during the first six
months of 1998. A provision of $170,000 was made for loan losses during the
same period in 1997. The Company experienced a gain on securities transactions
totaling approximately $66,000 in the first six months of 1998 compared to
losses of $64,000 in the first six months of 1997. Other income, excluding
gains on securities transactions, for the first six months of 1998 was
$2,099,000 compared to $1,338,000 for the same period in 1997 due primarily to
an increase in insufficient funds fee income as a result of the initiation of a
new deposit program in March 1998 and the establishment of a trust office in
Corsicana, Texas in March 1997. Total other expenses for the first six months
of 1998 were $5,058,000 compared to $4,447,000 for the same period in 1997.
Income tax expense for the first six months of 1998 and 1997 was $482,000 and
$462,000, respectively.
PROPOSED ACQUISITION
- --------------------
In May 1998, the Company agreed to acquire certain assets and assume certain
liabilities of Jefferson National Bank, Jefferson, Texas, for a purchase price
of $6,500,000. The acquisition of Jefferson National Bank will result in an
approximate increase in total assets of the Company of $32,977,000, total loans
of $7,779,000, and total deposits of $29,599,000, and will be accounted for
using the purchase method of accounting.
It is anticipated that the proposed acquisition will be completed, subject to
regulatory approvals, during the fourth quarter of 1998, although no assurance
can be given that the acquisition will be completed or that such timetable will
be met. The acquisition is expected to be funded through internal sources.
MERGER OF FIRST STATE BANK WASKOM
- ---------------------------------
Citizens National Bank and First State Bank filed an application with the
Comptroller for approval to merge First State Bank with and into Citizens
National Bank under the charter and title of Citizens National Bank (the
"merger"). The sole banking office of First State Bank is now being operated as
a full-service branch of Citizens National Bank since completion of the merger
on July 23, 1998. It is not anticipated that the merger will result in any
diminution of products and services currently available to customers of First
State Bank or Citizens National Bank. It is anticipated, however, that the
merger will generate certain operational efficiencies by operating under one
bank charter rather than two separate charters regulated by different regulatory
authorities.
NET INTEREST INCOME
- -------------------
For the six months ended June 30, 1998, net interest income was $5,416,000
compared to $5,376,000 for the first six months of 1997. The slight increase is
primarily the result of continued loan growth as loan and deposit interest rates
generally remained unchanged.
Net interest income for the three-month period ended June 30, 1998 was
$2,699,000 compared to $2,690,000 in 1997. The increase in 1998 is the same as
the reasons noted above for the six-month period.
PROVISION FOR LOAN LOSSES
- -------------------------
During the first six months of 1998, the Company increased its allowance for
loan losses through a provision of $293,000. The Company increased its allowance
for loan losses during the same period of 1997 by $170,000. The increase is
primarily due to an estimate for potential overdraft charge-offs that may result
from the insufficient funds fee program initiated in March 1998.
8
<PAGE>
The Company experienced net charge-offs of $29,000 in the first six months of
1998 compared to net charge-offs of $120,000 in the same period in 1997.
For the three-month period ended June 30, 1998, the Company increased its
allowance through a provision of $164,000. The Company increased its allowance
for loan losses during the same period in 1997 by $83,000.
See additional information related to the Company's loan operations in the
Allowance for Loan Loss section below.
OTHER INCOME AND EXPENSES
- -------------------------
Non-interest income, excluding securities gains/losses, was $2,099,000 for the
first six months of 1998 as compared to $1,338,000 in the first six months of
1997. This increase is due to increases in service charges through the
initiation of an insufficient funds fee program in March 1998, as well as an
increase in trust revenues due to the establishment of a trust office in
Corsicana, Texas in March 1997. The Company experienced gains on securities
transactions for the first six months of 1998 of $66,000 compared to losses on
securities transactions for the first six months of 1997 of $64,000. Other
expenses for the six-month period ended June 30, 1998 were $5,058,000 compared
to $4,447,000 during the same period in 1997. The increase in other expenses is
due to increases in general salaries and benefits, and occupancy and equipment
due to remodeling of the main bank facility in Henderson, Texas.
For the three months ended June 30, 1998, non-interest income, excluding
securities losses was $1,135,000 compared to $682,000 for the same period in
1997, with the majority of the increase due to insufficient funds fee income.
The Company experienced gains on securities transactions in the three months
ended June 30, 1998 of approximately $40,000 compared to losses on securities
transactions of $26,000 for the three months ended June 30, 1997.
INCOME TAXES
- ------------
Income tax expense for the first six months of 1998 was $482,000, compared to
$462,000 in the same period in 1997. The effective tax rate for the first six
months of 1998 and 1997, respectively, was 21.6% and 22.7%. This effective rate
is less than the statutory rate primarily because of tax-free income provided
from state and municipal bonds, leases and obligations. As these tax-free
investments, leases, and obligations mature and are replaced, the effective
income tax rate is expected to increase.
Income tax expense for the three-month periods ended June 30, 1998 and June 30,
1997 were $217,000 and $204,000 respectively.
FINANCIAL CONDITION
- -------------------
The Company's total assets at June 30, 1998 of $350,089,000 decreased from the
total assets at December 31, 1997 of $358,493,000. Total deposits were
$313,881,000 at June 30, 1998, compared to the December 31, 1997 total of
$322,107,000.
Equity capital of the Company, excluding unrealized gains or losses on
securities available for sale, as a percentage of total assets was 9.7% at June
30, 1998, compared to 9.2% at December 31, 1997. The risk-based Tier I and Tier
II capital ratios and the leverage ratio of Citizens National Bank amounted to
24.4%, 25.6%, and 9.2%, respectively at June 30, 1998 compared to 23.7%, 24.7%,
and 9.1%, respectively, at December 31, 1997. At June 30, 1998, First State
Bank had Tier I and Tier II capital ratios and a leverage ratio of 21.3%, 21.9%,
and 8.9%, respectively, compared to 27.5%, 28.0%, and 9.1%, respectively at
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998, the Company's cash and cash equivalents of $15,939,000
decreased from the December 31, 1997 amount of $22,138,000. The Company's
stockholders' equity of $34,236,000 remains at a level considered to be adequate
by management. Profits in excess of dividends paid to shareholders are
reflected in the increase in undivided profits from 1997.
9
<PAGE>
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The allowance for loan losses at June 30, 1998 and December 31,1997 was 1.31%
and 1.16% of outstanding loans, respectively. By its nature, the process through
which management determines the appropriate level of the allowance requires
considerable judgment. The determination of the necessary allowance, and
correspondingly the provision for loan losses, involves assumptions about
projections of national and local economic conditions, the composition of the
loan portfolio, and prior loss experience, in addition to other considerations.
As a result, no assurance can be given that future losses will not vary from the
current estimates. However, management believes that the allowance at June 30,
1998 is adequate to cover losses inherent in its loan portfolio. A migration
analysis and an internal classification system for loans also helps identify
potential problems, if any, that are not identified otherwise. From these
analyses, management determines which loans are potential candidates for
nonaccrual status, including impaired loan status, or charge-off. Management
continually reviews loans and classifies them consistent with the Comptroller's
guidelines to help ensure that an adequate allowance is maintained.
The allocation of the allowance for loan losses is based upon the inherent risks
in the various components of the loan portfolio. Amounts allocated to each
component are determined based on management's evaluations of concentrations of
credit risks, current and anticipated economic conditions, historical analyses,
and classification and estimated loss exposure assigned to specific credits.
These reserve allocations are subject to change as various economic conditions
dictate. The following table is an analysis of the Allowance for Loan Losses.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
1998 1997
--------------- --------------
<S> <C> <C>
Balance at beginning of period $ 1,249 1,146
Charge-offs:
Commercial, financial, and agricultural 7 57
Real estate-mortgage -- 1
Installment loans to individuals 119 118
--------------- --------------
126 176
Recoveries:
Commercial, financial, and agricultural 38 32
Installment loans to individuals 59 24
--------------- --------------
97 56
--------------- --------------
Net charge-offs 29 120
--------------- --------------
Additions charged to operations 293 170
--------------- --------------
Balance at end of period $ 1,513 1,196
=============== ==============
Ratio of net charge-offs during
the period to average loans outstanding
during the period -- .10%
=============== ==============
</TABLE>
NON ACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- --------------------------------------------
The Company's policy is to discontinue the accrual of interest income on loans
whenever it is determined that reasonable doubt exists with respect to timely
collectibility of interest and principal. Loans are placed on nonaccrual status
if either material deterioration occurs in the financial position of the
borrower, payment in full of interest or principal is not anticipated, payment
in full of interest or principal is past due 90 days or more unless well
secured, payment in full of interest or principal on a loan is past due 180 days
or more, regardless of collateral, or the loan in whole or in part is classified
as doubtful. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on
nonaccrual status, interest is no longer accrued or included in interest income
and previously accrued income is reversed.
10
<PAGE>
The following is a summary of the Company's problem loans as of June 30, 1998
and 1997.
<TABLE>
<CAPTION>
At June 30,
1998 1997
-------------- --------------
<S> <C> <C>
(dollars in thousands)
Nonaccrual loans $ 162 92
Restructured loans -- --
Other impaired loans -- --
Other real estate 184 175
-------------- --------------
Total non-performing loans 346 267
============== ==============
Loans past due 90+ days and still accruing 30 18
============== ==============
Other potential problem loans -- --
============== ==============
Income that would have been recorded in
accordance with original terms 5 5
Less income actually recorded -- --
-------------- --------------
Loss of income $ 5 5
============== ==============
</TABLE>
CONCENTRATION OF CREDIT RISK
- ----------------------------
The Company grants real estate, commercial, and industrial loans to customers
primarily in Henderson, Texas, and surrounding areas of east Texas. Although the
Company has a diversified loan portfolio, a substantial portion (approximately
48.5% at June 30, 1998) of its loans are secured by real estate and its ability
to fully collect its loans is dependent upon the real estate market in this
region. The Company typically requires collateral sufficient in value to cover
the principal amount of the loan. Such collateral is evidenced by mortgages on
property held and readily accessible to the Company. See additional information
related to the composition of the Company's loan portfolio included in note 3 to
the consolidated financial statements.
NEW EMPLOYEE BENEFIT PLANS
- --------------------------
In June 1998, the Company established a non-qualified deferred compensation plan
and performance and retention plan for certain select management employees of
the Company. Contributions by the Company are at the discretion of the Board of
Directors and generally provide vesting over five years. As of June 30, 1998,
no awards have been granted.
CORPORATE OBJECTIVES
- --------------------
It is the philosophy of the Company to continue to remain independent in
ownership, to foster its image as the community leader in banking, to increase
its market share through selected acquisitions and aggressive marketing, to
maintain a sound earning-asset portfolio, and to assess liquidity needs while
maximizing its profitability and return to its shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivatives embedded in
other contracts, and for hedging activities. It requires that an entity
recognizes all derivatives as either assets or liabilities in the balance sheet
and measures those instruments at fair value. The Statement will be effective
for the Company in the fiscal year ending in 2000. Due to the level of use of
derivatives of the Company, the effect of implementation of this new
pronouncement is not expected to have a significant effect on the financial
position or results of operations of the Company.
11
<PAGE>
In April 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position (SOP) 98-
5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires that the
costs of start-up activities, including organizational costs, be expensed as
incurred. SOP 98-5, effective for fiscal years beginning after December 15,
1998, requires initial application to be recorded as of the beginning of the
fiscal year in which the SOP is first adopted and is reported as the cumulative
effect of a change in accounting principle. Although certain capitalized costs
will be effected, the effect of implementation of this new pronouncement is not
expected to have a significant effect on the financial condition or results of
operations of the Company.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the information related to the market
risk of the Company since December 31, 1997.
12
<PAGE>
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HENDERSON CITIZENS BANCSHARES, INC.
Date: August 11, 1998 By: /s/ Milton S. McGee, Jr.
--------------------- -----------------------------------
Milton S. McGee, Jr., CPA
President
Date: August 11, 1998 By: /s/ Rebecca G. Tanner
--------------------- -----------------------------------
Rebecca G. Tanner, CPA
Chief Accounting Officer
14
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