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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _________ to ________
Commission File Number 33-42286
HENDERSON CITIZENS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2371232
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
201 WEST MAIN STREET, P. O. BOX 1009
HENDERSON, TEXAS 75653
(Address or principal executive offices) (Zip Code)
(903) 657-8521
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
[Title of Each Class] [Name of Each Exchange on Which Registered]
NONE NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant, based on the price of the voting stock in the most recent sale
transaction, which occurred on November 21, 1997, was $13,189,679. For purposes
of this computation, all officers, directors, and 5% beneficial owners of the
registrant are deemed to be affiliates. Further, the shares of registrant held
in trust by Citizens National Bank, Henderson, Texas, are assumed to be held by
an affiliate of the registrant. Such determination should not be deemed an
admission that such officers, directors and beneficial owners are, in fact,
affiliates of the registrant.
Number of shares outstanding of the registrant's common stock, as of March 2,
1998: 2,017,494
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1997 Annual Report to Shareholders are incorporated by reference
into Parts II and III. With the exception of such specific references as appear
in this report, the 1997 Annual Report to Shareholders is not deemed filed as
part of this report. (Index to Exhibits is located on page 24.)
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PART I
ITEM 1. BUSINESS
THE COMPANY
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Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as a
Texas corporation on November 13, 1990 and is a second-tier bank holding
company, owning one hundred percent (100%) of the issued and outstanding shares
of the common stock of Henderson Citizens Delaware Bancshares, Inc. (the
"Delaware BHC"), and one hundred percent (100%) of the issued and outstanding
shares of the common stock of Waskom Bancshares, Inc. The Company organized the
Delaware BHC on December 27, 1991. Waskom Bancshares, Inc. is an inactive shell
corporation.
The Company also indirectly owns one hundred percent (100%) of the issued
and outstanding shares of the $5.00 par value per share common stock (the
"Citizens Bank Stock") of Citizens National Bank, Henderson, Texas (the
"Citizens Bank"), and one hundred percent (100%) of the issued and outstanding
shares of the $1.25 par value per share common stock (the "Waskom Bank Stock")
of First State Bank, Waskom, Texas (the "Waskom Bank"). The Citizens Bank and
the Waskom Bank sometimes are referred to herein collectively as the "Subsidiary
Banks".
The Company's primary activity is to provide assistance to the Delaware BHC
and the Subsidiary Banks in the management and coordination of their financial
resources and to provide capital, business development, long-range planning and
public relations to the Delaware BHC and the Subsidiary Banks. The Delaware BHC
and the Subsidiary Banks operate under the day-to-day management of their own
officers, and each entities' individual boards of directors formulates its own
policies. A number of directors or officers of the Company are also directors
or officers of the Delaware BHC and the Subsidiary Banks. See "ITEM 10 --
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT." The Company conducts no
activity other than the operation of the Delaware BHC and, indirectly, the
Subsidiary Banks. The Company derives its revenues primarily from the operation
of the Subsidiary Banks in the form of dividends paid from the Subsidiary Banks
to the Delaware BHC and by the Delaware BHC to the Company. In addition, the
Company may receive tax benefits from any future losses of the Subsidiary Banks.
Neither the Company nor the Delaware BHC engage in any nonbanking
activities at this time. If, in the future, the Company proposes to engage in
any nonbanking activities through these corporations, it would be restricted to
those nonbanking activities permitted under guidelines of the Board of Governors
of the Federal Reserve System (the "Federal Reserve Board") and would need to
obtain regulatory approval to engage in such activities. As of December 31,
1997, the Company had, on a consolidated basis, total assets of approximately
$358,493,000, total deposits of approximately $322,107,000, total loans, (net of
unearned discount and allowance for loan losses) of approximately $106,061,000
and total stockholders' equity of approximately $32,729,000.
THE DELAWARE BHC
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The Delaware BHC is a wholly-owned subsidiary of the Company, organized in
1991 under the laws of the State of Delaware for the purpose of becoming an
intermediate bank holding company. The Delaware BHC owns 1,080,000 shares (100%)
of the issued and outstanding Citizens Bank Stock and 100,000 shares (100%) of
the issued and outstanding Waskom Bank Stock.
The primary purpose of the Delaware BHC is to limit the Texas franchise tax
liability of the Company. The Delaware BHC does not conduct any operations other
than providing assistance to the Subsidiary Banks and will derive its revenues
primarily from the operation of the Subsidiary Banks in the form of dividends.
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ACQUISITIONS
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On September 17, 1996, the Company completed its acquisition of all of the
issued and outstanding stock of Waskom Bancshares, Inc. and its majority-owned
subsidiary, the Waskom Bank. The Company acquired approximately 93% of the
stock of Waskom Bancshares, Inc. pursuant to the terms of a Stock Purchase
Agreement, dated as of May 24, 1996. The Company acquired the remaining shares
of Waskom Bancshares, Inc. and the minority interest of the Waskom Bank not
owned by Waskom Bancshares, Inc. pursuant to the terms of Stock Purchase
Agreements between the Company and each of the holders representing a minority
interest in Waskom Bancshares, Inc. and the Waskom Bank. Such stock was
acquired for cash, and the aggregate purchase price of $3,463,000 was funded
with a combination of notes and cash. The stock of the Waskom Bank directly and
indirectly acquired by the Company through the acquisition of Waskom Bancshares,
Inc. was thereafter contributed to the Delaware BHC. Waskom Bancshares, Inc. is
an inactive subsidiary of the Company. The Delaware BHC currently operates the
Citizens Bank and the Waskom Bank as separate subsidiaries. As described
elsewhere herein, the Company plans to merge the Waskom Bank with and into the
Citizens Bank, which affiliate merger is expected to be completed during the
second quarter of 1998.
On October 10, 1996, the Company completed the repurchase of 29,700 shares
of its common stock (representing approximately 1.375% of its then outstanding
shares) in a privately negotiated transaction from a single shareholder. Such
shares were purchased for $334,125 in the aggregate, or $11.25 per share. The
purchase price was paid in cash using available cash resources, and the Company
did not incur any debt in connection with the stock repurchase.
During 1997, the Company purchased 14,620 shares of its common stock from
five shareholders at an average cost of $12.06 per share. These privately
negotiated transactions all occurred prior to the tender offer (see below). The
purchase price was paid in cash using available cash resources, and the Company
did not incur any debt in connection with these stock repurchases.
On October 15, 1997, the Company initiated a tender offer to all of its
shareholders to purchase an aggregate of 140,000 shares of the Company's common
stock (representing approximately 6.6% of such outstanding shares) at a price of
$14.50 per share. The tender offer, as extended, expired on November 20, 1997.
Fifty-two shareholders of the Company tendered a total of 98,186 shares of
common stock in the tender offer representing an aggregate purchase price of
$1,423,697 plus related expenses of approximately $77,000. The purchase of
shares appropriately tendered and accepted for purchase by the Company was
funded entirely from internal resources and no debt was incurred in connection
with the transaction. In accordance with applicable law, on the date that the
tender offer materials were first mailed to the Company's shareholders, the
Company filed with the Securities and Exchange Commission an Issuer Tender Offer
Statement on Schedule 13E-4 describing the terms of the tender offer.
THE SUBSIDIARY BANKS
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General.
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The Citizens Bank opened for business in 1930 as Citizens National Bank of
Henderson, a national banking association chartered by the Office of the
Comptroller of the Currency (the "Comptroller") and was originally located at
101 East Main Street, Henderson, Texas. In 1973, the Citizens Bank moved to its
current location at 201 West Main Street. The Citizens Bank operates branch
offices in Henderson, Overton, Mount Enterprise, Jefferson, Malakoff, and
Chandler, Texas. On March 24, 1997, the Citizens Bank opened a trust office in
Corsicana, Texas. Three former employees of the Corsicana, Texas Nations Bank
trust department were hired to operate this trust office. Presently, the
Citizens Bank plans to open a loan production office at the Corsicana, Texas
location in March of 1998. At December 31, 1997, the Citizens Bank had
approximately $332,389,000 in assets, $300,725,000 in deposits, $98,573,000 in
loans (net of unearned discount and allowance for loan losses), and $29,445,000
in shareholders' equity. The Citizens Bank is regulated and supervised by the
Comptroller.
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The Waskom Bank was originally chartered on December 4, 1954, as a Texas
banking association. Its sole banking office is located at 745 Spur 156,
Waskom, Texas. At December 31, 1997, the Waskom Bank had approximately
$25,979,000 in assets, $22,114,000 in deposits, $7,488,000 in loans (net of
unearned discount), and $3,644,000 in shareholder's equity. The Waskom Bank is
regulated and supervised by the Federal Deposit Insurance Corporation (the
"FDIC") and the Texas Department of Banking (the "TDB").
Services. The Subsidiary Banks are full service banks offering a variety
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of services to satisfy the needs of the consumer and commercial customers in the
area. The Subsidiary Banks offer most types of loans, including commercial,
agribusiness, credit card, consumer, mortgage, home equity, and real estate
loans. The Subsidiary Banks also provide a wide range of consumer banking
services, including savings and checking accounts, MasterMoney debit card,
various savings programs, individual retirement accounts, safe deposit boxes,
and automated teller machines. The Citizens Bank also offers trust services and
automated clearinghouse payroll services. In 1992, the Citizens Bank began
offering a wide array of investment products, such as annuities, mutual funds
and discount brokerage services, to its customers. In 1994, the Citizens Bank
began offering a 24 hour automated telephone account inquiry system, which was
complemented in late 1995 by a loan by phone automated system. In January 1994,
the Citizens Bank began a Community Development Corporation ("CDC"), which is a
subsidiary of the bank, and offers affordable housing to lower income persons in
Rusk County. In May 1996, the CDC was approved to make loans in Marion and
Henderson Counties.
Saturday drive up banking has been offered at the Malakoff location since
its acquisition in 1994, and Saturday drive up banking has been offered in
Henderson at the Southside branch since November 1995. Saturday drive up
banking has been offered at the Chandler branch since April 1996.
Competition. The Citizens Bank serves a large portion of the East Texas
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area with offices in Henderson, Overton, and Mount Enterprise, which includes
Rusk County, Jefferson, which includes Marion County, and Malakoff and Chandler,
which includes Henderson County. The Waskom Bank compliments the service area
of the Citizens Bank by serving Harrison County in East Texas. The activities
in which the Subsidiary Banks engage are competitive. Each activity engaged in
involves competition with other banks, as well as with nonbanking financial
institutions and nonfinancial enterprises. In addition to competing with other
commercial banks within and outside their primary service areas, the Subsidiary
Banks compete with other financial institutions engaged in the business of
making loans or accepting deposits, such as savings and loan associations,
credit unions, industrial loan associations, insurance companies, small loan
companies, finance companies, mortgage companies, real estate investment trusts,
factors, certain governmental agencies, credit card organizations and other
enterprises. Additional competition for deposits comes from government and
private issuers of debt obligations and other investment alternatives for
depositors, such as money market funds and securities brokers. The Subsidiary
Banks also compete with suppliers of equipment in furnishing equipment financing
and leasing services.
Year 2000. The Company recognizes that the arrival of the Year 2000 poses
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a unique challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed and is repairing its computer applications and business processes to
provide for their continued functionality. An assessment of the readiness of
external entities which it interfaces with, such as vendors, customers, payment
systems, and others, is ongoing.
Effort is under way to address this issue, including a process of
inventory, scoping and analysis, modification, testing and certification, and
implementation. A major portion of the costs associated with correcting Year
2000 deficiencies will be met from existing resources through a reprioritization
of technology development initiatives, with the remainder representing
incremental costs.
The Company estimates that it will incur costs for testing of computer
applications and purchases of new hardware and software. Certain of these
hardware improvements would have probably been made regardless of the Year 2000
issue based on the Company's history of technology upgrades. It is anticipated
that the Company will be Year 2000 compliant by early 1999. The Company does
not anticipate that the related overall costs will be material to any single
year.
3
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Environmental Compliance. There are several federal and state statutes
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that govern the rights and obligations of financial institutions with respect to
environmental issues. Besides being directly liable under these statutes for
its own conduct, a bank may also be held liable under certain circumstances for
actions of borrowers or other third parties on property that collateralizes a
loan held by the bank. Such potential liability under the environmental
statutes may far exceed the original amount of a loan made by the bank secured
by the property. Currently, the Subsidiary Banks are not a party to any pending
legal proceedings under any environmental statute, nor are the Subsidiary Banks
aware of any instances that may give rise to such liability of the Subsidiary
Banks.
Employees. At December 31, 1997, the Citizens Bank employed approximately
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132 fulltime and 19 part-time employees, and the Waskom Bank employed
approximately 12 full-time employees and 1 part-time employee.
Affiliate Merger. During the first quarter of 1998, the Citizens Bank and
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the Waskom Bank anticipate filing an application with the Comptroller for prior
approval to merge the Waskom Bank with and into the Citizens Bank under the
charter and title of the Citizens Bank (the "Affiliate Merger"). The sole
banking office of the Waskom Bank will be operated as a full-service branch of
the Citizens Bank upon completion of the Affiliate Merger. It is not
anticipated that the Affiliate Merger will result in any diminution of products
and services currently available to customers of the Waskom Bank or the Citizens
Bank. It is anticipated, however, that the Affiliate Merger will generate
certain operational efficiencies by operating under one bank charter rather than
two separate charters regulated by different regulatory authorities.
It is anticipated that the Affiliate Merger will be completed during the
second quarter of 1998, although no assurance can be given that the Affiliate
Merger will be completed or that such timetable will be met.
Supervision and Regulation
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The following discussion of the regulatory environment under which bank
holding companies and banks operate is intended only to provide the reader with
a summary of some of the more material regulatory constraints upon the operation
of bank holding companies and banks and does not purport to be a complete
discussion of all regulatory constraints.
Bank Holding Company Regulation. Both the Company and the Delaware BHC are
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registered bank holding companies under the Bank Holding Company Act of 1956
(the "Bank Holding Company Act") and are therefore subject to regulation and
examination by the Federal Reserve Board. The Federal Reserve Board has broad
oversight authority with respect to many aspects of the activities, operations
and expansion of bank holding companies. For example, the Federal Reserve Board
must grant prior approval of (i) certain acquisitions of banks or thrifts by
bank holding companies; (ii) the engagement by bank holding companies or their
subsidiaries in certain activities that are deemed to be closely related to
banking; and (iii) transactions regarding the transfer of ownership of a bank
holding company's stock that constitute a "change in bank control" under the
provisions of the Change in Bank Control Act of 1978.
In addition, bank holding companies are required to file annual and other
reports with, and furnish information regarding its business to the Federal
Reserve Board. The Federal Reserve Board has available to it several
administrative remedies including cease-and-desist powers over parent holding
companies and nonbanking subsidiaries where the actions of such companies would
constitute a serious threat to the safety, soundness or stability of a
subsidiary bank. The Federal Reserve Board also has the authority to regulate
debt obligations (other than commercial paper) issued by bank holding companies.
Federal banking law provides that the Company and the Delaware BHC are able
to acquire or establish banks in any state of the United States. However, the
board of directors of the Company and the Delaware BHC do not at this time have
any plans to acquire or establish banks whether within the State of Texas or
elsewhere.
4
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In addition, the Texas Finance Code permits a bank holding company owning
stock of a bank located outside the State of Texas (a "Foreign Holding Company")
to acquire a bank or bank holding company located in Texas. Until September 1,
2001, such acquisition may occur only if the Texas bank to be directly or
indirectly controlled by the Foreign Holding Company (i) was in existence on or
had its charter application filed before July 15, 1987 and has continuously
operated since such date, or (ii) has existed and continuously operated as a
bank for a period of at least five (5) years. In any event, however, a Foreign
Holding Company may not acquire a Texas bank or bank holding company, if after
the acquisition, the Foreign Holding Company would own or control banks in Texas
the deposits of which would exceed twenty-five percent (25%) of the total
deposits of all state and national banks located in Texas. Pursuant to a Texas
Attorney General opinion interpreting the relevant provisions of applicable law,
a Foreign Holding Company acquiring a bank or bank holding company located in
the State of Texas may not become involved in its day-to-day operations.
The Comptroller, the Federal Reserve Board and the FDIC have adopted risk-
based capital guidelines which took effect on December 31, 1990. These
guidelines set forth the calculation of banks and bank holding companies'
capital to asset ratios by assigning a weight to all assets, including off-
balance-sheet assets, and by defining the components that may be included in
capital. The guidelines establish a capital ratio that compares an
institution's qualifying capital base (the numerator of the risk-based capital)
to its risk-weighted assets (the denominator of the ratio).
The guidelines create two categories of capital: Tier 1, or core capital,
and Tier 2, or supplementary capital. Generally, Tier 1 capital consists
primarily of the sum of common stock and perpetual noncumulative preferred stock
less goodwill and certain percentages of other intangible assets. Tier 2
capital consists primarily of perpetual preferred stock not qualifying as Tier 1
capital, perpetual debt, mandatory convertible securities, subordinated debt,
convertible preferred stock with an original weighted average maturity of at
least five years and the allowance for loan and lease losses up to a maximum of
1.25% of risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes
qualifying total capital. The Tier 1 component must comprise at least 50% of
qualifying total capital. All assets are assigned a weighted risk factor from
0% to 100%. Risk-based capital ratios are calculated using risk-weighted
assets, which include both on-and off-balance sheet assets.
Banks and bank holding companies are required to maintain a ratio of total
capital to risk-weighted assets ("Total Capital Ratio") of at least 8.0%, and a
ratio of Tier 1 capital to risk weighted assets ("Tier 1 Capital Ratio") of at
least 4.0%. Under these guidelines, the Company had a Total Capital Ratio of
24.7% and a Tier 1 Capital Ratio of 23.8% at December 31, 1997.
In addition, banks and bank holding companies are required to maintain a
minimum leverage ratio of Tier 1 capital to average total consolidated assets
("Leverage Capital Ratio") of at least 3.0% for the most highly-rated,
financially sound banks and bank holding companies and a minimum Leverage Ratio
of at least 4.0% for all other banks. The Comptroller, the FDIC and the Federal
Reserve Board define Tier 1 capital in the same manner for both the leverage
ratio and the risk-based capital ratio. Adjusted total assets is comprised of
total assets less intangible assets. As of December 31, 1997, the Company's
Leverage Capital Ratio was 9.0%.
The ability of the Company to pay dividends is restricted by the
requirement that it maintain an adequate level of capital, on a consolidated
basis, in accordance with guidelines of the Federal Reserve Board. Funds
available for payment of dividends to its shareholders and other expenses will
be provided primarily from dividends to the Company from the Delaware BHC, which
will in turn, be received by the Delaware BHC from the Subsidiary Banks. The
ability of the Citizens Bank to pay dividends is restricted by provisions of the
National Bank Act, and the ability of the Waskom Bank to pay dividends is
restricted by provisions of the Texas Finance Code. See "ITEM 5. MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS -- Dividends."
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Bank Regulation. The Citizens Bank is chartered under the National Bank
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Act and is subject to regulation, supervision and examination by the Comptroller
and to regulation by both the Federal Reserve Board and the FDIC. The Waskom
Bank is chartered under the Texas Finance Code and is subject to supervision,
examination and regulation of both the TDB and the FDIC, and is subject to the
power of the TDB and the FDIC to enforce compliance with applicable banking
statutes and regulations. The majority of the Subsidiary Banks' operations and
activities are subject to regulation and supervision by one or more of the
regulatory authorities noted above. For example, activities and operations of
the Subsidiary Banks such as (i) extension of credit and lending activities,
(ii) deposit collection activities; (iii) dividend payments; (iv) branch office
operations; and (v) interstate expansion are regulated by at least one or more
these regulatory agencies.
The ability of the Subsidiary Banks to pay dividends are restricted by
provisions of the National Bank Act in the case of the Citizens Bank, and the
Texas Finance Code in the case of the Waskom Bank. Under the National Bank Act,
the Citizens Bank generally may pay dividends to the extent of net profits. The
prior approval of the Comptroller, or his designee, however, is required for any
dividend to a bank holding company by any affiliated national bank if the total
of all dividends, including any proposed dividend, declared by the national bank
in any calendar year exceeds the total of its net profits (as defined) for such
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus. The Comptroller also has the authority to
prohibit a national bank from engaging in any activity that, in his opinion,
constitutes an unsafe or unsound practice in conducting its business. Under
certain circumstances relating to the financial condition of a national bank,
the Comptroller may determine that the payment of dividends would be an unsafe
or unsound practice. In addition, the Comptroller and the Federal Reserve Board
have recently expressed the view that national banks and bank holding companies
should refrain from dividend increases or reduce or eliminate dividends under
certain circumstances.
Under the Texas Finance Code, The Waskom Bank generally may not pay a
dividend reducing its capital and surplus without the prior approval of the
Banking Commissioner of the State of Texas. All dividends must be paid out of
net profits then on hand, after deducting expenses, including loses and
provisions for loan losses. Additionally, under provisions of the Federal
Deposit Insurance Act, the FDIC has the right to prohibit the payment of
dividends by a bank where such payment is deemed to be an unsafe and unsound
banking practice.
The ability of the Subsidiary Banks to pay dividends are also restricted by
the requirement that they each maintain adequate levels of capital in
accordance with guidelines promulgated from time to time by the Comptroller and
the FDIC, as applicable. Regulations adopted by the Comptroller and the FDIC
require banks to maintain minimum Tier 1 Capital Ratios of 4.0%, Total Capital
Ratios of 8.0%, and a Leverage Capital Ratios of at least 3.0% for the most
highly-rated, financially sound banks and at least 4.0% for all other banks.
Under the regulations, at December 31, 1997, the Subsidiary Banks had capital
ratios as follows:
<TABLE>
<CAPTION>
Tier 1 Total Leverage
Capital Ratio Capital Ratio Capital Ratio
------------- ------------- -------------
<S> <C> <C> <C>
Citizens Bank 23.7% 24.7% 9.1%
Waskom Bank 29.0% 29.5% 9.6%
</TABLE>
See "ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS -- Dividends."
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") became law on December 19, 1991, with the primary objective of
recapitalizing federal deposit insurance funds and making them more secure.
FDICIA reinforces the authority of federal regulatory agencies over banks,
changes bank accounting and auditing rules and establishes levels of
capitalization to be used in determining the extent of regulatory intervention
into a bank's activities and whether to approve proposals submitted by banks
(such as branch applications, acquisitions or entry into new lines of business).
FDICIA requires the establishment of safety and soundness standards, and
requires certain actions to be taken by the federal regulatory authorities in
dealing with problem banks. Subject to certain limitations, FDICIA requires
that banks be assessed for payments made by the FDIC on uninsured deposits of
other institutions and prescribes FDIC assessments based on the risks inherent
in a bank's assets. Under FDICIA, a holding company is required to guarantee
compliance with any capital restoration
6
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plan entered into by a subsidiary bank which is not "adequately capitalized"
within the meaning of FDICIA. FDICIA generally restricts activities of state-
chartered banks to those permissible for national banks, requires the adoption
of uniform real estate loan regulations, establishes certain safeguards against
insider abuses, and calls for regulations designed to limit the risks posed by
one bank's exposure to another bank.
The Financial Institution Reform, Recovery and Enforcement Act of 1989
("FIRREA") was signed into law on August 9, 1989. This legislation included
various provisions that affect or may affect the Company, the Delaware BHC and
the Subsidiary Banks. Among other things, FIRREA generally permits bank holding
companies to acquire healthy thrifts as well as failed or failing thrifts.
FIRREA also removed certain crossmarketing prohibitions previously applicable to
thrift and bank subsidiaries of a common holding company. Such changes could
increase the competition facing the Subsidiary Banks in their service areas.
Furthermore, a multi-bank holding company may now be required to indemnify the
federal deposit insurance fund against losses it incurs with respect to such
company's affiliated banks, which in effect makes a bank holding company's
equity investments in healthy bank subsidiaries available to the FDIC to assist
such company's failing or failed bank subsidiaries.
In addition, pursuant to FIRREA, any depository institution that is not in
compliance with the minimum capital requirements of its primary federal banking
regulator, or is otherwise in a troubled condition must notify its primary
federal banking regulator of the proposed addition of any person to the board of
directors or the employment of any person as a senior executive officer of the
institution at least 30 days before such addition or employment becomes
effective. During such 30-day period, the applicable federal banking regulatory
agency may disapprove of the addition of employment of such director or officer.
The Subsidiary Banks are not currently subject to any such requirements.
FIRREA also expanded and increased civil and criminal penalties available
for use by the appropriate regulatory agency against certain
"institution-affiliated parties" (primarily including management, employees and
agents of a financial institution, independent contractors such as attorneys and
accountants and others who participate in the conduct of the financial
institution's affairs) who knowingly or recklessly either violate a law or
regulation, breach a fiduciary duty or engage in unsafe or unsound practices.
These practices can include the failure of an institution to timely file
required reports or the submission of inaccurate reports. Furthermore, FIRREA
authorized the appropriate banking agency to issue cease and desist orders that
may, among other things, require affirmative action to correct any harm
resulting from a violation or practice, including restitution, reimbursement,
indemnifications or guarantee against loss. A financial institution may also be
ordered to restrict its growth, dispose of certain assets or take other action
as determined by the ordering agency to be appropriate.
In 1994, Congress adopted the Reigle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Reigle Act"). Such statute provides for nationwide
interstate banking, but does permit each state to make an election as to whether
such state will permit interstate branching. During its 1995 term, the Texas
legislature passed legislation providing that interstate branching will not be
permitted in Texas until at least 1999. Accordingly, banks located outside the
State of Texas are effectively prohibited from opening a branch in Texas.
Similarly, banks located in Texas are generally prohibited from opening branches
outside Texas. The Texas legislature is expected to revisit the issue of
interstate branching in the 1999 session and, until then, interstate branching
will be prohibited in Texas. Interstate banking (e.g., out-of-state holding
companies acquiring Texas financial institutions), however, cannot be prohibited
and must be permitted by all the states, subject to certain permissible state
law limitations on the ages of the banks to be acquired and limitations on the
total amount of deposits within a state that a bank holding company is permitted
to control.
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ITEM 2. PROPERTIES
THE CITIZENS BANK
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The Citizens Bank owns its main banking office and six branch offices. The
main office is a two-story, 33,000-square-foot office building located at 201
West Main Street, Henderson, Texas, and is the location where the majority of
the Citizens Bank's business is conducted. There is a six-lane drive-in
facility located directly behind the Citizens Bank. An automated teller machine
("ATM") is also located in a separate building at this address. The Citizens
Bank has five additional ATMs in Henderson, located in a convenience store at
321 State Highway 64 West, in a convenience store at 1414 West Main Street, in
the local hospital at 300 Wilson, in a general merchandise store at 2121 Highway
79 South, and in a convenience store located at the traffic star which is the
intersection of U.S. Highways 79 and 259 and State Highways 64 and 43.
The Citizens Bank has six branch offices and one trust office. The
Southside branch office is located at 1610 Highway 79 South, Henderson, Texas.
The Southside branch office contains approximately 4,200 square feet and has a
three-lane drive-in facility. The Overton branch office is located at 307 South
Commerce Street, Overton, Texas. The Overton branch has approximately 1,076
square feet, one drive-in lane and one ATM. The Mount Enterprise branch office
is located on Highway 84 in Mount Enterprise, Texas. The Mount Enterprise
branch facility has approximately 9,000 square feet, a two-lane drive-in
facility, and one ATM. The Jefferson branch office is located at 302 East
Broadway, Jefferson, Texas. The Jefferson branch office contains approximately
1,600 square feet and one drive-in lane. The Jefferson branch also maintains an
ATM located at a convenience store at 105 South Walcott, Jefferson, Texas. The
Malakoff branch is located at 115 West Royall Boulevard, Malakoff, Texas. The
Malakoff branch facility has approximately 10,000 square feet, a three-lane
drive-in facility and one ATM. The Chandler branch office is located at 105
Highway 31 East, Chandler, Texas. The Chandler branch office contains
approximately 1,600 square feet, one drive-in lane and an ATM. A speed of
service drive-in facility located at 230 Highway 31 East, Chandler, Texas is
currently under construction and is currently scheduled to open in June 1998,
although no assurances can be made that the facility will open on schedule. The
trust office is located at 400 W. Collin Street, Corsicana, Texas. This office
is in a leased building that has approximately 4,000 square feet.
THE WASKOM BANK
- ---------------
The Waskom Bank owns its sole banking office, which is located at 745 spur
156, Waskom, Texas. The building is a single story, brick building containing
approximately 6,000 square feet. One drive in lane is attached to the building
and one remote drive in lane is located on the property. Additionally, one drive
up ATM is located on the property. The Waskom Bank also maintains an ATM located
in a grocery store at Highway 79 North in Bethany, Texas.
There are no encumbrances on the properties discussed above.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management of the Company, excepting litigation in the
ordinary course of business, there are no material legal proceedings that have
been brought or threatened against the Company, the Delaware BHC or the
Subsidiary Banks.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A vote of the shareholders of the Company was not taken during the fourth
quarter of 1997.
8
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR STOCK
There is no established public market for the shares of the $5.00 par value
per share common stock of the Company (the "Company Stock"). The following table
shows (i) the high and low sales price for each sale of the common stock of the
Company indicated for which the management of the Company had knowledge of the
prices involved through March 2, 1998, (ii) the number of such transactions for
the periods indicated, and (iii) the total number of shares traded in such
transactions. THESE PRICES REFLECT ONLY THE TRANSACTIONS WITH RESPECT TO WHICH
MANAGEMENT OF THE COMPANY HAS KNOWLEDGE OF THE PURCHASE PRICE. TRADE PRICES ARE
REPORTED ON AN INFORMAL BASIS, AND NO INDEPENDENT VERIFICATION OF THE TRADE
PRICES HAS BEEN MADE. THEY ARE THE RESULT OF ISOLATED TRANSACTIONS AND ARE NOT
NECESSARILY INDICATIVE OF THE ACTUAL OR MARKET VALUE OF SUCH SECURITIES.
<TABLE>
<CAPTION>
Company Stock
----------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
TRANSACTIONS SHARES
1998 LOW HIGH REPRESENTED REPRESENTED
- ------------ -------------- -------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
First Quarter
(Through March
2, 1998) - - - -
1997
- ------------
First Quarter $12.00 $12.50 7 1,550
Second Quarter $12.00 $12.50 20 23,700
Third Quarter $12.00 $12.00 1 400
Fourth Quarter $14.50 $14.50 54 98,215
1996
- ------------
First Quarter $12.00 $12.00 3 732
Second Quarter $12.00 $12.00 10 4,329
Third Quarter $12.00 $12.00 5 1,190
Fourth Quarter $11.25 $12.00 4 30,310
</TABLE>
As of March 2, 1998, there were 413 shareholders of record.
9
<PAGE>
DIVIDENDS
The Company declared and paid four quarterly dividends on the Company stock
during 1997. The Company declared quarterly dividends on the Company stock
during 1997 that approximated $341,000 (or $0.16 per share) for the first
quarter of 1997, $339,000 (or $0.16 per share) for the second quarter of 1997,
$339,000 (or $0.16 per share) for the third quarter of 1997, and $323,000 (or
$0.16 per share) for the fourth quarter of 1997. The Company paid four quarterly
dividends on the Company stock during 1997. On January 2, 1997 and on March 31,
1997, the Company paid a dividend on the Company stock that approximated
$341,000 (or $0.16 per share). On June 30, 1997 the Company paid a dividend on
the Company stock that approximated $339,000 (or $0.16 per share). On September
30, 1997 the Company paid a dividend on the Company stock that approximated
$339,000 (or $0.16 per share). The amount and timing of future dividend
payments will be determined by the Board and will depend upon a number of
factors, including the extent of funds legally available therefor and the
earnings, business prospects, acquisition opportunities, cash needs, financial
condition and regulatory and capital requirements of the Company, the Delaware
BHC and the Subsidiary Banks.
As a bank holding company, the Company's ability to pay dividends depends
upon the dividends it receives from the Delaware BHC. Dividends paid by the
Delaware BHC will, in turn, depend on the ability of the Subsidiary Banks to pay
dividends. The ability of the Subsidiary Banks to pay dividends is restricted by
provisions of the National Bank Act, in the case of the Citizens Bank, and the
Texas Finance Code, in the case of the Waskom Bank.
Under the National Bank Act, a bank is generally able to pay dividends to
the extent of net profits, except that unless the bank's capital surplus equals
its stated capital, no dividend shall be declared until the bank has transferred
to capital surplus an amount not less than 10% of the net profits of the bank
earned since the last dividend was declared. In addition, the prior approval of
the Comptroller is required for any dividend if the total of all dividends,
including any proposed dividend, declared by the national bank in any calendar
year exceeds the total of its net profits for such year combined with its
retained net profits for the preceding two (2) years, less any required
transfers to surplus. The Comptroller also has the authority to prohibit a
national bank from engaging in any activity that, in his opinion, constitutes an
unsafe or unsound practice in conducting its business. Under certain
circumstances relating to the financial condition of a national bank, the
Comptroller may determine that the payment of dividends would be an unsafe or
unsound practice. In addition, the Comptroller and the Federal Reserve Board
have expressed the view that national banks and bank holding companies should
restrain or refrain from dividend increases or reduce or eliminate dividends
under certain circumstances.
Under the Texas Finance Code, the Waskom Bank generally may not pay a
dividend reducing its capital and surplus without the prior approval of the
Banking Commissioner of the State of Texas. All dividends must be paid out of
net profits then on hand, after deducting expenses, including loses and
provisions for loan losses. Additionally, under provisions of the Federal
Deposit Insurance Act, the FDIC has the right to prohibit the payment of
dividends by a bank where such payment is deemed to be an unsafe and unsound
banking practice.
The ability of the Company, the Delaware BHC, and the Subsidiary Banks to
pay dividends is also restricted by the requirement that they maintain adequate
levels of capital (on a consolidated basis, in the case of the Company and the
Delaware BHC) in accordance with guidelines promulgated from time to time by the
Comptroller, in the case of the Citizens Bank, the TDB in the case of the Waskom
Bank, and the Federal Reserve Board, in the case of the Company and the Delaware
BHC. The Comptroller, the Federal Reserve Board and the FDIC have adopted
riskbased capital guidelines. Federal Reserve Board guidelines require the
Company to maintain a Tier 1 Capital Ratio of at least 4.0%, a Total Capital
Ratio of at least 8.0% and a Leverage Capital Ratio of at least 4.0%. The
Company's Tier 1 Capital, Total Capital Ratio and Leverage Capital Ratio at
December 31, 1997 were 23.8%, 24.7% and 9.0%, respectively, and thus were above
the regulatory minimums. See "ITEM 1. BUSINESS -- Supervision and Regulation."
The ability of the Company (as a Texas corporation) to pay dividends is
restricted by Texas law, which provides that a corporation may pay dividends
only out of unreserved and unrestricted earnings surplus of the corporation and
is directly tied to the Subsidiary Banks' ability to pay dividends. As of
December 31, 1997, neither the Company nor the Subsidiary Banks had entered into
any agreement with any regulatory authority requiring the Company or the
Subsidiary Banks to maintain higher ratios than regulations normally require.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Information in response to this requirement is presented on the inside
front cover page of the accompanying 1997 Annual Report to Shareholders, which
page is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required in response to this item is presented on pages 4
through 24 of the accompanying 1997 Annual Report to Shareholders, which pages
are hereby incorporated by reference.
ITEM 7A. QUANTITATIVE ANS QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required in response to this item is presented on pages 12
through 13 of the accompanying 1997 Annual Report to Shareholders, which pages
are hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company and its
subsidiaries, included on pages 25 through 47 of the accompanying 1997 Annual
Report to Shareholders, are hereby incorporated by reference.
Independent Auditors' Report for the Years ended December 31, 1997, 1996
and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and
1995.
Consolidated Statements of Stockholders' Equity - Years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996
and 1995.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
11
<PAGE>
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the executive
officers and directors of the Company. Directors serve for one year terms
ending at the next annual meeting of shareholders or until their successors are
elected and qualified. Executive officers serve at the pleasure of the Company's
Board of Directors. Included in this table are the names, ages, and positions
held by each person listed. Further information concerning such persons follows
the table.
NAME (AGE) POSITIONS HELD WITH THE COMPANY
---------- -------------------------------
E. Landon Alford (62) Director and Chairman of the Board
R.M. Ballenger (77) Director
Stayton M. Bonner, Jr. (45) Director
David J. Burks (74) Director
Billy Crawford (73) Director
Sheila Gresham (43) Director
William A. Hurst (60) Vice President, Treasurer and
Chief Financial Officer
James Michael Kangerga (45) Director
J. Mark Mann (42) Director
Milton S. McGee, Jr. (48) Director, President and Chief
Executive Officer
Charles H. Richardson (76) Director
Nelwyn Richardson (48) Secretary
Rebecca G. Tanner (42) Chief Accounting Officer
Tony Wooster (53) Director
Alfred Wylie (71) Director
BUSINESS EXPERIENCE
- -------------------
E. LANDON ALFORD has served as a director of the Company since November
1990 and as a director of the Citizens Bank since 1958. Mr. Alford became the
Chairman of the Board of Directors of both the Company and the Citizens Bank
during July 1992. Mr. Alford has served on various Board of Directors'
committees at the Citizens Bank since 1958. Mr. Alford also serves as Chairman
of the Board of the Waskom Bank. Mr. Alford is also Chairman of the Board of
H.C.B. Inc., a Texas corporation ("HCB") and an affiliate of the Company. Mr.
Alford has been Managing Partner of Alford Investments since September 1959.
R. M. (MAX) BALLENGER has served as a director of the Company since
November 1990. Mr. Ballenger has served as a director of the Citizens Bank
since 1980 and has served on several committees of the Citizens Bank since 1980.
Mr. Ballenger also serves as a director of the Waskom Bank and HCB.
Mr. Ballenger has been the owner of Max Ballenger Real Estate & Lease Brokerage
for over 25 years.
STAYTON M. BONNER, JR. has served as director of the Company since November
1990 and as a director of the Citizens Bank since February 1984. Mr. Bonner has
served on various Board of Directors' committees at the Bank since February
1984. Mr. Bonner also serves as a director of the Waskom Bank and HCB.
Mr. Bonner has practiced law since September 1977, has served as a consultant
for Odyssey Management since June 1986 and has acted as Foundation Manager for
the R.F. and Jessie Shaw Foundation, Inc. since January 1988.
DAVID J. BURKS has served as a director of the Company since November 1990
and as a director of the Citizens Bank since 1980. He has served on several of
the Board of Directors' committees at the Citizens Bank since 1980. Mr. Burks
also serves as a director of the Waskom Bank and HCB. Mr. Burks served as
President of Burks Tires, Inc. from 1971 until his retirement in 1995.
BILLY CRAWFORD has served as a director of the Company since November 1990
and as a director of the Citizens Bank since February 1974. He has served on
several of the Citizens Bank Board of Directors' committees since February 1974.
Mr. Crawford also serves as a director of the Waskom Bank and HCB. Mr. Crawford
is a retired funeral director.
12
<PAGE>
SHEILA GRESHAM has served as a director of the Company and the Citizens
Bank, since February 1993. Ms. Gresham is currently serving on various
committees of the Board of Directors of the Citizens Bank. Ms. Gresham also
serves as a director of the Waskom Bank and HCB. Ms. Gresham has served as
President of Smith Chevrolet-Oldsmobile-Cadillac Company since August 1993, and
she served as President of Smith Chevrolet Company from February 1980 until
August 1993.
William A. Hurst has served as Executive Vice President and Cashier of the
Citizens Bank since February 1981 and as a member of the Investment Committee
since February 1986. Mr. Hurst has served as Vice President, Treasurer and
Chief Financial Officer of the Company since 1990. Mr. Hurst is also an officer
of HCB.
JAMES M. KANGERGA has served as a director of the Company since November
1990 and as a director of the Citizens Bank since March 1989. He has served on
numerous committees of the Citizens Bank Board of Directors since March 1989.
Mr. Kangerga also serves as a director of the Waskom Bank and HCB. Mr. Kangerga
has been a 50% owner and a real estate broker in Rusk County Investments, Inc.
since 1985. He has performed bookkeeping functions for Michael Kangerga and M
Kangerga & Bro. since 1980.
J. MARK MANN has served as a director of the Company and the Citizens Bank
since January 1992. Mr. Mann has served on various committees of the Board of
Directors of the Citizens Bank since his election to the Board of Directors. Mr.
Mann also serves as a director of the Waskom Bank and HCB. He has been a partner
with the law firm of Wellborn, Houston, Atkison, Mann, Sadler, and Hill since
1981.
MILTON S. MCGEE, JR. has served as President, Chief Executive Officer and a
director of the Company since November 1990. In addition, Mr. McGee has served
as President, Chief Executive Officer and director of the Citizens Bank since
April 1990. He has served on various Committees of the Board of Directors of
the Citizens Bank since 1990. Mr. McGee also serves as the sole director of the
Delaware BHC and he has served in such position since February 1991. He also
has served in the following capacities: Chairman of the Board and Chief
Executive Officer of Kilgore Federal Savings & Loan Association from November
1989 to March 1990; President and Chief Executive Officer of NCNB Texas in
Henderson, Texas from July 1986 to November 1989; and President and Chief
Executive Officer of RepublicBank Brownwood from August 1983 to July 1986. Mr.
McGee also serves as a director of the Waskom Bank and HCB.
CHARLES H. RICHARDSON has served as a director of the Company since
November 1990 and as a director of the Citizens Bank since 1962. He has served
on several committees of the Board of Directors of the Citizens Bank since 1962.
Mr. Richardson also serves as a director of the Waskom Bank and HCB. Prior to
his retirement over six years ago, Mr. Richardson was a professor at Kilgore
College.
Nelwyn Richardson has served as Secretary of the Company since 1990. Ms.
Richardson has served as Senior Vice President of the Citizens Bank since 1995
and as Vice President since 1979. She has served on the Investment Committee
since 1986. Ms. Richardson is also an officer of HCB.
Rebecca G. Tanner has served as Chief Accounting Officer of the Company
since 1990. Ms. Tanner has served as Vice President and Controller of the
Citizens Bank since September 1991. Ms. Tanner served as an Assistant Vice
President at the Citizens Bank beginning in January 1990. Prior to that, Ms.
Tanner served as Assistant Vice President and Controller of NCNB Texas in
Henderson, Texas for approximately eleven years. Ms. Tanner is also an officer
of HCB.
TONY WOOSTER has served as a director of the Company and the Citizens Bank
since February 1993. He is currently serving on various committees of the Board
of Directors of the Citizens Bank. Mr. Wooster also serves as a director of the
Waskom Bank and HCB. Mr. Wooster is past President of the Henderson Economic
Development Corporation and previously served as the Mayor of the City of
Henderson from 1990 through 1992. Prior to 1990, Mr. Wooster was manager of
Morris Furniture Company.
ALFRED WYLIE has served as a director of the Company since November 1990
and as a director of the Citizens Bank since 1970. He served as Senior Vice
President and Trust Officer from 1984 until 1994 when he retired. Mr. Wylie has
been a member of various Board of Directors' committees at the Citizens Bank
since 1984. Mr. Wylie also serves as a director of the Waskom Bank and HCB.
13
<PAGE>
FAMILY RELATIONSHIPS
- --------------------
Charles Richardson, a director of the Company, HCB, the Citizens Bank and
the Waskom Bank, is the uncle of Stayton M. Bonner, Jr., who is also a director
of the Company, HCB, the Citizens Bank and the Waskom Bank. There are no other
family relationships between the members of the Board of Directors or executive
officers of the Company, the Citizens Bank or the Waskom Bank.
ITEM 11. EXECUTIVE COMPENSATION
Executive officers of the Company receive no compensation from the Company,
but are compensated for their services to the Company by the Citizens Bank by
virtue of the positions they hold in the Citizens Bank. The total compensation
for the periods indicated of Milton S. McGee, Jr., President and Chief Executive
Officer of the Company is set forth below. No other executive officer of the
Company received during 1997, 1996 or 1995 salary and bonus exceeding $100,000
in the aggregate.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation/(1)/
---------------------------------------------------------------
Name and Principal All Other
Position Year Salary/(2)/ Bonus Compensation/(3)/
- ------------------ ---- --------- -------- -----------------
<S> <C> <C> <C> <C>
Milton S. McGee, Jr. 1997 $165,600 $80,600 $23,238
President and Chief Executive 1996 157,716 74,286 21,734
Officer of the Company, the 1995 149,143 62,907 20,545
Citizens Bank, the Waskom Bank
and HCB
</TABLE>
/(1)/ Neither the Company nor the Citizens Bank has any long-term compensation
programs, so disclosure of such items is omitted.
/(2)/ Includes directors' fees.
/(3)/ Includes life insurance premiums paid on behalf of executive officers of
the Company and contributions made by the Citizens Bank to the executive
officer's account under the Citizens Bank's profit sharing plan.
Certain officers of the Company, HCB and the Subsidiary Banks receive
personal benefits in the form of club memberships, personal vacation and travel
expenses. The value of such benefits does not exceed the lesser of $50,000 or
10% of the total compensation reported for any such person.
All directors of the Company, HCB and the Subsidiary Banks (except for the
Chairman of the Board) are paid a total of $1,000 per month for attending all
four Board of Directors' meetings (including committee meetings) and outside
directors receive an additional $500 in December. The Chairman of the Board
receives $2,000 per month for attending such meetings. The directors and
officers of the Company, the Citizens Bank and HCB are elected for terms of one
year.
The Citizens Bank maintains a profit sharing plan pursuant to which each
salaried employee of the Citizens Bank who is 18 years old or older is eligible
for membership following completion of one year of service. The Board of
Directors of the Citizens Bank determines the amount of money that the Citizens
Bank will contribute to the profit sharing plan annually, in accordance with the
profitability of the Citizens Bank for the particular year or for previous
years. Contributions by the Citizens Bank are allocated to each member of the
plan in the same
14
<PAGE>
proportion as the member's compensation bears to the total compensation of all
members for that particular year. Contributions allocated to the account of a
member vest partially on an annual basis beginning in the third year, with full
vesting occurring after seven years of service. Members' accounts are fully
vested in the event of normal retirement, death or total disability. The profit
sharing plan is administered by the Citizens Bank. The Citizens Bank trust
department acts as trustee of the plan and invests the Citizens Bank's
contributions in specified assets as determined by the Board of Directors of the
Citizens Bank.
The Citizens Bank expensed approximately $303,000 to the profit sharing
plan in 1997, $281,000 in 1996, and $251,000 in 1995. The Citizens Bank's
contribution during 1997, 1996 and 1995 to the account of Milton S. McGee, Jr.
is as follows. Such amounts are included under the column captioned All Other
Compensation in the Summary Compensation Table.
Name of Individual
or Number in Group Contributions of the Citizens Bank
- ----------------- ----------------------- -------------------------------
1997 1996 1995
---- ---- ----
Milton S. McGee, Jr. $20,141 $18,920 $17,204
- -----------------------------------------------------------------------------
On June 12, 1995, the Company entered into a Change in Control Agreement
(the "Severance Agreement") with Milton S. McGee, Jr., President of the Company
("McGee"). The Severance Agreement is designed to provide certain benefits to
McGee in the event there is a change in control of the Citizens Bank or the
Company. Specifically, the Severance Agreement provides that upon a Triggering
Termination (as defined in the Severance Agreement), McGee shall have the right
to receive a cash lump sum payment equal to 299% of his average annual
compensation paid by the Citizens Bank and the Company for the five (5)
preceding calendar years, provided, however, that such payment is to be reduced
to the extent that McGee would be subject to a tax pursuant to Section 4999 of
the Internal Revenue Code of 1986, as amended (the "Code"), as a result of
"parachute payments" (as defined in the Code) made pursuant to the Severance
Agreement or a deduction would not be allowed to the Company for all or any part
of such payments by reason of Section 280G(a) of the Code. In addition, for a
period of two years from the date of a Change in Control (as defined in the
Severance Agreement), or eighteen months from the date of the Triggering
Termination, if sooner (the "Benefits Period"), McGee shall continue to receive
all health, dental, disability, accident and life insurance plans or
arrangements made available by the Company or the Bank in which he or his
dependents were participating immediately prior to the date of his termination
as if he continued to be an employee of the Company and the Bank, to the extent
that participation in any one or more of such plans and arrangements is possible
under the terms thereof, provided that if McGee obtains employment with another
employer during the Benefits Period, such coverage shall be provided only to the
extent that the coverage exceeds the coverage of any substantially similar plans
provided by his new employer.
Under the terms of the Severance Agreement, a Triggering Termination would
occur upon the termination of McGee's employment with the Company or the
Citizens Bank on or after a Change in Control due to either: (i) his resignation
for Good Reason or (ii) his involuntary termination by the Citizens Bank or the
Company, provided that such involuntary termination (as defined in the Severance
Agreement) was not a Termination for Cause (as defined in the Severance
Agreement).
Under the terms of the Severance Agreement, a Change in Control means and
is deemed to have occurred if and when (i) any entity, person or group of
persons acting in concert, (other than the current members of the Board of
Directors of the Company (the "Board") or any of their descendants) becomes
beneficial owner of securities of the Company representing more than fifty
percent (50%) of the combined voting power of the Company or any successor
corporation; (ii) any entity, person or group of persons acting in concert,
(other than the Company or the current members of the Board or any of their
descendants) becomes beneficial owner of securities of the Citizens Bank
representing more than fifty percent (50%) of the combined voting power of the
Citizens Bank or any successor; (iii) the effective date of a merger or
consolidation of the Company or the Citizens Bank with one or more other
corporations or banks as a result of which the holders of the outstanding voting
stock of the Company immediately prior to the merger hold less than fifty
percent (50%) of the combined voting power of the surviving or resulting
corporation or bank; or (iv) the effective date of a transfer of all or
substantially all of the property of the Company or the Citizens Bank other than
to an entity of which the Company or the Citizens Bank owns at least eighty
percent (80%) of the combined voting power. Notwithstanding the foregoing, no
Change in Control is
15
<PAGE>
deemed to have occurred for purposes of the Severance Agreement as a result of
any transaction or series of transactions involving only the Company, the
Citizens Bank, any affiliate (within the meaning of Section 23A of the Federal
Reserve Act of 1913, as amended), or any of them, or any of their successors.
Under the terms of the Severance Agreement, resignation for Good Reason
means that McGee resigns from his position(s) with the Company or the Citizens
Bank as a result of any of the following: (i) the assignment to McGee without
his consent of any duties inconsistent with his positions, duties,
responsibilities and status with the Citizens Bank or the Company as in effect
immediately before a Change in Control or a detrimental change in his titles or
offices as in effect immediately before a Change in Control, or any removal of
McGee from or any failure to reelect McGee to any of such positions, except in
connection with the termination of his employment for Cause or as a result of
his disability or death; (ii) a reduction of McGee's base salary or overall
compensation (other than as a result of year to year variations in bonuses or
overtime consistent with past practices) without the prior written consent of
McGee, which is not remedied within ten (10) calendar days after receipt by the
Company of written notice from McGee of such reduction; (iii) a determination by
McGee made in good faith that as a result of a Change in Control, he has been
rendered unable to carry out, or has been hindered in the performance of, any of
the authorities, powers, functions, responsibilities or duties attached to his
position with the Company or the Citizens Bank immediately prior to the Change
in Control, which situation is not remedied within thirty (30) calendar days
after receipt by the Company of written notice from McGee of such determination;
(iv) the Citizens Bank relocates its principal executive offices or requires
McGee to have as his principal location of work any location which is in excess
of thirty (30) miles from the current location of the Citizens Bank or to travel
away from his office in the course of discharging his responsibilities or duties
hereunder more than thirty (30) consecutive calendar days or an aggregate of
more than ninety (90) calendar days in any consecutive three hundred sixty-five
(365) calendar-day period without, in either case, his prior consent; or (v)
failure by the Company to require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to McGee, expressly to assume and agree to perform the Severance
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place.
Under the terms of the Severance Agreement, Termination for Cause means
that McGee is involuntarily terminated from employment based upon his commission
of any of the following: (i) an intentional act of fraud, embezzlement or theft
in connection with his duties or in the course of his employment with the
Company or the Citizens Bank; (ii) intentional wrongful damage to property of
the Company or the Citizens Bank; (iii) intentional wrongful disclosure of trade
secrets or confidential information of the Company or the Citizens Bank; (iv)
willful violation of any law, rule or regulation (other than traffic violations
or similar offenses) or final cease and desist order; or (v) intentional breach
of fiduciary duty owed to the Company or the Citizens Bank involving personal
profit, provided, that no act, or failure to act, on the part of McGee is to be
deemed "intentional" unless done, or omitted to be done, by McGee not in good
faith and without reasonable belief that his action or omission was in the best
interest of the Company or the Citizens Bank.
Should McGee die prior to full payment of all benefits due under the
Severance Agreement, payment of any remaining benefits is to be made to his
beneficiaries designated in writing, or, if no designation is made, to his
estate. The Company has no obligation to reserve funds to fulfill its
obligations under the Severance Agreement, and the Company has not elected to
reserve any funds for such purpose. The Severance Agreement terminates on the
earlier of (i) McGee's sixty-fifth (65th) birthday, (ii) the fifth anniversary
of the first event that constitutes a Change in Control, or (iii) the fifth
anniversary of the date of execution of the Severance Agreement, provided,
however, that the Severance Agreement will not terminate pursuant to subsection
(iii) unless either party to the Severance Agreement notifies the other party
prior to any anniversary date of such agreement that the Severance Agreement is
to be terminated in accordance with subsection (iii). Upon such notice, the
termination date set forth in subsection (iii) is to be determined as if the
Severance Agreement had been executed on the immediately preceding anniversary
date of execution of such agreement.
The Company does not have any stock option or other executive compensation
plans.
16
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL SHAREHOLDERS
- ----------------------
At March 2, 1998, the Company had 413 shareholders of record. The
following table sets forth information concerning the securities of the Company
owned beneficially at such time by each person, group or entity known by the
Company to own beneficially more than 5% of the shares of any class of such
securities.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP / PERCENT OF CLASS
OF HENDERSON CITIZENS BANCSHARES INC. COMMON STOCK
Name and Address of Number and Percent of Shares
Beneficial Owner Owned of Company Stock/(1)/
- ---------------- ----------------------------
E. Landon Alford 140,228 / 6.95%/(2)/
P. O. Box 67
Henderson, TX 75653
John R. Alford, Jr. 165,040 / 8.18%
P. O. Box 5219
Austin, TX 78763
Stayton M. Bonner, Jr. 145,622 / 7.22%/(3)/
P. O. Box 1833
Henderson, TX 75653
Michael Kangerga 132,978 / 6.59%
102 1/2 E. Main Street
Henderson, TX 75652
Ella Langdon Alford Trust 165,044 / 8.18%
P. O. Box 10
Brixey, MO 65618
Citizens National Bank 132,840 / 6.58%/(4)/
and Stayton M. Bonner, Trustees
P. O. Box 1009
Henderson, TX 75653
/(1)/ Unless otherwise indicated, all shares listed are held of record by the
individual indicated with sole power to vote and to dispose of such
shares. Percentages are based on 2,017,494 shares outstanding.
/(2)/ Includes 2,000 shares owned by Mr. Alford's wife, Phyllis P. Alford.
/(3)/ Includes 9,698 shares owned by Odyssey Partners LTD. for which Mr. Bonner
has voting authority. Also included are 44,280 shares held in trust for
Mr. Bonner as a co-beneficiary and co-trustee of the R.F. Shaw, S.M.B.,
Jr. Living Trust. Mr. Bonner is also co-trustee with the Citizens Bank on
two other trusts of which he is not a beneficiary, which trusts own an
aggregate of 88,560 shares. The shares held in all three of these trusts
(the "Shaw Trusts") are voted solely by Mr. Bonner. Therefore, the 132,840
shares held in the three Shaw trusts are included in the total shares
beneficially owned by Mr. Bonner.
/(4)/ The shares are held in three trusts for the benefit of various
individuals. Stayton M. Bonner, Jr., a director of the Citizens Bank and
the Company, is a beneficiary and co-trustee with the Citizens Bank of one
of the trusts, which owns 44,280 shares, or 2.19% of Company Stock. In
addition, it appears that Mr. Bonner is also cotrustee with the Citizens
Bank (but not a beneficiary) of two such trusts, which own an aggregate of
88,560 shares, or 4.39%, of the Company Stock. The shares held in all
three trusts are voted solely by Mr. Bonner.
17
<PAGE>
MANAGEMENT
- ----------
The following table sets forth the number of shares of the Company Stock
beneficially owned (i) by each director and advisory director of the Company and
(ii) by the directors and executive officers of the Company as a group as of
March 2, 1998.
Number and Percent of Shares
Name Owned of Company Stock/(1)/
---- ----------------------------
E. Landon Alford 140,228 / 6.95%/(2)/
R. M. Ballenger 800 / 0.04%
Stayton M. Bonner, Jr. 145,622 / 7.22%/(3)/
David J. Burks 9,775 / 0.48%
Billy Crawford 1,000 / 0.05%
Sheila Gresham 6,120 / 0.30%
James M. Kangerga 9,188 / 0.46%
J. Mark Mann 5,710 / 0.28%/(4)/
Milton S. McGee, Jr. 6,698 / 0.33%/(5)/
Charles H. Richardson 24,160 / 1.20%/(6)/
Tony Wooster 1,800 / 0.09%/(7)/
Alfred Wylie 32,764 / 1.62%/(8)/
Directors and executive offic 383,865/ 19.03%/(9)/
the Company as a group (12 Persons)
/(1)/ Unless otherwise indicated, all shares listed are held of record by the
individual indicated with the sole power to vote and dispose of such
shares. Percentages are based on 2,017,494 shares outstanding.
/(2)/ Mr. Alford's wife, Phyllis P. Alford, owns 2,000 of these shares.
/(3)/ A total of 9,698 of these shares are owned by Odyssey Partners LTD. Mr.
Bonner has sole voting authority for the shares owned by Odyssey Partners
LTD. Also includes 44,280 shares held in trust for Mr. Bonner as a co-
beneficiary and co-trustee of the R. F. Shaw, S.M.B., Jr. Living Trust. In
addition, Mr. Bonner is also co-trustee with the Citizens Bank of two
other trusts of which he is not a beneficiary, which trusts own an
aggregate of 88,560 shares of common stock. The shares of Company Stock
held in all three of these trusts ("the "Shaw Trusts") are voted solely by
Mr. Bonner. Therefore, the 132,840 shares of common stock held in such
trusts are included in the total shares owned by Mr. Bonner.
/(4)/ Shares are held jointly by Mr. Mann and his wife, Debra Mann.
/(5)/ Includes 50 shares owned by Mr. McGee's minor son, Derek W. McGee.
Includes 6,648 shares held jointly by Mr. McGee and his wife, Sharla
McGee.
/(6)/ Includes 2,160 shares held jointly by Mr. Richardson and his wife, Ruebe
Gene Shaw Richardson.
/(7)/ Shares are held jointly by Mr. Wooster and his wife, Sue Wooster.
18
<PAGE>
/(8)/ Includes 2,640 shares held by Mr. Wylie's wife, Gladys M. Wylie.
/(9)/ Any discrepancy between the actual total of the percentages and the stated
total percentage is due to rounding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Subsidiary Banks have had, and are expected to have in the future,
banking transactions in the ordinary course of business with certain of the
Company's and the Subsidiary Bank's respective directors, executive officers and
their "associates." Management of the Company and the Subsidiary Banks believe
that all such loans have been made on substantially the same terms as those
prevailing at the time for comparable transactions, including interest rates and
collateral, with other persons and do not involve more than the normal risk of
collectability or present other unfavorable features, and that all such loans
are believed to be in compliance with the Financial Institutions Regulatory and
Interest Rate Control Act of 1978. See THE COMPANY CONSOLIDATED FINANCIAL
STATEMENTS, Footnote 6, reflected on page 37 of the 1997 Annual Report to
Shareholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of Report.
1. Financial Statements
The consolidated financial statements for 1997, 1996 and 1995 as listed
in Item 8 of this report, together with the report of KPMG Peat Marwick
LLP dated March 4, 1997, appearing on pages 25 through 47 of the
accompanying 1997 Annual Report to Shareholders are incorporated herein
by reference.
2. Financial Statement Schedules
None
3. Exhibits
13.1 Henderson Citizens Bancshares, Inc. 1997 Annual Report to
Shareholders.
21.1 Subsidiaries of registrant.
27.1 Financial Data Schedule.
(b) Reports on Form 8 - K.
There were no reports on Form 8 - K filed during the fourth quarter of
1997.
(c) See the Exhibit Index attached hereto.
Management Contracts and Compensation Plans -- The following exhibits
listed in the Exhibit Index are identified below in response to Item
14(a)-3 on Form 10-K:
Exhibit 10.2 Change in Control Agreement dated June 12, 1995 by and between
Henderson Citizens Bancshares, Inc. and Milton S. McGee Jr.
19
<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: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ E. Landon Alford Director and Chairman of March 18, 1998
- -------------------------- the Board
E. Landon Alford
/s/ Milton S. McGee, Jr.
- -------------------------- Director, President and March 18, 1998
Milton S. McGee, Jr. Chief Executive Officer
/s/ R. M. Ballenger Director March 18, 1998
- --------------------------
R. M. Ballenger
/s/ Stayton M. Bonner, Jr. Director March 18, 1998
- --------------------------
Stayton M. Bonner, Jr.
/s/ D. J. Burks Director March 18, 1998
- --------------------------
D. J. Burks
/s/ Billy Crawford Director March 18, 1998
- --------------------------
Billy Crawford
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Sheila Gresham Director March 18, 1998
- --------------------------
Sheila Gresham
/s/ James Michael Kangerga Director March 18, 1998
- --------------------------
James Michael Kangerga
/s/ J. Mark Mann Director March 18, 1998
- --------------------------
J. Mark Mann
/s/ Charles H. Richardson Director March 18, 1998
- --------------------------
Charles H. Richardson
/s/ Tony Wooster Director March 18, 1998
- --------------------------
Tony Wooster
/s/ Alfred Wylie Director March 18, 1998
- --------------------------
Alfred Wylie
</TABLE>
21
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 BY REGISTRANTS WHICH HAVE NOT
REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
The following items will be sent to the shareholders of record of the
Company on or before March 28, 1998, and copies of such information shall be
sent to the Securities and Exchange Commission on or before such time:
(1) 1997 Annual Report to Shareholders
(2) Notice of Annual Meeting to Shareholders and Proxy Statement
(3) Proxy Card
22
<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. 1997 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,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------ ------------ ------------ ------------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $ 22,267 20,716 20,346 14,946 15,324
Total interest expense 11,546 11,203 11,536 7,127 6,559
-------------- ------------ ------------ ------------ ------------
Net interest income 10,721 9,513 8,810 7,819 8,765
Provision (reduction of allowance)
for loan losses 330 264 180 (150) (500)
-------------- ------------ ------------ ------------ ------------
Net interest income after
provision (reduction of
allowance) for loan losses 10,391 9,249 8,630 7,969 9,265
Total other income 3,290 3,243 2,009 1,676 1,712
Total other expense (9,265) (8,038) (7,556) (6,359) (6,031)
-------------- ------------ ------------ ------------ ------------
Income before income tax expense and
cumulative effect of change in
accounting principle 4,416 4,454 3,083 3,286 4,946
Income tax expense 1,026 1,110 619 651 1,420
-------------- ------------ ------------ ------------ ------------
Income before cumulative effect of
change in accounting principle 3,390 3,344 2,464 2,635 3,526
Cumulative effect at January 1, 1993,
of changes in accounting
principle - - - - 255
-------------- ------------ ------------ ------------ ------------
Net Income 3,390 3,344 2,464 2,635 3,271
============== ============ ============ ============ ============
Per share data:
Net income 1.61 1.55 1.14 1.22 1.51
Dividends $ .64 .64 .64 .64 .61
Dividend payment ratio 39.53% 41.21 56.14 52.50 40.29
Return on average assets 0.98% 1.00 0.76 0.99 1.28
Return on average equity 10.56% 10.60 8.25 9.42 11.82
Balance Sheet Information:
Loans, net $ 106,061 100,825 80,499 63,784 51,552
Allowance for loan losses 1,249 1,146 1,019 997 1,014
Total assets 358,493 356,830 326,879 313,038 257,721
Total deposits 322,107 320,673 293,611 285,522 227,152
Stockholders' equity 32,729 31,988 31,206 26,147 29,160
Stockholders' equity / total assets 9.13% 8.96 9.55 8.35 11.31
</TABLE>
<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, 1997
The following discussion and analysis of financial condition and
results of operations of the Company should be read in conjunction with the
consolidated financial statements, the notes thereto, and other financial and
statistical information appearing elsewhere in this 1997 Annual Report.
INTRODUCTION
- ------------
Henderson Citizens Bancshares, Inc. (the "Company") was incorporated as
a Texas corporation on November 13, 1990 and was organized for the purpose of
becoming a second-tier bank holding company through the direct acquisition of
one hundred percent (100%) of the issued and outstanding shares of the common
stock of Henderson Citizens Delaware Bancshares, Inc. (the "Delaware BHC") and
through the indirect acquisition of one hundred percent (100%) of the issued and
outstanding shares of the $5.00 par value per share common stock of Citizens
National Bank (the "Citizens Bank"). In addition to the Citizens Bank, the
Delaware BHC also owns 100% of the issued and outstanding shares of the common
stock of First State Bank (these subsidiaries are sometimes referred to herein
as the "Subsidiary Banks"). The Delaware BHC was incorporated pursuant to the
laws of the State of Delaware on February 21, 1991 in order to facilitate the
acquisition of the Citizens Bank. The acquisition of the Delaware BHC by the
Company and the acquisition of the Citizens Bank by the Delaware BHC was
consummated on December 27, 1991.
The Company's primary activity is to provide assistance to its
subsidiaries in the management and coordination of their financial resources and
to provide capital, business development, long-range planning and public
relations to its subsidiaries. Delaware BHC and its subsidiaries operate under
the day-to-day management of its own officers and each entities' individual
boards of directors formulates its own policies. A number of directors or
officers of the Company are also directors or officers of its subsidiaries. The
Company conducts no other activity than the operation of its subsidiaries. The
Company derives its revenues primarily from the operation of its subsidiaries in
the form of dividends paid from the Subsidiary Banks.
Delaware BHC owns 100% of the issued and outstanding shares of the
Subsidiary Banks. The Delaware BHC was organized as a Delaware corporation in
1991 in order to facilitate the acquisition of Citizens Bank and to limit the
Company's Texas franchise tax liability. The Delaware BHC currently does not
conduct any significant activities and has no activities contemplated at this
time. The Delaware BHC owns 100% of the issued and outstanding stock of the
Subsidiary Banks.
Citizens Bank opened for business in 1930 as Citizens National Bank of
Henderson, a national banking association chartered by the Comptroller of the
Currency (the "Comptroller") and originally located at 101 East Main Street,
Henderson, Texas. In 1973, the Bank moved to its current location at 201 West
Main Street.
In 1990, Citizens Bank acquired certain assets and assumed
substantially all of the liabilities of General S&L from the Resolution Trust
Corporation ("RTC"). With this acquisition, the Bank opened its Southside Branch
at 1610 Highway 79 South in Henderson and a branch at 307 Commerce in Overton,
Texas.
On December 31, 1991, the Company acquired 100% of the issued and
outstanding shares of Enterprise Bancshares, Inc. ("Enterprise"). At the date of
the acquisition of Enterprise, Merchants State Bank of Mount Enterprise, Texas
("Merchants Bank") was a wholly owned subsidiary of Enterprise. Immediately
following the consummation of the Enterprise acquisition, Merchants Bank was
merged with and into Citizens Bank, becoming the third branch of Citizens Bank.
The branch is located at 110 Rusk Street (Highway 84) in Mt. Enterprise, Texas.
On December 29, 1995 Enterprise was merged with the Delaware BHC.
In 1994, the Citizens Bank acquired three new branch locations and
expanded its service area outside of Rusk, County, Texas (see below). With the
acquisition of these branches, the Citizens Bank now has six branch locations.
4
<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 ("the Waskom Bank"). The Company
acquired approximately 93% of the stock of Waskom Bancshares, Inc. pursuant to
the terms of a Stock Purchase Agreement, dated as of May 24, 1996. The Company
acquired the remaining shares of Waskom Bancshares, Inc. and the minority
interest of the Waskom Bank not owned by Waskom Bancshares, Inc. pursuant to the
terms of Stock Purchase Agreements between the Company and each of the holders
representing a minority interest in Waskom Bancshares, Inc. and the Waskom Bank.
Such stock was acquired for cash, and the aggregate purchase price of $3,463,000
was funded with a combination of notes payable and cash. The stock of the Waskom
Bank directly and indirectly acquired by the Company through the acquisition of
Waskom Bancshares, Inc. was thereafter contributed to the Delaware BHC. Waskom
Bancshares, Inc. is an inactive subsidiary of the Company.
The Waskom Bank was originally chartered on December 4, 1954, as a
Texas banking association. Its sole banking office is located at 745 Spur 156,
Waskom, Texas. At December 31, 1997, the Waskom Bank had approximately
$25,979,000 in assets, $22,114,000 in deposits, $7,339,000 in loans (net of
unearned discount and allowance for loan losses), and $3,644,000 in
shareholders' equity. The Waskom Bank is regulated and supervised by the Federal
Deposit Insurance Corporation (the "FDIC") and the Texas Department of Banking
(the "TDB").
The Delaware BHC currently operates Citizens Bank and the Waskom Bank
as separate subsidiaries. However, during the first quarter of 1998, the
Citizens Bank and the Waskom Bank anticipate filing an application with the
Comptroller for prior approval to merge the Waskom Bank with and into the
Citizens Bank under the charter and title of the Citizens Bank (the "Affiliate
Merger"). The sole banking office of the Waskom Bank will be operated as a
full-service branch of the Citizens Bank upon completion of the Affiliate
Merger. It is not anticipated that the Affiliate Merger will result in any
diminution of products and services currently available to customers of the
Waskom Bank or the Citizens Bank. It is anticipated, however, that the Affiliate
Merger will generate certain operational efficiencies by operating under one
bank charter rather than two separate charters regulated by different regulatory
authorities.
It is anticipated that the Affiliate Merger will be completed during
the second quarter of 1998, although no assurance can be given that the
Affiliate Merger will be completed or that such timetable will be met.
The Company's management continues its strategy to increase market
share and enhance long-range profitability by evaluating potential acquisitions.
This evaluation process involves maintenance of strong equity capital and
consistent earnings, and meeting internal financial objectives of the Company.
5
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Net income for 1997 was $3,390,000 compared to $3,344,000 for 1996 and
$2,464,000 for 1995. The increase in earnings in 1997 was attributable to an
improved net interest margin, and improved non-interest income. The Company
experienced a gain on sale of securities in 1997 of $191,000 compared to a gain
in 1996 of $719,000 and a loss of $128,000 in 1995. A provision for loan losses
of $330,000 was made in 1997 compared to provisions of $264,000 and $180,000 in
each of 1996 and 1995, respectively. Net interest income increased due to
increases in volumes of loans as a result of continued strong demand during
1997. In addition, net interest margins in 1997 improved over 1996 and 1995
levels. Other income, excluding securities transactions, in 1997 increased
approximately $575,000 over 1996. Other expenses were $9,265,000 in 1997
compared to $8,038,000 in 1996.
NET INTEREST INCOME
- -------------------
Net interest income is the difference between interest income from
interest-earning assets and interest expense on interest-bearing liabilities. In
Table I, interest income on each category of interest-earning assets and the
interest expense on interest-bearing liabilities is weighted to produce yields
and rates for each category of assets and liabilities. The difference between
the weighted yields of assets and rates on liabilities is the net interest
spread. Net interest margin is net interest income as a percentage of total
interest-earning assets.
Net interest income was affected by an increase in interest income of
$1,551,000 and an increase in interest expense of $343,000. The majority of the
increase in interest income was the result of higher loan volumes, which
generally are higher yielding assets than investment securities, whereas the
increase in interest expense was due to higher volumes. Differences in yields
and volumes can be found in Table II.
Net interest spreads and margins for 1997 increased from 1996 levels,
as they did in 1996 from 1995 levels. Although the average rate earned on
interest bearing assets increased slightly from 6.76% in 1996 to 6.99% in 1997,
the average rate paid on interest bearing liabilities remained constant at 4.11%
in 1996 and 1997. With rates earned increased and rates paid remaining constant
the result was a positive effect on spreads and margins for 1997. Net interest
spreads were approximately 2.8%, 2.7%, and 2.6% for the years 1997, 1996, and
1995, respectively, and net interest margins were 3.5%, 3.2%, and 3.1%, during
the same three-year period.
INTEREST INCOME
- ---------------
SECURITIES. Yields on all securities, other than mortgage-backed
securities and collateralized mortgage obligations, increased in 1997 from
yields in 1996 for various reasons. In January of 1996 approximately $26,000,000
of U. S. Treasury securities were sold, and a gain on sale of approximately
$586,000 was recognized. Approximately $25,000,000 was immediately reinvested to
establish a three year rolling Treasury ladder, however these reinvestments were
at lower rates. The increase in yields on state and municipal securities in 1996
compared to 1995 was due to maturities of lower yielding securities and
reinvestments into higher yielding securities with slightly longer final
maturities. The Company's yield on all securities increased during 1997 as
compared to 1996, and 1996. U.S. governments yielded 5.97%, 5.65% and 6.36%, in
1997, 1996, and 1995, respectively. State and municipal yields were 6.95%,
6.65%, and 7.54%, in 1997, 1996, and 1995, respectively. Other securities, which
includes mortgage backed securities and collateralized mortgage obligations,
yielded 6.23% in 1997, 6.11% in 1996, and 6.14% in 1995.
LOANS. In 1997, the Company experienced a 14.2% increase in average
loan balances over 1996. The average loan balance increased approximately
$12,561,000 to $101,245,000 in 1997, compared to $88,684,000 in 1996. In 1996,
the average loan balances increased approximately $17,337,000 over the 1995
balances. The average loan balance during 1997 increased due to continued strong
loan demand and marketing efforts. Yields on loans increased slightly to 8.73%
in 1997 compared to 8.62% in 1996 and 1995.
OTHER INTEREST-EARNING ASSETS. Other interest-earning assets consist of
interest-bearing deposits with other financial institutions and federal funds
sold. The yield on interest-bearing deposits with other financial institutions
increased to 5.49% in 1997 from 5.25% in 1996. The 1996 rate of 5.25% was a
decline from 5.87% in 1995. The yield on federal funds sold increased to 6.20%
in 1997 from 5.40% in 1996. In contrast the 1996 rate of 5.40% declined from
5.85% in 1995.
6
<PAGE>
Table I - Average Balances and Interest Yields and Spreads (dollars in
thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------------
1997 1996 1995
-------- --------- ---------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balances Expense Rate Balances Expense Rate Balances Expense Rate
-------- ------- ------ -------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with
financial institutions 7,565 389 5.14 6,228 327 5.25 8,303 487 5.87
Federal funds sold 3,257 202 6.20 2,165 117 5.40 2,975 174 5.85
Securities:
U.S. governments 60,996 3,640 5.97 58,780 3,323 5.65 69,318 4,412 6.36
State and municipals* 32,200 1,478 6.95 31,664 1,390 6.65 31,778 1,582 7.54
Other*** 123,977 7,718 6.23 129,609 7,917 6.11 122,888 7,542 6.14
Loans, net** 101,245 8,840 8.73 88,684 7,642 8.62 71,347 6,149 8.62
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets* 329,240 22,267 6.99 317,130 20,716 6.76 306,609 20,346 6.90
Other assets:
Cash and due from banks 7,486 9,582 8,932
Premises and equipment, net 4,652 3,300 3,177
Allowance for loan losses (1,159) (1,097) (1,021)
Other assets 6,258 5,188 5,138
-------- -------- --------
Total average assets $ 346,477 334,103 322,835
======== ======== ========
Interest-bearing liabilities:
NOW, money market and
savings deposits 117,556 3,195 2.72 117,455 3,337 2.84 115,940 3,666 3.16
Time deposits 162,297 8,298 5.11 154,685 7,839 5.07 150,890 7,870 5.22
Other borrowed funds 860 53 6.16 443 27 6.09 - - -
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing liabilities 280,713 11,546 4.11 272,583 11,203 4.11 266,830 11,536 4.32
Other liabilities and stockholders
equity:
Demand deposits 31,955 27,864 25,746
Other liabilities 2,538 2,117 1,606
Stockholders' equity 32,115 31,539 28,653
-------- -------- --------
Total average liabilities and
stockholders equity $ 346,477 334,103 322,835
======== ======== ========
Net interest income $10,721 9,513 8,810
======= ======= =======
Net Interest spread* 2.88% 2.65 2.58
====== ====== ======
Net interest margin* 3.49% 3.23 3.14
====== ====== ======
</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.
7
<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 II - Analysis of Changes in Net Interest Income (dollars in thousands)
<TABLE>
<CAPTION>
1997 over 1996 1996 over 1995
---------------------------------------------------------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total
due to due to Increase due to due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
-------------- ------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest bearing deposits
with financial institutions $ 70 (8) 62 (122) (38) (160)
Federal funds sold 59 26 85 (47) (10) (57)
Securities:
U.S. governments 125 192 317 (670) (419) (1,089)
State and municipals 24 64 88 9 (201) (192)
Other* (337) 138 (199) 412 (37) 375
Loans, net 1,085 113 1,198 1,493 - 1,493
-------------- ------------- ------------- ------------- -------------- -------------
Total interest income 1,026 525 1,551 1,075 (705) 370
-------------- ------------- ------------- ------------- -------------- -------------
Interest-bearing liabilities:
NOW, money market and
savings deposits 3 (145) (142) 48 (377) (329)
Time deposits 385 74 459 198 (229) (31)
Other borrowed funds 25 1 26 27 27
-------------- ------------- ------------- ------------- -------------- -------------
Total interest expense 413 (70) 343 273 (606) (333)
-------------- ------------- ------------- ------------- -------------- -------------
Net interest income $ 613 595 1,208 802 (99) 703
============== ============= ============= ============= ============== =============
</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 $117,556,000 in 1997
compared to $117,455,000 in 1996 and $115,940,000 in 1995. Time deposits, which
consist of certificate of deposits and individual retirement accounts averaged
$162,297,000 in 1997, $154,685,000 in 1996, and $150,890,000 in 1995. Average
interest bearing deposits increased $7,713,000 from 1996 to 1997 and $5,753,000
from 1995 to 1996. Total interest expense increased slightly in 1997 from 1996
due primarily to volume. Total interest expense decreased slightly between 1996
and 1995 primarily due to rates. Longer-term interest rates moved down slightly
during 1997 while short term rates increased slightly as the yield curve
flattened. Interest rates increased sharply in the beginning of 1995 but then
leveled and moved slightly downward toward the end of the year. The average
interest rate on interest-bearing liabilities was 4.11% in 1997, 4.11% in 1996,
4.32% in 1995.
8
<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 $3,099,0000 in 1997 compared to $2,524,000 in 1996
and $2,137,000 in 1995. The increase of approximately $575,000 in 1997 over 1996
was primarily the result of increases in service charge income on customer
deposit accounts, as well as increases in trust fiduciary income and other fee
income. The increase of approximately $387,000 in 1996 over 1995 was primarily
the result of increases in service charge income on customer deposit accounts
and increases in trust fiduciary income.
NON-INTEREST EXPENSE
- --------------------
Total non-interest expense was $9,265,000 in 1997 compared to
$8,038,000 in 1996, and $7,556,000, in 1995. These increases are explained in
further detail by category below.
PERSONNEL EXPENSE. Personnel costs for 1997 were $5,601,000, $4,770,000
in 1996, and $4,205,000 in 1995. The increase of $831,000 over 1996 was due
primarily to general increases in salaries and benefits, as well as a full year
of expense related to the acquisition of the Waskom Bank. The increase due to
the Waskom Bank was approximately $268,000.
OCCUPANCY EXPENSE AND EQUIPMENT EXPENSE. Total occupancy and equipment
expenses were $1,038,000 in 1997, $927,000 in 1996, and $781,000 in 1995. The
increase in 1997 was due to remodeling at the main bank location at 201 W. Main
Street, Henderson, Texas, the addition of a trust office in Corsicana, Texas,
maintenance and service contracts, and the full year effect of the acquisition
of the Waskom Bank. The increase due to the Waskom Bank was approximately
$74,000. The increase in 1996 over 1995 was due to remodeling related expenses,
property tax increases, increased depreciation due to document imaging as well
as higher maintenance and service contract costs.
REGULATORY ASSESSMENTS AND OTHER EXPENSES. Regulatory assessments were
$127,000 in 1997 compared to $191,000 in 1996 and $407,000 in 1995. The decrease
in regulatory assessments from 1996 to 1997 and from 1996 and 1995 was a result
of decreases in FDIC assessments. In 1996 the Jefferson branch was charged a
one-time assessment for former savings and loan deposits of approximately
$73,000. Other expenses were $2,499,000 in 1997 compared to $2,150,000 in 1996,
and $2,163,000 in 1995. The increase in 1997 from 1996 is due to legal fees,
stationery and supplies, telephone, hotels and travel, educational meetings,
special events, Pulse service fees, and the effects of a full year of other
expenses related to the acquisition of the Waskom Bank. The increase due to the
Waskom Bank was approximately $285,000. The decrease in 1996 from 1995 was the
result of cost cutting efforts. Decreases occurred in legal fees, franchise tax,
stationery and supplies, advertising, telephone, entertainment and education.
Increases did occur in some categories such as other professional fees,
insurance, fraud expense, and credit card and merchant processing expenses.
PROVISION FOR LOAN LOSSES
- -------------------------
The provision for loan losses is the amount that is added to the
allowance for loan losses through a charge against earnings to maintain an
appropriate balance in the allowance with respect to outstanding loans.
Management evaluates the adequacy of the level of the allowance for loan losses
in relation to the level of the total loan portfolio and the elements of risk
estimated to be present in an effort to afford adequate reserves to cover
potential loan losses in the future. Due to average loan growth of approximately
14%, a provision of $330,000 was made to the allowance for loan losses during
1997. In 1996 management made a provision of $264,000 due to average loan growth
of approximately 24%, and in 1995 management made a provision of $180,000 also
due to rapid average loan growth of approximately 29%. See "Management's
Discussion and Analysis of the Financial Condition and Results of Operations of
the Company -- Allowance for Loan Losses" for more discussion relative to the
provision for loan losses.
INCOME TAXES
- ------------
The Company's effective tax rate was 23.2% in 1997, 24.9% in 1996, and
20.1% in 1995. This effective rate is less than the statutory rate primarily
because of tax-free income provided from state and municipal bonds, leases and
obligations. As these tax-free investments, leases, and obligations mature and
are replaced, the effective tax rate is affected.
9
<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 60.8%, 63.9%, 69.3%, 71.6%, and 71.2%, of total assets for the years
1997 through 1993, respectively. Total assets have grown from a December 31,
1993, level of $257,721,000 to $358,493,000 at December 31, 1997. The increase
in total assets that resulted from the Waskom transaction in 1996 was
approximately $25,700,000. The increase in loans that resulted from the Waskom
transaction was approximately $5,600,000. Approximately $4,600,000 increase in
loans was recognized from the branches acquired in 1994. Total assets at
year-end 1994 increased approximately $55,317,000 from 1993 total assets of
$257,721,000. The increase was due to the Jefferson acquisition and NationsBank
acquisitions which accounted for approximately $14,556,000 and $45,676,000 in
total assets, respectively.
Table III - Condensed Balance Sheet Information (dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Interest-bearing deposits
with financial institutions $ 8,212 3,892 2,642 3,661 10,896
Federal funds sold 5,040 1,150 - 2,000 -
Securities 217,973 228,155 226,450 224,244 183,419
Loans, net 106,061 100,825 80,499 63,784 51,552
Cash and due from banks 8,886 12,413 8,916 8,688 6,735
Other 12,321 10,395 8,372 10,661 5,119
---------- ---------- ---------- ---------- -----------
Total assets $ 358,493 356,830 326,879 313,038 257,721
========== =========== ========== ========== ===========
Liabilities:
Demand deposits-non-interest bearing $ 32,860 31,785 28,435 25,164 21,645
Interest-bearing demand and
savings deposits 126,016 120,468 114,295 116,259 99,640
Time deposits 163,231 168,420 150,881 144,099 105,867
---------- ---------- ---------- ---------- -----------
Total deposits 322,107 320,673 293,611 285,522 227,152
Other liabilities 3,657 4,169 2,062 1,369 1,409
---------- ---------- ---------- ---------- -----------
Total liabilities 325,764 324,842 295,673 286,891 228,561
Stockholders' equity 32,729 31,988 31,206 26,147 29,160
---------- ---------- ---------- ---------- -----------
Total liabilities and
stockholders' equity $ 358,493 356,830 326,879 313,038 257,721
========== ========== ========== ========== ===========
</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.
10
<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 by charging
fees and service charges as well as the net interest earned from the investment
of customer deposits. Net cash provided by operating activities was $3,341,000
in 1997, $4,819,000 in 1996 and $3,942,000 in 1995.
INVESTING ACTIVITIES
- --------------------
The Company invests available funds primarily in securities and loans
to customers. Funds not otherwise used are invested in federal funds sold to
Texas Independent Bank and First USA Bank, and interest-bearing demand accounts
with the Federal Home Loan Bank.
FINANCING ACTIVITIES
- --------------------
In addition to cash provided and used by operating and investing
activities, the Company receives and disburses cash in connection with customer
deposit activities.
ASSET/LIABILITY MANAGEMENT
- --------------------------
Asset/liability management involves the acquisition and deployment of
funds at an appropriate rate and maturity structure so as to optimize net
interest income while satisfying the cash flow requirements of depositors and
borrowers. Generally, management maintains an excess of interest-sensitive
liabilities over interest-sensitive assets. Table IV provides an analysis of the
Company's interest rate sensitivity for its assets and liabilities. Note that
the amounts disclosed in Table IV are shown based upon the period the underlying
asset or liability is subject to repricing regardless of maturity.
Table IV - Rate Sensitivity Analysis (dollars in thousands)
Interest Sensitivity/Gap Analysis
December 31, 1997
<TABLE>
<CAPTION>
Over
1 - Month 3 - Month 6 - Month 1 - Year 1 - Year Total
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans $14,560 3,639 3,475 6,295 80,037 108,006
Securities 32,333 9,457 5,155 27,010 144,018 217,973
Other earning assets 12,359 - 297 391 205 13,252
--------- --------- --------- -------- -------- -------
59,252 13,096 8,927 33,696 224,260 339,231
Funding Source-
Interest bearing deposits 151,901 28,253 25,238 48,532 35,323 289,247
--------- --------- --------- -------- -------- -------
Repricing/Maturity Gap:
Period $ (92,649) $ (15,157) $ (16,311) $(14,836) $188,937
========= ========= ========= ======== ========
Cumulative (92,649) (107,806) (124,117) (138,953) 49,984
========= ========= ========= ======== ========
Period/Total Earning Assets (27.31%) (4.47%) (4.81%) (4.37%) 55.70%
</TABLE>
11
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
Interest rate risk can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. A sudden and substantial
increase in interest rates may adversely impact the Company's earnings to the
extent that the interest rates borne by assets and liabilities do not change at
the same speed, to the same extent, or on the same basis. Although the Company
manages other risks, as in credit and liquidity risk, in the normal course of
its business, management considers interest rate risk to be its most significant
market risk and could potentially have a material effect on the Company's
financial condition and results of operations. The Company has no trading
account nor does it engage in any trading activities.
A derivative financial instrument includes futures, forwards, interest
rate swaps, option contracts, and other financial instruments with similar
characteristics. The Company does not currently use derivatives to manage market
and interest rate risks. However, the Company is party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the consolidated balance sheet. Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expirations dates and may require collateral from the borrower if
deemed necessary by the Company. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party up to a stipulated amount and with specified terms and conditions.
Commitments to extend credit and standby letters of credit are not recorded as
an asset or liability by the Company until the instrument is exercised.
The Company's interest rate risk management is the responsibility of
the Investment Committee, which reports to the Board of Directors. The
Investment Committee establishes policies that monitor and coordinate the
Company's sources, uses and pricing of funds. Potential economic losses due to
future interest rate changes can be reflected as a loss of future net interest
income and/or a loss of current fair market value. Management recognizes certain
risks are inherent and that the goal is to measure the effect on net interest
income and to adjust the balance sheet to minimize the risk while at the same
time maximize income.
The Company continues to reduce the volatility of its net interest
income by managing the relationship of interest rate sensitive assets to
interest rate sensitive liabilities. To accomplish this, management has
undertaken steps to increase the percentage of variable rate assets, as a
percentage of its total earning assets. The Company's adjustable rate loans are
primarily tied to published indices, such as the Wall Street Journal prime rate.
Adjustable rate mortgage backed securities are typically tied to the 11th
District Cost of Funds index ("COFI"), the London Interbank Offered Rate
("LIBOR"), or the Constant Maturity Treasury ("CMT") index.
The Company's exposure to interest rate risk is reviewed on a regular
basis. The Company utilizes a simulation model to analyze net interest income
sensitivity to movements in interest rates. The simulation model projects net
interest income based on both an immediate rise or fall in interest rates (rate
shock) over a twelve-month period. The model is based on the actual maturity and
repricing characteristics of interest rate sensitive assets and liabilities. The
model incorporates assumptions regarding the impact of changing interest rates
on the prepayment rate of certain assets and liabilities as well as projections
for anticipated activity levels by product lines offered by the Company. The
simulation model also takes into account the Company's historical core deposits.
Management considers the Company's market risk to be acceptable at this time.
The table below represents in tabular form contractual balances of the
Company's on-balance sheet financial instruments at the expected maturity dates
as well as the fair value of those on-balance sheet financial instruments for
the year ended December 31, 1997. The expected maturity categories take into
consideration historical prepayment speeds as well as actual amortization of
principal and does not take into consideration reinvestment of cash. Principal
prepayments are the amounts of principal reduction, over and above normal
amortization. The actual maturities of these instruments could vary
substantially if future prepayments differ from the Company's historical
experience. The Company's assets and liabilities that do not have a stated
maturity date, as in cash equivalents and certain deposits, are considered to be
long term in nature by the Company and are reported in the "Over 5 years"
column. The Company does not consider these financial instruments to be
materially sensitive to interest rate fluctuations and historically the balances
have remained fairly constant over various economic conditions. The weighted
average effective interest rates for the various assets and liabilities
presented are actual as of December 31, 1997.
12
<PAGE>
The fair value of cash, interest-bearing deposits with financial
institutions, federal funds sold, and interest receivable and payable
approximate their book values due to their short maturities. The fair value of
investment securities are based on third party pricing obtained by the Company's
portfolio accounting service provider. Stock of the Federal Reserve Bank and
Texas Independent Bank does not have a market and is shown at cost. The fair
value of loans are estimated in portfolios with similar financial
characteristics and takes into consideration discounted cash flows through the
estimated maturity or repricing dates using estimated market discount rates that
reflect credit risk. The fair value of demand deposits, NOW, money market, and
savings account is the amount payable upon demand. The fair value of time
deposits is based upon the discounted value of contractual cash flows, which is
estimated using current rates offered for deposits of similar remaining terms.
Table V - Market Risk Sensitive Instruments (dollars in thousands)
Scheduled maturity of market risk sensitive instruments at December 31, 1997:
<TABLE>
<CAPTION>
Weighted
Average
Over Fair Effective
Year 1 Year 2 Year 3 Year 4 Year 5 5 Years Total Value Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Securities
Fixed Rate 35,006 61,757 23,084 9,934 5,938 12,833 148,552 148,917 5.93%
Floating Rate 7,980 2,689 7,497 7,880 5,093 37,914 69,053 69,053 6.29%
Equity Securities 368 368 368 5.69%
------------------------------------------------------------------------------
Total Securities 42,986 64,446 30,581 17,814 11,031 51,115 217,973 218,338
Loans
Fixed Rate 37,059 18,460 16,459 6,597 7,053 7,499 93,127 89,033 9.69%
Floating Rate 7,015 667 1,309 1,052 692 4,144 14,879 14,879 9.08%
------------------------------------------------------------------------------
Total 44,074 19,127 17,768 7,649 7,745 11,643 108,006 103,912
LIABILITIES
Savings, NOW,
and Money Market
Deposits - - - - - 126,016 126,016 126,016 2.72%
Certificates of 143,378 13,880 4,052 735 1,186 - 163,231 163,872 4.58%
Deposit
Short-term
Borrowings - 844 - - - - 844 844 5.61%
</TABLE>
13
<PAGE>
LOANS
- -----
The Company's loan portfolio consists primarily of real estate,
commercial and industrial, and consumer loans. Total loans were $108,006,000 at
December 31, 1997 compared to $103,185,000 at December 31, 1996 and $82,687,000
at December 31, 1995.
As can be seen in Table V, a strong increase of approximately 17.2% in
commercial and industrial loans, a moderate increase of approximately 8.5% in
real estate loans occurred while installment loans decreased a moderate 9.7% in
1997. The increases in 1996 from 1995 were the result of strong loan demand and
an approximately $6,100,000 increase due to the acquisition of Waskom. Increases
in loans not related to the acquisition of Waskom were also the result of
marketing efforts aimed at real estate and installment customers. The increase
in 1995 is the result of increased loan demand, marketing efforts and branch
acquisitions. The increase in 1994 over 1993 is partially attributable to the
acquisition of the Jefferson Branch, and the NationsBank Branches and an
increase in lease financing receivables and tax-exempt obligations.
At December 31, 1997, real estate mortgage loans comprised 46.4% of the
loan portfolio, compared to 44.8% and 43.7% at December 31, 1996, and December
31, 1995, respectively.
Table VI - Loan Information (dollars in thousands) - Outstanding Balances at:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
Types of Loans 1997 1996 1995 1994 1993
- -------------- ------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 27,973 23,863 22,444 18,410 14,787
Real estate - mortgage 50,122 46,211 34,009 28,683 24,404
Installment 29,911 33,111 26,234 18,123 13,956
------------- ------------- ------------ ------------- ------------
Total $ 108,006 103,185 82,687 65,216 53,147
============= ============= ============ ============= ============
</TABLE>
Approximately 13% of the Company's loans have adjustable interest
rates, while most loans are on fixed rates maturing within five years. Table VII
presents a maturity analysis of the Company's loan portfolio at December 31,
1997:
Table VII - Loan Interest and Maturity Information (dollars in thousands)
<TABLE>
<CAPTION>
At December 31, 1997
-----------------------------------------------------------
Commercial Real
and Industrial Estate Installment Totals
---------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
Fixed rate loans:
Mature within one year $ 5,638 3,821 5,614 15,073
Mature in one to five years 10,321 31,335 23,104 64,760
Mature after five years 3,600 9,653 505 13,758
---------------- ------------- -------------- ------------
Total fixed rate loans 19,559 44,809 29,223 93,591
Floating rate loans:
Mature within one year 5,326 1,234 453 7,013
Mature in one to five years 1,677 1,807 235 3,719
Mature after five years 1,411 2,272 - 3,683
---------------- ------------- -------------- ------------
Total floating rate loans 8,414 5,313 688 14,415
Total loans:
Mature within one year 10,964 5,055 6,067 22,086
Mature in one to five years 11,998 33,142 23,339 68,479
Mature after five years 5,011 11,925 505 17,441
---------------- ------------- -------------- ------------
Total loans $ 27,973 50,122 29,911 108,006
================ ============= ============== ============
</TABLE>
14
<PAGE>
ALLOWANCE FOR LOAN LOSSES
- -------------------------
In 1997, 1996 and 1995 respectively the Company made provisions to
increase the allowance for loan losses by $330,000, $264,000 and $180,000. The
larger provision during 1997 was made due to continued growth in loan and lease
balances. The acquisition of the Waskom Bank accounted for approximately $24,000
of the increase in the allowance for loan losses in 1996. As in 1997, increases
in 1996 and 1995 were due to continued increases in loan and lease balances. In
1997 the Company experienced net charge offs of $227,000 compared to net charge
offs in 1996 of $161,000. The balance in allowance for loan losses at December
31, 1997 was $1,249,000 compared to the December 31, 1996 balance of $1,146,000
and the December 31, 1995 balance of $1,019,000. The allowance for loan losses
at December 31, 1997, 1996 and 1995, was 1.16%, 1.11%, and 1.23%, of outstanding
loans, respectively.
By its nature, the process through which management determines the
appropriate level of the allowance requires considerable judgment. The
determination of the necessary allowance and, correspondingly, the provision for
loan losses, involves assumptions about and projections of national and local
economic conditions, the composition of the loan portfolio, and prior loss
experience, in addition to other considerations. As a result, no assurance can
be given that future losses will not vary from the current estimates. However,
management believes that the allowance at December 31, 1997 is adequate to cover
losses inherent in its loan portfolio. A migration analysis and an internal
classification system for loans also helps identify potential problems. From
these analyses, management determines which loans are potential candidates for
nonaccrual status or charge-off. Management continually reviews loans and
classifies them consistent with the regulatory guidelines to help ensure that an
adequate allowance is maintained.
The Company uses a combination of a loss migration approach and a
specific allocation approach to determine the adequacy of the allowance for loan
and lease losses. In general, the migration analysis tracks, on a quarter by
quarter basis, the percentage of various classified loan pools which ultimately
becomes a loss over a twelve month time period. The sum of the loss percentages
for each quarter of the analysis is used to estimate the loss that exists in the
Company's current population of classified loans. The methodology for
determining loss percentages on unclassified loans is based on historical losses
on the pool of loans that were considered pass credits twelve months prior to
the loss. Adjustments are then made to account for risks in the portfolio
associated with: (1) levels of, and trends in, delinquencies and non-accruals;
(2) trends in volume and terms of loans; (3) changes in lending policies and
procedures; (4) experience, ability and depth of lending management and staff;
(5) national and local economic trends and conditions; and (6) concentrations of
credit.
Based on historical trends, the Company estimates that approximately
$319,000 will be charged off in the year ending December 31, 1998. The breakdown
of this estimate is as follows: $39,000 in commercial and industrial, $30,000 in
real estate - mortgage, and $250,000 in installment.
15
<PAGE>
Table VIII - Analysis of Allowance of Loan Losses (dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,146 1,019 997 1,014 1,624
Charge-offs:
Commercial and industrial 57 20 90 27 148
Real estate mortgage - 2 15
1 -
Installment loans 289 223 157 33 67
------------- ------------ ------------- ------------ -------------
Total charge-offs 347 243 247 62 230
------------- ------------ ------------- ------------ -------------
Recoveries:
Commercial and industrial 49 28 40 157 70
Real estate mortgage - - - - -
Installment loans 71 54 49 38 50
------------- ------------ ------------- ------------ -------------
Total recoveries 120 82 89 195 120
------------- ------------ ------------- ------------ -------------
Net charge-offs (recoveries) 227 161 158 (133) 110
Additions charged (credited) to operations 330 264 180 (150) (500)
Addition due to acquisition
- 24 - - -
------------- ------------ ------------- ------------ -------------
Balance at end of period $ 1,249 1,146 1,019 997 1,014
============= ============ ============= ============ =============
Average loans outstanding
during the period* $ 101,245 88,684 71,347 55,516 52,757
Gross charge-offs as a percent
of average loans* 0.34% 0.29 0.35 0.11 0.44
Recoveries as a percent
of gross charge-offs 34.58% 33.75 36.03 314.52 52.17
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period* 0.22% 0.19 0.22 (0.24) 0.21
</TABLE>
* Net of unearned income
Table IX - Allocation of Allowance for Loan Losses (dollars in thousands)
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ------------------ ----------------- ----------------- -----------------
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 $ 619 49.5% $ 359 23.1% $ 468 27.2% $ 239 29.7% $ 343 27.8%
Real estate -
mortgage 191 15.3 81 44.8 112 41.1 123 43.7 122 45.9
Installment 413 33.1 420 32.1 366 31.7 86 26.6 113 26.3
Unallocated 26 2.1 286 N/A 73 N/A 549 N/A 436 N/A
-------- -------- --------- -------- -------- -------- -------- -------- -------- --------
$ 1,249 100.0% $ 1,146 100.0% $1,019 100.0% $ 997 100.0% $ 1,014 100.0%
======== ======== ========= ======== ======== ======== ======== ======== ======== ========
</TABLE>
*Represents the ratio of each loan category to gross loans (including unearned
interest)
16
<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 $172,000 in 1997, $147,000 in 1996, and
$99,000 in 1995. The increase from 1996 to 1997 was the result of one loan being
moved to nonaccrual status. The increase in nonaccrual loans in 1996 was the
result of the Waskom Bank acquisition. The decrease in 1995 was the result of
one nonaccrual loan being paid off and reductions by payments received on loans.
Restructured loans include those for which there has been a reduction in stated
interest rate, extension of maturity, reduction in face amount of debt, or
reduction in accrued interest. As of December 31, 1997, the Company had no
restructured loans.
Loans past due over ninety days and still accruing interest were
$20,000 at December 31, 1997, a decrease from the December 31, 1996 amount of
$33,000.
Table X - Analysis of Nonaccrual, Past Due, Other Real Estate, and Restructured
Loans (dollars in thousands)
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 172 147 99 195 233
Restructured loans - - - - -
Other impaired loans - - - - -
Other real estate 186 151 - - 4
------------- ------------ ------------- ------------ -------------
Total nonperforming assets 358 298 99 195 237
============= ============ ============= ============ =============
Allowance for loan loss to
nonperforming assets 348.88% 384.90 1029.29 511.28 427.85
Nonperforming assets as a per-
centage of stockholders' equity 1.1% .9 .3 .7 .8
Loans past due 90+ days and
still accruing $ 20 $ 33 41 33 33
============= ============ ============= ============ =============
Other potential problem loans - - - - -
============= ============ ============= ============ =============
Income that would have been
recorded in accordance with
original terms $ 5 7 5 20 18
Less income actually
recorded - 3 - - -
------------- ------------ ------------- ------------ -------------
Loss of income $ 5 4 5 20 18
============= ============ ============= ============ =============
</TABLE>
17
<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.
Management's strategy with respect to securities is to maintain a very
high quality portfolio with generally short duration. The quality of the
portfolio is maintained with 85% of the total comprised of U.S. Treasury,
federal agency securities, and agency issued mortgage securities. Treasury
holdings are currently positioned in a ladder structure. Three year treasury
bonds are purchased quarterly, held for two years, then sold with one year left
to maturity to take advantage of the slope in the yield curve. The
collateralized mortgage obligations (CMOs) and mortgage backed securities (MBS)
held by the Company are backed by agency collateral which consists of loans
issued by the Federal Home Loan Mortgage Corporation (FHLMC), Federal National
Mortgage Corporation (FNMA), and the Government National Mortgage Association
(GNMA) with a blend of fixed and floating rate coupons.
Credit risk is minimized through agency backing, however, there are
other risks associated with MBS and CMOs. These other risks include prepayment,
extension, and interest rate risk. MBS are securities which represent an
undivided interest in a pool of mortgage loans. CMOs are structured obligations
that are derived from a pool of mortgage loans or agency mortgage backed
securities. CMOs in general have widely varying degrees of risk, which results
from the prepayment risk on the underlying mortgage loans and its effect on the
cash flows of the security.
Prepayment risk is the risk of borrowers paying off their loans sooner
than expected in a falling rate environment by either refinancing or
curtailment. Extension risk is the risk that the underlying pool of loans will
not exhibit the expected prepayment speeds thus resulting in a longer average
life and slower cash flows than anticipated at purchase. Interest rate risk is
based on the sensitivity of yields on assets which change in a different time
period or in a different proportion from that of current market interest rates.
This may be as a result of a lagging index, such as the Cost of Funds Index or
periodic and annual caps on floating rate pools. Changes in average life due to
prepayments and changes in interest rates in general will cause the market value
of MBS and CMOs to fluctuate.
The Company's MBS portfolio consists of fixed rate balloon maturity
pools with short stated final maturities, fixed rate conventional mortgage
pools, and adjustable rate mortgage (ARM) pools with coupons that reset annually
and have longer maturities. Investments in CMOs consist mainly of Planned
Amortization Classes (PAC), Targeted Amortization Classes (TAC), and sequential
classes. Floating rate securities make up 77% of the CMO portfolio. Support and
liquidity classes with longer average lives and floating rate coupons are a
relatively small portion of the portfolio.
To maximize after-tax income, investments in tax-exempt municipal
securities are utilized, but with somewhat longer maturities.
At December 31, 1997, the Company's level of structured notes was
insignificant.
Securities are the Company's single largest interest-earning asset
representing approximately 61%, 64%, and 69% of total assets at December 31,
1997, 1996, and 1995 respectively. The investment portfolio totaled $218.0
million at December 31, 1997, down from $228.2 million at December 31, 1996, and
from $226.4 million at December 31, 1995.
18
<PAGE>
The various types of securities held by the Company are listed below
in Table XI:
Table XI - Investment Securities Information (dollars in thousands)
<TABLE>
<CAPTION>
Held to Maturity Portfolio At December 31,
---------------------------------------------
(Carried at Amortized Cost) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Treasuries $ 7,038 7,062 7,087
U.S. Government Agencies 10,144 10,215 16,293
State and Municipal 32,213 34,069 32,511
Corporate securities - 2,508 2,541
------------- ------------- -------------
49,395 53,854 58,432
Mortgage-backed securities
and collateralized mortgage
obligations 19,838 28,561 24,318
------------- ------------- -------------
Total Held to Maturity $ 69,233 82,415 82,750
============= ============= =============
<CAPTION>
Available for Sale Portfolio At December 31,
---------------------------------------------
(Carried at Market Value) 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
U.S. Treasuries $ 60,282 54,115 56,867
U.S. Government Agencies 20,029 17,716 21,271
Corporate securities - 1,004
3,034
Other securities 368 348 348
------------- ------------- -------------
80,679 73,183 81,520
Mortgage-backed securities and
collateralized mortgage obligations 68,061 72,557 62,180
------------- ------------- -------------
Total Available for Sale $148,740 145,740 143,700
============= ============= =============
</TABLE>
19
<PAGE>
The maturities and weighted yields of each portfolio by type of
security and their book and market values are detailed below in Table XII:
Table XII - Investment Securities Maturities and Yield Information (dollars in
thousands)
Held to Maturity Portfolio (Carried at amortized cost):
<TABLE>
<CAPTION>
As of December 31, 1997
Matures in Matures in Matures in Matures in Amortizing
1 Year or Less 1-5 Years 5-10 Years After 10 Years Securities Total
----------------- ---------------- ----------------- ---------------- ----------------- Book Market
Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Value Value
-------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury and
government
agencies $ 4,992 6.82% 12,190 5.60 - - - - - - 17,182 17,199
State and
Municipal* 6,543 6.57 13,461 6.66 8,116 7.65 4,093 7.47 - - 32,213 32,573
Corporate
securities - - - - - - - - - - - -
-------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- -------
11,535 6.68 25,651 6.16 8,116 7.65 4,093 7.47 - - 49,395 49,772
Mortgage-backed
securities - - - - - - - - 19,838 6.11 19,838 19,826
-------- -------- -------- ------- -------- -------- -------- ------- -------- -------- ------- -------
Total $11,535 6.68 25,651 6.16 8,116 7.65 4,093 7.47 19,838 6.11 69,233 69,598
======== ======== ======== ======= ======== ======== ======== ======= ======== ======== ======= =======
</TABLE>
Available for Sale Portfolio (Carried at Market Value):
<TABLE>
<CAPTION>
As of December 31, 1997
-----------------------
Matures in Matures in Matures in Matures in Amortizing
1 Year of Less 1-5 Years 5-10 Years After 10 Years Securities Total
----------------- ---------------- ---------------- ---------------- ---------------- Amortized Market
Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield Cost Value
------- ------- ------- ------- ------- ------- ------- ------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S Treasury and
government
agencies $18,990 5.21 61,005 6.05 - - - - - - 79,995 80,311
Corporate - - - - - - - - - - - -
securities
Other securities - - 368 5.70 - - - - - - 368 368
------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- -------
18,990 5.21 61,373 6.05 - - - - - - 80,363 80,679
Mortgage-backed
securities and
collateralized
mortgage
obligations - - - - - - - - 68,885 6.18 68,885 68,061
------- ------- ------- ------- ------ ------- ------- ------- ------ ------- ------- -------
Total $18,990 5.21 61,373 6.05 - - - - 68,885 6.18 149,248 148,740
======= ======= ======= ======= ====== ======= ======= ======= ====== ======= ======= =======
</TABLE>
* Yields are stated on a tax-equivalent basis at a 34% effective tax rate.
20
<PAGE>
DEPOSITS
- --------
Total deposits at December 31, 1997 were $322.1 million, an increase of
approximately $1.4 million from the December 31, 1996 deposit total of $320.7
million. Deposits totaled approximately $293.6 million at December 31, 1995.
Approximately $21.6 million of the increase from 1995 to 1996 was a result of
the Waskom Bank acquisition.
Total average deposits in 1997 were $311,808,000, an increase of
$11,804,000 over the December 31, 1996 total of $300,004,000. Average deposits
at December 31, 1995 were $292,576,000. The majority of the increase from 1996
to 1997 and from 1995 to 1996 was a result of the Waskom Bank acquisition.
The average balances of the various deposit types for the last three years
along with the interest paid and average deposit interest rates follow:
Table XIII - Analysis of Depositor Average Balances (dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- ------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balances Expense Rate Balances Expense Rate Balances Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand $ 31,955 - -% $ 27,864 - -% $ 25,746 - -%
Interest-bearing demand 73,665 1,910 2.59 72,194 2,015 2.79 68,590 2,210 3.22
Savings 9,419 250 2.65 8,442 226 2.68 7,756 212 2.73
Money market accounts 34,472 1,035 3.00 36,819 1,096 2.98 39,594 1,244 3.14
Time 162,297 8,298 5.11 154,685 7,839 5.07 150,890 7,870 5.22
-------- -------- ------- -------- -------- ------- -------- -------- -------
Total $311,808 11,493 4.11% $300,004 11,176 4.11% $292,576 11,536 4.32%
======== ======= ======= ======== ======== ======= ======== ======== =======
</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, 1997,
52.1% of total average deposits were time deposits compared to 52.5%, and 51.4%
at December 31, 1996 and 1995, respectively.
Included in the table below are time deposits at December 31, 1997,
with balances of $100,000 or more. These deposits represent 32.6% of total time
deposits and, as can be seen in Table XIII, the majority of such deposits will
mature within three months, reflecting the volatile nature of these deposits.
The cost of these funds is generally higher than for other time deposits. The
following table provides an analysis of the maturity of these deposits:
Table XIV - Certificates of Deposit $100,000 or more (dollars in thousands) at
December 31, 1997
<TABLE>
<CAPTION>
Maturity from Percent of
December 31, 1997 Total
----------------- ------------
<S> <C> <C>
Three months or less $ 34,509 64.83%
Within months four through six 3,483 6.54
Within months seven through twelve 12,535 23.55
Over one year 2,703 5.08
------------- -------------
Total $ 53,230 100.00%
============= =============
</TABLE>
21
<PAGE>
SHORT-TERM BORROWINGS
- ---------------------
As of December 31, 1997, the Company's short term borrowings consisted
of notes payable issued as a result of the Waskom acquisition. The Waskom notes
payable plus accrued interest totaled $894,000 at December 31, 1997 and were
accruing interest at the rate of 6.10%. As of March 15, 1998, the balance of the
Waskom notes payable had been reduced to $449,000 including accrued interest.
The rate of interest on these notes payable changed from 6.10% to 5.61% on
September 17, 1997 and will remain at this rate for a period of one year. From
time to time, primarily due to decreases in liquidity caused by timing of
investment transactions, the Company may borrow on a short-term basis from the
Federal Reserve Bank, or purchase federal funds through lines of credit approved
at Texas Independent Bank.
CAPITAL RESOURCES
- -----------------
The Company's shareholders' equity of $32,729,000 at December 31, 1997
remains at a level considered to be adequate by management. Profits in excess of
dividends paid to shareholders are reflected in the increase in retained
earnings from 1996. Approximately $368,000 of the increase in shareholder equity
from 1996 to 1997 is due to an improvement in the unrealized gain or loss on
available for sale securities. The Company had a net unrealized loss on
available for sale securities of approximately $703,000 at December 31, 1996
compared to a loss of approximately $335,000 at December 31, 1997. The decrease
in the net unrealized loss on available for sale securities was caused by a
decline in long term interest rates which have a positive impact on the market
price of many of the Company's investment securities. Shareholders' equity was
$31,988,000 at December 31, 1996 and $31,206,000 at December 31, 1995. The
regulatory agencies that govern banks require banks to meet certain minimum
capital guidelines. Under the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"), Federal bank regulatory agencies adopted new
capital adequacy guidelines which link the adequacy of a bank's capital to the
risks inherent in both its on and off balance sheet activities. These guidelines
are termed "risk based" capital guidelines and became fully effective on
December 31, 1992. At that time, banks were required to have a minimum ratio of
Tier 1 capital to total risk-adjusted assets, as defined in the regulations, of
not less than 4%, and a ratio of combined Tier 1 and Tier 2 capital to total
risk-adjusted assets of not less than 8%. Tier 1 capital consists primarily of
the sum of common stock and perpetual noncumulative preferred stock less
goodwill less certain percentages of other intangible assets. Tier 2 capital
consists primarily of perpetual preferred stock not qualifying as Tier 1
capital, perpetual debt, mandatory convertible securities, subordinated debt,
convertible preferred stock with an original weighted average maturity of at
least five years and the allowance for loan and lease losses up to a maximum of
1.25% of risk weighted assets. The sum of Tier 1 and Tier 2 capital constitutes
qualifying total capital. The federal regulatory agencies may require higher
ratios in the event of certain circumstances that they, in their discretion,
deem to be of sufficient cause to require higher ratios. At December 31, 1997,
Citizens Bank had Tier 1 and total capital ratios of 23.7% and 24.7%
respectively. At December 31, 1996, Citizens Bank had a Tier 1 and total capital
ratio of 23.5% and 24.4% respectively. At December 31, 1995, Citizens Bank's
Tier 1 and total capital ratios were 24.2%, and 25.0% respectively. At December
31, 1997, the Waskom Bank had Tier 1 and total capital ratios of 27.5% and 28.0%
respectively. At December 31, 1996, the Waskom Bank had Tier 1 and total capital
ratios of 25.3% and 25.5% respectively.
The Federal and state bank regulatory agencies also require that a bank
maintain a minimum leverage capital ratio of Tier 1 capital to average total
consolidated assets of at least 3% for the most highly-rated, financially sound
banks and a minimum leverage ratio of at least 4% to 5% for all other banks.
Adjusted total assets is comprised of total assets less the intangible assets
that are deducted from Tier 1 capital. As of December 31, 1997, Citizens Bank's
leverage ratio was 9.1%, compared to 9.0% as of December 31, 1996 and 9.5% as of
December 31, 1995. As of December 31, 1997, the Waskom Bank's leverage ratio was
9.1%, compared to 8.9% at December 31, 1996.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was signed into law on December 19, 1991. The prompt corrective
actions of FDICIA place restrictions on any insured depository institution that
does not meet certain requirements including minimum capital ratios. The
restrictions are based on an institution's FDICIA defined capital category and
become increasingly more severe as in institution's capital category declines.
In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital
categories based on an institution's capital ratios. The capital categories, in
declining order, are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To be "well capitalized," an institution is required to have
at least a 5% leverage ratio, a 6% Tier 1 risk-based capital ratio, and a 10%
total risk-based capital ratio. However, the regulatory agencies may impose
higher minimum standards on individual institutions or may downgrade an
institution from one category because of safety and soundness concerns. As of
December 31, 1997, 1996 and 1995, Citizens Bank met all regulatory requirements
to be deemed "well capitalized." As of December 31, 1997 and 1996, the Waskom
Bank met all regulatory requirements to be deemed "well capitalized."
22
<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.
During 1997 the Company purchased 14,620 shares of its common stock
from five shareholders at an average cost of $12.06 per share. These privately
negotiated transactions all occurred prior to the tender offer (see below). The
purchase price was paid in cash using available cash resources, and the Company
did not incur any debt in connection with these stock repurchases.
On October 15, 1997, the Company initiated a tender offer to all of its
shareholders to purchase an aggregate of 140,000 shares of the Company's common
stock (representing approximately 6.6% of such outstanding shares) at a price of
$14.50 per share. The tender offer, as extended, expired on November 20, 1997.
Fifty-two shareholders of the Company tendered a total of 98,186 shares of
common stock in the tender offer representing an aggregate purchase price of
$1,423,697. The purchase of shares appropriately tendered and accepted for
purchase by the Company was funded entirely from internal resources and no debt
was incurred in connection with the transaction. In accordance with applicable
law, on the date that the tender offer materials were first mailed to the
Company's shareholders, the Company filed with the Securities and Exchange
Commission an Issuer Tender Offer Statement on Schedule 13E-4 describing the
terms of the tender offer.
EMPLOYEES
- ---------
At December 31, 1997, the Company employed approximately 144 full-time
and 20 part-time employees. Management highly values and respects its excellent
relationship with its employees.
COMPETITION
- -----------
The Company services a large portion of the East Texas area with
offices in Henderson, Overton, and Mount Enterprise, which includes Rusk County,
Jefferson, which includes Marion County, Malakoff and Chandler, which includes
Henderson County, Waskom, which includes Harrison County, and Corsicana which
includes Navarro County.
The activities in which the Company engages are competitive. Each
activity engaged in involves competition with other banks, as well as with
nonbanking financial institutions and nonfinancial enterprises. In addition to
competing with other commercial banks within and outside its primary service
area, the Company competes with other associations, credit unions, industrial
loan associations, insurance companies, small loan companies, finance companies,
mortgage companies, real estate investment trusts, factors, certain governmental
agencies, credit card organizations and other enterprises. Additional
competition for deposits comes from government and private issuers of debt
obligations and other investment alternatives for depositors, such as money
market funds. The Company also competes with suppliers of equipment in
furnishing equipment financing and leasing services.
OUTLOOK AND CORPORATE OBJECTIVES
- --------------------------------
Though many factors such as inflation, interest rate risks, credit
quality, regulatory environment and local economic conditions affect the
earnings of the Company, the outlook for 1998 appears to be good. The Company
faces the challenge of maintaining a high quality loan portfolio while trying to
increase its market share of loans, reduce its overhead by utilization of
economies of scale, coordinate its branch operations, maintain deposits in a
historically low interest rate environment, stay abreast of the latest
technological changes, preserve its strong dividend payout, and increase its non
interest income.
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are directly affected by inflation. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are important to the maintenance of
acceptable performance levels.
It is the philosophy of the Company to remain independent in ownership,
to foster its image as the community leader in banking, increase market share
through selected acquisitions and aggressive marketing, maintain a sound
earning-asset portfolio, and assess liquidity needs while maintaining our
profitability and the return to our shareholders.
23
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
The following new accounting pronouncements were issued during 1997
together with the expected impact on the Company.
FASB 128, Earnings per Share - This Statement specifies the
computation, presentation, and disclosure requirements for earnings per share
for entities with publicly held common stock or potential common stock. Due to
the relatively simple capital structure of the Company, there was no effect from
the implementation of this Statement.
FASB 129, Disclosure of Information about Capital Structure - This
Statement establishes standards for disclosing information about an entity's
capital structure. Due to prior disclosures made by the Company, there are no
new disclosures as a result of implementation of this Statement.
FASB 130, Reporting Comprehensive Income - This Statement requires the
Company to report both comprehensive income and net income for all periods
presented beginning with the quarter ending with March 31, 1998. The Company
plans to implement this Statement in 1998.
24
<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, 1997 and 1996, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Henderson Citizens
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Shreveport, Louisiana
March 2, 1998
25
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ---- ----
<S> <C> <C>
Cash and due from banks $ 8,886 12,413
Interest-bearing deposits with financial institutions 8,212 3,892
Federal funds sold 5,040 1,150
Securities:
Held to maturity, approximate market values of $69,598
in 1997 and $82,465 in 1996 69,233 82,415
Available for sale 148,740 145,740
------- -------
217,973 228,155
Loans, net 106,061 100,674
Premises and equipment, net 5,209 3,751
Accrued interest receivable 3,311 3,449
Other assets 3,801 3,346
------- -------
$ 358,493 356,830
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand - noninterest-bearing $ 32,860 31,785
NOW accounts 79,810 74,984
Money market and savings 46,206 45,484
Certificates of deposit and other time deposits 163,231 168,420
------- -------
Total deposits 322,107 320,673
Accrued interest payable 1,105 1,144
Other liabilities 2,552 3,025
------- -------
325,764 324,842
Stockholders' equity:
Preferred stock, $5 par value; 2,000,000 shares authorized,
none issued or outstanding $ -- --
Common stock, $5 par value; 10,000,000 shares authorized,
2,160,000 issued 10,800 10,800
Capital surplus 5,400 5,400
Undivided profits 18,875 16,825
Net unrealized losses on securities available for sale,
net of income taxes (335) (703)
------- -------
34,740 32,322
Less treasury stock, 142,506 shares in 1997 and
29,700 shares in 1996 at cost (2,011) (334)
------- -------
Total stockholders' equity 32,729 31,988
------- -------
Commitments and contingencies
$ 358,493 356,830
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Interest income:
Loans $ 8,840 7,642 6,149
Investment securities:
Taxable - available-for-sale 8,829 8,058 7,693
Taxable - held-to-maturity 2,529 3,182 4,261
Tax-exempt 1,478 1,390 1,582
Federal funds sold 202 117 174
Interest-bearing deposits with financial
institutions 389 327 487
------ ------ ------
Total interest income 22,267 20,716 20,346
------ ------ ------
Interest expense:
Deposits:
NOW accounts 1,910 2,015 2,210
Money market and savings 1,285 1,322 1,456
Certificates of deposit and other time deposits 8,298 7,839 7,870
Other borrowed funds 53 27 --
------ ------ ------
Total interest expense 11,546 11,203 11,536
------ ------ ------
Net interest income 10,721 9,513 8,810
Provision (reduction of allowance) for loan losses 330 264 180
------ ------ ------
Net interest income after provision
(reduction of allowance) for loan losses 10,391 9,249 8,630
------ ------ ------
Other income:
Net gains (losses) on securities transactions 191 719 (128)
Income from fiduciary activities 753 632 587
Service charges, commissions, and fees 1,440 1,148 934
Other 906 744 616
------ ------ ------
Total other income 3,290 3,243 2,009
------ ------ ------
Other expenses:
Salaries and employee benefits 5,601 4,770 4,205
Occupancy and equipment 1,038 927 781
Regulatory assessments 127 191 407
Other 2,499 2,150 2,163
------ ------ ------
Total other expenses 9,265 8,038 7,556
------ ------ ------
Income before income tax expense 4,416 4,454 3,083
Income tax expense 1,026 1,110 619
------ ------ ------
Net income $ 3,390 3,344 2,464
====== ====== ======
Net income per common share $ 1.61 1.55 1.14
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAINS (LOSSES) TOTAL
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 December 31, 1994 $ -- 10,800 5,400 13,777 (3,830) -- 26,147
Net income -- -- -- 2,464 -- -- 2,464
Cash dividends ($0.64 per share) -- -- -- (1,382) -- -- (1,382)
Net change in unrealized gains
on securities available for sale -- -- -- -- 3,977 -- 3,977
------ ------ ----- ------ ------ ------ ------
Balances at December 31, 1995 -- 10,800 5,400 14,859 147 -- 31,206
Net income -- -- -- 3,344 -- -- 3,344
Cash dividends ($0.64 per share) -- -- -- (1,378) -- -- (1,378)
Net change in unrealized losses
on securities available for sale -- -- -- -- (850) -- (850)
Purchase of 29,700 shares of
treasury stock -- -- -- -- -- (334) (334)
------ ------ ----- ------ ------ ------ ------
Balances at December 31, 1996 -- 10,800 5,400 16,825 (703) (334) 31,988
Net income -- -- -- 3,390 -- -- 3,390
Cash dividends ($0.64 per share) -- -- -- (1,340) -- -- (1,340)
Net change in unrealized losses
on securities available for sale -- -- -- -- 368 -- 368
Purchase of 112,806 shares of
treasury stock -- -- -- -- -- (1,677) (1,677)
------ ------ ----- ------ ------ ------ ------
Balances at December 31, 1997 $ -- 10,800 5,400 18,875 (335) (2,011) 32,729
====== ====== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 3,390 3,344 2,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Net amortization (accretion) of premium
(discount) on securities 352 589 (34)
Net (gains) losses on securities transactions (191) (719) 128
Provision (reduction of allowance) for loan losses 330 264 180
Depreciation and amortization 437 375 421
Decrease (increase) in accrued interest receivable 138 624 (303)
Decrease (increase) in other assets (618) (74) 460
Increase (decrease) in accrued interest payable (39) (14) 222
Increase (decrease) in other liabilities (458) 430 404
------- ------- -------
Net cash provided by operating activities 3,341 4,819 3,942
------- ------- -------
Investing activities:
Proceeds from sales of available-for-sale securities 31,909 55,669 15,700
Proceeds from maturities, paydowns, and calls of
available-for-sale securities 18,452 25,473 31,372
Proceeds from maturities, paydowns, and calls of
securities held to maturity 19,722 15,995 20,636
Purchases of available-for-sale securities (52,634) (74,142) (25,676)
Purchases of securities held-to-maturity (6,871) (11,291) (38,307)
Net increase in loans (5,869) (15,051) (16,895)
Proceeds from sales, premises and equipment and
other real estate 157 -- --
Purchases of bank premises and equipment (1,941) (756) (270)
Cash received from acquisitions -- 1,544 --
------- ------- -------
Net cash used by investing activities 2,925 (2,559) (13,440)
------- ------- -------
Financing activities:
Net increase (decrease) in deposits 1,434 5,349 8,089
Cash dividends paid (1,340) (1,378) (1,382)
Purchase of treasury stock (1,677) (334) --
------- ------- -------
Net cash provided (used) by financing activities (1,583) 3,637 6,707
------- ------- -------
Increase (decrease) in cash and cash equivalents 4,683 5,897 (2,791)
Cash and cash equivalents at beginning of year 17,455 11,558 14,349
------- ------- -------
Cash and cash equivalents at end of year $ 22,138 17,455 11,558
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BUSINESS -- Henderson Citizens Bancshares, Inc. (the "Company") through its
indirect subsidiaries, Citizens National Bank, Henderson, Texas and First
State Bank, Waskom, Texas (the "Banks"), provides a full range of banking
services to individual and corporate customers in east Texas. The
Company and the Banks are subject to regulations of certain federal and
state agencies and undergo periodic examinations by those regulatory
authorities.
BASIS OF PRESENTATION -- The consolidated financial statements have been
prepared in conformity with generally accepted accounting principles. In
preparing the consolidated financial statements, the Company is required
to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and income and
expenses for the period.
CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, interest-
bearing deposits with financial institutions, and federal funds sold.
Generally, federal funds are sold for one-day periods.
SECURITIES -- The Company accounts for its debt and marketable equity
securities under the provisions of Statement of Financial Accounting
Standards No. 115 (Statement 115), Accounting for Certain Investments in
Debt and Equity Securities. Under Statement 115, the Company classifies
its debt and marketable equity securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in the near
term. Held-to-maturity securities are those securities in which the
Company has the ability and intent to hold until maturity. All other
securities not included in trading or held-to-maturity are classified as
available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of the related income tax
effect, on available-for-sale securities are excluded from earnings and
are reported as a separate component of stockholders' equity until
realized. Transfers of securities between categories are recorded at
fair value at the date of transfer.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary is charged to
operations, resulting in the establishment of a new cost basis for the
security.
(Continued)
30
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Premiums and discounts are amortized or accreted either over the life of
the related security as an adjustment to yield using the effective
interest method, or are periodically adjusted to reflect the actual
payment experience on the underlying mortgage loans, which does not
materially differ from the interest method. Dividend and interest income
are recognized when earned. Realized gains and losses for securities
classified as available-for-sale and held-to-maturity are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
LOANS -- Interest on real estate, commercial, and industrial loans is
accrued as earned. Interest on installment loans is deferred and
recognized under the sum-of-the-digits method, which generally results in
level rates of return on principal balances outstanding.
A loan is considered impaired when based upon current information, it is
probable that a creditor will be unable to collect amounts due. If a
loan is impaired, then impairment is measured by (1) the present value of
expected future cash flows discounted at the loan's original effective
interest rate, or (2) the market price of impaired loans, or (3) the fair
value of collateral.
The accrual of income on loans is generally discontinued and all interest
income previously accrued and unpaid is deducted from income when a loan
becomes more than ninety days delinquent, or when certain factors
indicate reasonable doubt as to the timely collectibility of all amounts
due. A loan may remain on accrual status if it is in the process of
collection and is either well secured or guaranteed. Generally, loans on
which the accrual of income has been discontinued are designated as
nonaccruing loans, and includes all loans classified as "impaired" loans.
Generally, nonaccruing loans are returned to an accrual status only when
none of the principal or interest is due and unpaid and the full
collectibility of the outstanding loan balance is reasonably assured.
Cash receipts on nonaccruing loans are generally applied to the principal
balance until the remaining balance is considered fully collectible.
ALLOWANCE FOR LOAN LOSSES -- The allowance for loan losses is maintained at
a level believed adequate by management to absorb potential loan losses.
Management's determination of the adequacy of the allowance is based on
an evaluation of the relative risks inherent in the loan portfolio,
taking into consideration the nature, volume, and quality of the
portfolio, specific problem loans, past credit loss experience, current
and future economic conditions, results of internal review procedures,
and other relevant factors. This evaluation is inherently subjective as
it requires material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans. The provision for
loan losses is charged to expense, and loans charged off, net of
recoveries, are charged directly to the allowance.
While the Company uses available information to recognize losses on loans,
future changes to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Company's allowance for loan losses. Such agencies may require the
Company
(Continued)
31
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to record changes to the allowance based on their judgments about
information available to them at the time of their examination.
PREMISES AND EQUIPMENT -- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is provided over the estimated
useful lives of the respective assets on a straight-line basis.
Maintenance and repairs are charged to operating expense, and renewals
and betterments are capitalized. Gains or losses on dispositions are
reflected currently in the statement of income.
INCOME TAXES -- The Company uses the asset and liability method of
accounting for income taxes under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET INCOME PER COMMON SHARE -- Net income per common share is calculated
based on the weighted average number of shares outstanding during the
year. The weighted average common shares outstanding were 2,109,747 in
1997, 2,153,333 in 1996 and 2,160,000 in 1995.
In February 1997, the Financial Accounting Standards Board issued Statement
128, Earnings Per Share, effective for 1997. The adoption of this
Statement had no impact on the Company's calculation or presentation of
earnings per share.
GOODWILL -- Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a straight-line basis
over the expected periods to be benefited, generally five to fifteen
years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted future operating
cash flows of the acquired operation. The amount of goodwill impairment,
if any, is measured based on projected discounted future operating cash
flows using a discount rate reflecting the CompanyOs average cost of
funds. The assessment of the recoverability of goodwill will be impacted
if estimated future operating cash flows are not achieved.
RECLASSIFICATIONS -- Certain amounts in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
(2) ACQUISITIONS
------------
On September 17, 1996, the Company acquired substantially all of the
outstanding shares of Waskom Bancshares, Inc. and its majority owned
subsidiary, First State Bank, Waskom, Texas. Pursuant to the purchase
agreement, the Company paid $3,463,000, $1,511,000 of
(Continued)
32
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
which was paid as a note payable due upon demand having an interest rate
of 6.10%. This transaction resulted in approximately $1,337,000 in
goodwill, which is being amortized over fifteen years on a straight-line
basis. The transaction was accounted for using the purchase method of
accounting. This acquisition resulted in an increase in total assets of
$24,075,000 and total deposits of $21,714,000. Operations of Waskom
Bancshares, Inc. and First State Bank prior to the acquisition are not
included in these consolidated financial statements.
The following unaudited pro forma information reflects the results of
operations for the years ended December 31, 1996 and 1995, as though this
acquisition had occurred at the beginning of 1995 (in thousands of
dollars, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <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>
(3) CASH AND DUE FROM BANKS
-----------------------
The Banks are a member of the Federal Reserve System and are required to
maintain reserve balances in accordance with Federal Reserve Bank
requirements. Such reserve requirements totaled $794,000 and $998,000 at
December 31, 1997 and 1996, respectively.
(4) REGULATORY MATTERS
------------------
Applicable federal and state regulations impose restrictions on the amounts
of dividends that may be declared by the Banks. In addition to the
formal statutes and regulations, regulatory authorities also consider the
adequacy of the Banks' total capital in relation to its assets, deposits,
and other such items.
National and state banks are generally required to obtain approval of the
regulatory agencies if dividends declared in any year exceed the profits
of that year combined with the net retained profits of the preceding two
years. For 1997, the Banks will be required to obtain approval of the
regulatory agencies before they can declare any dividends which exceed
1998 net income by approximately $799,000.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
was signed into law on December 19, 1991. The prompt corrective actions
of the FDICIA place restrictions on any insured depository institution
that does not meet certain requirements, including minimum capital
ratios. The restrictions are based on an institution's FDICIA
(Continued)
33
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
defined capital category and become increasingly more severe as an
institutions capital category declines. In addition to the prompt
corrective action requirements, FDICIA includes significant changes to
the legal and regulatory environment for insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased
reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations.
The prompt corrective action regulations define specific capital categories
based on an institution's capital ratios. The capital categories in
declining order are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To be considered "well capitalized," an institution
is required to have at least a 5% leverage ratio, a 6% Tier I risk-based
capital ratio, and a 10% total risk-based capital ratio. However, the
regulatory agencies may impose higher minimum standards on individual
institutions or may downgrade an institution from one category because of
safety and soundness concerns.
At December 31, 1997, Citizens National Bank, Henderson, Texas' leverage
ratio was 9.1%, Tier I risk-based ratio was 23.5%, and total risk-based
ratio was 24.4% and First State Bank, Waskom, Texas' leverage ratio was
9.1%, Tier I risk-based ratio was 27.5%, and total risk-based ratio was
28.0%.
(5) SECURITIES
----------
The amortized cost (carrying value) and approximate fair value of
securities held-to-maturity at December 31, 1997 and 1996, are summarized
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 7,038 39 (27) 7,050
U.S. government agencies 10,144 14 (9) 10,149
State and municipal 32,213 412 (52) 32,573
Mortgage-backed securities
and collateralized mortgage
obligations 19,838 52 (64) 19,826
------ --- ---- ------
$ 69,233 517 (152) 69,598
====== === ==== ======
</TABLE>
(Continued)
34
<PAGE>
<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
====== ====== ======= ======
</TABLE>
The amortized cost and approximate fair value (carrying value) of
securities available-for-sale at December 31, 1997 and 1996, are
summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 60,004 322 (44) 60,282
U.S. government agencies 19,991 56 (18) 20,029
Mortgage-backed securities and
collateralized mortgage
obligations 68,885 288 (1,112) 68,061
Other securities 368 -- -- 368
------- ----- ------ -------
$ 149,248 666 (1,174) 148,740
======= ===== ====== =======
December 31, 1996
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
---- ----- ------ -----
U.S. Treasury $ 53,963 313 (161) 54,115
U.S. government agencies 17,758 67 (109) 17,716
Mortgage-backed securities and
collateralized mortgage
obligations 73,734 323 (1,500) 72,557
Other securities 1,350 2 -- 1,352
------- ----- ------ -------
$ 146,805 705 (1,770) 145,740
======= ===== ====== =======
</TABLE>
(Continued)
35
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of securities at December 31,
1997, by contractual maturity, are shown below (in thousands of dollars).
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<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 $ 11,535 11,552 17
Due after one year through five years 25,651 25,686 35
Due after five years through ten years 8,116 8,367 251
Due after ten years 4,093 4,167 74
Mortgage-backed securities and
collateralized mortgage obligations 19,838 19,826 (12)
-------- ------- ------
$ 69,233 69,598 365
======== ======= ======
</TABLE>
<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 $ 18,990 18,967 (23)
Due after one year through five years 61,005 61,344 339
Due after five years through ten years 368 368 --
Mortgage-backed securities,
collateralized mortgage obligations,
and other amortizing securities 68,885 68,061 (824)
-------- ------- ------
$ 149,248 148,740 (508)
======== ======= ======
</TABLE>
Proceeds from the sales of securities were $31,909,000 and $55,669,000 in
1997 and 1996, respectively. Gross gains of $259,000 and $763,000 were
recognized on those sales in 1997 and 1996, respectively. Gross losses
of $68,000 and $44,000 were recognized on sales in 1997 and 1996,
respectively.
Investment securities having a carrying value of $60,382,000 and
$52,306,000 at December 31, 1997 and 1996, respectively, were pledged to
secure public funds on deposit or for other purposes as required or
permitted by law.
(Continued)
36
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1995 Citizens National Bank, Henderson, Texas transferred securities
having an amortized cost of $33,439,000 from its held-to-maturity
portfolio to its available-for-sale portfolio. At the time of the
transfer, these securities had net unrealized gains of approximately
$775,000. This transfer was made during the one time reassessment
allowed by the Financial Accounting Standards Board for the
reclassification of held-to-maturity and available-for-sale investment
security portfolios.
(6) LOANS AND ALLOWANCE FOR LOAN LOSSES
-----------------------------------
The composition of the loan portfolio at December 31, 1997 and 1996, is as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Real estate mortgage $ 49,979 46,211
Commercial and industrial 28,195 23,863
Installment and other 29,832 33,111
------- -------
Total 108,006 103,185
------- -------
Less:
Allowance for loan losses (1,249) (1,146)
Unearned discount (696) (1,214)
------- -------
Loans, net $ 106,061 100,825
======= =======
</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 substantially the same terms as
those prevailing at the time for comparable loans and similar
transactions with other persons. The amounts of these loans were
$737,000 and $783,000 at December 31, 1997 and 1996, respectively. The
change during 1997 reflects $554,000 in new loans and $600,000 of
repayments.
At December 31, 1997 and 1996, the Banks had discontinued the accrual of
interest on loans aggregating $172,000 and $147,000 respectively. Net
interest income for 1997 and 1996 would have been higher by $5,600 and
$6,400, respectively, had interest been accrued at contractual rates on
nonperforming loans.
At December 31, 1997 and 1996, the recorded investment in impaired loans
was $172,000 and $147,000, respectively. The average recorded investment
in impaired loans for 1997 and 1996 approximated $107,000 and $116,000,
respectively. No interest income was recognized on these impaired loans
for 1997 and 1996.
(Continued)
37
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses are summarized as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, January 1 $ 1,146 1,019 997
Provision (reduction of allowance) for
loan losses 330 264 180
Addition due to acquisition -- 24 --
Loans charged off (347) (243) (247)
Recoveries on loans 120 82 89
----- ----- -----
Balance, December 31 $ 1,249 1,146 1,019
===== ===== =====
</TABLE>
During 1997, the Banks reduced loans through the repossession of other real
estate and assets by $152,000. There were no such reductions in 1996 and
1995.
(7) PREMISES AND EQUIPMENT
----------------------
Premises and equipment at December 31, 1997 and 1996, are summarized as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
December 31,
Estimated -------------
useful lives 1997 1996
------------ ---- ----
<S> <C> <C> <C>
Land -- $ 442 442
Bank buildings 40 years 5,032 3,297
Furniture, fixtures, and equipment 5-10 years 3,754 2,947
Construction in progress 14 302
------ ------
9,242 6,988
Less accumulated depreciation (4,033) (3,237)
------ ------
Premises and equipment, net $ 5,209 3,751
====== ======
</TABLE>
Amounts charged to operating expenses for depreciation were $437,000,
$375,000, and $312,000 in 1997, 1996, and 1995, respectively.
(8) TIME DEPOSITS
-------------
Included in certificates of deposit and other time deposits at December 31,
1997 and 1996, were $53,230,000 and $53,609,000, respectively, of
certificates of deposit in denominations of $100,000 or more. Interest
expense on time deposits of $100,000 or more amounted to $2,650,000,
$2,281,000, and $2,348,000, for the years ended DecemberE31, 1997, 1996,
and 1995, respectively.
(Continued)
38
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1997, the scheduled maturities of time deposits are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1998 $ 143,378
1999 13,880
2000 4,052
2001 735
2002 1,186
--------
$ 163,231
========
</TABLE>
During 1997, 1996, and 1995, the Banks made interest payments of
$11,496,000, $11,149,000, and $11,314,000, respectively, to depositors
and other banks.
(9) INCOME TAXES
------------
Federal income tax expense (benefit) applicable to income before tax for
the years ended December 31, 1997, 1996, and 1995, is as follows (in
thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current $ 1,151 979 769
Deferred (125) 131 (150)
----- ----- ----
$ 1,026 1,110 619
===== ===== ====
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34% in 1997, 1996, and 1995, to pretax income
when compared to actual income tax expense as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,501 1,519 1,048
Increase (decrease) in income taxes resulting
from:
Tax-exempt interest (542) (471) (465)
Other 67 62 36
----- ----- -----
Actual income tax $ 1,026 1,110 619
===== ===== =====
Effective tax rate 23.2% 24.9 20.1
===== ===== =====
</TABLE>
(Continued)
39
<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, 1997 and 1996, are presented below (in thousands of
dollars):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 64 --
Organizational/acquisition costs 89 48
Accrued liabilities 83 40
Unrealized loss on securities available-for-sale 173 362
--- ---
Total gross deferred tax assets 409 450
Less valuation allowance -- --
--- ---
Net deferred tax assets 409 450
--- ---
Deferred tax liabilities:
Investment securities 170 67
Premises and equipment - depreciation -- 122
Other assets 64 22
--- ---
Total deferred tax liabilities 234 211
--- ---
Net deferred tax asset $ 175 239
=== ===
</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 in the accompanying consolidated balance
sheets are current federal income taxes payable of $235,000 and $164,000
at December 31, 1997 and 1996, respectively. A net deferred federal
income tax asset of $175,000 and $239,000 is included in other assets at
December 31, 1997 and 1996, respectively.
Income taxes paid during 1997, 1996, and 1995, totaled $1,155,000,
$995,000, and $205,000, respectively.
(10) PROFIT SHARING PLAN
-------------------
The Company has a 401(k) savings plan which covers substantially all full-
time employees with one year of service. With respect to employer
contributions, vesting under the plan begins in the third year and
participants become fully vested after seven years. Contributions are at
the discretion of the Board of Directors. The Company expensed $303,000,
$281,000, and $251,000 related to the plan for the years ended
December 31, 1997, 1996, and 1995, respectively.
(Continued)
40
<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 1997, 1996, and 1995, the Company charged HCB a management fee of
$27,500, $15,000, and $13,500, respectively for various services provided
to HCB. The amount charged was considered to be the fair value of those
services rendered. During 1997, 1996 and 1995, Citizens National Bank
Henderson, Texas' trust department charged HCB an additional $9,282,
$6,530 and $4,600, respectively, for management services related to HCB's
mineral interests.
During 1995, HCB purchased real estate from the Company for $43,000.
(12) COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's financial position and results of operations.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
Statement of Financial Accounting Standards No. 107 (Statement 107),
Disclosures about Fair Value of Financial Instruments, requires that the
Company disclose estimated fair values for its financial instruments.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Company's financial instruments, fair
value estimates are based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
(Continued)
41
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CASH, DUE FROM BANKS, INTEREST-BEARING DEPOSITS WITH FINANCIAL
INSTITUTIONS, AND FEDERAL FUNDS SOLD -- For these short-term investments,
the carrying amount is a reasonable estimate of fair value.
SECURITIES -- The fair value, which approximates the estimated market
values, of longer-term securities and mortgage-backed securities, except
certain state and municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received from
securities dealers. The fair value, which approximates the estimated
market values, of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so fair
value estimates are based on quoted market prices of similar instruments,
adjusted for differences between the quoted instruments and the
instruments being valued.
LOANS -- Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential mortgage, and consumer.
The carrying amounts of performing loans that were funded or will mature
within three months of the balance sheet date approximate the fair values
of those loans. Additionally, the carrying amounts of adjustable rate
loans that reprice within ninety days also approximate the fair values of
those loans. The fair values of the remaining performing and
nonperforming loans are calculated by discounting scheduled cash flows
through the estimated maturity, using estimated market discount rates
that reflect the credit and interest rate risk inherent in the loans.
The estimate of maturity is based on the Company's historical experience
with repayments for each loan classification, modified, as required, by
an estimate of the effect of current economic and lending conditions.
DEPOSITS -- The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings, NOW accounts, and money
market accounts, is equal to the amount payable as of December 31, 1997
and 1996. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar
remaining maturities.
INTEREST ACCRUALS -- The fair values of the Company's accrued interest
receivable and accrued interest payable amounts approximate their
carrying values due to the short maturity of these financial instruments.
(Continued)
42
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996, are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 8,886 8,886 12,413 12,413
Interest-bearing deposits with
financial institutions 8,212 8,212 3,892 3,892
Federal funds sold 5,040 5,040 1,150 1,150
Securities 217,973 218,338 228,155 228,205
Loans, net 106,061 103,912 100,825 99,410
Accrued interest receivable 3,311 3,311 3,449 3,449
Financial liabilities:
Deposits:
Demand - noninterest-bearing 32,860 32,860 31,785 31,785
NOW accounts 79,810 79,810 74,984 74,984
Money market and savings 46,206 46,206 45,484 45,484
Certificates of deposit and other
time deposits 163,231 163,872 168,420 168,692
Accrued interest payable 1,105 1,105 1,144 1,144
</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, 1997
--------------------
<S> <C>
Financial instruments whose contractual amounts
represent credit risk:
Commitments to extend credit $ 13,361,000
Standby letters of credit 376,000
</TABLE>
(Continued)
43
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Banks
evaluate each customer's creditworthiness on a case-by-case basis. The
amount and nature of collateral obtained, if deemed necessary by the
Banks upon extension of credit, is based on management's credit
evaluation of the counter-party. Such collateral may include accounts
receivable; inventory; property, plant, and equipment; real estate; and
income-producing commercial and oil and gas properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private short-term
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. The Banks hold collateral supporting those
commitments for which collateral is deemed necessary.
(15) CONCENTRATION OF CREDIT RISK
----------------------------
The Banks grant real estate, commercial, and industrial loans to customers
primarily in Henderson, Texas, and surrounding areas of east Texas.
Although the Banks have a diversified loan portfolio, a substantial
portion (approximately 47.1% at December 31, 1997) of its loans are
secured by real estate and its ability to fully collect its loans is
dependent upon the real estate market in this region. The Banks
typically require collateral sufficient in value to cover the principal
amount of the loan. Such collateral is evidenced by mortgages on
property held and readily accessible to the Banks.
The Banks had $7,119,000 and $3,293,000 on deposit with the Federal Home
Loan Bank of Dallas at December 31, 1997 and 1996, respectively.
(Continued)
44
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(16) PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
---------------------------------------------------
The financial information below summarizes the financial position of
Henderson Citizens Bancshares, Inc. (parent company only) as of December
31, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1997.
BALANCE SHEETS
(Parent Only)
December 31, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
------ ------ ------
<S> <C> <C>
Cash in subsidiary bank $ 367 1,062
Investment in subsidiaries 33,551 32,791
Other assets 27 13
------ ------
Total assets $ 33,945 33,866
====== ======
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Dividends declared $ 323 341
Accounts payable 49 26
Other liabilities 844 1,511
------ ------
1,216 1,878
Stockholders' equity:
Preferred stock -- --
Common stock 10,800 10,800
Capital surplus 5,400 5,400
Undivided profits 18,875 16,825
Net unrealized losses on securities available
for sale (335) (703)
Less treasury stock (2,011) (334)
------ ------
Total stockholders' equity 32,729 31,988
------ ------
Total liabilities and stockholders' equity $33,945 33,866
====== ======
</TABLE>
(Continued)
45
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
(Parent Only)
Years ended December 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividends, including dividends paid by subsidiary
banks $ 3,070 4,368 1,384
Interest expense 10 -- --
Operating expenses 50 27 --
----- ----- -----
Income before income tax benefit and
equity in undistributed earnings of
subsidiaries 3,010 4,341 1,384
Income tax expense 12 12 23
----- ----- -----
Income before equity in undistributed
earnings of subsidiaries 2,998 4,329 1,361
Equity in undistributed earnings of subsidiaries 392 (985) 1,103
----- ----- -----
Net income $ 3,390 3,344 2,464
===== ===== =====
</TABLE>
(Continued)
46
<PAGE>
HENDERSON CITIZENS BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
(Parent Only)
Years ended December 31, 1997, 1996, and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income $ 3,390 3,344 2,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiaries (392) 985 (1,103)
Decrease (increase) in other assets (14) 12 11
Increase in accounts payable and
dividends declared 5 21 --
Decrease in other liabilities (667) -- --
------ ------ ------
Net cash provided by operating activities 2,322 4,362 1,372
Investing activities - purchase of subsidiary -- (1,934) --
Financing activities:
Cash dividends paid (1,340) (1,378) (1,382)
Purchase of treasury stock (1,677) (334) --
------ ------ ------
Net cash used by financing activities (3,017) (1,712) (1,382)
Increase (decrease) in cash (695) 716 (10)
Cash at beginning of year 1,062 346 356
------ ------ ------
Cash at end of year $ 367 1,062 346
====== ====== ======
</TABLE>
47
<PAGE>
INDEPENDENT AUDITORS LEGAL COUNSEL REGISTRAR/TRANSFER AGENT
KPMG Peat Marwick LLP Jenkens & Gilchrist, P.C. Citizens National Bank
Shreveport, Louisiana Dallas, Texas Accounting Department
P. O. Box 1009
Henderson, Texas 75653-1009
ANNUAL SHAREHOLDERS' MEETING
The annual shareholders' meeting of the Company will be held at Citizens
National Bank, 201 West Main, Henderson, Texas at 10:00 a.m. on Tuesday April
14, 1998.
FORM 10-K
The Company will, upon written request, provide after April 1, 1998, without
charge, a copy of the annual report on Form 10-K for 1997 filed with the
Securities and Exchange Commission to any shareholder to whom this 1997 Annual
Report is sent. Requests should be made to Henderson Citizens Bancshares, Inc.,
Attn: Chief Financial Officer, P.O. Box 1009, Henderson, Texas, 75653-1009. Any
exhibit will be provided on request upon payment of the reasonable expenses of
furnishing the exhibit.
- --------------------------------------------------------------------------------
HENDERSON CITIZENS DELAWARE BHC
BANCSHARES, INC. OFFICERS
OFFICERS
CHAIRMAN OF THE BOARD DIRECTOR & PRESIDENT
Landon Alford Milton S. McGee, Jr., CPA
PRESIDENT VICE PRESIDENT & TREASURER
Milton S. McGee, Jr., CPA William A. Hurst
VICE PRESIDENT, SECRETARY
TREASURER & CHIEF Nelwyn Richardson
FINANCIAL OFFICER
William A. Hurst ASST. SECRETARY, ASST. TREASURER
& CHIEF FINANCIAL OFFICER
SECRETARY Rebecca G. Tanner, CPA
Nelwyn Richardson
CHIEF ACCOUNTING OFFICER
Rebecca G. Tanner, CPA
48
<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 2, 1998, (ii) the number of such
transactions for the periods indicated, and (iii) the total number of shares
traded in such transactions. THESE PRICES REFLECT ONLY THE TRANSACTIONS WITH
RESPECT TO WHICH MANAGEMENT OF THE COMPANY HAS KNOWLEDGE OF THE PURCHASE PRICE.
TRADE PRICES ARE REPORTED ON AN INFORMAL BASIS, AND NO INDEPENDENT VERIFICATION
OF THE TRADE PRICES HAS BEEN MADE. THEY ARE THE RESULT OF ISOLATED TRANSACTIONS
AND ARE NOT NECESSARILY INDICATIVE OF THE ACTUAL OR MARKET VALUE OF SUCH
SECURITIES.
Company Stock
--------------------------------------------------------
NUMBER OF NUMBER OF
TRANSACTIONS SHARES
1998 LOW HIGH REPRESENTED REPRESENTED
- ---- --------- --------- ------------ -----------
First Quarter
(Through March
2, 1998) - - - -
1997
- ----
First Quarter $12.00 $12.50 7 1,550
Second Quarter $12.00 $12.50 20 23,700
Third Quarter $12.00 $12.00 1 400
Fourth Quarter $14.50 $14.50 54 98,215
1996
- ----
First Quarter $12.00 $12.00 3 732
Second Quarter $12.00 $12.00 10 4,329
Third Quarter $12.00 $12.00 5 1,190
Fourth Quarter $11.25 $12.00 4 30,310
As of March 2, 1998, there were 413 shareholders of record.
49
<PAGE>
EXHIBIT 21.1
------------
Henderson Citizens Bancshares, Inc.
Henderson Citizens Delaware Bancshares, Inc. (100%)
Citizens National Bank, Henderson, Texas (100%)
First State Bank, Waskom, Texas (100%)
Waskom Bancshares, Inc. (100%)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,886
<INT-BEARING-DEPOSITS> 8,212
<FED-FUNDS-SOLD> 5,040
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 148,740
<INVESTMENTS-CARRYING> 69,233
<INVESTMENTS-MARKET> 69,598
<LOANS> 106,757
<ALLOWANCE> 1,249
<TOTAL-ASSETS> 358,493
<DEPOSITS> 322,107
<SHORT-TERM> 844
<LIABILITIES-OTHER> 2,813
<LONG-TERM> 0
0
0
<COMMON> 10,800
<OTHER-SE> 21,929
<TOTAL-LIABILITIES-AND-EQUITY> 358,493
<INTEREST-LOAN> 8,840
<INTEREST-INVEST> 13,427
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 22,267
<INTEREST-DEPOSIT> 11,493
<INTEREST-EXPENSE> 11,546
<INTEREST-INCOME-NET> 10,721
<LOAN-LOSSES> 330
<SECURITIES-GAINS> 191
<EXPENSE-OTHER> 9,265
<INCOME-PRETAX> 4,416
<INCOME-PRE-EXTRAORDINARY> 4,416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,390
<EPS-PRIMARY> 1.61
<EPS-DILUTED> 1.61
<YIELD-ACTUAL> 6.99
<LOANS-NON> 172
<LOANS-PAST> 20
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,146
<CHARGE-OFFS> 347
<RECOVERIES> 120
<ALLOWANCE-CLOSE> 1,249
<ALLOWANCE-DOMESTIC> 1,249
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 26
</TABLE>
